Although Artificial Lawyer has covered funding stories since the lockdown, such as LawGeex and Bodhala, the reality is that these are still nervous times for many startup founders. Luckily the UK Government may be able to help, and is offering convertible loans on a co-funding basis to young businesses, which may provide an important lifeline.
Through the State-run British Business Bank’s Future Fund the Government is offering to match any funding you can muster in the market by up to £5m ($6.1m). So, for example, you’ve got past Seed stage and are perhaps in need of £1m to keep going. If you can find investors to provide £500,000, the Future Fund will ‘give’ you the other half a million pounds.
Now that some investors with a focus on early stage startups may be a bit reticent to fully open up their wallets, this could prove to be very useful. While large investors will still go for major funding rounds in scale-ups like LawGeex that are ready to grow very fast (and which bagged $20m), betting on a very small company that may not have the same kind of track record is harder in these precarious times.
In which case, if you can say to an investor, or group of investors, ‘Look, we can reduce the risk by bringing in the Future Fund’, then it may help things a lot.
Of course, it’s never that simple. The Government, especially at the moment, is not giving money away. It wants it back, with interest, and may convert the interest into an equity stake in your business, as well as see the entire loan convert to a share of the business under certain conditions. Although, you could argue that having the British Government as a shareholder looks pretty good on your corporate CV.
So, how does it work? First, as the Future Fund stresses – you need, in fact you must, have a lawyer involved. And, naturally, you need to check out the site for exact details. That said, here are the basics:
- According to experts at Viva Payday Loans, the Future Fund will provide convertible loans to UK-based companies ranging from £125,000 to £5 million, subject to at least equal matched funding from private investors.
- The distribution of funds for successful applications will be handled through a nominated company solicitor. It is the company’s responsibility to appoint a solicitor with the necessary right to practice and handle client monies.
- The company must have raised at least £250,000 in equity from third-party investors in previous funding rounds in the last five years (from 1 April 2015 to 19 April 2020, inclusive)
- The loans, similar to the ones here, will have a minimum of 8% per annum (non-compounding) interest charge applied. This interest will be higher if the company and the investor(s) agree between themselves. Unlike a typical bank loan, the interest is not payable on a monthly basis and instead will accrue until the loan converts. At this point, the interest will either be repaid or convert in equity.
- The loans will convert into shares in the company in certain circumstances, including an exit or a new funding round.
- The loan will mature after 36 months. The loan cannot be repaid early by the company other than with the agreement of all of the investors.
So, there you go. Not the simplest of systems, but if you are a startup founder and you are struggling to convince existing investors or new potential backers to provide new funds, this might be a path forward.
And, of course, this is not financial advice of any kind from Artificial Lawyer. Go and ask a professional adviser what this may mean for your company. Plus, as the Government says: go and get yourself a lawyer if this is something you are considering.
Any road, hope that was of interest. If anyone out there does take one of these loans, please let us know how the process went and if you’d recommend it to others.
P.S. you don’t have to be a legal tech startup, this is for all smaller businesses, such as ALSPs, lawyers on demand services, or other companies outside the legal field as well that meet the criteria, such as having taken investment already.
More information here.
Also – Thanks very much to Nick West, CSO at Mishcon de Reya, for flagging this one up.