The Future Fund Convertible Loan Agreement Template: Everything You Need to Know
The ongoing COVID-19 pandemic has heavily impacted the financial stability of many start-ups and small businesses. To help them weather this storm, the UK government launched the Future Fund initiative in May 2020. Under this scheme, the government committed over £500 million in convertible loans to help innovative companies through the crisis and support their growth in the future.
If your company is eligible for this funding, you will need to sign a Convertible Loan Agreement (CLA) to formalize the loan. This agreement is a legal document that outlines the terms and conditions of the loan, including the interest rate, repayment schedule, and conditions for converting the loan into equity. In this article, we will delve deeper into the Future Fund Convertible Loan Agreement Template and everything you need to know about it.
What is a Convertible Loan Agreement?
A convertible loan is a type of funding in which the lender converts the loan into equity on a future date, usually when the company raises additional funding. The convertible loan agreement outlines the terms of the loan and the conversion process. Convertible loans are popular because they offer the lender the option to convert their loan into equity at a future date, thus providing a chance to benefit from the company`s growth.
What is the Future Fund Convertible Loan Agreement?
The Future Fund Convertible Loan Agreement is a standard legal document provided by the British Business Bank for companies that have been approved for the Future Fund loan. The agreement is designed to be a template and is intended to be a starting point for negotiations between the company and the investors.
The agreement specifies the loan amount, interest rate, repayment schedule, and conversion terms. The loan is designed to be repayable within three years, but the company can choose to repay the loan early without incurring any penalties. If the loan is not repaid within the agreed period, it will automatically convert into equity.
What are the key terms of the Future Fund Convertible Loan Agreement?
1. Interest rate: The loan agreement specifies an annual interest rate of 8% that is payable upon conversion or maturity. The interest is not payable during the life of the loan.
2. Maturity date: The loan has a maturity date of 36 months from the date of the agreement, after which it will be automatically converted into equity.
3. Conversion discount: The agreement specifies that the loan will convert into equity at a 20% discount to the valuation of the company at the next funding round.
4. Valuation cap: The agreement sets a maximum valuation cap for the company at which the loan will convert into equity, regardless of the valuation at the next funding round. The valuation cap is equal to the valuation of the company before the loan is issued.
5. Use of funds: The loan can only be used for working capital purposes and cannot be used to repay any existing debt or pay dividends.
6. Director’s certificate: The company’s director must provide a certificate that the company is eligible for the loan and agrees to the terms of the agreement.
7. Governing law: The agreement is governed by English law.
Why is the Future Fund Convertible Loan Agreement important?
The Future Fund Convertible Loan Agreement is important for start-ups and small businesses as it provides them with access to much-needed funding during the COVID-19 pandemic. The loan has flexible repayment terms, converts into equity at a discount to the valuation of the company at the next funding round, and has a valuation cap. The agreement also has standardized terms and is designed to be a starting point for negotiations between the company and the investors, thus reducing the legal costs associated with raising funds.
The Future Fund Convertible Loan Agreement Template provides start-ups and small businesses with access to funding during the COVID-19 pandemic. This agreement outlines the terms and conditions of the loan, including the interest rate, repayment schedule, and conversion terms. The agreement provides flexibility and has standardized terms, making it a good starting point for negotiations between the company and the investors. If you are thinking of applying for the Future Fund loan, make sure you understand the terms of the Convertible Loan Agreement and seek legal advice before signing the agreement.