Future Fund's Convertible Opportunities

I've had limited experience with convertibles on Seedrs but I've found that if the deadline is reached without a raise happening then things move quite slowly, sometimes they don't convert on the expected date. Also, communication of what's happening isn't always good from Seedrs or the companies.

It's possible that the conversion process and terms might be more strictly adhered to than normal Seedrs convertibles as they will be converted on the same term and times as the future fund, so no room for Seedrs to negotiate as nominee.

Looking at the key terms tab of other companies raising right now seems to give a good amount of information on the factors to consider, although they will vary by company so it might be worth reading them over for THIS to see what you think.

I don't know if it really opens investors to any more risk or exploitation than a standard equity deal. I would see a risk in this type of setup being if they allowed the terms of conversion to be on the event of a small raise at a high valuation, meaning they could use a small capital investment to force convertible investors to convert at a higher share price than might be fair. Looking at the terms a qualifying round would need to be equal or more than the convertible loan amount, plus there are valuation caps which together should stop this. It might be worth asking about the investor protections offered on shares once they convert as its not clear if future fund shares have a different set of terms.

I have read the terms and conditions for this type of investment a number of times for a few companies and I confess to being confused by all the jargon. This puts me off investing.

There's some articles by a guy called James Muroch who you'll see commenting all over the place on Seedrs, he's made a large portfolio by investing small amounts over a lot of companies, so he has a good overview of how Seedrs convertibles perform in practice (and how well ECF investments perform in general). I appreciate it's a pain to make an account to read but here's a link to an article about Seedrs convertibles for anyone interested :

https://www.angelnews.co.uk/blog/perspectives/convertibles-a-distraction-asks-james-murdoch/

Cheers alymt. Will take a look.

Thanks @Alymt for the article!

@Lee My take on the future fund convertible notes is that they are great terms for investors, but the caveat is that the businesses using the future fund are distressed in some way (i.e. they'd only accept the aggressive future fund terms if they weren't confident in their ability to do a standard equity raise/convertible note), so I always carefully assess the risks. At the end of the day though, it's probably understandable for certain businesses to struggle in these times.

In short, personally, I love them. I see them as bargains (usually) - but I try to proceed with caution, making sure i'm not catching a falling knife.

Here's a nifty table I dug out from Seedrs, it compares future fund convertible terms to EIS terms:

Just to summarise the above:

- If the company fails, future fund convertible holders get first dibs on any cash salvaged (e.g. through liquidation)

- You basically double your money (paper return) on conversion (the redepmtion premium) - which is awesome imo. The longstop date is 3 years though..

- The lack of CGT relief is a downer

Thanks for the insight @Admin. I also agree with what you are saying regarding the companies technically being distressed, however I think its interesting the number of first-time crowdfunding companies who are taking this option. It's as if Seedrs marketing plus the future fund provision is really appealing to some businesses to go the ECF route.

@Admin Just to expand on your explanation above - where does the 'Valuation Cap' that is present in convertible term sheets fit into this? My understanding is that the valuation cap is the maximum valuation of the next raise to which the campaign will convert into equity for. For example, if the valuation cap on the term sheet is £20m and the discount is 20%. At the next raise the company undertakes, lets say two scenarios: (a) if the valuation is £30m, then my amount will convert as if the valuation is £20m. (b) If the valuation is £18m, then my amount will convert at to equity as if the valuation is £14.4m (£18m - 20% discount). Is this your understanding also?

Also, is the 8% interest rate payable to crowd investors also or just the Future Fund? My understanding is that we are investing on the same terms so it is due to us, however it is only payable on a conversion event.

Would be great to get anyone elses thoughts on this and their understanding too?

Good question! That's exactly how I understand a valuation cap to work - it's basically the maximum valuation your (to-be) shares would ever convert at. To be pedantic though, it would be a 20% discount on the share price not the valuation, which can sometimes give a slightly different figure.

A convertible note doesn't have to have a valuation cap unfortunately, and I haven't seen many future fund convertible notes that do so far; so if you're wondering why you can't find one - there probably isn't one! Having no valuation cap adds the risk that if a 'trigger' (i.e. conversion) event happens -such as a large funding round- at a ridiculous valuation, your shares will convert at that ridiculously overpriced valuation (less the discount of course).

The interest is payable to investors as well, but it can be paid in cash *or* as equity. So let's say your convertible converted in 3 years and paid 10% interest, you would get the 30% interest's worth converted to shares (on top of the 'normal' converted shares) if it wasn't paid to you in cash by the maturity date. Most startups end up just paying the interest as equity because they generally have poor cash flow, which doesn't mix well with high interest debt.

Fun fact: Technically, all convertibles are supposed to pay interest by definition. The so-called 'convertibles' that you see on Seedrs that dont pay interest do so to be able to offer EIS. These are more accurately called ASAs (Advanced Subscription Agreements) - which are pretty much like convertibles, but without interest. I think they just call them convertibles as it's a friendlier, less jargon-y name.