Future Fund Convertible Loan Agreements for UK Startups

If you ran a UK startup during the pandemic, there’s a good chance you came across the UK Government’s “Future Fund” scheme and the idea of using a convertible loan note.

Convertible loans can be an effective way to raise money quickly when you’re not ready (or not able) to agree a valuation. But they can also create confusion for founders, especially when the documents feel more like “investor paperwork” than day-to-day business admin.

This guide breaks down what a Future Fund-style convertible loan is, how convertible loan agreements typically work in practice, the key legal and commercial terms you should understand, and the documents you’ll usually need to get it done properly.

Note: this article is general information for UK startups and small businesses, and isn’t legal, financial, tax or accounting advice. The right structure and drafting will depend on your cap table, other investors, and what you’re trying to achieve-so it’s worth getting tailored advice before you sign anything.

What Is A Future Fund Convertible Loan?

A Future Fund convertible loan is (in simple terms) a loan to your company that is designed to convert into equity later-usually when you do a priced funding round (like a Seed or Series A), or when another conversion trigger happens.

Historically, “Future Fund” refers to a UK Government-backed scheme introduced during COVID-19 (2020–2021) to support innovative companies. While that scheme is now closed to new applications, founders still search for “Future Fund convertible loan” because:

• many startups still have Future Fund loans sitting on their balance sheets;
• future investment rounds often need to deal with these instruments before new money comes in; and
• the Future Fund’s standard documents influenced how many UK founders and investors approach convertible loan deals more generally.

So even if you’re not raising via that scheme today, understanding the structure is useful because it often impacts:

• your next fundraising;
• your dilution and control;
• the “paperwork stack” (loan agreements, side letters, consents); and
• how clean your due diligence looks to new investors.

And one key point to keep in mind: a convertible loan is still a debt instrument until it converts. That means repayment obligations and default risks can apply-so you want to be confident you understand your company’s commitments.

How Does A Future Fund Convertible Loan Work In Practice?

Although each deal can vary, most Future Fund-style convertible loans follow a similar structure:

1) It Starts As A Loan (With Interest)

Your company borrows money from the lender(s). The loan usually accrues interest over time. Interest may be paid periodically, or “rolled up” and added to the amount that converts.

Even if everyone expects conversion, the legal starting position is still: the company owes a debt.

2) It Converts Later (Usually At A Discount)

On a trigger event-most commonly a priced equity round-the loan converts into shares. The conversion price often reflects a founder-friendly compromise:

• investors get rewarded for the early risk (often via a discount);
• the company avoids setting a valuation too early; and
• the cap table isn’t immediately reshuffled until the next round.

Conversion mechanics can be surprisingly technical. If you’re agreeing the headline economics in a short document first, it helps to capture them clearly in a term sheet so the legal agreement doesn’t drift later.

3) There Are Other Possible Triggers

Convertible loans often include additional conversion or repayment triggers, such as:

• maturity date (when the loan is due to be repaid if it hasn’t converted);
• sale/exit (conversion or repayment on a company sale);
• winding up (what happens if the business fails); and
• early conversion options (sometimes at the investor’s election, sometimes automatic).

These triggers matter because they change the “real risk” profile of the instrument. A loan that can be demanded back at maturity is very different (commercially) from one that essentially must convert.

4) Your Existing Documents Still Matter

A convertible loan doesn’t exist in a vacuum. Your company’s constitution and shareholder arrangements often control what you’re allowed to do-especially if conversion results in new share classes, preference rights, or changes to voting power.

Before you sign, it’s sensible to check your Articles of Association and any Shareholders Agreement to make sure the company has the right authority and that you’re not accidentally breaching investor consent rights.

Key Terms In A Future Fund Convertible Loan Agreement (And Why They Matter)

The main reason founders get caught out with convertible loans is that the “headline number” (how much you’re raising) is only one part of the deal. The conversion and control terms can be just as important.

Here are the big terms you should understand in any Future Fund convertible loan (or similar convertible loan agreement).

Discount Rate

A discount means the investor converts into shares at a cheaper price than new investors in the next priced round (for example, a 20% discount).

From a founder’s perspective, discount is usually easier to live with than a valuation cap-because it ties the conversion price to the valuation your next lead investor is willing to pay.

Valuation Cap (If Any)

A valuation cap sets a maximum valuation at which the investor’s loan can convert, even if your next round is priced higher.

Caps can protect investors if the company grows quickly. But they can also create unexpected dilution for founders if the cap is set too low relative to where the business ends up.

Interest

Interest might look small on paper, but it still increases dilution if it converts into equity. Also, interest can interact with a maturity date-meaning the total amount due grows over time.

Maturity Date

This is one of the most important “reality check” clauses.

Ask yourself: if the loan doesn’t convert, can the company actually repay it? If not, what happens at maturity-does the loan automatically convert, or can the investor demand repayment and put the business under pressure?

Qualifying Funding Round Definition

Convertible loan agreements usually define what type of equity round triggers automatic conversion. The thresholds matter (for example, minimum amount raised), and so does how the agreement treats:

• bridge rounds;
• insider rounds;
• advance subscriptions; and
• rounds with different share classes.

If your next round doesn’t fit the definition, you might discover conversion isn’t automatic-which can complicate the fundraising timetable.

Most Favoured Nation (MFN) And Side Letters

Some investors want an MFN clause so they can adopt better terms offered to later investors in other convertible instruments.

This can be reasonable, but it can also create admin and uncertainty if you’re using multiple instruments. You’ll want to keep your fundraising “stack” consistent.

Information Rights And Control Covenants

Convertible lenders sometimes request ongoing reporting obligations (management accounts, budgets, KPI reporting) and restrictions on what the company can do without consent (for example, taking on more debt or selling key assets).

These aren’t always “bad”, but you need to be realistic about what you can comply with. Missing reporting deadlines can technically become a breach.

Events Of Default

Default clauses outline what happens if the company breaches the agreement (or becomes insolvent). The consequences can be serious-sometimes including immediate repayment demands.

If you’re agreeing to “company-friendly” default terms, make sure they are actually reflected in the final contract. And remember: for a contract to be enforceable, you still need the fundamentals of what makes a contract legally binding (clear offer/acceptance, intention, consideration, certainty, etc.).

What Documents And Approvals Will Your Startup Need?

Founders often expect one document. In reality, a Future Fund-style convertible loan (or any convertible loan deal) usually needs a small suite of documents and internal approvals to make it clean and enforceable.

Convertible Loan Agreement

This is the main contract. It sets out:

• the loan amount and drawdown mechanics;
• interest and repayment terms;
• conversion triggers and conversion calculations;
• warranties (statements the company makes as true); and
• events of default and enforcement rights.

Because conversion affects ownership, this isn’t a “template-and-go” document. Small drafting differences can materially change dilution outcomes.

Corporate Approvals (Board And/Or Shareholder)

Your company will usually need formal approvals to enter into the loan and issue shares on conversion. That often includes board minutes and sometimes shareholder resolutions, depending on:

• what your Articles say;
• whether pre-emption rights are triggered;
• whether you need authority to allot shares; and
• whether you’re creating a new share class.

It’s common to document these approvals with a Directors Resolution (and, where required, a shareholder resolution).

Updates To Articles And Shareholder Arrangements

If conversion will result in issuing preference shares (or shares with special rights), you may need updated Articles to reflect those rights.

It’s also common for new investors to require updates to your shareholders’ deal terms-especially if conversion introduces a new “investor class” into the cap table. This is where your Shareholders Agreement often becomes the document that sets the rules for:

• decision-making and reserved matters;
• future share issues;
• transfers and exits; and
• founder leaver provisions.

Subscription Documents On Conversion

When the loan converts, the company will usually need to issue shares and complete the related paperwork (including share allotment steps and updating registers).

Depending on how the conversion is structured, a Share Subscription Agreement may be relevant to document the share issue terms clearly (particularly in a priced round where multiple investors subscribe at once).

Novation Or Assignment (If The Loan Moves)

Sometimes convertible loans get transferred-for example, as part of a group restructure, an investor entity change, or an acquisition. If the parties need to replace one party with another (rather than just assign rights), you may be looking at a Deed of Novation.

This is the kind of detail that can come up during due diligence, so it’s worth keeping your documents tidy from day one.

Common Risks For Founders (And How To Manage Them)

Convertible loans can be founder-friendly, but they’re not “risk-free funding”. Here are some common issues we see, and what you can do about them.

Risk 1: The Loan Becomes A Problem At The Next Round

It’s very common for your next lead investor to scrutinise the convertible loan terms, because those terms impact their ownership and their position in the cap table.

How to manage it:

• Keep your convertible terms consistent across investors where possible (avoid a “patchwork” of side letters).
• Be clear about whether the loan converts into the same share class as the new investors.
• Make sure the conversion mechanics are unambiguous (especially around caps, discounts, and accrued interest).

Risk 2: Unexpected Dilution For Founders

Founders sometimes model dilution assuming only the principal converts, then later realise interest and other amounts also convert, or that a valuation cap bites harder than expected.

How to manage it:

• Run a few cap table scenarios before signing (low valuation round, high valuation round, no round before maturity).
• Confirm exactly what converts: principal, interest, costs, and any premium.
• Get advice early-once it’s signed, leverage is limited.

Risk 3: Maturity Creates Leverage For Investors

If the company hasn’t raised a qualifying round by maturity, an investor may have leverage to renegotiate (or demand repayment). Even if everyone is acting reasonably, the dynamic can become stressful.

How to manage it:

• Make sure the maturity outcome is commercially workable (repayment vs automatic conversion vs extension mechanics).
• Keep communication open with investors well before maturity approaches.
• Track key dates centrally (don’t rely on someone’s inbox).

Risk 4: Your Company Documents Don’t Match The Deal

You can have a perfectly drafted convertible loan agreement, but if your Articles don’t allow what the agreement requires (or your shareholders’ agreement requires consents you didn’t obtain), you can end up with a messy situation.

How to manage it:

• Check authority to allot shares and disapply pre-emption rights where needed.
• Confirm any investor consent thresholds before you sign.
• Keep your Articles of Association aligned with your funding strategy.

Risk 5: You Treat It Like “Standard Funding” When It’s Still Debt

Founders sometimes assume a convertible loan is basically equity and overlook the debt-like protections investors may have.

How to manage it:

• Read the default and repayment clauses carefully (this is where debt behaves like debt).
• Be realistic about covenants and reporting obligations.
• If you’re unsure, get the agreement reviewed before you sign-fixing problems later is usually harder and more expensive.

Key Takeaways

• A Future Fund convertible loan is a loan that is intended to convert into equity later, commonly on a priced funding round, but it remains debt until conversion happens.
• The most important terms to understand are the discount, valuation cap (if any), interest, maturity date, and what counts as a qualifying funding round.
• Your existing documents-especially your Articles of Association and Shareholders Agreement-often control whether the company can enter the loan and issue shares on conversion.
• Convertible loan agreements can create real founder risk if maturity arrives before conversion, or if the conversion mechanics create unexpected dilution.
• To keep your fundraising smooth, document approvals properly (for example via a Directors Resolution) and make sure your paperwork is consistent and due diligence-ready.
• If the loan needs to be transferred or parties need replacing, you may need a Deed of Novation rather than informal email agreements.

If you’d like help reviewing or drafting a Future Fund convertible loan agreement (or cleaning up your documents before your next funding round), you can reach us at 08081347754 or team@sprintlaw.co.uk for a free, no-obligations chat.