Future Fund - Government Support for Startups

The government has recently announced a £250m fund to invest into startups that can secure match-funding from third party investors.

More details can be found here.

The offer of support to startups is great, apart from the instrument they have chosen is a convertible loan note. This raises issues from a fiqhi perspective.

Having read carefully through the headline terms (the actual terms will be released later this month), we are of the view that:

  1. Under the view that the convertible loan note is haram as it charges interest, the note itself should only be used in extreme duress by Muslim founders for their companies. The conditions for the usage are explained in this fatwa here.

  2. Under the view that the convertible loan note is best understood as a (discounted) equity investment by the Future Fund, to avail of the note becomes permissible. However, this is not our current view as the interest attached to the loan accrues and performs as interest on our reading of the headline terms. We are continuing to review this position as further details on the scheme emerge and as discussions continue with industry experts and Islamic scholars.

  3. It is permissible to invest in companies that have taken the Future Fund convertible loan money however - as long as such amount is less than 33% of the company’s total assets.

This post has been drafted with advice from Muftis but given the evolving nature of this scheme, should not be seen as a definitive fatwa just yet.

This is honestly so helpful. As somebody who works with startups and investors all the time, I can’t tell you how many requests I’ve gotten from Muslim founders who are in desperate need of these emergency funds from the government but want to avoid impermissible interest at all costs. Thank you Islamicfinanceguru for the quality content as usual!


An update on the above:

We think that there are two potential ways a startup can avail of the Future Fund’s loan note:

  1. Where the next round is closed on the day that the Future Fund loan is made - so no interest accrues; and

  2. Where there is some bespoke and careful drafting the next round’s subscription documents to the effect that the Future Fund loan converts at a discount that is greater than the 20% discount it standardly requires but where that additional discount above 20% is equivalent to the shares that would have been otherwise bought by the interest component due at the time. In other words, as the Future Fund matches whatever are the more favourable economic terms, it would match that automatically and technically no interest would be due.

On (1) we have seen written confirmation from HM Treasury that this approach works - but of course it would need timing to be impeccable to close the round on the same day.

On (2), we suspect that the people approving these loans will not go into the minutiae of deal specifics and it really would require careful drafting and working with Islamic scholars on this.

So (1) is the preferred route.

Of course the whole thing is academic right now as there have been £450m of applications for a pot of £250m!

Sincere thanks to @Mufti_Faraz_Adam and @Mufti_Billal for their input and insights on this journey of discovery!

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