Firetree Chocolate

Key information

Disclosures

Foresight Group’s Midlands Engine Investment Fund (“Foresight”) was an early stage investor in Firetree in early 2019, via a number of different debt and equity instruments. Some of the key terms of Foresight’s investment are set out below, focusing on ways in which Foresight’s terms may impact ordinary shareholders.

Foresight has invested a total of £1,025,000 into Firetree by way of:
• Preference Shares which have some debt like elements - £570,000;
• A Shares, which contain a number of preferential rights to dividends and returns as explained further below - £95,000;
• Convertible Debt - £75,000; and
• Loan - £285,000.
These instruments are explained in further detail below.

Preference Shares
Foresight has invested £570,000 via the issue of Preference Shares. The rights attaching to the Preference Shares are set out in the Company’s Articles of Association, and have some features that are more akin to debt than a standard venture preference share:
• The Preference Shares receive a dividend each year, equivalent to 10% per annum of the amount invested (which is not paid for the first two years but rolled up and paid out in subsequent years or on exit);
• On an exit or return of proceeds, the Preference Shares are paid out first at 1.25x the amount invested (i.e. 25% profit) or if the valuation at exit is more than £40,000,000, the Preference Shares are paid out at 2.25x (i.e. 125% profit).
• The Preference Shares do not otherwise participate in the equity proceeds, so the return on exit is fixed at the above rates.

A Shares
Foresight has invested £95,000 via A Shares in the Company and will be investing a further £125,000 into A Shares as part of the current fundraise. The A Shares operate as a more standard VC style preference share, with some additional protections:

• Preferential Return: On an exit or liquidation, the A Shares enjoy a 1x participating preferential return (ranking behind the Preference Shares but ahead of other share classes). This means that the A Shareholders will receive 1x their investment back ahead of other shareholders, and will then also participate alongside other equity shareholders in the return of proceeds.

In addition:

• Dividend. From 22 January 2024 onwards (i.e. 5 years from initial Foresight Investment), the A Shares start to receive an annual preferred dividend equal to 5% of the profits of the Company per year, increasing by 2% each year. This right is uncapped and is not time bound.

The dividend right is intended to encourage the management team to seek an exit event within 5 years. However, if this is not achieved, the preferred dividend could lead to a material distribution of annual profits to Foresight ahead of an exit. It is the company’s stated intent to make dividend payments to all shareholders, but the actual payment of dividends to other share classes will require the consent of Foresight, such consent not to be unreasonably withheld.

• Ratchet. The ratchet provisions in the Articles of Association are in the process of being redrafted in order to accommodate Seedrs’ requirements and the new investment coming in. The ratchet provisions will work to potentially issue bonus equity to Foresight at the time of any exit which will increase their % stake in the company by the amount set out in the table below but only in the event that Foresight would otherwise receive less than £4,600,000 in “net proceeds”. Net Proceeds includes all monies paid to Foresight from their investment up to and including the time of exit, so will include all capital and dividend payments on their ordinary shares and preference shares plus the repayment/conversion of the loan notes (and interest thereon) plus the repayment of the loan (and its interest) plus any unpaid dividend or interest payments thereon. At the maximum ratchet, Foresight would be issued shares to increase their equity stake by 6%.

At the current funding round valuation, the Net Proceeds that would be payable to Foresight would entitle them to receive the full 6% bonus equity. This has therefore been fully factored into the pre-money valuation of the current round. As such, assuming no further issue of equity occurs, the ratchet is fully accounted for in the valuation displayed on Seedrs

Net Proceeds Received by Foresight (£) Bonus equity to be issued to Foresight to increase Foresight’s stake by the following %:

Convertible Debt
Foresight has invested £75,000 by way of a convertible loan. The key terms include:
• Interest is accrued at 8% per annum and payable quarterly. The interest for the first two years is accrued but not paid out and is only paid out on redemption of the convertible loan.
• Foresight has the option to convert the loan to equity on an exit, fundraising event or the maturity date of 23 January 2024 or if the company serves a notice that it intends to redeem the loan. The conversion price is fixed at £0.25 per share (the same share price as the current round).
• If the loan is redeemed, either on an exit or at the maturity date, then a redemption premium of £75,000 is payable (i.e. Foresight will receive 2x their initial investment back).

Loan
Foresight has also provided the company with a £285,000 loan which accrues interest at 8% per annum, payable quarterly. The interest on the loan for the first two years is rolled up (so not paid out in cash) and is only paid out on repayment of the loan. The loan is repayable in January 2024.

Other debt
The company has a £750,000 asset backed facility with IGF Business Credit Limited. £250,000 as a loan (of which approximately £201,000 is outstanding) and an asset backed invoice discounting facility of £500,000, with approximately £65,000 of this facility currently utilised.