South Korean e-retailer giant Coupang’s acquisition of Farfetch finally completed on 31 January, in a move that will provide Farfetch with an emergency £500million and keep the business alive. However, it was not celebrations all round between Farfetch’s investors and shareholders.
It appears that one particular group of these investors, the ‘loan note’ holders, whose investments total USD1 trillion collectively, will not receive interest on their loans to the company.
This is because the sale to Coupang is likely to ‘trigger’ these loan notes to convert into Farfetch shares at completion. In the absence of a trigger event, the notes would have remained outstanding until their 2027 maturity date (when interest would begin to accrue).
Half of these note holders (known as the “2027 Ad Hoc Group”) publicly called on Farfetch’s directors to explore other alternatives for the company’s survival.
From a company’s perspective, there are many methods to choose from when looking to receive a capital injection from an outside party. We take a look at some of the recent investments to make waves in the fashion world – from SKIMS to Harry Styles-backed S.S. Daley.
Direct Subscriptions
Pop superstar Harry Styles has become a minority shareholder in the label S.S. Daley, his go-to designer for music videos and photoshoots, following an investment of an undisclosed amount in January 2024.
Although London-based Steven Stokey-Daley founded the brand in late 2020, Mr Styles’ investment is thought to be the first major funding event beyond initial seed capital and prestigious prize money (Mr Stokey-Daley won ‘Best Emerging Designer’ and the ‘LVMH Prize for Young Designers’ at the 2022 Fashion Awards). The money appears to be a single investment rather than part of a wider funding round with co-investors. Mr Daley has stated that the investment will help to “grow its direct-to-consumer business” while it focuses on “brand longevity and scaling the business into a modern, British heritage house”.
Investments in this manner may be made by way of an advance subscription agreement or convertible loan note (see below), or they may simply be made by a direct subscription for shares in the company. Often, where there is a single individual/entity investing and there is no commercial rationale for deferring the issue of shares to the investor, the parties will into a subscription agreement governing the terms and amount of the investment. The shares will then be issued immediately following receipt of the investment monies, with no conditions to be satisfied to receive the shares and no interest accruing on the investment.
Direct subscriptions may be done via institutional investors or through ‘angel’ investors, such as Harry Styles.
Convertible Loan Notes
Convertible loan notes (‘loan notes’ or simply ‘notes’) are instruments under which an individual/entity offers the company a loan (either on a secured or unsecured basis) that is convertible into shares (or other form of equity investment) at a future date.
The loan usually converts at a material discount to those who subscribe directly for shares upon the occurrence of certain specified events. These “conversion events” are usually the occurrence of events such as a sale of the company (or a change in the control of the company), an IPO, or a subsequent equity investment round taking place that exceeds a pre-agreed financial threshold (for example, a £2m funding round).
The loan notes will also have a ‘longstop date’ or a maturity date, by which point the notes should have converted into equity. If no conversion events have occurred by this time, the investor can usually ‘demand’ that the notes convert into shares or that the loan is repaid in its entirety with accrued interest (see below).
Loan notes can either be interest-bearing or non-interest-bearing. If the loan note longstop date arrives, but no conversion events have occurred, then interest-bearing notes normally begin to accrue interest from this date until such date as the notes are eventually converted (or ‘redeemed’).
Although the finer details of the Farfetch loan notes are unknown, it is likely that these notes were interest-bearing and that the sale to Coupang will have acted as a conversion event, meaning that the 2027 maturity date was not reached. It is unlikely that interest was payable to the original lenders.
Convertible loan notes are a fairly straightforward and “quick” way for a company to receive one or more investments. As a result, the associated costs for putting loan notes in place can be relatively lower than on a fully-fledged funding round. Due to the relatively prolonged period between investment and conversion into shares, this method also gives the existing shareholders of the company a longer period where it retains control before other shareholders come on board, and their shareholdings in the company are ‘diluted’.
Advance Subscriptions
Similar to a loan note, an Advance Subscription Agreement (or ‘ASA’) is an agreement between an investor and a company by which the company receives an investment or ‘subscription’ for shares.
Ultimately this will convert into shares in the company at a future date. As with a loan note, an ASA may come with a pre-agreed discount price per share compared to those shareholders who invest later. It will also have certain specified conversion events and a longstop date. An ASA is more commonly seen at an early, or even start-up, stage, being relatively easy to implement and not requiring a formal company valuation. However, it does not constitute a form of debt in the way that a loan note would. Unlike loan notes, ASAs will only convert into shares, meaning the ASAs are not interest-bearing, and the investor does not have their investment repaid, as is the case with a loan.
It is common for companies to use ASAs in their early stages of life, followed by more substantial funding rounds down the line. However, given that ASAs often include a discount, should a future funding round act as a conversion event for the ASAs, new investors may be unhappy about having a higher subscription price per share than the ASA investors. The board of directors often has an uphill task in keeping different groups of investors happy, particularly if there has been a material change in their identity over differing investment processes/rounds.
Funding Rounds
In contrast to smaller, ‘ad-hoc’ investments by means of loan notes or ASAs, many companies will raise capital by undertaking a fundraising round. Usually, at least one ‘lead investor’ will be investing material funds and will lead the negotiation on the main transaction documents (the subscription agreement and new (or amended) articles of association and shareholders’ agreement). One or more co-investors may also want a seat at the table during negotiations to ensure their rights as minority shareholders are adequately protected.
Naturally, a funding round will dilute the founders’ shareholdings and other existing shareholders. Typically, the first major fundraising round at a start-up (or early stage) company will be a seed capital round, or a ‘Series A’ round, for which a Series A valuation of the Company is required. Further funding rounds may be Series B, Series C, top-up rounds, or “priced” rounds (typically involving an agreed valuation process).
Funding rounds often take longer to complete than loan notes or ASAs (typically 2 – 3 months from agreeing on the Heads of Terms (or ‘term sheet’), though for various reasons, the company and investors may agree on an accelerated timeline). This will often be more expensive to implement.
The round will include a due diligence exercise undertaken by the investors and a disclosure exercise undertaken by the company / its directors, all of which can divert a significant amount of time away from the directors’ ‘day jobs’ of running the company! Much of the negotiation will centre on ‘reserved matters’, or actions that the company cannot take post-completion without first obtaining the investors’ consent. Typically, these include things like a sale of the business (or an IPO), disposing of a significant or material portion of the business, incurring capital expenditure in excess of an agreed threshold, taking on debt or issuing further shares/equity in the company, altering the company’s articles of association etc.
Notable fashion funding rounds in the last 12 months include a Series C investment round at Kim Kardashian’s SKIMS brand in July 2023, led by Wellington Management with participation from Green Oaks Capital Partners, D1 Capital Partners and Imaginary Ventures, and totalling USD 270million. Established in 2019, SKIMS has raised a total of USD 670 million to date. SKIMS stated that this funding will go toward product innovation, category expansion and retail expansion.
Similarly, HURR, a female-founded British luxury fashion rental platform that counts John Lewis, Mulberry, and Net-a-Porter among its partners, completed a seed funding round in December. The round was led by Praetura Ventures, with co-investors Octopus Ventures (an investor in Depop) and Ascension, and raised just under £8million. Previously, HURR’s 2021 funding round closed at £5.4million.
In addition, in November 2023, London-based Cult Mia, an online fashion marketplace, raised £2.5million in a seed round led by Fuel Ventures, with Morgan Stanley, WomanKind Ventures and David Wertheimer as co-investors. The new funds will be used to “supercharge Cult Mia’s growth” and “to increase efficiencies in acquiring and retaining customers while expanding the core team to cover new product and service verticals planned to roll in 2024.
Finally, Swedish start-up skincare brand Mantle raised £2.4million in a seed funding round led by Venrex (see above for their investment fund with the British Fashion Council) earlier this month. Mantle’s broad range of skincare and body products focuses on repairing the skin’s barrier and has already developed a cult following in Scandinavia. Mantle intends to use the capital and funds to expand further in the UK and launch its products in Germany, the Netherlands, and the US. To date, Mantle has raised just under £7million.
Crowdfunding
Equity crowdfunding is sometimes used by early-stage companies as a means of raising capital. Usually, by collecting small investments from a very wide group of people, which, in aggregate, amount to a healthy cash injection into the company.
Crowdfunding is usually handled online, either through a third-party platform or via social media and digital word of mouth that goes beyond a founder’s existing network of family and friends. As the investments are usually on a ‘pay what you’d like to’ basis, rather than for a specified minimum investment amount, the shares acquired amount to very small minority shareholdings without significant influence or control over the company’s business.
Vestiare Collective recently announced its own crowdfunding campaign, opening up ownership of the company to members of the public for the first time. The investments are managed collectively via Crowdcube, a third party. The shares on offer are Series 1 preferred shares, granting the investor voting rights on any resolution put to the company’s shareholders and preferential rights to receive proceeds in case of a sale or IPO of the business.
However, those who invest during this crowdfunding period will be treated as a group, with Crowdcube voting on the group’s behalf and the investors having little direct say in the management of the business going forward.
Whilst generating a return on your investment is never guaranteed, particularly with loan notes, these transaction options highlight the risks involved in making and receiving investments and why seeking tailored advice from experienced lawyers is so important.
