Term_Sheet_FINAL_May_2010
This sample document is the work product of a national coalition of attorneys who specialize in venture capital financings, working under the auspices of the NVCA. This document is intended to serve as a starting point only, and should be tailored to meet your specific requirements. This document should not be construed as legal advice for any particular facts or circumstances. Note that this sample document presents an array of (often mutually exclusive) options with respect to particular deal provisions.
TERM SHEET
This term sheet maps to the NVCA Model Documents, and for convenience the provisions are grouped according to the particular Model Document in which they may be found. Although this term sheet is perhaps somewhat longer than a "typical" VC Term Sheet, the aim is to provide a level of detail that makes the term sheet useful as both a road map for the document drafters and as a reference source for the business people to quickly find deal terms without the necessity of having to consult the legal documents (assuming of course there have been no changes to the material deal terms prior to execution of the final documents).
FOR SERIES A PREFERRED STOCK FINANCING OF
[INSERT COMPANY NAME], INC.
[ __, 20__]
This Term Sheet summarizes the principal terms of the Series A Preferred Stock Financing of [___________], Inc., a [Delaware] corporation (the “Company”). In consideration of the time and expense devoted and to be devoted by the Investors with respect to this investment, the No Shop/Confidentiality [and Counsel and Expenses] provisions of this Term Sheet shall be binding obligations of the Company whether or not the financing is consummated. No other legally binding obligations will be created until definitive agreements are executed and delivered by all parties. This Term Sheet is not a commitment to invest, and is conditioned on the completion of due diligence, legal review and documentation that is satisfactory to the Investors. This Term Sheet shall be governed in all respects by the laws of the [State of Delaware].
Offering Terms
Closing Date: As soon as practicable following the Company’s acceptance of this
Term Sheet and satisfaction of the Conditions to Closing (the
“Closing”). [provide for multiple closings if applicable] Investors: Investor No. 1: [_______] shares ([__]%), $[_________]
Investor No. 2: [_______] shares ([__]%), $[_________]
[as well other investors mutually agreed upon by Investors and the
Company]
Amount Raised: $[________], [including $[________] from the conversion of
principal [and interest] on bridge notes].1
Price Per Share: $[________] per share (based on the capitalization of the Company
set forth below) (the “Original Purchase Price”).
Pre-Money Valuation: The Original Purchase Price is based upon a fully-diluted pre-money
valuation of $[_____] and a fully-diluted post-money valuation of
$[______] (including an employee pool representing [__]% of the
fully-diluted post-money capitalization).
Capitalization: The Company’s capital structure before and after the Closing is set
forth on Exhibit A.
1Modify this provision to account for staged investments or investments dependent on the achievement of milestones by the Company.
CHARTER2
Dividends: [Alternative 1: Dividends will be paid on the Series A Preferred on
an as-converted basis when, as, and if paid on the Common Stock]
[Alternative 2: The Series A Preferred will carry an annual [__]%
cumulative dividend [payable upon a liquidation or redemption]. For
any other dividends or distributions, participation with Common
Stock on an as-converted basis.] 3
[Alternative 3: Non-cumulative dividends will be paid on the Series
A Preferred in an amount equal to $[_____] per share of Series A
Preferred when and if declared by the Board.]
Liquidation Preference: In the event of any liquidation, dissolution or winding up of the
Company, the proceeds shall be paid as follows:
[Alternative 1 (non-participating Preferred Stock): First pay [one]
times the Original Purchase Price [plus accrued dividends] [plus
declared and unpaid dividends] on each share of Series A Preferred.
The balance of any proceeds shall be distributed pro rata to holders of
Common Stock.]
[Alternative 2 (full participating Preferred Stock): First pay [one]
times the Original Purchase Price [plus accrued dividends] [plus
declared and unpaid dividends] on each share of Series A Preferred.
Thereafter, the Series A Preferred participates with the Common
Stock pro rata on an as-converted basis.]
[Alternative 3 (cap on Preferred Stock participation rights): First pay
[one] times the Original Purchase Price [plus accrued dividends]
[plus declared and unpaid dividends] on each share of Series A
Preferred. Thereafter, Series A Preferred participates with Common
Stock pro rata on an as-converted basis until the holders of Series A
Preferred receive an aggregate of[_____] times the Original Purchase
Price (including the amount paid pursuant to the preceding
sentence).]
A merger or consolidation (other than one in which stockholders of
2The Charter (Certificate of Incorporation) is a public document, filed with the Secretary of State of the
state in which the company is incorporated, that establishes all of the rights, preferences, privileges and restrictions of the Preferred Stock.
3In some cases, accrued and unpaid dividends are payable on conversion as well as upon a liquidation event. Most typically, however, dividends are not paid if the preferred is converted. Another alternative is to give the Company
the option to pay accrued and unpaid dividends in cash or in common shares valued at fair market value. The latter are referred to as “PIK” (payment-in-kind) dividends.
the Company own a majority by voting power of the outstanding
shares of the surviving or acquiring corporation) and a sale, lease,
transfer, exclusive license or other disposition of all or substantially
all of the assets of the Company will be treated as a liquidation event
(a “Deemed Liquidation Event”), thereby triggering payment of the
liquidation preferences described above [unless the holders of [___]%
of the Series A Preferred elect otherwise]. [The Investors' entitlement
to their liquidation preference shall not be abrogated or diminished in
the event part of the consideration is subject to escrow in connection
with a Deemed Liquidation Event.]4
Voting Rights: The Series A Preferred shall vote together with the Common Stock on
an as-converted basis, and not as a separate class, except (i) [so long
as [insert fixed number, or %, or “any”] shares of Series A Preferred
are outstanding,] the Series A Preferred as a class shall be entitled to
elect [_______] [(_)] members of the Board (the “Series A
Directors”), and (ii) as required by law. The Company’s Certificate
of Incorporation will provide that the number of authorized shares of
Common Stock may be increased or decreased with the approval of a
majority of the Preferred and Common Stock, voting together as a
single class, and without a separate class vote by the Common Stock.5 Protective Provisions: [So long as[insert fixed number, or %, or “any”] shares of Series A
Preferred are outstanding,] in addition to any other vote or approval
required under the Company’s Charter or By-laws,the Company will
not, without the written consent of the holders of at least [__]% of the
Company’s Series A Preferred, either directly or by amendment,
merger, consolidation, or otherwise:
(i) liquidate, dissolve or wind-up the affairs of the Company, or
effect any merger or consolidation or any other Deemed
Liquidation Event; (ii) amend, alter, or repeal any provision of the
Certificate of Incorporation or Bylaws [in a manner adverse to the
Series A Preferred];6 (iii) create or authorize the creation of or
issue any other security convertible into or exercisable for any
equity security, having rights, preferences or privileges senior to
or on parity with the Series A Preferred, or increase the authorized
number of shares of Series A Preferred; (iv) purchase or redeem
4See Subsection 2.3.4 of the Model Certificate of Incorporation and the detailed explanation in related footnote 25.
5For corporations incorporated in California, one cannot “opt out” of the statutory requirement of a separate class vote by Common Stockholders to authorize shares of Common Stock. The purpose of this provision is to "opt out"
of DGL 242(b)(2).
6Note that as a matter of background law, Section 242(b)(2) of the Delaware General Corporation Law provides that if any proposed charter amendment would adversely alter the rights, preferences and powers of one series of Preferred Stock, but not similarly adversely alter the entire class of all Preferred Stock, then the holders of that series are entitled to a separate series vote on the amendment.
or pay any dividend on any capital stock prior to the Series A
Preferred, [other than stock repurchased from former employees
or consultants in connection with the cessation of their
employment/services, at the lower of fair market value or cost;]
[other than as approved by the Board, including the approval of
[_____] Series A Director(s)]; or (v) create or authorize the
creation of any debt security [if the Company’s aggregate
indebtedness would exceed $[____][other than equipment leases
or bank lines of credit][unless such debt security has received the
prior approval of the Board of Directors, including the approval of
[________] Series A Director(s)]; (vi) create or hold capital stock
in any subsidiary that is not a wholly-owned subsidiary or dispose
of any subsidiary stock or all or substantially all of any subsidiary
assets; [or (vii) increase or decrease the size of the Board of
Directors].7
Optional Conversion: The Series A Preferred initially converts 1:1 to Common Stock at any
time at option of holder, subject to adjustments for stock dividends,
splits, combinations and similar events and as described below under
“Anti-dilution Provisions.”
Anti-dilution Provisions: In the event that the Company issues additional securities at a
purchase price less than the current Series A Preferred conversion
price, such conversion price shall be adjusted in accordance with the
following formula:
[Alternative 1: “Typical” weighted average:
CP2 = CP1 * (A+B) / (A+C)
CP2= Series A Conversion Price in effect immediately after
new issue
CP1= Series A Conversion Price in effect immediately prior
to new issue
A = Number of shares of Common Stock deemed to be
outstanding immediately prior to new issue (includes
all shares of outstanding common stock, all shares of
outstanding preferred stock on an as-converted basis,
and all outstanding options on an as-exercised basis;
and does not include any convertible securities
converting into this round of financing)8
B = Aggregate consideration received by the Corporation
with respect to the new issue divided by CP1
C = Number of shares of stock issued in the subject
7The board size provision may also be addressed in the Voting Agreement; see Section 1.1 of the Model Voting Agreement.
8The "broadest" base would include shares reserved in the option pool.
transaction]
[Alternative 2: Full-ratchet – the conversion price will be reduced to
the price at which the new shares are issued.]
[Alternative 3: No price-based anti-dilution protection.]
The following issuances shall not trigger anti-dilution adjustment:9
(i) securities issuable upon conversion of any of the Series A
Preferred, or as a dividend or distribution on the Series A
Preferred; (ii) securities issued upon the conversion of any
debenture, warrant, option, or other convertible security; (iii)
Common Stock issuable upon a stock split, stock dividend, or any
subdivision of shares of Common Stock; and (iv) shares of
Common Stock (or options to purchase such shares of Common
Stock) issued or issuable to employees or directors of, or
consultants to, the Company pursuant to any plan approved by the
Company’s Board of Directors [including at least [_______]
Series A Director(s)].
Mandatory Conversion: Each share of Series A Preferred will automatically be converted into
Common Stock at the then applicable conversion rate in the event of
the closing of a [firm commitment] underwritten public offering with
a price of [___]times the Original Purchase Price (subject to
adjustments for stock dividends, splits, combinations and similar
events) and [net/gross] proceeds to the Company of not less than
$[_______] (a “QPO”), or (ii) upon the written consent of the holders
of [__]%of the Series A Preferred.10
[Pay-to-Play: [Unless the holders of [__]% of the Series A elect otherwise,] on any
subsequent [down] round all [Major] Investors are required to
purchase their pro rata share of the securities set aside by the Board
for purchase by the [Major] Investors. All shares of Series A
Preferred11 of any [Major] Investor failing to do so will automatically
[lose anti-dilution rights] [lose right to participate in future rounds]
[convert to Common Stock and lose the right to a Board seat if
9Note that additional exclusions are frequently negotiated, such as issuances in connection with equipment leasing and commercial borrowing. See Subsections 4.4.1(d)(v)-(viii) of the Model Certificate of Incorporation for additional exclusions.
10The per share test ensures that the investor achieves a significant return on investment before the Company
can go public. Also consider allowing a non-QPO to become a QPO if an adjustment is made to the Conversion Price for
the benefit of the investor, so that the investor does not have the power to block a public offering.
11Alternatively, this provision could apply on a proportionate basis (e.g., if Investor plays for ? of pro rata share, receives ? of anti-dilution adjustment).
applicable]. 12
Redemption Rights:13The Series A Preferred shall be redeemable from funds legally
available for distribution at the option of holders of at least[__]% of
the Series A Preferred commencing any time after [________] at a
price equal to the Original Purchase Price [plus all accrued but unpaid
dividends]. Redemption shall occur in three equal annual portions.
Upon a redemption request from the holders of the required
percentage of the Series A Preferred, all Series A Preferred shares
shall be redeemed [(except for any Series A holders who
affirmatively opt-out)].14
STOCK PURCHASE AGREEMENT
Representations and Warranties: Standard representations and warranties by the Company.
[Representations and warranties by Founders regarding [technology
ownership, etc.].15
Conditions to Closing: Standard conditions to Closing, which shall include, among other
things, satisfactory completion of financial and legal due diligence,
qualification of the shares under applicable Blue Sky laws, the filing
of a Certificate of Incorporation establishing the rights and
preferences of the Series A Preferred, and an opinion of counsel to the
12If the punishment for failure to participate is losing some but not all rights of the Preferred (e.g., anything other than a forced conversion to common), the Certificate of Incorporation will need to have so-called “blank check preferred” provisions at least to the extent necessary to enable the Board to issue a “shadow” class of preferred with diminished rights in the event an investor fails to participate. Because these provisions flow through the charter, an alternative Model Certificate of Incorporation with “pay-to-play lite” provisions (e.g., shadow Preferred) has been posted.
As a drafting matter, it is far easier to simply have (some or all of) the preferred convert to common.
13Redemption rights allow Investors to force the Company to redeem their shares at cost (and sometimes investors may also request a small guaranteed rate of return, in the form of a dividend). In practice, redemption rights are
not often used; however, they do provide a form of exit and some possible leverage over the Company. While it is
possible that the right to receive dividends on redemption could give rise to a Code Section 305 “deemed dividend” problem, many tax practitioners take the view that if the liquidation preference provisions in the Charter are drafted to provide that, on conversion, the holder receives the greater of its liquidation preference or its as-converted amount (as provided in the Model Certificate of Incorporation), then there is no Section 305 issue.
14Due to statutory restrictions, it is unlikely that the Company will be legally permitted to redeem in the very circumstances where investors most want it (the so-called “sideways situation”), investors will sometimes request that certain penalty provisions take effect where redemption has been requested but the Company’s available cash flow does
not permit such redemption - - e.g., the redemption amount shall be paid in the form of a one-year note to each unredeemed holder of Series A Preferred, and the holders of a majority of the Series A Preferred shall be entitled to elect
a majority of the Company’s Board of Directors until such amounts are pai d in full.
15Founders’ representations are controversial and may elicit significant resistance as they are found in a minority of venture deals. They are more likely to appear if Founders are receiving liquidity from the transaction, or if
there is heightened concern over intellectual property (e.g., the Company is a spin-out from an academic institution or the Founder was formerly with another company whose business could be deemed competitive with the Company), or in international deals. Founders’ repr esentations are even less common in subsequent rounds, where risk is viewed as significantly diminished and fairly shared by the investors, rather than being disproportionately borne by the Founders. A sample set of Founders Representations is attached as an Addendum at the end of the Model Stock Purchase Agreement.
Company.
Counsel and Expenses: [Investor/Company] counsel to draft closing documents. Company to
pay all legal and administrative costs of the financing [at Closing],
including reasonable fees (not to exceed $[_____])and expenses of
Investor counsel[, unless the transaction is not completed because the
Investors withdraw their commitment without cause].16
Company Counsel: [
]
Investor Counsel: [
]
INVESTOR S’ RIGHTS AGREEMENT
Registration Rights:
Registrable Securities: All shares of Common Stock issuable upon conversion of the Series
A Preferred [and [any other Common Stock held by the Investors]
will be deemed “Registrable Securities.”17
Demand Registration: Upon earliest of (i) [three-five] years after the Closing; or (ii) [six]
months18following an initial public offering (“IPO”), persons
holding [__]% of the Registrable Securities may request [one][two]
(consummated) registrations by the Company of their shares. The
aggregate offering price for such registration may not be less than
$[5-15] million. A registration will count for this purpose only if (i)
all Registrable Securities requested to be registered are registered and
(ii) it is closed, or withdrawn at the request of the Investors (other
than as a result of a material adverse change to the Company).
Registration on Form S-3: The holders of [10-30]% of the Registrable Securities will have the
right to require the Company to register on Form S-3, if available for
use by the Company, Registrable Securities for an aggregate offering
price of at least $[1-5 million]. There will be no limit on the
aggregate number of such Form S-3 registrations, provided that there
16The bracketed text should be deleted if this section is not designated in the introductory paragraph as one of
the sections that is binding upon the Company regardless of whether the financing is consummated.
17Note that Founders/management sometimes also seek limited registration rights.
18The Company will want the percentage to be high enough so that a significant portion of the investor base is behind the demand. Companies will typically resist allowing a single investor to cause a registration. Experienced investors will want to ensure that less experienced investors do not have the right to cause a demand registration. In some cases, different series of Preferred Stock may request the right for that series to initiate a certain number of demand registrations. Companies will typically resist this due to the cost and diversion of management resources when multiple constituencies have this right.
are no more than [two] per year.
Piggyback Registration: The holders of Registrable Securities will be entitled to “piggyback”
registration rights on all registration statements of the Company,
subject to the right, however, of the Company and its underwriters to
reduce the number of shares proposed to be registered to a minimum
of [20-30]% on a pro rata basis and to complete reduction on an IPO
at the underwriter’s discretion. In all events, the shares to be
registered by holders of Registrable Securities will be reduced only
after all other stockholders’ shares are reduced.
Expenses: The registration expenses (exclusive of stock transfer taxes,
underwriting discounts and commissions will be borne by the
Company. The Company will also pay the reasonable fees and
expenses[, not to exceed $______,] of one special counsel to
represent all the participating stockholders.
Lock-up: Investors shall agree in connection with the IPO, if requested by the
managing underwriter, not to sell or transfer any shares of Common
Stock of the Company [(including/excluding shares acquired in or
following the IPO)] for a period of up to 180 days [plus up to an
additional 18 days to the extent necessary to comply with applicable
regulatory requirements]19following the IPO (provided all directors
and officers of the Company [and [1 – 5]% stockholders] agree to the
same lock-up). [Such lock-up agreement shall provide that any
discretionary waiver or termination of the restrictions of such
agreements by the Company or representatives of the underwriters
shall apply to Investors, pro rata, based on the number of shares held. Termination: Upon a Deemed Liquidation Event, [and/or] when all shares of an
Investor are eligible to be sold without restriction under Rule 144(k)
[and/or] the [____] anniversary of the IPO.
No future registration rights may be granted without consent of the
holders of a[majority] of the Registrable Securities unless
subordinate to the Investor’s rights.
Management and Information Rights: A Management Rights letter from the Company, in a form reasonably acceptable to the Investors, will be delivered prior to Closing to each Investor that requests one.20
Any [Major] Investor [(who is not a competitor)] will be granted access to Company facilities and personnel during normal business hours and with reasonable advance notification. The Company will
19See commentary in footnotes 23 and 24 of the Model Investor s’ Rights Agreement regarding possible extensions of lock-up period.
20See commentary in introduction to Model Managements Rights Letter, explaining purpose of such letter.
deliver to such Major Investor (i) annual, quarterly, [and monthly] financial statements, and other information as determined by the Board; (ii) thirty days prior to the end of each fiscal year, a comprehensive operating budget forecasting the Company’s revenues, expenses, and cash position on a month-to-month basis for the upcoming fiscal year[; and (iii) promptly following the end of each quarter an up-to-date capitalization table. A “Major Investor” means any Investor who purchases at least $[______] of Series A Preferred.
Right to Participate Pro Rata in Future Rounds: All [Major] Investors shall have a pro rata right, based on their percentage equity ownership in the Company (assuming the conversion of all outstanding Preferred Stock into Common Stock and the exercise of all options outstanding under the Company’s stock plans), to participate in subsequent issuances of equity securities of the Company (excluding those issuances listed at the end of the “Anti-dilution Provisions” section of this Term Sheet. In addition, should any [Major] Investor choose not to purchase its full pro rata share, the remaining [Major] Investors shall have the right to purchase the remaining pro rata shares.
Matters Requiring Investor Director Approval: [So long as the holders of Series A Preferred are entitled to elect a Series A Director,the Company will not, without Board approval, which approval must include the affirmative vote of [one/both] of the Series A Director(s):
(i) make any loan or advance to, or own any stock or other
securities of, any subsidiary or other corporation, partnership, or other entity unless it is wholly owned by the Company; (ii) make any loan or advance to any person, including, any employee or director, except advances and similar expenditures in the ordinary course of business or under the terms of a employee stock or option plan approved by the Board of Directors; (iii) guarantee, any indebtedness except for trade accounts of the Company or any subsidiary arising in the ordinary course of business; (iv) make any investment inconsistent with any investment policy approved by the Board; (v) incur any aggregate indebtedness in excess of $[_____] that is not already included in a Board-approved budget, other than trade credit incurred in the ordinary course of business;
(vi) enter into or be a party to any transaction with any director, officer or employee of the Company or any “associate” (a s defined in Rule 12b-2 promulgated under the Exchange Act) of any such person [except transactions resulting in payments to or by the Company in an amount less than $[60,000] per year], [or transactions made in the ordinary course of business and pursuant to reasonable requirements of the Company’s business and upon fair and reasonable terms that are approved by a majority of the
Board of Directors];21(vii) hire, fire, or change the compensation of the executive officers, including approving any option grants; (viii) change the principal business of the Company, enter new lines of business, or exit the current line of business; (ix) sell, assign, license, pledge or encumber material technology or intellectual property, other than licenses granted in the ordinary course of business; or (x) enter into any corporate strategic relationship involving the payment contribution or assignment by the Company or to the Company of assets greater than [$100,000.00].
Non-Competition and
Non-Solicitation Agreements:22Each Founder and key employee will enter into a [one] year non-competition and non-solicitation agreement in a form reasonably acceptable to the Investors.
Non-Disclosure and Developments Agreement: Each current and former Founder, employee and consultant will enter into a non-disclosure and proprietary rights assignment agreement in a form reasonably acceptable to the Investors.
Board Matters: [Each Board Committee shall include at least one Series A Director.]
The Board of Directors shall meet at least [monthly][quarterly],
unless otherwise agreed by a vote of the majority of Directors.
The Company will bind D&O insurance with a carrier and in an
amount satisfactory to the Board of Directors. Company to enter into
Indemnification Agreement with each Series A Director [and
affiliated funds] in form acceptable to such director. In the event the
Company merges with another entity and is not the surviving
corporation, or transfers all of its assets, proper provisions shall be
made so that successors of the Company assume the Company’s
obligations with respect to indemnification of Directors. Employee Stock Options: All employee options to vest as follows: [25% after one year, with
remaining vesting monthly over next 36 months].
[Immediately prior to the Series A Preferred Stock investment,
[______] shares will be added to the option pool creating an
21Note that Section 402 of the Sarbanes-Oxley Act of 2003 would require repayment of any loans in full prior
to the Company filing a registration statement for an IPO.
22Note that non-compete restrictions (other than in connection with the sale of a business) are prohibited in California, and may not be enforceable in other jurisdictions, as well. In addition, some investors do not require such agreements for fear that employees will request additional consideration in exchange for signing a
Non-Compete/Non-Solicit (and indeed the agreement may arguably be invalid absent such additional consideration - - although having an employee sign a non-compete contemporaneous with hiring constitutes adequate consideration in jurisdictions where non-competes are generally enforceable). Others take the view that it should be up to the Board on a case-by-case basis to determine whether any particular key employee is required to sign such an agreement.
Non-competes typically have a one year duration, although state law may permit up to two years.
unallocated option pool of [_______] shares.]
Key Person Insurance: Company to acquire life insurance on Founders [name each Founder]
in an amount satisfactory to the Board. Proceeds payable to the
Company.
RIGHT OF FIRST REFUSAL/CO-SALE AGREEMENT
Right of first Refusal/ Right of Co-Sale (Take-me-Along): Company first and Investors second (to the extent assigned by the Board of Directors,) will have a right of first refusal with respect to any shares of capital stock of the Company proposed to be transferred by Founders [and future employees holding greater than [1]% of Company Common Stock (assuming conversion of Preferred Stock and whether then held or subject to the exercise of options)], with a right of oversubscription for Investors of shares unsubscribed by the other Investors. Before any such person may sell Common Stock, he will give the Investors an opportunity to participate in such sale on a basis proportionate to the amount of securities held by the seller and those held by the participating Investors.23
VOTING AGREEMENT
Board of Directors: At the initial Closing, the Board shall consist of [______] members
comprised of (i) [Name] as [the representative designated by [____],
as the lead Investor, (ii) [Name] as the representative designated by
the remaining Investors, (iii) [Name] as the representative designated
by the Founders, (iv) the person then serving as the Chief Executive
Officer of the Company, and (v) [___] person(s) who are not
employed by the Company and who are mutually acceptable [to the
Founders and Investors][to the other directors].
[DragAlong:Holders of Preferred Stock and the Founders [and all future holders of
greater than [1]% of Common Stock (assuming conversion of
Preferred Stock and whether then held or subject to the exercise of
options)] shall be required to enter into an agreement with the
Investors that provides that such stockholders will vote their shares in
favor of a Deemed Liquidation Event or transaction in which 50% or
more of the voting power of the Company is transferred and which is
approved by [the Board of Directors] [and the holders of ____%of
the outstanding shares of Preferred Stock, on an as-converted basis
(the “Electing Holders”)], so long as the liability of each stockholder
in such transaction is several (and not joint) and does not exceed the
stockholder's pro rata portion of any claim and the consideration to be
paid to the stockholders in such transaction will be allocated as if the
consideration were the proceeds to be distributed to the Company's
23Certain exceptions are typically negotiated, e.g., estate planning or de minimis transfers. Investors may also seek ROFR rights with respect to transfers by investors, in order to be able to have some control over the composition of
the investor group.
stockholders in a liquidation under the Company's then-current
Certificate of Incorporation.]24
[Sale Rights: Upon written notice to the Company from the Electing Holders, the
Company shall initiate a process intended to result in a sale of the
Company.]25
OTHER MATTERS
Founders’ Stock:All Founders to own stock outright subject to Company right to
buyback at cost. Buyback right for [__]% for first [12 months] after
Closing; thereafter, right lapses in equal [monthly] increments over
following [__] months.
[Existing Preferred Stock:26The terms set forth above for the Series [_] Preferred Stock are
subject to a review of the rights, preferences and restrictions for the
existing Preferred Stock. Any changes necessary to conform the
existing Preferred Stock to this term sheet will be made at the
Closing.]
No Shop/Confidentiality: The Company agrees to work in good faith expeditiously towards a
closing. The Company and the Founders agree that they will not, for
a period of [______] weeks from the date these terms are accepted,
take any action to solicit, initiate, encourage or assist the submission
of any proposal, negotiation or offer from any person or entity other
than the Investors relating to the sale or issuance, of any of the capital
stock of the Company [or the acquisition, sale, lease, license or other
disposition of the Company or any material part of the stock or assets
of the Company] and shall notify the Investors promptly of any
inquiries by any third parties in regards to the foregoing. [In the event
that the Company breaches this no-shop obligation and, prior to
[________], closes any of the above-referenced transactions [without
providing the Investors the opportunity to invest on the same terms as
the other parties to such transaction], then the Company shall pay to
the Investors $[_______] upon the closing of any such transaction as
liquidated damages.]27 The Company will not disclose the terms of
this Term Sheet to any person other than officers, members of the
Board of Directors and the Company’s accountants and attorneys and
other potential Investors acceptable to [_________], as lead Investor,
24See Subsection 3.3 of the Model Voting Agreement for a more detailed list o f conditions that must be satisfied in order for the drag-along to be invoked.
25See Addendum to Model Voting Agreement
26Necessary only if this is a later round of financing, and not the initial Series A round.
27It is unusual to provide for such “break-up” fees in connection with a venture capital financing, but might
be something to consider where there is a substantial possibility the Company may be sold prior to consummation of the financing (e.g., a later stage deal).
without the written consent of the Investors.
Expiration: This Term Sheet expires on [_______ __, 20__] if not accepted by the
Company by that date.
EXECUTED THIS [__] DAY OF [_________],20[___].
[S IGNATURE B LOCKS]
EXHIBIT A
Pre and Post-Financing Capitalization
Pre-Financing Post-Financing Security # of Shares % # of Shares % Common – Founders
Common – Employee Stock Pool
Issued
Unissued
[Common – Warrants]
Series A Preferred
Total