TERM SHEET FOR POTENTIAL
EQUITY INVESTMENT
IN [NAME OF COMPANY]
AND STRATEGIC ALLIANCE
This term sheet summarizes the principal terms with respect to a potential private placement of equity securities of (the "Company") by
("Investor") and related strategic alliance. This term sheet is intended solely as a basis for further discussion and is not intended to be and does not constitute a legally binding obligation. No legally binding obligations will be created, implied, or inferred until a document in final form entitled "Series Stock Purchase Agreement," is executed and delivered by all parties. Without limiting the generality of the foregoing, it is the parties intent that, until that event, no agreement shall exist among them and there shall be no obligations whatsoever based on such things as parol evidence, extended negotiations, "handshakes," oral understandings, or courses of conduct (including reliance and changes of position).
The concern addressed by the last two sentences is whether an agreement in principle or term sheet could be construed to be a contract binding on the investor group. From the investor's perspective, they will not want to be bound in any way until all conditions precedent have been met, such as completion of due diligence and execution of a definitive purchase agreement. The language in the first paragraph of the text would have to be modified if the investors are expecting a "lock-up" or option to invest in the Company, on the terms set forth in the Term Sheet.
| Amount of Investment: |
$ |
| Valuation of the Company: |
$_________Pre-Money on a fully diluted basis
$_________Post-Money on a fully diluted basis |
| Type of Security: |
Shares of the Company's Series Preferred Stock ("Preferred"), convertible into shares of the Company's Common Stock ("Common"). |
| Price Per Share: |
$ ("Original Purchase Price"). |
| Capitalization of the Company: |
The current capitalization of the Company is set forth in Exhibit 1, and the capitalization of the Company after this proposed financing is set forth in Exhibit 2. |
| Rights, Preferences, Privileges and Restrictions of Preferred Stock: |
(1) Dividend Provisions : [Starting on January 1, 20__,] [T]he holders of the Preferred will be entitled to receive dividends [at the rate of % of the Original Purchase Price] whenever funds are legally available and when and as declared by the Board. No dividend shall be paid on the Common at a rate greater than the rate at which dividends are paid on Preferred (based on the number of shares of Common into which the Preferred is convertible on the date the dividend is declared). Dividends on Preferred will be in preference to dividends paid on the Common. Dividends on the Preferred will be noncumulative.
(2) Liquidation Preference : In the event of any liquidation, dissolution or winding up of the Company, the holders of Preferred will be entitled to receive in preference to the holders of Common an amount ("Liquidation Preference") equal to the Original Purchase Price plus any dividends declared on the Preferred but not paid [and then to share with the holders of the Common in the remaining assets on an as-if-converted basis]. At the option of the holders of Preferred, the effectuation by the Company or third party acquirors of a transaction or series of transactions in which more than [50%] [80%] of the voting power of the Company is disposed of to a single person or group of affiliated persons or the consolidation or merger of the Company with or into any other corporation or corporations or the sale of all or substantially all of its assets shall be deemed to be a liquidation, dissolution or winding up for purposes of the liquidation preference.
(3) Conversion : A holder of Preferred will have the right to convert Preferred, at the option of the holder, at any time, into shares of Common. The total number of shares of Common into which Preferred may be converted initially will be determined by dividing the Original Purchase Price by the conversion price. The initial conversion price will be the Original Purchase Price. The conversion price will be the subject of adjustment to reflect stock dividends, stock splits and similar events and as provided in paragraph (5) below.
(4) Automatic Conversion: / The Preferred will be automatically converted into Common, at the then applicable conversion price, upon the closing of a sale of the Company's shares of Common Stock pursuant to a firm commitment underwritten public offering by the Company at a public offering price per share (prior to underwriter commissions and discounts) that is not less than $ / in an offering greater than $[10,000,000].
(5) Antidilution Provisions: The conversion price of the Preferred will be subject to adjustment (i) for stock dividends, stock splits, or similar events, and (ii) on a weighted average basis to prevent dilution in the event that the Company issues additional shares at a purchase price less / than the applicable conversion price. / No adjustment to the conversion price will occur for any issuance of additional shares at a purchase price in excess of the current conversion price. Conversion prices will not be adjusted because of (a) conversion of Preferred Stock, or (b) the issuance and sale of, or the grant of options to purchase, / shares of Common pursuant to the Company's employee stock purchase or option plans (the "Reserved Employee Shares").
(6) Voting Rights: Except with respect to election of Directors, a holder of Preferred will have the right to that number of votes equal to the number of shares of Common issuable upon conversion of its Preferred at the time the shares are voted. Election of Directors will be as described under "Board Representation" below.
(7) Protective Provisions: [So long as there are at least shares of Preferred outstanding,] / consent of the holders of at least a majority of the outstanding Preferred will be required for any action which would: (i) amend or repeal any provision of, or add any provision to, the Company's [Articles] [Certificate] / or Bylaws to change the rights of the Preferred, or increase or decrease the number of authorized shares of the Preferred; (ii) create any new series or class or shares having a preference or priority as to dividends or assets superior to or on a parity with that of the Preferred; (iii) create any bonds, notes or other obligations convertible into, exchangeable for or having option rights to purchase shares of stock with any preference or priority as to dividends or assets superior to or on a parity with that of the Preferred; (iv) reclassify any class or series of Common into shares with a preference or priority as to dividends or assets superior to or on a parity with that of the Preferred; (v) apply any of its assets to the redemption or acquisition of any shares of Common, except from employees, advisors, officers, directors, consultants and serviceproviders of the Company on terms approved by the Board; or (vi) agree to a merger, sale or consolidation of the Company with another entity or the effectuation of any transaction or series of related transactions in which more than [50%] [80%] of the voting power of the Company is disposed.
|
| Redemption: |
The Company shall redeem the Preferred in [three] equal annual installments commencing [six] years from the date of purchase by paying in cash an amount equal to the Original Purchase Price plus any declared but unpaid dividends [plus % for each year the Preferred Stock is outstanding]. To the extent that the Company may not at any such date legally redeem such Preferred, such redemption will take place as soon as legally permitted. / |
| Information and information Registration Rights: |
(1) Registration Rights Agreement: The and registration rights provisions between the Company and any past purchasers of the Company’s stock shall be merged with the registration rights of the investors in this transaction to be set forth in an Information and Registration Rights Agreement (the “Rights Agreement”).
(2) Information Rights: So long as an investor holds Preferred (or Common issued upon conversion of Preferred), the Company will deliver to such investor annual audited and quarterly unaudited financial statements. So long as the investor holds at least % / of the Preferred (or Common issued upon conversion of the Preferred), and the Company has not gone public, the Company will timely furnish such investor with budgets and monthly financial statements.
(3) Demand Rights on Forms other than Form S 3: If, at any time after the earlier of the Company’s initial public offering and the date [three] years from the purchase of the Preferred (but not within 180 days of the effective date of a registration), investors holding at least % / of the Preferred (or Common issued upon conversion of the Preferred) request that the Company file a Registration Statement for at least % / of the Common issued or issuable upon conversion of the Preferred (or any lesser percentage if the aggregate offering price to the public would exceed $ ), / the Company will use its best efforts to cause such shares to be registered. The Company will not be obligated to effect more than two registrations (other than on Form S 3) under these demand registration right provisions. /
(4) Registrations on Form S 3: Holders of at least % of the Preferred (or Common Stock issuable upon conversion of the Preferred) will have the right to require the Company to file an unlimited number of Registration Statements of its Common Stock on Form S 3 (or any equivalent successor form) if the anticipated aggregate public offering price to the public would exceed $ . /
(5) Piggy Back Registration: The investors will be entitled to “piggy back” registration rights on registrations of the Company or on any demand registrations, subject to the right of the Company and its underwriters, in view of market conditions, to reduce or eliminate the number of shares of the investors proposed to be registered. /
(6) Registration Expenses: All registration expenses (exclusive of underwriting discounts and commissions) and special counsel fees of a selling shareholder shall be borne by the Company.
(7) Transfer of Registration Rights: The registration rights may be transferred to a transferee (other than a competitor of the Company) who acquires at least [25%] of the shares held by a holder of Preferred (or Common issued upon conversion of Preferred).
(8) Future Purchasers of Company Securities: / Subsequent purchasers of the Company’s securities may be granted [comparable information and registration rights without the consent of the holders of the Preferred] [information and registration rights upon consent of the holders of at least [51%] of the holders of Preferred (or Common issued upon conversion of Preferred)].
(9) Other Registration Provisions: Other provisions will be contained in the Stock Purchase Agreement with respect to registration rights as are customary, including cross indemnification, the Company’s ability to delay the filing of the demand registration for a period of not more than 120 days, the agreement by purchasers of the Preferred if requested by the underwriter in a public offering not to sell any Company securities they hold for a period of up to 180 days following the effective date of the Registration Statement of such offering, underwriting arrangements and the like. The registration rights will only apply to Common issued upon conversion of Preferred and the Company shall have no obligation to register an offering of Preferred.
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| Board Representation: |
The authorized number of directors of the Company will be not less than nor more than , to be initially fixed at . So long as [25%] or more of the Preferred issued in this financing remain outstanding, the Preferred (voting as a class) will elect directors and the Common (voting as a class) will elect directors. If at any time, less than [25%] of the Preferred remains outstanding, all of the directors will be elected by the Preferred and Common voting together as one class, and the Preferred will be entitled to vote as if all of the Preferred were converted to Common. |
| Use of Proceeds: |
The proceeds from the sale of the Preferred will be used for working capital. / |
| Employment Relationships: |
The Company has or will have prior to the closing employment agreements with the following persons: . The Company will hire persons to the following positions: |
| Market Standoff Agreements |
The Company, prior to closing, will cause all present holders of the Company's Common and all present holders of options to purchase the Company's Common to execute a Market Standoff Agreement with the Company pursuant to which such holders will agree, if so requested by the Company or any underwriter's representative in connection with the first public offering of the Company's Common, not to sell or otherwise transfer any securities of the Company during a period of up to 180 days following the effective date of the registration statement. The Company will require all future purchasers of stock prior to the Company's initial public offering to execute such a Market Standoff Agreement. |
| Reserved Employee Shares: |
The Company may reserve up to / shares of Common (the "Reserved Employee Shares") inclusive of shares presently reserved for issuance upon the exercise of outstanding options for issuance to employees and consultants. The Reserved Employee Shares will be issued from time to time under such arrangements, contracts or plans as are approved by the Board of Directors. Issuance of shares or options to employees in excess of the Reserved Employee Shares will be subject to the investors' right of first refusal described below. Holders of Reserved Employee Shares will be required to execute Stock Restriction and Vesting Agreements as described above. |
| Right of First Refusal: |
In the event that the Company offers equity securities (other than Reserved Employee Shares, or upon conversion of outstanding Preferred, or upon exercise of outstanding options or warrants, or in connection with an acquisition or in a public offering), each investor [who holds at least __% of the Preferred Stock issued in this private placement] shall have a right of first refusal to purchase the same percentage of such offering as such holder purchased of the shares of Preferred issued in this private placement. This right will terminate upon the Company's initial public offering. |
| Confidential Information and Inventions Assignment |
Each officer, director and key employee of the Company will enter into a Confidential and Inventions Assignment Agreement in a form reasonably acceptable to the Company and the investors. / |
| The Stock Purchase Agreement: |
The purchase of the Preferred, if consummated, will be made pursuant to a Stock Purchase Agreement (with exhibits) drafted by counsel to the Investor and acceptable to the Company and the Investor. The Stock Purchase Agreement will contain, among other things, representations and warranties of the Company, / covenants of the Company, / and conditions to the obligations of the Investor. |
| The Strategic Alliance Agreement: |
The parties will enter into [a series of strategic alliance agreements as follows:______________] [a license agreement containing the following key points: (1) a license to the Investor for use of the Company's technology for the following purposes:_________ ;
(2) a royalty fee payable as follows:___________ ;
(3) exclusivity of the license as follows: ____________;
(4) term of the license with renewal rights as follows: ]. [A distribution and marketing agreement containing the following key points:_______________.] |
| Conditions of Closing: |
The closing for the purchase of the purchase of the Preferred will be conditioned upon:
(1) (1) Completion of due diligence to the satisfaction of the investors in their sole discretion.
(2) Execution by the Company of a Stock Purchase Agreement and related agreements satisfactory to the investors in their sole discretion.
(3) Compliance by the Company with applicable securities laws.
(4) Opinion of counsel to the Company rendered to the investors in form and substance satisfactory to the investors.
[(5) Key man life insurance having been obtained for the benefit of the Company on for $ [, provided that the Company can obtain such insurance at normally prevailing rates for persons in good health].]
(6) Execution of strategic alliance agreement.
[(7) Other material conditions.]
(8) Such other conditions as are customary for transactions of this type. |
| Expenses: |
The Company will pay the reasonable legal fees and expenses incurred by a single counsel to the Investor. |
| Finders: |
The Company and the Investor each will indemnify the other for any finder's fees for which that party is responsible. |
| Closing: |
The closing of the transaction, if all conditions are met, is expected to occur on or before_______, 20 . |
| Counsel to the Investors: |
Phone: ( )
Fax: ( )
Attn: |
| Counsel to the Company: |
Phone: ( )
Fax: ( )
Attn: |
| Distribution List: |
The parties list for distribution of documents is set forth as Exhibit 3. |
Exhibit 1
[Current Capitalization
of the Company]
Exhibit 2
[Capitalization of the Company
after the Proposed Financing]
Exhibit 3
[Distribution List for Documents]
|
