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Sample Venture Capital (or Angel) Term Sheet Term Sheet

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Sample Venture Capital (or Angel) Term Sheet Term Sheet
Sample Venture Capital (or Angel) Term Sheet

Term Sheet – Series A Convertible Preferred Stock



Name of Company: ABC Inc.

Investors: Accredited Investors, minimum investment: [$50,000/$100,000 if angel –

larger amounts if VCs].

Amount of Financing: [$500,000 minimum to $2,000,000 maximum].

Optional early closing at Company option upon raising [$500,000].

Current Capitalization: 800,000 common shares outstanding

100,000 options granted

100,000 options reserved for future grants

1,000,000 total current fully-diluted shares

Type of Security: Series A Preferred Stock.

Pre-money Valuation: $2,000,000 (on a fully-diluted basis).

Price of Series A: $2.00 per share. [Calculation: Pre-money Valuation, divided by number

of fully-diluted shares prior to financing.]

A Round Ownership %: 20% ($500,000 offering) to 50% ($2,000,000 offering), post offering, on

a fully-diluted basis.

Closing Date: Projected closing date of March 31, 2009.

Dividends: [Cumulative (important) vs. noncumulative (much less important).]

[Annual dividend rates often vary between 5% and 12% and rate is

important for cumulative dividends].

Liquidation The proceeds from the sale of the Company shall be distributed as

Preference: follows: First, the Series A Investors shall receive $2.00 per share of

Series A Preferred (1x original purchase price), plus all accrued and

declared but unpaid dividends; and second, the Series A Preferred and

Common Stock shall share in any remaining proceeds based upon their

respective stock ownership (assuming the conversion of Series A

Preferred Stock into Common Stock). [Note: This 1x liquidation

preference reflects that the Series A “participates”. Also, can use (i) plain

2x or 3x (very favorable to new investors), (ii) 2x or 3x “kick-outs”

(favorable to new investors), or (iii) non-participating (least favorable to

new investors).]

Conversion Rights: The Series A Preferred shall be entitled to convert into Common Stock,

initially on a one-for-one basis at the option of the holder, subject to

“Anti-Dilution” protection described below.

Anti-Dilution: In the event that the Company issues additional shares of stock (or

options or warrants) at a price of less than $2.00 per share (subject to

customary exceptions), then the conversion ratio of the Series A Preferred

shall be adjusted based upon a [broad-based – which is common and

favorable to the Company] weighted average [vs. full ratchet – which is

pro-investor] basis. [Note: Customary exceptions includes securities

issued under an option plan or to a lender for borrowed money, stock

issued in acquisitions, etc.]

Automatic Conversion: Upon (i) the determination of the holders of a majority of the Series A

Preferred shares, or (ii) the Company’s IPO which generates gross

proceeds of at least [$30] million and is at a price per share of at least







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[$10.00 (5x purchase price)], all Series A shares will be converted into

Common Stock.

Voting Rights/ Series A shareholders are entitled to one vote per share (assuming the

Protective Provisions conversion of Series A Preferred Stock into Common Stock). In addition,

the consent of the holders of a majority of the Series A Preferred will be

required for the following actions: (a) the sale of the Company (whether

by merger, stock sale or asset sale), (b) the increase or decrease of the

authorized number of shares of Preferred Stock or Common Stock or

the designated number of shares of a series of Preferred Stock, (c) the

authorization or issuance of any new class or series of shares, or

reclassification of any existing class of shares into shares, having rights,

preferences or privileges senior to or on a parity with the Series A

Preferred with respect to redemption, dividends, voting or liquidation,

(d) the repurchase or redemption of the Common Stock or Preferred

Stock of the Company other than repurchases upon termination of

employment at or below cost or pursuant to the Company's right of

repurchase, (e) the declaration or payment of any dividend on the

Common Stock, (f) an increase or decrease in the size of the Board of

Directors, (g) the incurrence of any debt in an aggregate amount greater

than $500,000, (h) the liquidation or dissolution of the Company, or (i)

any action that results in any adverse change or alteration to the powers,

preferences or special rights of the Series A Preferred.

Redemption: On or after the [fifth] anniversary of the Closing, the holders of the Series

A Preferred Stock may redeem their shares of Series A Preferred at a

price per share equal to the greater of (i) fair market value of the Series A

Preferred or (ii) [1x or 2x] purchase price, plus accrued and declared but

unpaid dividends. [Note: Although redemption is a common term,

redemption is hardly ever done in fact. It would typically be effected if

the company is a marginal business generating marginal cash flow and

little prospects for bigger success.]

Information Rights: The Company shall provide [monthly/quarterly] unaudited financial

reports to the holders of Series A Preferred. Series A shareholders also

have the right to inspect the Company’s books and records. [Note: (i)

Annual budgets are often required, especially by VCs; and (ii) audited

annual financial statements generally are required.]

Registration Rights: After the earlier of [five] years after closing of the Series A Preferred or

180 days after the closing of the Company’s IPO, the holders of a

majority of the Series A Preferred may elect to register their shares of

Company stock. The Series A Preferred shall also have piggyback and

Form S-3 registration rights. The Company shall pay all registration

expenses (except commissions or underwriting fees on the seller’s

shares).

Lock-up Provision: Series A shareholders shall agree not to sell or transfer any of their shares

or other Company securities from the closing of the IPO until 6 months

after the closing of the IPO. This lock-up provision shall only be

effective if all other shareholders which hold at least 1% of the Company

stock (and all officers and directors) are also subject to the same

provision to at least the same extent.

Right of First Refusal: First, the Company, and then the holders of the Series A Preferred, shall

have the right of first refusal on the proposed sale of any shares held by

the Founders and key employees. [Should this also apply to Series A







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shares? All common stockholders or only founders and executives (the

latter is more typical)?]

Right of Co-Sale: If the Company and the Series A shareholders do not exercise their right

of first refusal, then the Series A shareholders shall have the right to

participate in the sale of any such shares to a third party, on a pro rata

basis (based upon their respective ownership). [Should this also apply to

the sale of Series A shares?]

Preemptive Rights: Each Series A shareholder shall have the right to purchase newly issued

Company securities sufficient to maintain their same percentage

ownership in the Company (subject to customary exceptions, such as

securities issued under an option plan or to a lender for borrowed money,

or stock issued in acquisitions). [Right of oversubscription is common.]

This right shall terminate upon the Company’s IPO or a sale of the

Company.

Board of Directors: The Board of Directors shall be [three-five] members. The Series A

Preferred shall be entitled to appoint [two] directors. The Board shall

meet at least [monthly/quarterly]. [Note: Very important who controls

the Board.]

[Reverse Vesting:?] The Founders shares shall vest in equal monthly installments over a

[24/36/48] month period. [Note: Founders should resist the request for

reverse vesting if made. Also may have tax consequences.]

Proprietary Information As a condition of employment, each employee shall sign an agreement

& Invention Agreement: (and the same for independent contractors) that obligates them to keep

proprietary information confidential and that any inventions related to the

Company’s business are owned by the Company, plus non-solicitation

provisions.



SBIC Side Letter: As a separate condition of Closing, the Company will deliver the attached

form of SBIC Side Letter. [Only necessary if SBICs invest.]



Equity Incentive Plan: The Company will have an Equity Incentive Plan in place at the Closing,

in a form acceptable to the Investors, with four year vesting of options

and stock grants.



Reps and Warranties: The Series A Preferred Stock Purchase Agreement will contain

customary representations and warranties [Note: about 15-30] by the

Company, including: (a) as to intellectual property ownership by the

Company, (b) as to the financial statements and liabilities of the

Company, (c) as to compliance with laws and contracts, and (d) as to

capitalization of the Company including all outstanding options,

warrants, or other rights by any third party to acquire any equity

securities of the Company at any time. It also will contain appropriate

conditions of closing, including an opinion of counsel for the Company.

Additional customary representations and warranties as to the nature of

the business of the Company and the like will be included as may be

required by the Investors. The Stock Purchase Agreement will contain

customary Investor representations and warranties.



Closing and Conditions: Closing will be held on or before March 31, 2009 and is subject to:

(a) final investment approval by Investors following completion of

customary due diligence;







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(b) completion by the Investors’ counsel of legal due diligence;

(c) satisfactory completion, execution and delivery of customary legal

documentation;

(d) no material adverse change in the financial condition or business

prospects of the Company;

(e) the Company obtaining approvals/waivers required from the

Company's Board, its stockholders and any required third parties; and

(f) at least [$500,000 - $2,000,000] of gross proceeds to the Company at

Closing.

Expenses: Company expenses related to this round of financing include legal fees

and financial consultant fees, and are expected to be not more than

[$25,000].

Exclusivity Period: Upon execution of this Term Sheet, the Company agrees to refrain from

entertaining additional investment offers for a period of [30- 45] days

from the date of signing.





[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]









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This Term Sheet is intended as a summary of the discussions of Hogan & Hartson Ventures

with the Company for the proposed financing of the Company by the Investors. Except for the

sections titled “Exclusivity Period” and “Expenses”, this Term Sheet is not a binding agreement

between or among any parties but is subject to negotiation and execution of definitive documents.

[Very important – term sheet is not binding.]

While execution of this Term Sheet creates no legal obligation for either party, other than

adherence to the sections titled “Exclusivity Period” and “Expenses”, we will very much appreciate

the signature of a representative of the Company confirming receipt of this Term Sheet so that Hogan

& Hartson Ventures can proceed with our discussions and commit further resources to moving toward

the Closing. This proposal will expire at 5:00 p.m. (MST) on Friday, February 27, 2009, if by such

time we do not receive a signed copy via facsimile sent to Hogan & Hartson Ventures’ offices (303-

899-7333) to the attention of Mark Heimlich.



Thank you and we look forward to working with you for the continued success of the Company.

HOGAN & HARTSON VENTURES, LP





By:

Name: Mark Heimlich

Title: Manager of the General Partner







ACKNOWLEDGED AND ACCEPTED:



ABC INC.





By

Snake Pliskon, Chief Executive Officer



Date:









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