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.
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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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