Sample Venture Capital (or Angel) Term Sheet Term Sheet – Series A Convertible Preferred Stock
Name of Company: Investors: Amount of Financing: Current Capitalization: ABC Inc. Accredited Investors, minimum investment: [$50,000/$100,000 if angel – larger amounts if VCs]. [$500,000 minimum to $2,000,000 maximum]. Optional early closing at Company option upon raising [$500,000]. 800,000 100,000 100,000 1,000,000 common shares outstanding options granted options reserved for future grants total current fully-diluted shares
Type of Security: Pre-money Valuation: Price of Series A: A Round Ownership %: Closing Date: Dividends:
Series A Preferred Stock. $2,000,000 (on a fully-diluted basis). $2.00 per share. [Calculation: Pre-money Valuation, divided by number of fully-diluted shares prior to financing.] 20% ($500,000 offering) to 50% ($2,000,000 offering), post offering, on a fully-diluted basis. Projected closing date of March 31, 2009. [Cumulative (important) vs. noncumulative (much less important).] [Annual dividend rates often vary between 5% and 12% and rate is important for cumulative dividends]. The proceeds from the sale of the Company shall be distributed as 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).] 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. 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.] 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
Liquidation Preference:
Conversion Rights:
Anti-Dilution:
Automatic Conversion:
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[$10.00 (5x purchase price)], all Series A shares will be converted into Common Stock. Voting Rights/ Protective Provisions Series A shareholders are entitled to one vote per share (assuming the 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. 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.] 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.] 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). 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. 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
Redemption:
Information Rights:
Registration Rights:
Lock-up Provision:
Right of First Refusal:
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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?] 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. 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.] 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.] As a condition of employment, each employee shall sign an 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. As a separate condition of Closing, the Company will deliver the attached form of SBIC Side Letter. [Only necessary if SBICs invest.] 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. 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 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;
Preemptive Rights:
Board of Directors:
[Reverse Vesting:?]
Proprietary Information & Invention Agreement:
SBIC Side Letter:
Equity Incentive Plan:
Reps and Warranties:
Closing and Conditions:
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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]. 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.
Exclusivity Period:
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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 (303899-7333) 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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