VIEWS: 879 PAGES: 8 CATEGORY: Financing With Debt POSTED ON: 1/4/2012
This Debt Financing Term Sheet sets forth terms and conditions for the issuance of secured convertible promissory notes to raise capital for a startup company. The promissory notes will convert to equity in the company after closing. A term sheet is a non-binding agreement that lays the groundwork for ensuring that the parties involved in a business transaction are in agreement on most aspects of the deal. Once the parties agree to the term sheet, a binding agreement that conforms to the term sheet is drawn up. This document contains numerous standard provisions commonly included in a debt financing term sheet. It should be used in the financing process of a startup company.
This Debt Financing Term Sheet sets forth terms and conditions for the issuance of secured convertible promissory notes to raise capital for a startup company. The promissory notes will convert to equity in the company after closing. A term sheet is a non-binding agreement that lays the groundwork for ensuring that the parties involved in a business transaction are in agreement on most aspects of the deal. Once the parties agree to the term sheet, a binding agreement that conforms to the term sheet is drawn up. This document contains numerous standard provisions commonly included in a debt financing term sheet. It should be used in the financing process of a startup company. DEBT FINANCING TERM SHEET FOR THE PURCHASE AND SALE OF SECURED CONVERTIBLE PROMISSORY NOTES OF ____________________, INC. [Instruction: Enter company name here.] _________________, 20__ This Debt Financing Term Sheet (this “Debt Financing Term Sheet”) sets forth the principal terms offered to __________________ [Instruction: Enter name of investor here.] (the “Investor”) for the purchase of convertible promissory notes of __________________ [Instruction: Enter company name here.], a _______ [Instruction: Enter state of incorporation here.]corporation (the “Company”). SECTION I. GENERAL 1. Type of Security Convertible notes, bearing interest at a simple interest rate of _________ (___%) percent calculated on the basis of a 360-day year consisting of twelve, 30-day months (the “Notes”). 2. Amount Invested A minimum of __________ ($____) dollars and a maximum of _________ ($______) dollars. 3. Investors Investor, as well as other investors designated by Company (collectively, the “Note Investors”). 4. Closing As soon as practicable following the Company’s acceptance of this Debt Financing Term Sheet and satisfaction of the conditions described below under the caption “Conditions to Closing” (the “Initial Closing”). Up to ______ ( ) [Instruction: Enter number here.] additional closings may occur at any time during the _____ ( ) [Instruction: Enter number of days here.] day period following the Initial Closing. SECTION II. TERMS OF THE NOTES 1. Term of Payment: If not converted as provided in paragraph 2 of this section prior to the twelve-month anniversary of the Initial Closing, the Notes would be payable upon demand. Prepayment is not permitted prior to a payoff event (the due date, the closing of a change of control transaction or the closing of the Company’s IPO). 2. Terms of Conversion: Copyright © 2013 Docstoc Inc. 2 The Notes would be convertible on the following terms: A. At any time after the Closing, at the Investor’s option, into a number of shares of the Company’s Common Stock (the “Common Shares”), equal to __________ (____%) percent of the Company’s capital stock calculated on a fully diluted basis; or; B. In the event that the conversion contemplated by the foregoing clause shall not have already occurred, then into the Company’s next issued series of preferred shares (the “Preferred Shares”) resulting in new money of not less than _________ ($____) dollars (the “Preferred Financing”) at the per share price of such Preferred Shares (interest would either be paid or converted at the option of the Company). 3. Change of Control or IPO: If a change of control transaction or the Company’s IPO occurs prior to the Series A Preferred Financing, the Notes would, at the election of the holders of a majority of the outstanding principal of the Notes, be either (i) payable upon demand as of the closing of such transaction or (ii) convertible into shares of the Company’s Common Stock (the “Common Shares”) immediately prior to such transaction at a price per share equal to the lesser of (the “Common Price”) (y) the per share value of the Common Shares as then reasonably determined by the Company’s Board of Directors acting in good faith, from time to time, in connection with either the grant of an incentive stock option qualified under Section 422 of the Internal Revenue Code of 1986, as amended, or the sale of common stock in a private sale to a third party in an “arms- length” transaction, or (z) the per share consideration to be received by the holders of the Common Shares in such transaction. 4. Warrant Coverage: Upon issuance of the Notes in each Closing, purchasers would receive __-year warrants (the “Warrants”) to purchase that number of shares of Warrant Stock determined by dividing ________ ( __%) percent of the original principal amount of such purchaser’s note by the Warrant Exercise Price. “Warrant Stock” means the Series A Preferred Shares, unless the warrant is exercised prior to the Series A Preferred Financing, in which case Warrant Stock means the Common Shares. “Warrant Exercise Price” means the Series A Preferred Price, unless the Warrant Stock is Common Shares, in which case the Warrant Exercise Price is the Common Price. 5. Security: Repayment of the Notes would be secured by a first priority security interest in collateral consisting of all of the assets of the Company. Copyright © 2013 Docstoc Inc. 3 SECTION III. GOVERNANCE 1. Protective Provisions: The Company would not, without the written consent of the holders of at least a majority of the principal amount of the Notes, either directly or by amendment, merger, consolidation, or otherwise (i) liquidate, dissolve or wind up the Company, (ii) merge or consolidate the Company (other than one in which members of the Company own a majority by voting power of the outstanding equity of the surviving or acquiring company), (iii) sell, lease, transfer or otherwise dispose of all or substantially all of the assets of the Company; (iv) amend, alter, or repeal any provision of the Company’s Articles of Incorporation or Bylaws; (v) 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 Notes or the Common Shares; (vi) create or authorize the creation of any debt in excess of ____________ ($______) dollars in the aggregate; (viii) make any capital expenditures in excess of __________ ($______) dollars in the aggregate that are not contemplated by the then-approved Budget; (ix) increase or decrease the size of the Board of Directors of the Company (the “Board”); (x) hire or terminate any senior executive; (xi) license or transfer all or any portion of the intellectual property rights of the Company; (xii) enter into or amend any insider transactions; (xiii) make any loan or advance to any person, including any employee or manager; or (xiv) guarantee any indebtedness except for trade accounts of the Company. 2. Board of Directors/Committees: The Board would consist of not more than _______ ( ) persons. The holders of the Notes would be entitled to elect ______ ( ) [Instruction: Enter number here.]members of the Board (the “Investor Directors”), who would initially be ____________ and ____________. [Instruction: Enter titles of board of director members here.] The holders of the Common Shares would be entitled to elect _______ ( ) _ members of the Board, (the “Founder Directors”) who shall initially be ___________ and ___________. [Instruction: Enter titles of board of director members here.] The holders of the Common Shares would enter into a voting agreement with the Note Investor to ensure such Board composition. The remaining member of the Board would be selected by the Investor Directors and the Founder Directors. Each Board committee would include an Investor Director. At the Initial Closing, each of the Investor Directors would be issued restricted membership units equal to__________ (__%) percent of the post-money value of the Company which would vest in equal monthly increments over the __ ( ) months beginning on _______________, 20__. The Independent Director would be issued restricted membership units equal to ___________ (__%) percent of the post-money value of the Company which would vest in equal monthly increments over the __ ( ) months beginning on the day the Independent Copyright © 2013 Docstoc Inc. 4 Director begins his/her service on the Board of the Company. These awards will not dilute the Investor’s investment. SECTION IV. ADDITIONAL RIGHTS 1. Management and Information Rights: Investor would receive (a) during 20__, monthly “dashboard” summary financial results, and beginning in 20__, monthly financials, (b) quarterly unaudited financials, (c) annually reviewed statements and a budget, and (d) a quarterly brief descriptive report from the CEO. 2. Right to Participate Pro Rata in Future Rounds: All holders of the Notes would have a pro rata right, based on their percentage equity ownership in the Company (assuming the conversion of the Notes into the Common Shares at the Common Price and the exercise of all outstanding warrants and options outstanding under the Company’s stock plans), to participate in subsequent issuances of equity securities of the Company (excluding certain exceptions). 3. Rights of Refusal/Co-Sale: The Company first and the Investor second would have a right of first refusal with respect to any shares of capital stock of the Company proposed to be sold by any current shareholder and employees holding greater than _________ (__%) percent of the Common Stock (assuming exercise of all options and conversion of the Notes) (the “Key Holders”), with a right of oversubscription for Investor of shares unsubscribed by the other Note Investors. Before any Key Holder could sell common stock, such Key Holder would give the holders of the Notes 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 Note Investors. 4. Liquidation Preference: In the event of any liquidation of the Company, Investor will be entitled to receive a preference payment in the amount equal to one (1) times the original investment. 5. Redemption Rights after Conversion: The Common Shares or Preferred Shares would be redeemable from funds legally available for distribution at the option of at least 50% of the Note Investors, commencing any time after the fourth anniversary of the Initial Closing at a price equal to the original purchase price of the Notes plus a ___________ (____%) percent cumulative annual return. Redemption would occur in three equal semi-annual installments. Note Investors not wanting to be redeemed may affirmatively opt-out of any such redemption. 6. Proprietary Information, Inventions and Non-compete, Agreements: Copyright © 2013 Docstoc Inc. 5 Each officer, employee and consultant of the Company would enter into acceptable proprietary information, inventions and non-compete agreements. 7. Representations and Warranties: The Note Purchase Agreement would contain customary representations including, without limitation, organization and qualification, capitalization, intellectual property, authorization, execution and delivery, validity and enforceability of agreements, issuance of the Notes and the Warrants, no litigation, compliance with laws, no governmental consent, taxes, no conflict with agreements and charter provisions, taxes, ERISA, employment and labor regulations, no undisclosed liabilities, no affiliate transactions, no defaults and no material adverse change. 8. Covenants: The Note Purchase Agreement would contain customary covenants, including, without limitation, compliance with laws, maintenance of property, procurement of insurance, payment of taxes and rights to inspect properties. 9. Conditions to Closing: Standard conditions to the Initial Closing, which would include, among others: (i) satisfactory completion of intellectual property, financial, regulatory and legal due diligence of the Company by the Investor; (ii) qualification of the Notes and the Warrants under applicable Blue Sky laws; (iii) the development and implementation of an operating plan that is satisfactory to the Investor; (iv) the adoption of Bylaws and Articles of Incorporation of the Company acceptable to the Investor; and (vi) satisfactory review by the Investor of the financial statements of the Company for the year ended _____. 10. Non-Binding Terms: Except for the provisions set forth in the captions below entitled “Exclusivity”, “Confidentiality” and “Legal Fees and Expenses”, this Debt Financing Term Sheet is not an offer subject to acceptance and no obligation will be created by execution of this Debt Financing Term Sheet unless and until definitive documents have been executed and delivered. 11. Exclusivity: The Company agrees that it will not, at any time prior to _____ ( ) days after its acceptance of this Debt Financing Term Sheet (the “Exclusivity Date”), 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 Investor relating to the sale or issuance of any of the equity of the Company or the acquisition, sale, lease, license or other disposition of the Company or any material part of the Common Shares or assets of the Company. 12. Confidentiality: Copyright © 2013 Docstoc Inc. 6 The Company shall not disclose the terms of this Debt Financing Term Sheet to any person or entity except for the Company’s accountants and attorneys. 13. Legal Fees and Expenses: Investor’s counsel will draft the definitive documents. The Company will pay all legal and administrative costs of the financing incurred by the Investor at the Initial Closing, including reasonable fees and expenses of the Investor’s counsel (not to exceed __________ ($_____) dollars). If the transaction contemplated by this Debt Financing Term Sheet is not completed, the Company shall reimburse the Investor’s costs associated with due diligence in an amount not to exceed __________ ($____) dollars, plus actual legal fees incurred. 1. Expiration: This Debt Financing Term Sheet expires on _____________, 20___ if not accepted by the Company by that date. The undersigned hereby agree to the foregoing terms. This instrument may be executed in one or more counterparts and by facsimile, each of which will constitute an original, and all of which will constitute one and the same instrument. Sincerely, ___________________ [Instruction: Type Investor name here in all caps.] By: ______________________ [Instruction: Type name of person signing document for lead investor here.] Its: ___________________ [Instruction: Type title of person signing document for lead investor here.] ACCEPTED AND AGREED TO AS OF THE DATE SET FORTH BELOW: THE COMPANY: Copyright © 2013 Docstoc Inc. 7 ____________________, INC., [Instruction: Type name of company here.] a _________ [Instruction: Type state of incorporation here.] corporation. By: ______________________ [Instruction: Type name of person signing document for company here.] Its: ___________________ [Instruction: Type title of person signing document for company here.] Copyright © 2013 Docstoc Inc. 8
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