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Debt Financing Term Sheet

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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.

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  • pg 1
									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:



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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.



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                                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



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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:


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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:


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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:



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____________________, 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.]




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