Debt Financing Term Sheet
This Debt Financing Term Sheet sets forth terms and conditions for
the issuance of secured convertible promissory notes to raise capital
for Company startup. The promissory notes will convert to equity
in the company after closing.
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EXPRESS, IMPLIED, OR OTHERWISE, INCLUDING AS TO THEIR LEGAL EFFECT AND
COMPLETENESS. They are for guidance and should be modified to meet your needs and the
laws of your state. Use at your own risk. Docstoc and anyone who participated in providing or
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modifying any form is not creating or entering into an Attorney-Client relationship. Docstoc
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does not provide legal advice. The information and forms are not a substitute for the advice of
your own attorney.
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 ___% calculated on the basis of a
360-day year consisting of twelve, 30-day months (the “Notes”).
2. Amount Invested
A minimum of $_____ and a maximum of $________.
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:
The Notes would be convertible on the following terms:
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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 ____% 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
$_______ (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 __% 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.
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
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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 $__________ in the
aggregate; (viii) make any capital expenditures in excess of $__________ 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 __% 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 __% of the post-money value of
the Company which would vest in equal monthly increments over the __ months beginning on
the day the Independent 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:
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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 __% 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 ____% 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
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:
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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:
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 $________).
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 $_______, plus actual legal fees incurred.
14. Expiration:
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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:
____________________, 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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