MODEL TERM SHEET SERIES A PREFERRED STOCK FINANCING OF STARTUP, INC. This represents a typical VC term sheet, although it presents a range of options and alternative provisions for certain key terms. Term sheets can vary widely, of course, and there are a number of important issues that are not highlighted below, so we strongly encourage you to consult with counsel before signing any term sheet. This term sheet summarizes the proposed terms of the Series A Preferred Stock financing of Startup, Inc. (the “Company”). This term sheet is for discussion purposes only and [,except for the No-Shop and Confidentiality provisions set forth below,] no legally binding obligations will be created unless and until definitive agreements are executed and delivered by all parties. Investment Terms Investors: [___________________] (“Investor 1”) [___________________] (“Investor 2”) and other investors mutually agreed upon by the Investors and the Company. $[________], [including $[________] from the conversion of principal [and interest] on bridge notes]. Fully-diluted pre-money valuation of $[______] (including an available option pool representing [__%] of the fully-diluted postmoney capitalization). The price per share of the Series A Preferred will be $[________] (the “Original Issue Price”), based the capitalization set forth in Exhibit A. The Company’s capital structure before and after the Closing is set forth on Exhibit A.
Amount Raised: Pre Money Valuation; Price Per Share:
Capitalization: Terms of Series A Preferred Stock Liquidation Preference:
In the event of any liquidation, dissolution or winding up of the Company, the proceeds shall be paid as follows: [Alternative 1 -- Company/Founder Friendly -- Non-participating Preferred Stock] First, the holders of the Series A Preferred will receive an amount equal to the Original Issue Price per share plus declared [or accrued] and unpaid dividends, if any. Any amounts remaining after such distribution shall be payable pro-rata to the holders of the common stock. [Alternative 2 -- Investor Favorable -- Fully-participating Preferred Stock] First, the holders of the Series A Preferred will receive an amount equal to the Original Issue Price per share plus declared [or accrued] and unpaid dividends, if any. Any amounts remaining after such distribution shall be payable pro-rata to the holders of the
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Model Term Sheet Page 2 Series A Preferred and the common stock on an as-converted basis. [Alternative 3 -- Middle Ground -- Capped-Participation] First, the holders of the Series A Preferred will receive an amount equal to the Original Issue Price per share plus declared [or accrued] and unpaid dividends, if any. Any amounts remaining after such distribution shall be payable pro-rata to the holders of the Series A Preferred and the common stock on an as-converted basis until the holders of the Series A Preferred have received, together with the initial distribution, a total of [three times] the Original Issue Price. Any amounts remaining after such distributions shall be payable pro-rata to the holders of the common stock. A merger or consolidation (other than one in which stockholders of the Company own a majority by voting power of the outstanding shares of the surviving or acquiring corporation) and a sale, lease, transfer, exclusive license or other disposition of all or substantially all of the assets of the Company will be treated as a liquidation event (a “Deemed Liquidation Event”), thereby triggering payment of the liquidation preferences described above unless the Requisite Preferred Holders (as defined below) elect otherwise. Dividends: [Alternative 1 -- Company/Founder Friendly -- No Accruing Dividend] Dividends will be paid on the Series A Preferred only on an as-converted basis when, as, and if paid on the common stock. [Alternative 2 -- Investor Favorable -- Accruing Dividend] The Series A Preferred will accrue dividends at the rate of [__]% per annum, payable only when and if declared by the Board [or upon a liquidation or redemption]. For any other dividends or distributions, participation with common stock on an as-converted basis. Voting Rights: The Series A Preferred Stock shall vote together with the common stock on an as-converted basis, and not as a separate class, except as required by law or as set forth below with respect to the election of directors and protective provisions. As used herein, the term “Requisite Preferred Holders” means the holders of [a majority] [at least __%] of the Series A Preferred.
Board of Directors:
The board of directors shall consist of [5] members. The holders of the common stock shall be entitled to elect [2] directors (the “Common Directors”), [one of whom shall always be the Company’s then current CEO]. As long as at least [25%] of the Series A Preferred remains outstanding, the holders of the Series A Preferred shall be entitled to elect [2] directors (the “Preferred Directors”), one of whom shall be designated by Investor 1 and one of whom shall be designated by Investor 2, in each case so long as the investor continues to hold at least [25%] of its initial Series A Preferred shares. The remaining director shall be an independent _____________________________________________________________________________________
Model Term Sheet Page 3 director designated with the unanimous consent of the Common Directors and the Preferred Directors. Protective Provisions: So long as at least [25%] of the initial shares of Series A Preferred remain outstanding, the Company will not, without the written consent of the Requisite Preferred Holders, either directly or indirectly by amendment, merger, consolidation, or otherwise: (i) liquidate, dissolve or wind-up the business and affairs of the Company, or effect any Deemed Liquidation Event or consent to any of the foregoing; amend, alter, or repeal any provision of the Certificate of Incorporation or Bylaws [so as to change the rights, preferences or privileges of the Series A Preferred];
(ii)
(iii) create or authorize (whether by reclassification or otherwise), or issue or obligate itself to issue shares of, any other security convertible into or exercisable for any equity security, having rights, preferences or privileges senior to or on parity with the Series A Preferred, or increase the authorized number of shares of Series A Preferred; (iv) purchase or redeem or pay any dividend on any capital stock prior to the Series A Preferred, other than stock repurchased from former employees or consultants in connection with the cessation of their employment/services, at the lower of fair market value or cost as approved by the board of directors including [one of] the Preferred Directors; (v) [create or authorize the creation of any debt security [if the Company’s aggregate indebtedness would exceed $[____][other than equipment leases or bank lines of credit] unless such debt security has received the prior approval of the board of directors including [one of] the Preferred Directors];
(vi) create or hold capital stock in any subsidiary that is not a wholly-owned subsidiary or dispose of any subsidiary stock or all or substantially all of any subsidiary assets; (vii) increase or decrease the size of the Board of Directors; (viii) increase the number of shares reserved for issuance under the Company’s stock plan;
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Model Term Sheet Page 4 (ix) [can be many others]. Conversion: The Series A Preferred initially converts to common stock at an initial ratio of 1:1, subject to adjustments for stock dividends, splits, combinations and similar events, and as described under AntiDilution below. The Series A Preferred shall be convertible at any time at the option of the holder and shall be automatically converted (i) in an underwritten public offering with a price of [___] times the Original Issue Price (subject to adjustments for stock dividends, splits, combinations and similar events) and proceeds to the Company of not less than $[_______] (a “Qualified Public Offering”), or (ii) upon the election of the Requisite Series A Holders. [Alternative 1 -- Most Common Approach -- Broad-based Weighted Average Anti-Dilution] In the event that the Company issues additional securities at a purchase price less than the then current Series A Preferred conversion price, such conversion price shall be adjusted on a broad-based weighted average basis. [Alternative 2 -- Investor Favorable -- Full Ratchet Anti-Dilution] In the event that the Company issues additional securities at a purchase price less than the then current Series A Preferred conversion price, such conversion price shall be reduced to the price at which the new shares are issued. [Alternative 3 -- Company/Founder Friendly, But Not Common -No anti-dilution; Omit this section entirely.] The following issuances shall not trigger anti-dilution adjustment: (i) securities issuable upon conversion of any of the Series A Preferred, or as a dividend or distribution on the Series A Preferred; securities issued upon the conversion of any warrant, option, or other convertible security;
Anti-dilution:
(ii)
(iii) common stock issuable upon a stock split, stock dividend, or any subdivision of shares of common stock; (iv) shares of common stock issued or issuable to employees or directors of, or consultants to, the Company pursuant to any plan or agreement approved by the Company’s Board of Directors [including [one of] the Preferred Directors]; shares of common stock issued or issuable to banks, equipment lessors or other financial institutions, or to real property lessors, pursuant to a debt financing, equipment
(v)
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Model Term Sheet Page 5 leasing or real property leasing transaction approved by the board of directors of the Corporation[, including [one of] the Preferred Directors]. [Pay-to-Play:] [Unless the Requisite Preferred Holders elect otherwise,] in connection with any subsequent [down round] financing, any [Major] Investor who fails to participate to the full extent of their participation rights (as described below under “Participation in Future Rounds”) shall [have their Series A Preferred converted to common stock] [forfeit their anti-dilution rights] [ forfeit the right to participate in future rounds] [other punitive measures].] [The Series A Preferred shall be redeemable from funds legally available for distribution at the option of the Requisite Preferred Holders commencing any time after [five years from the closing of the Series A Preferred financing] at a price equal to the Original Issue Price plus all declared [or accrued] but unpaid dividends, if any. Redemption shall occur in three equal annual portions.]
[Redemption]
Other Investor Rights Registration Rights: Investors shall have customary demand (two demand registrations beginning five years from closing or six months following IPO), S-3 (unlimited, not to exceed two per year) and piggyback registration rights (unlimited) and lockup obligations. [Registration rights in actual term sheets are often more detailed but not worth getting into in the workshop.] [A “Major Investor” means any Investor who purchases at least $[______] of Series A Preferred.] Unless waived by the Requisite Preferred Holders, all [Major] Investors shall have a right to participate in subsequent equity issuances (other than the carveouts listed at the end of the Anti-Dilution section above), based on their pro-rata ownership in the Company (assuming the exercise or conversion of all securities exercisable or convertible into common stock). In addition, should any [Major] Investor choose not to purchase its full pro rata share, such [Major] Investor’s portion shall be allocated among the participating [Major] Investors. Any [Major] Investor will be granted access to Company facilities and personnel during normal business hours and with reasonable advance notification. The Company will deliver to each [Major] Investor (i) annual ([audited]), quarterly, [and monthly] financial statements, and other information as determined by the Board; and (ii) thirty days prior to the end of each fiscal year, a comprehensive operating budget forecasting the Company’s revenues, expenses, and cash position on a month-to-month basis for the upcoming fiscal year.
Participation in Future Rounds:
Information Rights:
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Model Term Sheet Page 6 Rights of first Refusal and Co-Sale: Founders shall be subject to a right of first refusal on stock transfers in favor of the Company first and thereafter the [Major] Investors , and a right of co-sale in favor of the [Major] Investors, subject t to customary exceptions. [So long as the holders of Series A Preferred are entitled to elect a Series A Director, the Company will not, without the approval of the board of directors, which approval must include the affirmative vote of [one of] the Preferred Directors: (i) make any loan or advance to, or own any stock or other securities of, any subsidiary or other corporation, partnership, or other entity unless it is wholly owned by the Company; make any loan or advance to any person, including, any employee or director, except advances and similar expenditures in the ordinary course of business or under the terms of a employee stock or option plan approved by the board of directors; guarantee any indebtedness except for trade accounts of the Company or any subsidiary arising in the ordinary course of business; make any investment inconsistent with any investment policy approved by the board of directors; incur any aggregate indebtedness in excess of $[_____] that is not already included in a board-approved budget, other than trade credit incurred in the ordinary course of business; hire, fire, or change the compensation of the executive officers, including approving any option grants; change the principal business of the Company, enter new lines of business, or exit the current line of business; sell, assign, license, pledge or encumber material technology or intellectual property, other than licenses granted in the ordinary course of business; enter into any corporate strategic relationship involving the payment contribution or assignment by the Company or to the Company of assets greater than [$_____].]
[Matters Requiring Preferred Director Approval:]
(ii)
(iii)
(iv) (v)
(vi) (vii)
(viii)
(ix)
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Model Term Sheet Page 7 [Drag Along] [Significant stockholders shall enter into an agreement with the [Major] Investors that provides that such stockholders will vote their shares in favor of a Deemed Liquidation Event or transaction in which 50% or more of the voting power of the Company is transferred and which is approved by [the board of directors] [the holders of __% of the common stock] [and the Requisite Preferred Holders.] Each current and former founder, employee and consultant will enter into a confidentiality and inventions assignment agreement in a form reasonably acceptable to the Investors. The Preferred Directors shall be entitled to serve on any committee of the board of directors. The board of directors shall meet at least [monthly][quarterly], unless otherwise agreed by the board of directors, including [one of] the Preferred Directors. The Company shall enter into indemnification agreements with the Preferred Directors [and the Investors who designate the Preferred Directors] and shall obtain D&O insurance with a carrier and in an amount satisfactory to the Preferred Directors. Employee Stock Options: All employee options to vest as follows: [25% after one year, with remaining vesting monthly over next 36 months. No acceleration on termination or change of control without the approval of [one of] the Preferred Directors]. [The common stock held by the founders will be subject to vesting (buyback at cost) on the following schedule: [x% vested initially, the remainder vesting monthly over the [__] months following the closing. [[__%] becomes vested on Deemed Liquidation Event.] [[__%] becomes vested upon involuntary termination.] [Company to acquire life insurance (proceeds payable to the Company) on [___________] in an amount satisfactory to the board of directors, including [one of] the Preferred Directors.] [Each Founder and key employee will enter into a non-competition and non-solicitation agreement in a form reasonably acceptable to the Investors.]
Confidentiality and Inventions Agreement: Board Matters:
[Vesting of Founders’ Stock]
[Key Person Insurance:]
[Non-Competition and NonSolicitation and Agreements:] Other Matters Financing Documents; Closing Conditions:
The investment will be made pursuant to a Series A Preferred Stock Purchase Agreement, Amended and Restated Certificate of Incorporation; Investor Rights Agreement; Right of First Refusal and Co-Sale Agreement; Voting Agreement; Indemnification
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Model Term Sheet Page 8 Agreement and other customary documents to be prepared by counsel to [the Company/Investors]. The Stock Purchase Agreement shall include standard representations and warranties by the Company [and the founders]. Conditions to Closing: The financing shall be subject to standard closing conditions, including among other things, satisfactory completion of financial and legal due diligence. No broker, finder or other similar fees shall be paid in connection with the financing. [If the financing closes], the Company shall pay the out-of-pocket expenses of the Investors in connection with this transaction (including legal fees and expenses of one counsel to the Investors), [regardless of whether the transaction contemplated hereby is consummated], subject to a cap of [$_______]. [The Company [and the Investors] agree[s] to work in good faith expeditiously towards a closing.] The Company agrees that it will not, for a period of [30] days from the date hereof, solicit, initiate, encourage or assist the submission of any proposal, negotiation or offer from any person or entity other than the Investors relating to the sale or issuance of any of the capital stock of the Company [or the acquisition, sale, lease, license or other disposition of the Company or any material part of the stock or assets of the Company] [and shall notify the Investors promptly of any inquiries by any third parties in regards to the foregoing]. The Company [the Investors]will not disclose the terms of this term sheet to any person other than officers, directors, accountants, advisors and attorneys [and other potential Investors [acceptable to the Investors]], without the written consent of the Investors. This term sheet expires on [__________] if not accepted by the Company by that date.
Broker/Finder Fees: Expenses:
No Shop/Confidentiality:
Expiration:
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Model Term Sheet Page 9 EXHIBIT A Capitalization Table
Class Common Stock Founders Common Stock Employee Stock Pool Issued/Granted Available Stock Pool Increase Warrants Total Common Preferred Stock Investor 1 Investor 2 Other Investors [Convertible Notes] Total Preferred Total
Pre-Financing Shares %
Post-Financing Shares %
[_______] [_______] [_______] [_______] [_______] [_______]
[____%] [____%] [____%] [____%] [_____% [____%]
[_______] [_______] [_______] [_______] [_______] [_______]
[____%] [____%] [____%] [____%] [____%] [____%]
[_______] [_______] [_______] [_______] [_______] [_______] [____%] [_______]
[____%] [____%] [____%] [____%] [____%] [____%]
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