Term Sheet Negotiation Investor Version Company Version Agreed Version Issuer MediaStream, LLC (“the Company”) MediaStream, LLC (“the Company”) MediaStream, LLC (“the Company”) Purchasers Thor Ventures Security 6% Series B Senior Convertible Preferred Stock Purchase Price $1.00 per share (“Purchase Price”) $1.00 per share (“Purchase Price”) $1.00 per share (“Purchase Price”) Amount $5,000,000 (“the Total Purchase Price”) $5,000,000 (“the Total Purchase Price”) $5,000,000 (“the Total Purchase Price”) Conversion Convertible at option of holder at rate of one share of Common Stock for each share of Preferred Stock. Convertible at option of holder at rate of one share of Common Stock for each share of Preferred Stock. Convertible at option of holder at rate of one share of Common Stock for each share of Preferred Stock. Automatic Conversion The Preferred Stock will be automatically converted in Common Stock of the Corporation in the event of IPO or other Qualifying Liquidation Event. Qualifying IPO: company valuation of 100 million (usually company wants lower because they want to get rid of preferred stock—clean up their balance sheet…investor can always waive it) Define qualified IPO Investor wants IPO conversion because it’s more liquid. Anti-dilution Proportional adjustment for stock splits, stock dividends, recapitalizations, and the like. The conversion price will be adjusted on a weighted average basis (based on all outstanding shares of Series Preferred and Common Stock) for issuances of additional equity securities at a purchase price below the then effective conversion price (subject to standard exceptions). Agreed. Dilution: prevents future rounds being sold at a price lower than what we paid (economic dilution)—if you start issuing at less than 1.00 then when we get our common stock it’s worth less. Dilution adjustment in number of shares and the price. Price adjustment: investor wants full ratchet (price conversion rights are at lower price), but we’ll give them weighted average. Dividends/Distributions The holders of the Preferred Stock shall be entitled to Cumulative—the amount we invested continues to grow. Before the company goes out of business we receive Mandatory Cumulative Dividends at 8%. get paid. Upon liquidation—get par value back + accrued dividends Higher riskhigher dividend IRR for venture40% (we don’t hit this unless we get dividends) If mediastream had developed a new patent then it gives mediastream more bargaining powerhowever, ordinarily you will be pleased with 1 term sheet. Ranking The Preferred Stock will be senior to all other equity securities of the Company. Wants us to subordinate to future offerings. Usually subordination only occurs in series A round (with friends and families). Thor will probably prevail here… Mandatory Redemption Preferred Stock will be mandatorily redeemed after 7 years from the Closing Date at a cash redemption price equal to 110% of the Purchase Price. Redemption makes it liquid. § 500 trumps everything else on redemption rights. Investment horizon for VC fund—we want a way to get out. VC’s usually win here. Redemption at Holder’s Option At the election of the holders of the Preferred, the Company shall redeem the outstanding Preferred shares in two equal installments beginning on the fifth anniversary of the Prior Preferred closing date. After 5 years—if we don’t like where the company is going we want to pull Liquidation Preference In the event of any liquidation, dissolution or winding up of the Company, the holders of the Series Preferred shall be entitled to receive in preference to the Common Stock an amount payable in cash equal to the Original Purchase Price for the Preferred and the original purchase price for the Prior Preferred plus declared and unpaid dividends (the Differences between the two: participating preferred. Investor wants participating (2 bites at the apple); company wants no participating This is one that the company can usually win. Investors win only when the company doesn’t get it. The VC will include the last paragraph (about mergers) so that they can get out upon a sale. VC’s want to include merger/sale in the definition of liquidation. VC’s want to get paid firstthey are in it to raise money. “Liquidation Preference”). After the payment of the Liquidation Preference to the holders of the Series Preferred, the remaining assets shall be distributed ratably to the holders of the Common and the Series Preferred (assuming the conversion of all Preferred Stock). A merger, reorganization or other acquisition type transaction in which control of the Company or all or substantially all of its assets is transferred will be treated by holders of the Series Preferred as a liquidation. Voting The Preferred Stock will vote on all matters on a two for one basis with the Holders of the Common Stock 1:1 Whether each share gets 1 vote, or each converted share gets 1 vote (after stock split). We want 1.6 votes at least (series A) Information Rights The Company shall provide the holders of Preferred access to all books and records of the Company and any other information reasonably requested. Registration Rights The Investors will have demand, piggyback and S-3 registration rights with expenses payable by the Company. The registration rights may be transferred to a transferee who acquires at least 25% of an Investor’s Differences here: demand v. piggyback and when can you make a demand (if we can make demand any time then we can force company to go public…interests of investor and company may not be the same)—careful counsel will say “after IPO”. Company will pay all the registration costs Company registers the shares to go public (only the company even though the stockholders may have shares. Transfer of registration rights to a partner or affiliate of the Investors will be without restrictions as to minimum share holdings. the right to piggyback onto the IPO or registration statement—it’s the company who gets to do it) Underwriters cutback Stockholders Agreement The Investors will not be required to adhere to the provisions of the Stockholders Agreement. Protective Provisions So long as the Investors own at least 30% of the Investor’s original investment, the prior consent shall be required for the following actions: (i) any amendment or change to the rights, preferences, privileges or power of the Series Preferred; (ii) any action that authorizes, creates or issues shares of any class of stock hiving rights, preferences or privileges superior to or on parity with the Series Preferred; (iii) any increase or decrease in the authorized number of shares of the Series Preferred or Common; (iv) any merger or consolidation of the Company with one or more other corporations in which the stockholders of the Company immediately after such merger or consolidation hold stock representing less than a majority of the voting power of the outstanding stock of the surviving corporation and any sale of all or substantially all of the assets of the Company; (v) any amendment or waiver of any provisions of the Company’s Articles of Incorporation (the “Articles”) or Bylaws that affects the rights of the Series Preferred; (vi) the payment of any dividend on the Common Stock; and (vii) other protective provisions to be set forth in the Articles. The consent of a majority of the Preferred, voting as a separate series shall be required for the following actions: (i) any amendment or waiver of provisions of the Company’s Articles or Bylaws that adversely affects the rights, preferences and privileges of the Preferred; and (ii) any action that authorizes, creates or issues shares of stock having rights, preferences or privileges superior to or on a parity with the Preferred. Preemptive Rights The Investors shall have a pro rata right, based on their percentage equity ownership, on a fully diluted basis, to participate in subsequent equity ownership, on a fully diluted basis, to participate in subsequent equity financings of the Company, subject to customary exclusions. Such right will terminate upon the closing of a Qualifying IPO. Co-Sale Rights The holders of the Preferred will have the right to sell on their conditions a proportionate amount of shares of their Preferred stock on an as-converted basis to third parties. Board of Directors Holders of the Preferred, voting as a separate series shall be entitled to elect two members of the Company’s Board of Directors. The names of Board members shall be Shannon Gallagher-Bolton and Scott Shane. important Indemnification The Company shall indemnify the Investors on all claims by third parties arises from status or conduct of the Company. Expenses The Company will pay reasonable legal fees (up to a maximum of $10,000,000 and expenses of counsel for the Investors, payable at the closing or payable if the Company elects not to proceed with this transaction. Founders Lock-Up Pursuant to an IPO, the Founders and all employees agree not to transfer until the 180th day after the completion of the IPO. Important Approved Option Plan None. Confidentiality: The existence and terms of this Term Sheet, and the fact that negotiations may be ongoing with the Investors, are strictly confidential and may not be disclosed to anyone except the Company’s directors, senior executive officers, and legal counsel.