Blognation Term Sheet
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Date: [ ] 2007 To: Blognation Limited Cherry Tree, Popes Lane Cookham Dean, Berkshire SL6 9AS (the “Company”) Dear Sirs RE: INVESTMENT OUTLINE TERMS Further to our recent discussions, we, Secora plc (“Secora”) write to inform you that Secora would be prepared to invest in the Company and this letter sets out the outline terms and conditions upon which that investment would be made. This letter is subject to contract except for paragraphs 6, 7, 8 and 10 which are intended to be legally binding on acceptance. 1. INVESTMENT AMOUNT Our understanding is that an amount of approximately £250,000 is required by the Company to support further expansion and for working capital purposes. Secora is prepared to invest the whole of this amount. 2. 2.1. TERMS OF SECORA’S INVESTMENT IN THE COMPANY Secora’s investment will be £250,000 for 25% of the diluted share capital of the Company. Providing a valuation of £1m post money The investment will be made by way of subscription for a new class of A ordinary shares conferring the rights set out in paragraph 5.2. this is preference share The investment will be made in three (3) tranches detailed below and in accordance with a budget (the “Budget”) to be prepared and agreed between Secora and the board of the Company prior to completion of the investment agreement. Secora will provide written confirmation that sufficient funds have been set aside for the purpose of covering all three tranches (a total of £250,000) and that payments are conditional only on terms agreed with the Company in relation to performance being in line with or no worse than the Budget. This allows total control, budget is kind of funny and open to differing opinion Secora, or its representative, and the Company will schedule two “Investment Meetings” to be held at least five (5) days prior to the investment dates for tranches 2 and 3, in order to review current trading and matters relating to the Company; 2.3.1. 2.3.2. 2.3.3. 2.4. First Tranche £130,000 payable on completion of the investment agreement; £60,000 payable by 1 April 2007; and £60,000 payable by 1 June 2007 2.2. 2.3. Conditional Second Tranche Conditional Third Tranche The Company will issue A ordinary shares to Secora in proportion to the amounts of each investment tranche and on the dates of each such tranche. D:\Docstoc\Working\pdf\b8bc9bad-084b-4c8e-aedb-d5768fcad242.doc 1 2.5. Secora and the board of the Company will agree any payments to be made to the creditors listed in schedule 1 to this letter by the Company from the first such tranche. Secora will assume there are no other creditors, loans, directors’ payments or other such liabilities unless set out in schedule 1. Secora shall be the sole investor in respect of the Company’s funding requirements referred to in paragraph 1 above. Why – if you miss, you cannot raise money. CONDITIONS PRECEDENT Secora will subscribe when the following conditions have been met: 2.6. 3. 3.1. Secora is satisfied with the outcome of due diligence investigations carried out by Secora and/or its financial and legal advisers on the Company; Secora is satisfied with the provisions of the investment documentation; Secora is satisfied with the Company’s banking facilities; the completion of appropriate money laundering checks on the Company and its directors; Secora is satisfied with the factual content and reasonableness of the opinions and forecasts in the business plan and budget for the Company. Secora is not aware of any share option scheme or incentive scheme issued and run by the Company. Any such scheme would require the approval of Secora and would not exceed 10% of the issued share capital at any time. The Company will appoint a finance director or financial controller to keep accurate and current financial records for the Company. Need not be full time BOARD REPRESENTATION Secora would have the right to appoint a non-executive director and/or a Board observer to the Board and all committees constituted by the Board of each of the Company and its subsidiaries. An observer is entitled to the information to which a director is entitled and may call, attend and speak at Board meetings but not vote on any Board matter. The nonexecutive director will be entitled to receive remuneration of £15,000 per annum, payable monthly in arrears, or such other amount as Secora and the Company agree. The observer will not be entitled to any remuneration from the Company. Will not get shares and must be independent. Voting to be agreed. This changes balance of voting 3.2. 3.3. 3.4. 3.5. 3.6. 3.7. 4. 5. INVESTMENT DOCUMENTATION Secora’s investment will require the following documents, all in a form prepared by Secora’s solicitors, Moore Blatch: 5.1. investment agreement between Secora, the Company and its existing shareholders containing the following provisions: 5.1.1. Secora’s prior approval is required before certain key constitutional and management decisions are taken. These are as set out in schedule 2 to this letter; comments there Secora and its agents has the right on demand to inspect and take copies of the books and records, management accounts etc. of the Company and its subsidiaries; but not often, will not be withheld, not to burden 5.1.2. D:\Docstoc\Working\pdf\b8bc9bad-084b-4c8e-aedb-d5768fcad242.doc 2 5.1.3. The Company will keep accurate and current monthly management accounts and send a copy of such accounts to Secora within 14 working days of the end of each month; appropriate warranties and indemnities from the Company and its existing shareholders. These are as set out in schedule 3 to this letter; THIS IS THE MOST IMPORTANT PART – YOU HAVE TO BE 100% BEHIND THESE non-competition and non-solicitation of existing customers, suppliers and staff by any of the existing shareholders whilst they remain shareholders and for a 12 month period after they cease to be shareholders, restrictions on the ability of the existing shareholders to transfer their shareholdings in the Company except as permitted by the articles of association of the Company or Secora’s nominee director; 5.1.4. 5.1.5. 5.2. memorandum and new articles of association of the Company containing the following provisions: 5.2.1. Voting rights: The A ordinary shares shall have one vote per share. It is assumed that the existing authorised and issued ordinary shares of the Company carry one vote per share. Yes but what is the voting rights, what is majority and 51% 5.2.2. Dividend rights: The A ordinary shares shall rank pari passu with the existing ordinary shares. 5.2.3. Conversion: The A ordinary shares shall at the instance of the A ordinary shareholders (or in accordance with related provisions in the new articles of association) be convertible into ordinary shares on a one for one basis, but must be converted at the time of an agreed flotation on a recognised stock exchange. 5.2.4. Liquidation preference/allocation of sale proceeds: In the event of a voluntary winding up or other return of capital, a change of control by way of a share sale or asset sale but not an agreed flotation on a recognised stock exchange (a “Liquidation Event”), the proceeds of such exit shall be distributed as follows: Firstly, the A ordinary shareholders shall in priority to any other shareholder be entitled to that amount of the proceeds equal to one times (1x) the subscription price paid or credited as paid for such shares (together with any accrued or unpaid dividends) (the “Preference Amount”) except in the event that the return to investors exceeds three times (3x) subscription price. THIS MEANS YOU DON’T HAVE MUCH ROOM TO RAISE MORE ON NEW PREFERENCE SHARES, Thereafter the proceeds (if any), shall be shared amongst all shareholders on a pro rata basis. - 5.2.5. Investment preference: AGAIN MAKE REAISING NEW MONEY HARD In relation to any further issue of shares (which has been approved by Secora, the Company shall be obliged to offer such shares to the A ordinary shareholders in priority to any other person but on such terms and at a price which is no less favourable than that agreed by the Company in connection with such further issue. This investment preference shall be capped at the maximum of two times (2x) the A ordinary shareholders’ pre-emption rights based on the D:\Docstoc\Working\pdf\b8bc9bad-084b-4c8e-aedb-d5768fcad242.doc 3 percentage of the issued share capital held by the relevant A ordinary shareholders. To the extent that any A ordinary shareholder chooses not to take up his full investment preference, such shortfall will be made available to the other A ordinary shareholders in priority to any other person. 5.2.6. Anti-dilution: If there is a further issue of shares at a share price of less than Secora’s subscription price, the A ordinary shareholders shall receive additional compensatory shares which would result in their original investment being re-priced at the share price being offered on the qualifying further issue. The compensatory shares shall only be available to those A ordinary shareholders who subscribe pursuant to the relevant further issue for their pro rata share of the further issue for their pro rata share of the further issue, such pro rata share to be calculated by reference to the percentage of the issued share capital held by the relevant A ordinary shareholder. THIS PREVENTS ANYONE INVESTING. 5.2.7. provisions as to transfers of shares: existing shareholders are permitted to transfer shares without restriction to certain family members and family trusts; NEED TO DEFINE AND APPROVE, BUT NOT WITHHELD the ability for the Fund’s nominee to require a takeover offer to be extended to cover the Fund’s shareholding as a condition of the takeover offer completed (i.e. a tag along); provisions for the compulsory transfer of shares by existing shareholders (other than the Fund’s nominee) in the event of a material breach of the investment agreement, articles of association or the service contract of an existing shareholder or the existing shareholder’s employment with the Company or any of its subsidiaries being terminated; NOT SURE standard pre-emption rights on transfers of shares which override a takeover offer; DEFINE a good leaver/bad leaver distinction to be applied to the pricing of shares where the compulsory transfer procedure applies; NO - - - - 5.3. 5.4. service/employment contracts for directors and key staff; and WHERE ARE THEY a disclosure letter setting out specific disclosures only by reference to individual warranties contained in the investment agreement. COSTS AND EXPENSES On completion of the investment, the Company shall: 6. 6.1. pay an arrangement fee of 5% of the amount of Secora’s investment (£12,500 plus VAT) (the “Arrangement Fee”) payable as to 50% as a non-refundable payment (£6,250 plus VAT) on completion of the investment agreement and as to the remaining 50% on receipt of Secora’s second tranche of investment; WHY pay Secora’s solicitors and other advisers reasonable fees and expenses in connection with the investment (“Transaction Costs”). If, following signing by the Company of this offer letter: NEED TO KNOW WHAT THEY ARE AND AGREE PRIOR 6.2. D:\Docstoc\Working\pdf\b8bc9bad-084b-4c8e-aedb-d5768fcad242.doc 4 6.2.1. the Company withdraws from the transaction prior to completion of the investment agreement; or Secora withdraws from the transaction prior to completion of the investment agreement in consequence of it becoming aware of any creditors or material facts about the Company not disclosed to Secora prior to the signing of this letter; 6.2.2. then the Company shall be liable to reimburse Secora for any Transaction Costs up to the date of such withdrawal; 6.3. pay the remuneration of any NON EXEC director appointed by Secora as referred to in this letter. INFORMATION AND CONFIDENTIALITY By accepting this offer, the Company authorises Secora to consult with all the Company’s existing and proposed providers of debt and/or equity finance and advisers and to exchange information in any reasonable manner. It is an express term of this letter that the Company shall not disclose the contents of this letter to any person other than to the Company’s professional advisers without Secora’s prior written consent,WHICH WILL NOT BE UNDEULY WITHHELD EXCLUSIVITY Further work has been undertaken over the coming weeks. Accordingly, the Company agrees, by accepting this offer, not to enter into any discussions or to negotiate with any other providers of equity finance without Secora’s prior written consent. This period of exclusivity will last for a period of two (2) months from the date of this letter. WHY 9. TIME SCALES Subject to the conditions precedent set out in paragraph 3 of this letter, Secora’s objective is to ensure that completion of the investment takes place as soon as reasonably possible after acceptance of this offer. Therefore, Secora reserves the right to amend this offer if: 9.1. it is not accepted on or by 10 December 2007 or such later date as may be agreed in writing between the Company and Secora; or the investment is not completed within 4 weeks after the date of acceptance of this offer, or such later date as may be agreed in writing between the Company and Secora. LEGAL EFFECT This offer letter is not legally binding except that paragraphs 6, 7, 8 and this paragraph 10 will be binding immediately upon the Company countersigning this letter. This letter is governed by English law and any dispute arising in relation to it will be subject to the exclusive jurisdiction of the English courts. Secora believes that this offer has taken the combined objectives of the Company and its shareholders, Secora’s own requirements together with those of the business and produced meaningful financial arrangements for the Company’s development. We trust therefore that this offer meets the Company’s requirements. Yours faithfully 7. 7.1. 7.2. 8. 9.2. 10. [ ] D:\Docstoc\Working\pdf\b8bc9bad-084b-4c8e-aedb-d5768fcad242.doc 5 On behalf of Secora plc Signed for and on behalf of Blognation Limited Date: ……………………………………………. D:\Docstoc\Working\pdf\b8bc9bad-084b-4c8e-aedb-d5768fcad242.doc 6 Schedule 1 LIST OF CREDITORS Payments to be made from first investment tranche Agreed by Secora £ Editors (Eds) Web Developers (Webs) December Eds&Webs 41,000 14,000 12,000 67,000 D:\Docstoc\Working\pdf\b8bc9bad-084b-4c8e-aedb-d5768fcad242.doc 7 Schedule 2 Shareholder agreement PRIOR APPROVAL TO CONSTITUTIONAL AND MANAGEMENT DECISIONS The investment agreement shall contain key constitutional and management decisions which require Secora’s prior approval before they are taken by the Company including but not limited to the following: 1. 2. incurring borrowings above a set limit; need to define now, how to get above limit acquiring businesses or the shares of other companies and making business disposals or disposals of shares in subsidiaries; issuing, repurchasing or reducing any of its share capital; altering its memorandum or articles of association; passing any resolutions for its winding up or entering into any compromise or arrangement with its creditors; guaranteeing or providing security for third party obligations (other than normal trade credit); directors not shareholders granting any security over its assets or factoring or charging any of its book debts; directors not shareholders incurring capital expenditure above agreed limits; what is it changing the nature of its business; entering into any contract otherwise than on an arm’s length basis or in the ordinary course of business; appointing or removing directors or amending key staff employment contracts; not shareholders other than CEO entering into any proposition for admission of its shares to a public market; or making any significant changes to its accounting policies. What is significant? 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. D:\Docstoc\Working\pdf\b8bc9bad-084b-4c8e-aedb-d5768fcad242.doc 8 Schedule 3 WARRANTIES AND INDEMNITIES FROM THE COMPANY AND ITS EXISTING SHAREHOLDERS The investment agreement shall contain appropriate warranties and indemnities from the Company and its existing shareholders including but not limited to the following: 1. the truth and accuracy of the factual information supplied to Secora and its advisers and the reasonableness of the opinions and forecasts supplied to them; the truth and accuracy of the factual information in the business plan and the reasonableness of the opinions and forecasts in the business plan; the truth and accuracy of all replies given to due diligence enquiries raised by Secora and/or its advisers; the accuracy of the books and other records of the Company and its subsidiaries; disclosure of all of the material assets and actual and contingent liabilities of the Company and its subsidiaries; the accuracy of the last statutory accounts for the Company and its subsidiaries and the most recent management accounts; all material contracts have been disclosed to Secora; no material adverse change having occurred since the date of the Company’s last statutory accounts; the ownership or other right for the Company and its subsidiaries to use all intellectual property rights required for its businesses; any infringement of third party rights and/or infringements by third parties of the rights of the Company and its subsidiaries; all IT systems and data are owned by the Company or its subsidiaries; details of the Company’s subsidiaries (if any); the solvency of the Company and its subsidiaries; neither the Company nor the subsidiaries are in breach of any legislation (including environmental legislation); the Company and its subsidiaries are properly insured; the Company or its subsidiaries own and otherwise have the right to occupy the business premises; no material adverse staffing or pensions issues; no material litigation is active, pending or anticipated; and all tax liabilities have been paid or provided for and there are no contingent tax liabilities. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 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