USA Letter of Intent to Purchase Preferred Stock by Megadox


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[Name of Investor]                                     [Name of Company]
[address of Investor]                                  [address of Company]

Dear Sirs:

This letter is to confirm our discussions and set out a summary of the principal terms with respect to a
proposed purchase of preferred stock in the capital of [Name of Company] (the “Company”) by [Name of
Investor (the “Investor”). This Letter of Intent is intended solely as a basis for further discussions and is
not intended to be and does not constitute a legally binding obligation, except for Section XI, paragraph
(c). A legally binding obligation will only be created pursuant to definitive final agreements to be
negotiated and executed between the parties.

I.       Securities

(a)      The Investor will purchase $___________ worth of newly issued _______________ [describe class of
         shares] Preferred Stock, convertible into shares of common stock, representing _____% of the
         Company on a fully diluted basis including the entire option pool, conversion of all securities
         and exercise of all options and rights. The Investor will purchase the Preferred Stock for
         $________ per share, corresponding to a pre-transaction valuation of $___________________.

(b)      A non-cumulative dividend will accrue on the Preferred Stock at the rate of ______% per annum,
         payable as and when declared by the Board of Directors. Any dividends not paid currently
         (“Accrued Dividends”) shall be paid:

         (a)     upon the liquidation or winding up of the Company,
         (b)     under the provisions of “Liquidity Events”, as defined below, or
         (c)     upon redemption of the Preferred Stock.

         Upon conversion of the Preferred Stock into common stock, all dividends will be cancelled.

(c)      Each share of Preferred Stock will be convertible at any time, at the option of the holder, into
         shares of common stock of the Company at an initial conversion price equal to the original
         purchase price per share, subject to adjustment as described below under the heading “Anti-
         Dilution Provisions”. Initially, each share of Preferred Stock will be convertible into one (1) share
         of common stock.

II.      Liquidity Events

(a)      For purposes of this Letter of Intent, a “Liquidity Event” is defined as any liquidation, sale,
         merger (where a change of control occurs), or winding up of the Company. Upon the occurrence
         of a Liquidity Event in which the price per share is at least _____ times the average per share cost
         of the Investor’s holdings of Preferred Stock, the proceeds shall be allocated between the holders
         of common and Preferred Stock on a pro rata basis, treating the Preferred Stock on an “as if
         converted” basis.
(b)      Upon the occurrence of a Liquidity Event in which the price per share is not at least _____ times
         the average per share cost of the Investor’s holdings of Preferred Stock, the holders of Preferred
         Stock shall be entitled to receive in preference to the holders of the common stock an amount
         equal to the purchase price per share plus Accrued Dividends. Any remaining proceeds shall be

       allocated between the holders of common and Preferred Stock on a pro rata basis, treating the
       Preferred Stock on an “as if converted” basis.

(c)    If no Liquidity Event has occurred by Year ____, each holder of the Preferred Stock will have the
       option to redeem it in equal amounts at the end of Years _________. The redemption price will
       equal the initial purchase price of the Preferred Stock (subject to appropriate adjustment in the
       event of any stock dividends, stock split, combination or other similar re-capitalization affecting
       such shares), plus a yield of ___% compounded per annum for the number of years the Preferred
       Stock is outstanding.

(d)    To the extent that the Company may not legally redeem such shares of Preferred Stock on such
       dates, such redemption shall take place as soon as legally permitted.

(e)    Preferred Stock will be subject to a mandatory conversion in the event of a Qualified IPO, defined
       as one in which over $10 million in new capital is raised for the Company and the offering price
       per share is at least six (6) times the average per share cost of the Preferred Stock.

III.   Option Pool and Founders’ Stock

(a)    Prior to the completion of the investment transaction contemplated in this Letter of intent, an
       additional unallocated option pool of ________ shares, in addition to the pre-transaction
       unallocated pool of ____________ shares, will be created to attract new key employees and
       provide incentives for existing employees. The total unallocated option pool will represent ____%
       of the fully diluted post deal shares.

(b)    75% of the Founders’ stock will be subject to monthly vesting over a ____-year period.

IV.    Use of Proceeds

Proceeds from the investment will be used for working capital purposes. All outstanding shareholder
debt and deferred compensation will be converted into equity and thereafter considered paid-in capital,
prior to closing of the investment transaction.

V.     Board of Directors

(a)    The size of the Board of Directors will not exceed ___ members. Upon completion of the
       investment transaction, the Investor will have the right to elect ___ Board member(s), the
       common shareholders will have the right to elect ___ Board member(s), and the ____ Board
       member(s) will be as mutually agreed upon by the common shareholders and the Preferred

(b)    Board approval will be required for all material transactions, policies and other matters normally
       approved by the Board under _______________ [insert appropriate state] law, including but not
       limited to significant distributions, licensing or other arrangements or contracts, new
       indebtedness other than bank borrowing in the ordinary course of business, and matters relating
       to executive compensation. The Board of Directors shall approve the annual operating plan and
       capital budget. Board approval must also be sought for any capital expenditures in excess of the
       agreed capital budget and prior to engaging searches for new senior executives.

(c)    Board of Directors meetings will be held monthly until such time as the Board determines that
       monthly meetings are not required. The Company will reimburse Directors for their customary
       and reasonable expenses in attending Board meetings.

(d)     The Board will establish a Compensation Committee to recommend management compensation,
        Company benefit plans, and general option plans for approval by the Board. The Compensation
        Committee will consist of __________________________________. The Board of Directors will also
        establish an Audit Committee, which will be composed of _______________________________.

(e)     The Company will provide Directors will full indemnification, and will carry Directors & Officers
        Insurance, provided the Board deems it economically feasible.

VI.     Registration Rights

At any time after ___ months following the Company’s Initial Public Offering, the Investor may request
registration by the Company of its shares and the Company will use its best efforts to cause such shares
to be registered. The Investor has the right to ___________________________ [describe any rights the
Investor will have with respect to registering the shares]. The Company will pay all expenses in connection
with these rights.

VII.    Anti-Dilution Provisions

(a)     The Preferred Stock investment will have standard institutional anti-dilution protection on a
        weighted average basis, in respect of all securities issued by the Company at a price per share less
        than the original purchase price of the Preferred Stock except (i) shares issued pursuant to Section
        III above, and (ii) shares of common stock used upon conversion of any existing Preferred Stock.

(b)     The con
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