Startup Financing Offering Memorandum

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Startup Financing Offering Memorandum Powered By Docstoc
					                                      MEMORANDUM OF TERMS

This Memorandum of Terms summarizes the principal proposed terms of the Series A Preferred Stock to
be issued in connection with a private placement by TechStartup, Inc., a Delaware corporation (the
“Company”). Except with respect to provisions entitled “Confidentiality,” “Exclusive Negotiations” and
“Expenses” this Memorandum of Terms represents only the current thinking of the parties with respect to
certain of the major issues relating to the proposed private placement and does not constitute a legally
binding agreement among the parties.


Security:                                     Up to [            ]shares of Series A Preferred Stock (the

Valuation of the Company:                     $[                 ] pre-money

Price Per Share:                              $[                 ]

Aggregate Offering Price:                     Up to $[           ]

Capitalization:                               The pre-financing capitalization and the pro forma
                                              capitalization of the Company following the proposed private
                                              placement are summarized on Exhibit A to this Memorandum
                                              of Terms.

Anticipated Closing Date:                     Initial closing on or before December 31, 2027; one or more
                                              additional closings within 60 days thereafter.

Consideration:                                Cash

                                           Terms of the Preferred

Dividend Provisions:

(1)      Dividend rate: 8%

(2)      Cumulation: noncumulative

(3)      Priority: pari passu with other series and senior to common.

(4)      Participation: after preferred preferential dividends, preferred does not participate in further

Liquidation Preference:

(1)      Amount: original purchase price plus accrued dividends

(2)      Priority: pari passu with other preferred series and senior to common

(3)      Participation: after preferred preferential liquidation proceeds, preferred does not participate in
         further liquidation proceeds
(4)      A sale of all or substantially all of the assets of the Company or a merger or consolidation of the
         Company with or into any other company will be treated as a liquidation, dissolution or winding
         up of the Company.

Redemption: The outstanding shares of Preferred shall not be redeemable.

Conversion: Each holder of Preferred shall have the right to convert shares of Preferred at any time, at the
option of the holder, into shares of Common. The conversion rate shall initially be 1:1, and shall be subject
to antidilution adjustment as described below.

Automatic Conversion: Each share of Preferred shall automatically convert into Common, at the then
applicable conversion rate, upon the earlier to occur of (i) the closing of a firmly underwritten public
offering of shares of common of the Company at a per share public offering price (prior to underwriter
commissions and expenses) equal to three or more times the purchase price of the Preferred and total gross
offering proceeds to the Company in excess of $[                  ] million (a “Qualified Public Offering”),
or (ii) the affirmative consent of the holders of at least 50% of the then outstanding shares of Preferred.

Antidilution Provisions:

(1)     Adjustments. The conversion price of the Preferred shall be subject to adjustment, on a broad-
based weighted average basis, to prevent dilution in the event that the Company issues additional shares at
a purchase price per share less than the then current applicable Conversion Price.

(2)       Exceptions. There will be no adjustment to the Conversion Price of the Preferred for issuances of
(i) shares of common stock issued upon conversion of Preferred, (ii) shares issued to employees,
consultants or directors in accordance with plans approved by the Board of Directors, (iii) shares issued
upon exercise of options or warrants existing on the Closing Date, (iv) shares of common stock issued as a
dividend or distribution on Preferred, (v) shares of common stock issued in connection with a Qualified
Public Offering, (vi) shares of common stock issued or issuable pursuant to an acquisition of another
corporation by the Company, (vii) shares issued or issuable pursuant to equipment lease and bank financing
arrangements, (viii) shares of common stock issued to suppliers of goods or services pursuant to
transactions approved by the Board of Directors, or (ix) shares of common stock that are otherwise
excluded by vote or written consent of holders of a majority of Preferred.

Voting Rights: The holder of each share of Preferred shall have the right to a number of votes equal to the
number of shares of common issuable upon conversion of the Preferred. The Preferred shall vote with
common on all matters except as specifically provided herein or as otherwise required by law.

Protective Provisions: Consent of holders of 50% of the Preferred, voting as a class, shall be required for
any action which (i) materially alters or changes the rights, preferences or privileges of the Preferred as a
class it being understood that creation of a new series of Preferred Stock that is not senior to the Preferred
in rights of liquidation, dividends or redemption shall not be deemed adverse to the Preferred, (ii) increases
the authorized number of shares of preferred stock, (iii) creates any new class or series of shares having
rights, preferences or privileges senior to or on a parity with the Preferred, (iv) approves any merger, sale of
assets or other corporate reorganization or acquisition, (v) approves the purchase, redemption or other
acquisition of any common of the Company, other than repurchases pursuant to stock restriction
agreements approved by the Board of Directors that grant to the Company a right of repurchase upon
termination of the service or employment of a consultant, director or employee, (vi) authorizes the payment
of a cash dividend to any holders of any class or series of capital stock, (vii) results in the transfer of
material assets of the Company to any person other than a wholly-owned subsidiary of the Company, or
(viii) approves the liquidation or dissolution of the Company.

Information Rights:        So long as a holder of Preferred holds at least 250,000 shares of capital stock of
the Company, (i) the Company shall deliver to such holder audited annual financial statements within 120
days following year-end and unaudited quarterly financial statement within 45 days following quarter-end;
(ii) the Company will furnish such holder with annual business plans showing monthly projected financials,
plus monthly updates; and (iii) such holder shall be entitled to inspection. These rights shall terminate
upon the initial public offering of the Common.

Registration Rights:       The investors shall have the following registration rights:

          (1)      Demand Rights: Holders of at least 50% of the Preferred and common issued upon
conversion of the Preferred (collectively, the “Registrable Securities”) shall be entitled to demand that the
Company effect up to two (2) registrations of at least [                  ]% of the Registrable Securities (or
such lesser number of shares as shall have an aggregate price to the public of at least [$ ] million) at any
time following the earlier of (i) three (3) years following the Closing Date, or (ii) six (6) months following
the effective date of the Company’s initial public offering. The Company shall have the right to delay such
registration under certain circumstances for up to two (2) periods not in excess of ninety (90) days each in
any twelve (12) month period.

          (2)       Company Registration: The holders of Registrable Securities shall be entitled to
“piggyback” registration rights on any registered offering proposed to be effected by the Company on its
own behalf or on behalf of selling shareholders (other than an offering related solely to employee benefit
plans or a Rule 145 transaction). In an underwritten offering, however, the managing underwriters shall
have the right, in the event of marketing limitations, to limit the number of shares included in the offering
on behalf of holders of registrable securities. In the event of such marketing limitations, each holder of
Registrable Securities shall have the right to include shares on a pro rata basis as among all such holders
and to include shares in preference to any other holders of Common. No person shall be granted piggyback
registration rights on parity with or superior to those of the investors without the consent of holders of at
least 50% of the Registrable Securities.

         (3)     S-3 Rights: Holders of Registrable Securities shall be entitled to an unlimited number of
demand registrations on Form S-3 (if available to the Company) so long as such registered offerings are
each for common having an aggregate offering price of not less than [$1,000,000]; provided, however, that
the Company shall not be required to file more than [two (2)] such Form S-3 registration statements in any
twelve (12) month period. The Company may defer an S-3 filing for up to 90 days once during any 12-
month period.

          (4)      Expenses: [The Company shall bear the registration expenses (exclusive of underwriting
discounts and commissions) of all demands, piggybacks and S-3 registrations, provided that the Company
shall not be required to pay the fees of more than one counsel to all holders of Registrable Securities.] [The
Company shall bear the registration expenses (exclusive of underwriting discounts and commissions) of all
demand and piggyback registrations. The Investors shall bear the expenses, pro-rata, of all S-3
registrations. The Company shall not be required to pay the fees of more than one counsel to all holders of
Registrable Securities.]

         (5)       Transfer of Rights: Registration rights may be transferred by a holder of Registrable
Securities to current and former partners and members, and affiliates of that holder and to other persons
acquiring at least [____________] shares of the Company’s outstanding capital stock, provided the
Company is given written notice thereof.

         (6)     Standoff Provision: Holders of Registrable Securities shall agree not to sell any of the
Company’s capital stock within one hundred eighty (180) days following the initial public offering by the
Company, provided that all officers and directors (and related funds) of the Company are similarly bound
[and that the Company uses all reasonable efforts to obtain a similar covenant from all holders of at least
1% of the Company’s outstanding securities]

         (7)       Other Provisions: Such other provisions shall be contained in the Investor Rights
Agreement with respect to registration rights as are customary, including cross-indemnification,
underwriting arrangements and the period of time in which the Registration Statement shall be kept
effective (which period shall be no less than [120] days or such shorter period during which the distribution
described in the registration statement shall have been completed). Registrable Securities shall not include
shares held by any holder of less than 1% of the outstanding common stock of the Company if such shares
are available for sale pursuant to Rule 144 (except to the extent the standoff provision limits the holder’s
rights to sell following the offering).

                                               Other Matters

Vesting of Employee Shares: Subject to the discretion of the Board of Directors, shares issued to
employees, directors and consultants pursuant to the Company’s employee stock option plan shall be
subject to four-year vesting, with 25% of the shares vested upon the first anniversary of the commencement
of service and the remaining shares subject to monthly vesting thereafter. If the Board allows an option
holder to exercise an option prior to full vesting, the unvested shares shall be subject to a repurchase option
in favor of the Company which shall provide that upon termination of employment with or without cause,
the Company may repurchase, at cost, any unvested shares held by such shareholder.

Board Representation: The holders of the Preferred shall be entitled to [        ] representative(s) on the
Board of Directors. The Company and its principal shareholders will enter into a voting agreement to elect
to the Board of Directors such representatives of the Preferred plus [ ] representatives of holders of
common stock and [          ] additional mutually agreed independent industry persons. The representatives
of the Preferred shall be entitled to customary indemnification from the Company and reimbursement of
reasonable costs of attendance at meetings of the Board.

Right to Maintain Proportionate Ownership: Each holder of Preferred shall have a right of participation to
purchase a share of any offering of new securities of the Company (other than securities issued to
employees, directors or consultants or pursuant to acquisitions, equipment lease or secured debt financings,
and other customary exceptions) equal to the proportion which the number of shares of the Preferred held
by such holder (on an as-converted basis) bears to the Company’s fully-diluted capitalization (on an as-
converted and as-exercised basis). Such right shall terminate immediately prior to closing of a Qualified
Public Offering.

Co-Sale Agreement: The investors in the Preferred will have the right to participate on a pro rata basis (as
among holders of Preferred) in any proposed transfers of shares by specified members of management,
other than transfers to affiliated persons and entities or gifts to members of the immediate family or family
trusts, provided that the recipient agrees to be bound by the co-sale agreement with respect to subsequent
transfers. This right will terminate on a Qualified Public Offering.

Right of First Refusal on Sales by Management: Key members of management shall enter into an
agreement with the Company and the holders of the Preferred pursuant to which the Company (first) and
holders of the Preferred (second) shall have a right of first refusal, with respect to any proposed transfer of
capital stock of the Company by any such shareholder, to purchase the offered stock at the offered price (on
a pro rata basis among the holders of the Preferred (if the Company does not elect to purchase all of the
offered stock).

[Drag-Along Right: So long as the Investors own shares of Preferred Stock representing at least 25% of the
Company’s common stock on a fully-diluted basis, the Investors shall have drag-along rights with respect
to securities of any of the key members of management in the event of a proposed sale of the Company to a
third party (whether structured as a merger, reorganization, asset sale or otherwise). Such right will
terminate at and upon a Qualified Public Offering.]

[Company Right of First Refusal on Investor Sales: The Company shall have a right of first refusal to
acquire all securities proposed to be transferred or sold by an investor, subject to customary exclusions.]

Stock Restriction Agreements: Key members of management shall enter into agreements pursuant to
which the Company will have an option to repurchase at cost the shares of common stock held by such
person in the event that such shareholder’s employment with, or consulting to, the Company is terminated
prior to the expiration of four years from the date of purchase of the Preferred or the date of first
employment or consulting, whichever date is later. Assuming the shareholder’s continuous status as an
employee or consultant does not terminate, the shares subject to the Company’s repurchase option shall
vest and be released from the repurchase option in accordance with the following schedule: (i) 25% of the
shares shall vest on the anniversary of the closing of the sale of the Preferred, and (ii) 1/48th of the shares
shall vest on the first day of each month, beginning on the first month following the anniversary of the
closing of the sale of the Preferred.

Proprietary Information Agreements: Prior to closing, the Company will enter into Proprietary Information
Agreements with all employees. The Proprietary Information Agreements will contain provisions
satisfactory to the Investor with respect to confidentiality, corporate ownership of inventions and
innovations during employment, and noncompetition and nonsolicitation of employees and customers’
covenants during and after employment.

Purchase Agreement: The investment shall be made pursuant to a Preferred Stock Purchase Agreement
which shall contain, among other things, appropriate representations and warranties of the Company,
covenants of the Company reflecting the provisions set forth herein, and appropriate conditions of closing,
including an opinion of counsel for the Company. The Purchase Agreement shall provide that it may only
be amended with the approval of the Company and holders of more than 50% of the Preferred (and
common issued upon conversion of the Preferred).

[Key Man Life Insurance: The Company shall have obtained and maintain a key man life insurance policy
on each of __________ in the amount of [$2,000,000], with proceeds payable to the Company.]

[Exclusive Negotiations: From the date of this memorandum of terms until the earlier of (1) _________ or
(2) mutual termination of our negotiations, neither the Company nor any of its directors, officers,
employees or representatives will solicit or participate in negotiations or discussions with any person or
entity other than ______________ with respect to any investment in, or acquisition of the Company.]

Finders: The Company and the investors each shall indemnify the other for any finder’s fees for which they
are respectively responsible.

Affiliated Parties: For purposes of determining rights pursuant to share thresholds, an investor shall be
entitled to aggregate all shares held by affiliated funds and constituent partners and members.

Legal Fees and Expenses: Upon closing, the Company shall pay the reasonable fees and expenses of a
single counsel to the investors up to a maximum of $[ ]. Such fees will be payable at closing by wire
transfer or payable upon demand if the Company elects not to proceed with this transaction.

Confidentiality: The existence and terms of this term sheet and the fact that negotiations may be ongoing
with the Investors are strictly confidential and shall not be disclosed to any third party without the consent
of the Company and the lead Investor, except that the Company and the Investors may disclose the terms
and conditions described in this term sheet including its existence to their respective officers, directors,
employees, attorneys and other advisers, provided that such persons agree to the confidentiality restrictions
contained herein.

Conditions Precedent:     The investment contemplated under the proposed terms would be subject to
customary closing conditions, including but not limited to, the following conditions:

         (1)      The business, assets, financial condition, operations, results of operations and prospect of
the Company are substantially as have been represented to the investors and no change shall have occurred
which, in our sole judgment, is or may be materially adverse to the Company.

        (2)       Successful completion of any and all due diligence which the investors believe
          (3)     Negotiation and execution of a definitive agreement setting forth representations and
warranties of the Company and shareholders, covenants and other provisions customary in transactions of
this nature.

TechStartup, Inc. (“Company”)                                     Sandy Hill Ventures

By: _______________________                                       By: _______________________
Name: ____________________                                        Name: ____________________
Title: _____________________                                      Title: _____________________

Date: _____________________

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