Venture Capital Kit - Deluxe Edition |
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Entrepreneurs who are in the process of effecting a venture capital financing for their start-up or emerging companies will negotiate with one or more venture capital firms on a number of fundamental and important issues. These issues are generally initially set forth in a “Term Sheet” which will serve as the basic framework for the investment. It is important that the company anticipate these issues and that the Term Sheet reflect the parties' understanding with respect to them.
The following are some of the more important issues that arise, followed by sample Term Sheets:
Entrepreneurs who are in the process of effecting a venture capital financing for their start-up or emerging companies will negotiate with one or more venture capital firms on a number of fundamental and important issues. These issues are generally initially set forth in a “Term Sheet” which will serve as the basic framework for the investment. It is important that the company anticipate these issues and that the Term Sheet reflect the parties' understanding with respect to them.
The following are some of the more important issues that arise, followed by sample Term Sheets:
ACTION BY UNANIMOUS WRITTEN CONSENT
OF BOARD OF DIRECTORS OF
[ NAME OF CORPORATION]
WHEREAS, it is deemed desirable and in the best interests of this corporation that the following actions be taken by the Directors of this corporation pursuant to this Unanimous Written Consent:
NOW, THEREFORE, BE IT RESOLVED that, pursuant to applicable law, the undersigned, constituting all of the directors of [company name] (the "Corporation"), hereby adopts the following resolutions:Amendment and Restatement of Articles of Incorporation
WHEREAS, it is deemed to be advisable and in the best interests of the Corporation and its shareholders that the Corporation’s Articles of Incorporation be amended and restated in order to:
RESOLVED FURTHER, that the officers of the Corporation be, and each of them hereby is, authorized, empowered and directed, on behalf of the Corporation, to submit the Restated Articles to the shareholders of the Corporation for consideration thereof; and
RESOLVED FURTHER, that, following approval of the Restated Articles by the shareholders of the Corporation, the officers of the corporation be, and each of them hereby is, authorized, empowered and directed, on behalf of the Corporation, to execute the Restated Articles and to have the Restated Articles filed with the California Secretary of State. Series A Preferred Stock Financing
WHEREAS, there has been presented to this Board of Directors a Series A Preferred Stock Purchase Agreement (the "Purchase Agreement"), by and among the Corporation and the Purchasers listed on Exhibit A thereto (collectively, the “Purchasers”) pursuant to which the Purchasers agree to purchase from the Corporation an aggregate of _______________ shares of Series A Preferred Stock (the "Series A Stock") for $_____ per share; and
WHEREAS, there has been presented to this Board of Directors a Rights Agreement (the "Rights Agreement"), by and among the Corporation, the holders of Series A Preferred Stock and the Founder named therein (“Founder”) providing, among other things, for certain restrictions on the transfer and for certain registration rights with respect to the Series A Preferred Stock and certain shares of Common Stock;
WHEREAS, there has been presented to this Board of Directors a Voting Agreement (the "Voting Agreement"), by and among the Corporation, the Founder and the holders of Preferred Stock listed therein, a Right of First Refusal and Co-Sale Agreement (the “Right of First Refusal and Co-Sale Agreement”) by and among...
ACTION BY WRITTEN CONSENT OF THE SHAREHOLDERS OF
[COMPANY NAME]
In accordance with applicable law and the Bylaws of [company name], a [state of incorporation] corporation (the "Corporation"), the undersigned shareholders of the Corporation hereby adopts the following resolutions by written consent, effective for all purposes as of the date first set forth below:
Amendment and Restatement of Articles of Incorporation
WHEREAS, it is deemed to be advisable and in the best interests of the Corporation and its shareholder that the Corporation’s Articles of Incorporation be amended and restated in order to: (i) authorize series of Preferred Stock designated as Series A Preferred Stock, consisting of ________ authorized shares; (ii) set forth the rights, preferences and privileges of such Preferred Stock; and (iii) make certain other changes.
NOW, THEREFORE, BE IT RESOLVED, that the proposed amendments to the Articles of Incorporation of the Corporation set forth above are hereby authorized and approved and that the officers of the Corporation be, and each of them hereby is, authorized and empowered to execute all such instruments, documents and certificates and to take such other actions as they may deem necessary, advisable or proper to amend and restate the Articles of Incorporation of the Corporation as set forth herein.
Issuance and Sale of Series A Preferred Stock
WHEREAS, it is deemed to be advisable and in the best interests of the Corporation and its shareholder that the Corporation enter into a Series A Preferred Stock Purchase Agreement by and between the Corporation, and the Purchasers listed on Exhibit A thereto...
ENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
[NAME OF COMPANY]
[_______________], a corporation organized and existing under the laws of the State of Delaware (the “Corporation”), hereby certifies as follows:
FIRST: The name of the Corporation is [_______________]. The original Certificate of Incorporation of the Corporation was filed with the Secretary of State of the State of Delaware on ____________________, ____.
SECOND: Pursuant to Sections 228, 242 and 245 of the General Corporation Law of the State of Delaware, this Amended and Restated Certificate of Incorporation restates and integrates and further amends the provisions of the Certificate of Incorporation of the Corporation.
THIRD: The text of the original Certificate of Incorporation and any amendment and restatement thereto is hereby amended and restated to read in its entirety as follows:
ARTICLE I
The name of the Corporation is ______________________________.
ARTICLE II
The address of the registered office of the corporation in the State of Delaware is _____________________, in the City of ______________, County of __________________, and the name of its registered agent at that address is ______________________.
ARTICLE III
The purpose of the Corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of the State of Delaware.
ARTICLE IV
ARTICLE V
The rights, preferences, privileges and restrictions granted to or imposed upon the respective classes of the Corporation’s shares of capital stock or the holders thereof are as follows:
1. Dividend Rights
a. The holders of the then outstanding Series A Preferred Stock shall be entitled to receive, out of any funds legally available therefor, when and as declared by the Board of Directors, cumulative dividends at an annual rate of __________ percent (__%) of the original Series A Preferred Stock purchase price of ______ dollar ($________) (the “Original Series A Issue Price”) on each then outstanding share of Series A Preferred Stock, payable in preference and priority to any payment of any dividend on any shares of Common Stock of the Corporation, when and as declared by the Board of Directors (the “Cumulative Dividends”). If declared by the Board, such Cumulative Dividends on the Series A Preferred Stock shall be payable annually on each ________ __, commencing on ___________, ____. [The right to such dividends on the Series A Preferred Stock shall not be cumulative, and no rights shall accrue to the holders of Series A Preferred Stock by reason of the fact that dividends on such shares are not declared or paid in any prior year] [or] [The right to such dividends on the Series A Preferred Stock shall be cumulative, and shall be declared and paid upon the occurrence of any of the following events:2. Liquidation Rights
In the event of any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, the holders of each share of Series A Preferred Stock then outstanding shall be entitled to receive, out of the assets of the Corporation available for distribution to its stockholders, before any amount shall be paid to holders of Common Stock, the Original Series A Issue Price for each share of Series A Preferred Stock (appropriately adjusted for any stock splits, stock dividends, combinations and similar events), plus their Cumulative Dividends (the “Liquidation Preference”). If, upon the occurrence of the liquidation, dissolution or winding up of the Corporation, the assets and surplus funds distributed among the holders of Series A Preferred Stock shall be insufficient to permit the payment to such holders of their Liquidation Preference, then the entire assets and surplus funds of the Corporation legally available for distribution shall be distributed ratably among the holders of Series A Preferred Stock. If, upon the occurrence of the liquidation, dissolution or winding up of the Corporation, after the payment to the holders of Series A Preferred Stock of their Liquidation Preference, assets or surplus funds remain in the Corporation, the holders of Series A Preferred Stock
and the Common Stock shall be entitled to share in all such remaining assets and surplus funds in the same manner as if all shares of Series A Preferred Stock had been converted into Common Stock at the then effective Conversion Price (as defined in Section 5 below) immediately prior to the liquidation, dissolution or winding up of the Corporation.
At the election of the holders of a majority of the outstanding shares of the Series A Preferred Stock, for purposes of this Section 2, a liquidation, dissolution or winding up of the Corporation shall be deemed to be occasioned by, and to include, the Corporation’s sale, conveyance or disposition of all or substantially all of its assets or the effectuation by the Corporation (or third party acquirors) of a transaction or series of related transactions in which more than 50% of the voting power of the Corporation is disposed of, excluding transfers by the holders of the Series A Preferred Stock not...
Re: Board Observation Rights
Ladies and Gentlemen:
This letter will confirm our agreement that pursuant to your purchase of shares of Series __ Preferred Stock of _________________ (the “Company”), ______________________ (“Investor”) will be entitled to the following rights, in addition to the rights specifically provided in the documents between the Company and Investor of even date herewith.
Due Diligence Checklist
In connection with a potential transaction with venture investors, please provide us with the following materials or information relating to ______________________________, and any subsidiaries (together, the “Company”). Upon review, we may request additional documents. If compiling any of the requested items would be unduly burdensome, please let us know so that we may arrange a less burdensome alternative. If you have already delivered any of the information, please so indicate and you need not provide an additional copy.
A. Corporate Documents of the Company and Subsidiaries
DUE DILIGENCE QUESTIONNAIRE
This questionnaire is intended to help us obtain basic information about your business in connection with [describe potential transaction]. Please answer the questions listed below for _____________ and its subsidiaries in the spaces provided or use an attachment. Please return the completed questionnaire to __________________________ at________________________ (___)_____, with the other documents that we ask you to furnish. If you need clarification or have questions, please call ________________. Once we have reviewed your completed questionnaire and documents, we may need further information.
1. Capitalization
INVESTORS RIGHTS AGREEMENT
This Agreement is made as of the ____ day of __________, 20__ by and among [Name of Company], a ____________________ corporation with a principal place of business at ____________________ (the “Company”) and each of the stockholders of the Company listed in Exhibit A attached hereto (collectively the “Stockholders”).
Background
The Company currently has issued and outstanding __________ shares of its Common Stock, and __________ options to purchase Common Shares. On the date of this Agreement, the Company is issuing and selling shares of its Series A Preferred Stock (“Series A Shares”) pursuant to the _____________ Series A Preferred Stock Purchase Agreement (the “Series A Stock Purchase Agreement”), and is issuing Series A Shares upon conversion of certain outstanding debt of the Company. The purchasers of the Series A Shares have required this Agreement as a condition to the closing of their investment under the Series A Stock Purchase Agreement. Certain defined terms are defined in Article IV.
AGREEMENT ARTICLE I
COVENANTS OF THE COMPANY
1.01
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Affirmative Covenants of the Company. The Company covenants and agrees that until the consummation of a Qualified Public Offering, it will perform and observe the following covenants and provisions, and will cause each Subsidiary, if and when such Subsidiary exists, to perform and observe such of the following covenants and provisions as are applicable to such Subsidiary: |
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[Name of Company]
PREFERRED STOCK PURCHASE AGREEMENT
Dated as of ____________________
PREFERRED STOCK PURCHASE AGREEMENT
Preferred Stock Purchase Agreement (this "Agreement"), dated as of ________________, by and among __________________, a Delaware corporation (the "Company"), and the purchasers listed on Schedule 1.1 hereto (the "Purchasers").
ARTICLE 1
PURCHASE AND SALE OF STOCK
SECTION 1.1 Delivery. Subject to the provisions of this Agreement, the Purchasers agree to purchase at the Closing (as defined below), and the Company agrees to sell and issue to the Purchasers at the Closing, shares of Series A Preferred Stock (the "Shares") of the Company, for the purchase price of $_____ per share. The name and address of each Purchaser, and the number of Shares to be acquired by each Purchaser, are set forth in Schedule 1.1. The purchase and sale of Shares shall take place at the offices of the Company at 10:00 a.m. West Coast time, on ________________ or at such other time and place as the Company and a majority-in-interest of the Purchasers agree upon in writing (which time and place are designated as the "Closing" and which date is designated as the "Closing Date"). At the Closing the Company shall deliver to each Purchaser a certificate representing the Shares which such Purchaser is purchasing against delivery to the Company by such Purchaser by wire transfer, certified check or immediately available funds, or other manner of payment approved by the Company, in the amount of the purchase price therefor payable to the Company's order.
SECTION 1.2 Subsequent Sales of Shares. At any time up to 180 days following the Closing, the Company may sell up to __________ shares of additional Series A Preferred Stock to such additional investors as may be approved by the Board of Directors of the Company. All such sales shall be made on the terms and conditions set forth in this Agreement. Any Shares sold pursuant to this Section 1.2 shall be deemed to be "Series A Preferred Stock" and shall be deemed to be "Shares" sold pursuant to this Agreement, any purchasers thereof shall be deemed to be "Purchasers" for all purposes under this Agreement, and any such subsequent sale shall be deemed to occur at a "Closing" and the date of any such Closing shall be deemed to be a "Closing Date." The new purchasers shall become parties to this Agreement by signing a counterpart signature page hereto.
ARTICLE 2
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants that, except as set forth in the Disclosure Schedule attached hereto:
SECTION 2.1 Organization, Standing and Qualification. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has full corporate power and corporate authority to own, lease and operate its property and assets and to conduct its business as presently conducted and as proposed to be conducted by it. The Company has full corporate power and corporate authority to enter into and perform its obligations under this Agreement, the Rights Agreement in the form of Exhibit B hereto (the "Rights Agreement") and the Co-Sale Agreement (as defined below) (collectively, the "Transaction Documents"), and to carry out the transactions contemplated by the Transaction Documents. The nature of the Company's business and its ownership or leasing of property do not require that the Company become qualified as a foreign corporation in any state or jurisdiction other than where the failure to so qualify will not have a material adverse impact on the Company. Complete and correct copies of the Amended and Restated Certificate of Incorporation (the "Restated Certificate") and By-laws of the Company, as amended to date, have been delivered to counsel for the Purchasers.
SECTION 2.2 Capitalization.
SECTION 2.3 Validity of Stock. The Shares to be sold pursuant to this Agreement, when issued, sold, and delivered in accordance with the terms of this Agreement, will be duly and validly issued, fully paid and non-assessable. The shares of Common Stock issuable upon conversion of the Shares have been duly and validly reserved for issuance and, upon issuance in accordance with the terms of the Restated Certificate, will be duly and validly issued, fully paid and non-assessable.
SECTION 2.4 Subsidiaries. The Company does not own any capital stock, partnership interests or other equity interests of, or control, directly or indirectly, any other corporation, partnership, association or business entity.
SECTION 2.5 Financial Statements. The Company has furnished the Purchasers with its unaudited balance sheet as of ____________ (the "Current Balance Sheet") and its unaudited statement of operations and statement of cash flows for the ______ period ended _________, ____ (collectively, the "Financial Statements"). Except as set forth in Schedule 2.5, the Financial Statements are true and correct in all material respects, have been prepared in accordance with the books and records of the Company, and, except as set forth on Schedule 2.5, have been prepared in accordance with generally accepted accounting principles ("GAAP") consistently applied, and fairly present the financial position and cash flows of the Company as of such date and the results of its operations for the periods then ended.
The tangible assets designated on the Current Balance Sheet are shown thereon at actual cost, less depreciation and amortization, and, in the case of plant and equipment, are in good operating condition and state of repair in all material respects. All accounts receivable (if any) shown on the Current Balance Sheet constitute accounts receivable resulting from the sale of goods and services in the ordinary course of business, and, to the knowledge of the Company, such accounts receivable are subject to no conditions as to payment, offsets, counterclaims, defenses of any kind, returns, allowances, or credits other than to the extent of the allowance for doubtful accounts shown thereon.
SECTION 2.6 Insurance. Set forth on Schedule 2.6 is a true and complete list of all current insurance policies of the Company.
SECTION 2.7 Authorization; Approvals. All action on the part of the Company and its stockholders necessary for the authorization, execution, delivery, and performance of all its obligations under the Transaction Documents and for the authorization, issuance, and delivery of the Shares being sold under this Agreement, has been taken. Each of the Transaction Documents constitutes the valid and legally binding obligation of the Company, enforceable against the Company in accordance with its terms. The Company has obtained or will obtain prior to the Closing all necessary consents, authorizations, approvals and orders, and has made all registrations, qualifications, designations, declarations or filings with all federal, state, or other relevant governmental authorities, required on the part of the Company in connection with the consummation of the transactions contemplated by the Transaction Documents.
SECTION 2.8 No Conflict with Other Instruments. The execution, delivery and performance of each of the Transaction Documents does not and will not result in any violation of, conflict with, or constitute a default under any term or provision of (i) the Restated Certificate or Bylaws; (ii) any judgment, decree or order to which the Company is a party or by which its property is bound; (iii) any agreement, contract, understanding, indenture or other instrument to which the Company is a party, the effect of which would give rise to a material adverse effect on the Company; or (iv) any statute, rule or governmental regulation applicable to the Company or any of its property.
SECTION 2.9 Absence of Undisclosed Liabilities; Changes.
[NAME OF COMPANY]
SERIES A PREFERRED STOCK PURCHASE AGREEMENT
This Series A Preferred Stock Purchase Agreement (this "Agreement"), is made as of __________, ____ by and among [Name of Company], a Delaware corporation (the "Company"), and the undersigned purchasers (the "Purchasers").
NOW, THEREFORE, the parties hereto hereby agree as follows:
1. Authorization and Sale of Preferred Shares.
1.1 Authorization. The Company has duly authorized the sale and issuance of up to __________ shares of its Series A Preferred Stock having the rights, privileges and preferences set forth in the Company's Amended and Restated Certificate of Incorporation (the "Amended Certificate") in the form attached hereto as Exhibit A.
1.2 Sale of Preferred. Subject to the terms and conditions hereof, the Company shall issue and sell to the Purchasers, and each Purchaser agrees, severally, to purchase at the Closing, from the Company, an aggregate of _______ shares of Series A Preferred Stock (collectively, the "Shares"), at a purchase price of $____ per share. The amount to be purchased by each Purchaser and the form of consideration therefor is set forth in the Schedule of Purchasers attached as Schedule 1.
2. Closing Date; Delivery.
2.1 Closing Date. The closing of the purchase and sale of the Shares hereunder (the "Closing") shall be held at the offices of ___________________, at______________________, _______________, ______________, at __:___ [a.m.] [p.m.], __________, 20__ or at such other time and place as is mutually agreed to by the parties hereto (the date of the Closing is hereinafter referred to as the "Closing Date").
2.2 Delivery. Subject to the terms of this Agreement, at the Closing, the Company will deliver to the Purchasers a certificate representing the number of Shares being purchased by the Purchasers, which certificate shall be registered in the name of the Purchasers, against payment in full by the purchasers of the purchase price therefor by check or such other form of payment as shall be mutually agreed upon by the Purchasers and the Company, payable to the order of the Company.
3. Representations and Warranties.
The Company hereby represents and warrants to the Purchasers that:
3.1 Organization and Standing. The Company is a corporation duly organized and validly existing under the laws of the State of Delaware, is in good standing under such laws and is qualified to do business in California. The Company has all requisite power and authority to own and operate its properties and assets and to conduct its business as presently conducted and as proposed to be conducted. The Company is qualified or licensed and in good standing as a foreign corporation in all jurisdictions where the nature of its business or property makes such qualification or licensing necessary and the failure to be so qualified or licensed could materially adversely affect the business, earnings, prospects, properties or condition (financial or other) of the Company. True, complete and accurate copies of the Company's Certificate of Incorporation, Bylaws and all amendments to each to date have been delivered to counsel for the Purchasers and the Company has provided such counsel with copies of the minutes of all meetings, and all consents in lieu of meetings, of the Board of Directors and stockholders of the Company. Prior to the Closing, the Company shall have properly filed the Amended Certificate with the Secretary of State of Delaware and the same shall be in full force and effect.
3.2 Capitalization.
3.3 Corporate Power; Authorization. The Company has all requisite power and authority to enter into this Agreement and the other documents and agreements contemplated herein, to sell the Shares hereunder, and to carry out and perform its obligations under the terms of this Agreement and the other documents and agreements contemplated herein. All corporate action on the part of the Company and its officers, directors and stockholders necessary for the authorization, execution and delivery of this Agreement and the other documents and agreements contemplated herein, for the performance of the Company's obligations hereunder, for the consummation of the transactions contemplated herein, and for the authorization, issuance and delivery of the Shares and the Common Stock issuable upon conversion thereof has been taken or will be taken prior to the Closing. This Agreement has been duly executed and delivered by the Company and constitutes a legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its terms. As of the Closing Date, this Agreement and the other documents and agreements contemplated herein, will have been duly executed and delivered by the Company, and all parties thereto (other than the Purchasers), and will constitute legal, valid and binding obligations of the Company and such other parties, enforceable against each of them in accordance with their terms.
3.4 Subsidiaries. The Company does not presently own, of record or beneficially, or control, directly or indirectly, any capital stock or equity interest in any corporation, association or business entity. The Company is not, directly or indirectly, a participant in any joint venture or partnership.
3.5 Validity of Securities. The Shares, when issued, sold and delivered in accordance with the terms of this Agreement, will be duly and validly issued, fully paid and nonassessable and will be free and clear of any preemptive rights, security interests, claims, liens or encumbrances created by the Company. The Common Stock issuable upon conversion of the Shares has been, or prior to the Closing will be, duly and validly reserved and, upon issuance in accordance with the terms of this Agreement and the Amended Certificate, will be duly and validly issued, fully paid and nonassessable and will be free and clear of any preemptive rights, security interests, restrictions on transfer, claims, liens or encumbrances other than restrictions under applicable and state securities laws.
3.6 Governmental Consents.
RIGHT OF FIRST REFUSAL AND CO-SALE AGREEMENT
THIS RIGHT OF FIRST REFUSAL AND CO-SALE AGREEMENT is made this day of , ____, by and among , a __________ corporation (the "Company"), the Investors listed on the signature pages A hereto (collectively, the "Investors" and each individually, an "Investor") and the individuals identified on the signatures pages hereto as Key Shareholders who shall have executed a counterpart signature page hereto (collectively, the "Key Shareholders" and each individually, a "Key Shareholder") and their respective spouses, if any.
RECITALS:
NOW THEREFORE, in consideration of the mutual promises and covenants contained herein the parties hereto agree as follows:
1. Right of First Refusal on Key Shareholder Stock.
a. If at any time a Key Shareholder reaches agreement with any third party to sell or otherwise assign for consideration shares of the Company's common stock ("Common Stock"), or other securities of the Company convertible into or exchangeable for Common Stock (hereinafter, the "Common Equity Securities") to such third party, the Key Shareholder shall notify the Company and the Investors in writing (the "Sale Notice") prior to any such sale, of the terms of the proposed sale, assignment or transfer, and shall grant the Company, first, and then the Investors, second, the right to purchase all such securities on such terms as hereinafter set forth (the securities so offered being referred to herein as the "Offered Securities")....
STOCKHOLDER VOTING AGREEMENT
This Stockholder Voting Agreement is made by and among ________________________, a __________ corporation (the "Company"), the persons listed on the signature line hereof as the "Common Stockholders" (collectively, the "Common Stockholders") and, the persons listed in the signature line hereof as the "Series A Stockholders" (collectively, the "Series A Stockholders").
WHEREAS, the Common Stockholders are the holders of a majority of the Company's Common Stock and, the Series A Stockholders are acquiring shares of the Company's Series A Preferred Stock pursuant to a Series A Preferred Stock Purchase Agreement of even date herewith (the "Series A Purchase Agreement"); and
WHEREAS, the Bylaws of the Company have been amended on the date hereof to provide for a Board of Directors consisting of five (5) directors;
WHEREAS, the Common Stockholders and the Series A Stockholders desire that the Board of Directors of the Company be comprised of designated representatives as provided in this Agreement; and
NOW, THEREFORE, in consideration of the covenants set forth herein, the parties hereto agree as follows:
SECTION 1. Definitions. For purposes of this Agreement the following terms shall have the meanings set forth below:
"Common Stockholders' Shares." The shares of Common Stock issued and owned by the Common Stockholders as of the date hereof and any additional securities of the Company acquired by any of the Common Stockholders that are entitled to vote for the election of directors of the Company acquired during the term of this Agreement.
"Series A Stockholders' Shares." The shares of Series A Preferred Stock issued and owned by the Series A Preferred Stockholders as of the date hereof, any Common Stock acquired upon conversion thereof, and any additional securities of the Company acquired by the Series A Stockholders that are entitled to vote for the election of directors acquired during the term of this Agreement.
"Shares." The Common Stockholders' Shares and the Series A Stockholders' Shares, collectively.
SECTION 2. Agreement to Constitute Board.
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AND HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF. NO SUCH SALE OR DISTRIBUTION MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL IN A FORM SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF 1933.
CONVERTIBLE PROMISSORY NOTE
[Principal Amount]
TERM SHEET FOR POTENTIAL INVESTMENT
IN
[NAME OF COMPANY]
This term sheet summarizes the principal terms with respect to a potential private placement of equity securities of __________ (the "Company") by a group of investors led by __________. This term sheet is intended solely as a basis for further discussion and is not intended to be and does not constitute a legally binding obligation except as provided under "Confidentiality," "Exclusivity" and "Expenses" below. No other legally binding obligations will be created, implied, or inferred until a document in final form entitled "Stock Purchase Agreement," is executed and delivered by all parties. Without limiting the generality of the foregoing, it is the parties intent that, until that event, no agreement shall exist among them and there shall be no obligations whatsoever based on such things as parol evidence, extended negotiations, "handshakes," oral understandings, or courses of conduct (including reliance and changes of position), except as provided under "Confidentiality," "Exclusivity" and "Expenses" below.
The Company and the investors are discussing a private placement of shares of Preferred Stock on the following terms:
Amount of Investment: |
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Valuation of the Company: |
$ Pre-Money on a fully diluted basis $ Post-Money on a fully diluted basis |
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Type of Security: |
Shares of the Company's Series __ Preferred Stock ("Preferred"), convertible into shares of the Company's Common Stock ("Common"). |
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Price Per Share: |
$ ("Original Purchase Price"). |
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Capitalization of the Company: |
The current capitalization of the Company is set forth in Exhibit 1, and the capitalization of the Company after this proposed financing is set forth in Exhibit 2. |
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Rights,Preferences Privileges and Restrictions of Preferred Stock: |
(1) Dividend Provisions:[Starting on January 1, 20__,] [T]he holders of the Preferred will be entitled to receive dividends [at the rate of __% of the Original Purchase Price] whenever funds are legally available and when and as declared by the Board. No dividend shall be paid on the Common at a rate greater than the rate at which dividends are paid on Preferred (based on the number of shares of Common into which the Preferred is convertible on the date the dividend is declared). Dividends on Preferred will be in preference to dividends paid on the Common. Dividends on the Preferred will be noncumulative. |
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(2) Liquidation Preference: In the event of any liquidation, dissolution or winding up of the Company, the holders of Preferred will be entitled to receive in preference to the holders of Common an amount ("Liquidation Preference") equal to the Original Purchase Price plus any dividends declared on the Preferred but not paid [and then to share with the holders of the Common in the remaining assets on an as-if-converted basis]. At the option of the holders of Preferred, the effectuation by the Company or third party acquirors of a transaction or series of transactions in which more than [50%] [80%] of the voting power of the Company is disposed of to a single person or group of affiliated persons or the consolidation or merger of the Company with or into any other corporation or corporations or the sale of all or substantially all of its assets shall be deemed to be a liquidation, dissolution or winding up for purposes of the liquidation preference. |
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(3) Conversion: A holder of Preferred will have the right to convert Preferred, at the option of the holder, at any time, into shares of Common. The total number of shares of Common into which Preferred may be converted initially will be determined by dividing the Original Purchase Price by the conversion price. The initial conversion price will be the Original Purchase Price. The conversion price will be the subject of adjustment to reflect stock dividends, stock splits and similar events and as provided in paragraph (5) below. |
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(4) Automatic Conversion: The Preferred will be automatically converted into Common, at the then applicable conversion price, upon the closing of a sale of the Company's shares of Common Stock pursuant to a firm commitment underwritten public offering by the Company at a public offering price per share (prior to underwriter commissions and discounts) that is not less than $_____ in an offering greater than [$15 million]. |
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(5) Antidilution Provisions: The conversion price of the Preferred will be subject to adjustment (i) for stock dividends, stock splits, or similar events, and (ii) on a weighted average basis to prevent dilution in the event that the Company issues additional shares at a purchase price less than the applicable conversion price. No adjustment to the conversion price will occur for any issuance of additional shares at a purchase price in excess of the current conversion price. Conversion prices will not be adjusted because of (a) conversion of Preferred Stock, (b) the issuance and sale of, or the grant of options to purchase, ________ shares of Common pursuant to the Company's employee stock purchase or option plans (the "Reserved Employee Shares"), or (c) options or stock issued to equipment lessors and bank lenders. |
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(6) Voting Rights: Except with respect to election of Directors, a holder of Preferred will have the right to that number of votes equal to the number of shares of Common issuable upon conversion of its Preferred at the time the shares are voted. Election of Directors will be as described under "Board Representation" below. |
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(7) Protective Provisions: [So long as there are at least ____ shares of Preferred outstanding,] consent of the holders of at least a majority of the outstanding Preferred will be required for any action which would: (i) amend or repeal any provision of, or add any provision to, the Company's [Articles] [Certificate] or Bylaws to change the rights of the Preferred, or increase or decrease the number of authorized shares of the Preferred; (ii) create any new series or class or shares having a preference or priority as to dividends or assets superior to or on a parity with that of the Preferred; (iii) create any bonds, notes or other obligations convertible into, exchangeable for or having option rights to purchase shares of stock with any preference or priority as to dividends or assets superior to or on a parity with that of the Preferred; (iv) reclassify any class or series of Common into shares with a preference or priority as to dividends or assets superior to or on a parity with that of the Preferred; (v) apply any of its assets to the redemption or acquisition of any shares of Common, except from employees, advisors, officers, directors, consultants and serviceproviders of the Company on terms approved by the Board; or (vi) agree to a merger, sale or consolidation of the Company with another entity or the effectuation of any transaction or series of related transactions in which more than [50%] [80%] of the voting power of the Company is disposed. |
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Redemption: |
The Company shall redeem the Preferred in [three] equal annual installments commencing [six] years from the date of purchase by paying in cash an amount equal to the Original Purchase Price plus any declared but unpaid dividends [plus __% for each year the Preferred Stock is outstanding]. To the extent that the Company may not at any such date legally redeem such Preferred, such redemption will take place as soon as legally permitted. |
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Information and Registration Rights |
(1) Registration Rights Agreement: The information and registration rights provisions between the Company and.... |
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[ABC, Inc.]
Summary of Principal Terms for an Offering of Series B Preferred Stock
Company: | [ABC, Inc.] (the "Company") |
Amonut: | [$5,000,000] |
Type of Security: | Series B Convertible Preferred Stock |
Number of Shares: | [1,000,000] |
Price per Share: | [$5.00] (the "Original Purchase Price"). The Original Purchase Price represents a fully-diluted pre-money valuation of [$50] million. |
Investors: | [SD Venture Fund] and its affiliated funds (collectively referred to as the "Investors") |
Anticipated Closing Date: | ____________________ |
Pari Passu: | Except as set forth below, the Series B Preferred Stock (the "Preferred") will be treated as pari passu with the Series A Preferred of the Company (the "Prior Preferred" with the Preferred and Prior Preferred collectively referred to as the "Series Preferred"). |
Dividends: | The holders of the Preferred shall be entitled to receive out of legally available funds, dividends at a rate of [8%] of the Original Purchase Price per annum, payable when, as and if declared by the Board of Directors. Dividends shall not be cumulative. |
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 (the "Common") 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 "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.... |
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AND HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF. NO SUCH SALE OR DISTRIBUTION MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL IN A FORM SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF 1933.
Warrant No.:
Number of Shares:
Date of Issuance:
(subject to adjustment)
[Name of Company]
WARRANT TO PURCHASE SHARES OF COMMON STOCK
THIS CERTIFIES THAT, for value received, ________________ and its permitted assignees are entitled to subscribe for and purchase ________ shares of the fully paid and nonassessable Common Stock (as adjusted from time to time pursuant to the provisions of this Warrant), the “Shares”) of [Name of Company] (the “Company”), at the price and terms set forth below. As used herein, the term “Date of Grant” shall mean the Date of Grant listed on the signature page hereof.
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