Fill and Sign the Term Sheet Guide the Most Important Terms Clauses Examples Form

7.05 Term Sheet for Venture Capital Investment The following term sheet summarizes the principal terms typically included in a venture capital financing: Term Sheet for Start-Up Company Financing Security Preferred Stock, Series A Proceeds and Price per Share As negotiated. Terms of Preferred Stock Dividends Annual per share dividend of [8-10%] of the purchase price of the Preferred Stock prior to any distribution with respect to Common Stock, payable when and if declared by Board. Dividends are usually not cumulative (i.e., if not declared in any year, they are lost and not carried forward to the next year). For any other dividends or distributions, Preferred Stock participates with Common Stock on an as converted basis. Liquidation Preference First pay original purchase price plus declared but unpaid dividends on each share of Preferred Stock, balance of proceeds paid to Common Stock. [Alternative: First pay original purchase price plus declared but unpaid dividends on each share of Preferred Stock, then a fixed amount (generally 10%-20% of the cost of a share of the Preferred) on each share of Common Stock. Thereafter Preferred and Common share on as- converted basis.] A merger, reorganization or other transaction in which control of the Company is transferred may be treated as similar to a liquidation under either of the above alternatives. Redemption Redeemable by the Company after [5-7] years, at a price equal to cost plus declared but unpaid dividends. Also redeemable prior to such time with the consent of [50 to 66-2/3%] of the outstanding Preferred Stock. Optional: Mandatory full or partial redemption at cost plus declared but unpaid dividends, upon request of [50 to 66-2/3%] of the outstanding Preferred Stock beginning [4-6] years after Closing. Number of redemp-tions or percentage of shares redeem-able in any 12-month period may be limited. Conversion Rights Subject to antidilution adjustments, convertible into one share of Common Stock, Automatically converted into Common Stock upon closing of a firmly underwritten public offering of Common Stock yielding proceeds of at least $7.5 million at a public offering price of [5-8 times price per share of Preferred for initial round, less for subsequent rounds]. Antidilution Adjustments Conversion ratio adjusted, usually on a weighted average basis, in the event of dilution (i.e., sale of stock for a price per share less than the Preferred price per share) other than the sale of a [specified number] of shares of Common Stock reserved for employees. Proportional adjustments for stock splits and stock dividends. Voting Rights Votes on an as-converted to Common basis, but also has class vote as provided by law and on (i) the creation of any senior or pari passu (i.e., equally ranking) security, (ii) any transaction in which control of the Company is transferred or (iii) any transaction constituting a deemed dividend under U.S. tax laws. Terms of Preferred Stock Purchase Agreement Representations and Warranties Standard representations and warranties such as organization and good standing; capitalization struc-ture; due authorization; valid stock issuances; possession of all govern-mental consents; no adverse company litigation; ownership of intellectual property rights; disclosure agreements with employees; assurances of full disclosure; accuracy of business plan; good title to all assets; tax returns and corporate records complete; accuracy of financial statements; absence of adverse developments; material contracts. Registration Rights (i.e., registering the stock for public sale) (a) Beginning earlier of [2-4] years after Closing or three months after initial registration, [1-2] demand registrations (i.e., registrations undertaken at the request of the shareholders) upon initiation by holders of [30-50%] of outstanding Preferred. Expenses paid by Company. (b) Unlimited piggyback regis-trations (i.e., inclusion in a regis-tration undertaken by the Company) subject to pro rata cutback to a minimum of [0-20% for the initial public offering; 20- 35% for sub-sequent offerings] at the underwriter's discretion. Expenses paid by Company. (c) Unlimited S-3 registrations (i.e., registrations on a simplified basis available to certain public companies) of at least [$250,000-$500,000] each upon initiation by holders of [15-25%] of the Preferred. Expenses paid by selling shareholders. Financial InformationRights to monthly and annual financials and annual budget, as well as standard inspection rights. Board of Directors Members specified; will require election of investors' repre-sentative(s). May include: Com- pany's covenant of best efforts to maintain investor representative(s) on board; voting agreement or voting trust with founders; right of Preferred to elect one or more directors. [May also specify officers, but not fre-quently done unless specific event contemplated, such as hiring new CEO.] Key Man Insurance As requested by investors. Expenses Company to pay reasonable fees and expenses of one special counsel for all investors. Right of First Refusal Investors continuing to hold [10%] of the shares they originally purchase are entitled to a pro rate portion of any future issuances except issuances to employees pursuant to a vesting agreement. Capitalization-Post Closing Preferred Stock Outstanding [Amount issued in this and prior venture capital investments.] Common Stock Outstanding [Amount issued prior to this investment.] Reserved for Future Employees Issuances [As negotiated between Company and investors.] Vesting of Founder and Employee Stock 4 year vesting on a monthly basis, after an initial review period of 12 months during which no monthly vesting occurs; unvested shares purchasable at original cost and vested shares purchasable at then fair market value upon termination of employment for any reason. Restrictions on Transfer of Founder and Employee Stock(a) No transfers of unvested shares permitted. (b) Company to have a right of first refusal to purchase unvested shares until public offering described under "Conversion Rights." [(c) Optional: Right of investors to participate pro rata in any transfer of vested shares by founders/employees for value.]