NEF: Term Sheets & Investor Rights

Term Sheet

The devil’s in the details

September 17, 2009

http://www.newenterpriseforum.org/

Key elements of a Terms Sheet

9/17/2009New Enterprise Forum2

ValuationLiquidation preferenceAnti-dilution protectionDividends / Redemption rightsBoard Composition / GovernanceParticipation rights Redemption rightsProtective provisions No shop / NDA / Confidentiality

Overview


What is a “terms sheet”: What every early stage company dreams of A culmination of a 6 - 9 month investor due-diligence process A 10-12 page document with proposed investment terms It is not an LOI (letter of intent)

Key Concerns for company: Control Valuation & Dilution of ownership Value- add

Key Concerns for investors: Risk, risk, risk…Return Management Team Governance: When things go wrong….

Control: Board of Directors


Board shall be composed of __ members One representative for the Series A Preferred to

be designated by Lead Investor One representative for common shareholders CEO One independent Director, mutually acceptable

to all other directors Holders of Preferred and others holding 1% or

more of common shall execute a ‘voting agreement’ wherein each agrees to vote shares to ensure the foregoing board composition

Restrictions & Limitations


So long as shares of Series A Preferred remain outstanding, the Company shall not:

1. Amend its Certificate of Incorporation or Bylaws 2. Reclassify shares into shares with privileges senior to or on

parity with the Preferred 3. Increase or decrease the number of authorized shares 4. Effect any sale, lease, assignment, transfer or other conveyance

of assets 5. Effect the liquidation of the Company 6. Change the authorized number of directors 7. Make any capital expenditure over $__,000 not contemplated by

an annual budget approved by board 8. Incur more than $__,000 of debt 9. Transfer any proprietary technology other than in ordinary

course 10. Change the CEO

Voting Rights


One share, one vote Certificate of Incorporation will provide

authorized shares Preferred Stock initially converts 1:1 to

Common at option of holder Preferred Stock shall vote together with the

Common on an as-converted basis, except As long as ___% of Preferred remain

outstanding Preferred Stock holders Vote as a class Entitled to elect __ members of the Board

Information Rights


Holders of at least ____ shares (Major Investor) shall receive:

Annual budget Audited annual & unaudited quarterly

financials Standard inspection & visitation rights

Participation Rights


Holders of Series A Preferred have the right to purchase their pro-rata share of an offering of equity or convertible securities.

If holder declines such securities, that portion may be offered to others on terms no less favorable to the company.

Company first and Major Investors second have a right of first refusal of stock proposed to be sold by any Key holder.

Registration Rights


Demand Rights: Company files a Registration Statement for at

least __% of holders shares Company not obligated to affect more than two

registrations under these demand right provisions

Company Registration: Unlimited “piggy-back” registration rights

S-3 Rights Company shall bear registration expenses

Purchase Agreement


Investment made pursuant to a Stock Purchase Agreement, drafted by investors counsel Reps and warrants of the Company Covenants reflecting provisions set forth in Term

Sheet Conditions of closing

Investors Rights Agreement Right of First Refusal & Co-Sale Agreement Voting Agreement Amended & Restated Certificate of

Incorporation

Closing Date


The parties agree to use reasonable efforts to close financing on or before mm/dd/yr

Offer expires on Monday mm/dd/yrAny obligation is subject to standard conditions: Satisfactory completion of due diligence Qualification of the Series A shares under

applicable Blue Sky laws Filing of Certificate of Incorporation establishing the

rights and preferences of the Series A An opinion of counsel to the Company This summary of terms is not intended as a legally

binding commitment

Confidentiality


This Term Sheet and any related correspondence from the investors are to be held in strict confidence and not disclosed to any party other than the Board and legal counsel of the Company.

No Shop


The Company shall not, for a period of __ days after acknowledgement of this Term Sheet by the Company, take any action to solicit an offer from any person or entity other than the Lead and their approved investors.

Company may discuss interest from others acceptable to Lead in participating in a financing that results from this summary of terms.

Term Sheet

www.newenterpriseforum.org

September 17, 2009

http://www.newenterpriseforum.org/

Business

NEF: Term Sheets & Investor Rights