Series A Preferred Example Term Sheet

SUMMARY OF TERMS

SERIES A PREFERRED STOCK FINANCING

OF [[ COMPANY NAME ]]

This is a summary, for negotiation purposes only, of certain principal terms of the proposed Series A Preferred Stock financing of [[Company Name]], a [[State Name]] corporation (the “Company”) by [[Investor Name]] and other Investors referred to below. This summary of terms is not intended to be a binding agreement between the Company and [[Investor Name]] or a commitment by [[Investor Name]] to provide financing on these or any other terms.

NON-BINDING SUMMARY OF TERMS OF PROPOSED FINANCING

This summary of terms shall expire unless signed and accepted by the Company and returned to [[Investor Name]] not later than [[time]] p.m., [[time zone]], on [[date]].

Amount of Financing:

$[amount of financing]

Type of Security:

Series A Preferred Stock (the “Series A Preferred”)

Post-Money Valuation:

$[post-money valuation]

(on a fully diluted basis, including all options and warrants, and all unissued options authorized under the Option Plan)

Original Purchase Price:

To be determined to coincide with post‑money valuation.

Investors:

Name

Amount

[[Investor Name]]

$[amount of financing]

Total:

$[amount of financing]

Target Closing Date:

The closing for the initial investment by [[Investor Name]] is targeted to occur on or before [[date]].

Capitalization:

The capitalization of the Company on a fully diluted basis (including all options and warrants and all authorized but unissued options) will be as set forth in the capitalization table to be attached.

Use of Proceeds:

The Company will use the proceeds from the Series A Preferred financing for working capital and general corporate purposes.

Founders Stock:

[[Founder Name #1, Founder Name #2, etc.]] (the “Founders”) own Common Stock of the Company (“Common Stock”).

Founder will enter into a stock restriction agreement with the Company covering all of the Common Stock (“Founder’s Stock”) held by such Founder.  The Founder’s Stock will vest over [[number of years]] years, with [[x]]% of the Founder’s Stock vesting immediately upon the closing of the financing and the remaining Founder’s Stock vesting ratably at the end of each calendar month thereafter.

Founder’s Stock will be subject to:

  1. the right of the Company to repurchase any unvested Founder’s Stock at the price paid by the Founder upon termination of the Founder’s employment with the Company;
  2. a restriction against transfers of unvested Founder’s Stock;
  3. the rights of first refusal and co-sale provisions referred to below;
  4. full acceleration of vesting of unvested shares upon a change of control of the Company that constitutes a Liquidation Event (as defined below).

Stock Option Plan:

The total number of shares of Common Stock reserved for issuance pursuant to the Company’s Stock Option Plan (the “Option Plan”) will be equal to [[x.y]]% of the fully diluted Common Stock of the Company after giving effect to the proposed financing.  The options will be granted by the Board of Directors, may be immediately exercisable and will be subject to vesting over four years, with 25% of the options or shares vesting on the first anniversary of the date of grant and 1/48th of the options or shares vesting each month thereafter.

Description of Series A Preferred:

(1)

Dividends:  Holders of the Series A Preferred and Common Stock will be entitled to receive dividends on a pari passu basis, when, as and if declared by the Board of Directors.

(2)

Liquidation Preference:  In the event of any liquidation, dissolution or winding up of the Company, holders of the Series A Preferred will be entitled to receive in preference to the holders of Common Stock or any other stock ranking junior to the Series A Preferred an amount for each share of Series A Preferred (“Liquidation Amount”) equal to the Original Purchase Price plus any declared and unpaid dividends.  If the assets of the Company are insufficient to permit payment of the full Liquidation Amount to all holders of Series A Preferred, such assets will be distributed ratably to the holders of the Series A Preferred in proportion to the Liquidation Amount each such holder would otherwise be entitled to receive.  After payment in full of the Liquidation Amount to the Series A Preferred holders, any remaining assets shall be distributed to the holders of the Common Stock on a pro rata basis.

(3)

Merger, Reorganization or Sale of the Company:  A merger, consolidation or reorganization of the Company in which the holders of the Company’s outstanding voting securities immediately prior to such transaction will hold less than a majority of the Company’s outstanding voting securities immediately after such transaction, a sale of all or substantially all of the assets of the Company or the exclusive licensing of all or substantially all of the Company’s intellectual property in a single transaction or series of related transactions shall be deemed to be a liquidation of the Company unless otherwise determined by the holders of a majority of the Series A Preferred (together with any liquidation, dissolution or winding up of the Company, a “Liquidation Event”).  The conversion of Series A Preferred into Common Stock shall be permitted at any time up to or simultaneously with the consummation of such merger, consolidation, reorganization or sale of the Company.

(4)

Redemption:  The Series A Preferred Stock will not be redeemable

(5)

Conversion:  Each holder of Series A Preferred will have the right to convert the Series A Preferred at any time, at the option of the holder, into shares of the Common Stock of the Company.  The total number of shares of the Common Stock into which the Series A Preferred may be converted will be determined by dividing the Original Purchase Price per share by the conversion price per share.  The initial conversion price will be the Original Purchase Price.  The conversion price will be subject to adjustment as provided in the Anti-dilution Protection language below.

(6)

Automatic Conversion:  The Series A Preferred automatically will be converted into Common Stock, at the then applicable conversion rate, in the event of (a) an underwritten public offering of shares of the Common Stock of the Company at a public offering price per share (before deducting underwriting commissions and expenses) of at least [[x]]times the Original Purchase Price in which the aggregate proceeds are at least $[[yy]],000,000 (a “Qualified IPO”) or (b) the conversion of at least a majority of the number of shares of Series A Preferred issued in this financing.

(7)

Anti-dilution Protection:  If equity securities are subsequently issued at a price per share less than the conversion price then in effect, the conversion price of the Series A Preferred will be adjusted using a broad-based weighted average adjustment formula.  The conversion price of the Series A Preferred will also be subject to appropriate adjustment in the event that the Company effects a stock split, stock combination, stock dividend or similar event.  No adjustment in the conversion price will be made for the issuance of options or shares pursuant to the Option Plan or for other issuances for which anti-dilution adjustments are not customarily made.

(8)

Voting Rights:  The holders of a majority of the Series A Preferred, voting as a separate series, must approve (a) any amendment or change of the rights, preferences, privileges or powers of, or the restrictions provided for the benefit of, the Series A Preferred; (b) any action that authorizes, creates or issues shares of any class of stock having relative rights or preferences superior to or on a parity with the Series A Preferred; (c) any action that reclassifies any outstanding shares into shares having preferences superior to or on a parity with the Series A Preferred; (d) any amendment of the Company’s Certificate of Incorporation; (e) any increase in the number of authorized shares of the Common Stock or Preferred Stock; (f) any change in the size of the Board of Directors; (g) any increase in the number of shares of Common Stock reserved for issuance under the Option Plan or the creation of any new equity incentive or benefit plan; (h) any Liquidation Event; (i) the sale or disposition of any subsidiary, whether by merger, sale of stock or assets or otherwise; (j) the declaration or payment of a dividend on the Common Stock or any other class or series of stock (other than a dividend payable solely in shares of Common Stock); or (k) indebtedness in excess of $1,000,000.  On all other matters, the holders of the Series A Preferred will be entitled to vote with the holders of the Common Stock as a single class, with each share of Series A Preferred having the number of votes equal to the number of shares of Common Stock issuable upon conversion of such Series A Preferred share.

Preemptive Rights:

The Investors shall have the preemptive right to purchase a pro‑rata portion (based on their percentage ownership of the Company’s outstanding Common Stock and Preferred Stock on an as-converted basis) with a right of oversubscription if any Investor elects not to purchase its full pro‑rata share, of any equity securities offered by the Company in the future on the same terms and conditions as the Company proposes to offer such securities to other parties.  An Investor will have 15 days in which to exercise this preemptive right.

Registration Rights:

(1)

Demand Rights:  If, at any time after the earlier of (a) 180 days after the initial public offering of Common Stock or (b) the fifth anniversary of the closing of the financing, holders of a majority of the Series A Preferred (or Common Stock issued upon conversion of the Series A Preferred or a combination of such Common Stock and the Series A Preferred, all of which shares are referred to as “Registrable Securities”) request that the Company file a registration statement under the Securities Act of 1933 covering at least 25% of the Registrable Securities, the Company will use its best efforts to cause such shares to be registered.  The Company will not be obligated to effect more than two demand registrations.

(2)

Registrations on Form S‑3:  In addition, holders of at least 25% of the Registrable Securities will have the right to require the Company to file up to two registration statements on Form S‑3 (or any equivalent successor form) per year.

(3)

Piggyback Registration:  Holders of Registrable Securities will be entitled to “piggyback” registration rights on all registrations effected by the Company, subject to the right of the Company and its underwriters to reduce the number of shares that such holders propose to be registered to the extent required by such market conditions.  Any such provisions will provide that registrations must include at least 30% of the shares requested to be included by the holders of Registrable Securities (except that a full cut-back would be permitted upon a Qualified IPO), and employees, directors and other selling stockholders must be cut back fully before the holders of Registrable Securities will be cut back.

(4)

Registration Expenses:  Registration expenses (exclusive of underwriting discounts and commissions, but including all other expenses related to the registration and the reasonable fees and expenses of one counsel for the selling shareholders) of all demand, Form S-3 and piggyback registrations will be borne by the Company.

(5)

Transfer of Rights:  The registration rights will be transferable by the Investors.

(6)

Termination:  The registration rights will terminate six years after the closing of a Qualified IPO and would not apply to any holder who could sell all of such holder’s shares free of restrictions pursuant to Rule 144(k) promulgated under the Securities Act of 1933.

(7)

Market Stand-off:  If requested by the underwriters, the holders of Registrable Securities will agree to a lock-up, not to exceed 180 days, in the event of the Company’s IPO or in a secondary offering in which such holders are participating, in each case only so long as all officers, directors and holders of more than 1% of the Common Stock are subject to the same agreements.  These restrictions will not apply to transfers to affiliates of such holders or to purchases made in the open market following completion of the offering.

(8)

Additional Registration Rights:  The Company will not grant registration rights to any other holder of the Company’s securities that are superior to or inconsistent with those granted to the holders of the Registrable Securities without the prior approval of the holders of a majority of the Registrable Securities.

(9)

Other Registration Provisions:  The Registration Rights Agreement will contain other provisions that are customary in transactions of this kind.

Information Rights:

The Company will deliver to each holder of at least 10% shares of Series A Preferred or Common Stock issued upon conversion of the Series A Preferred (a “Qualified Holder”), (a) audited annual financial statements within 180 days after the end of each fiscal year, (b) unaudited quarterly financial statements within 45 days after the end of each fiscal quarter, and (c) an annual budget at least 45 days prior to the beginning of each fiscal year as approved by the Board of Directors.  In addition, a Qualified Holder will have inspection and visitation rights and will receive quarterly executive summaries of the Company’s activities.  These provisions will terminate upon a Qualified IPO.

Right of First Refusal and Co-Sale Applicable to Founders:

No Founder may sell or transfer any shares of capital stock (other than to immediate family members or in trust for the benefit of such holder or such holder’s immediate family members) without offering such shares on a pro rata basis first, to the Company, and then to the holders of Registrable Securities (with a right of over-subscription if any such holder elected not to purchase its full pro rata share) at the same price and on the same terms as those received in a bona fide third‑party offer.  Holders of Registrable Securities who decline to purchase such shares shall be entitled to sell into such offer on a pro rata basis with the selling Founder.  These rights will terminate upon a Qualified IPO.

Right of First Refusal
Applicable to Investors:

No holder of Series A Preferred Stock may sell or transfer any shares of Series A Preferred Stock (other than to affiliates) without offering such shares on a pro‑rata basis first, to the other Series A Preferred holders (with a right of over-subscription if any such holder elects not to purchase its full pro rata share) and then to the Company at the same price and on the same terms as those received in a bona fide third-party offer.  These rights will terminate on a Qualified IPO.

Board of Directors:

Following this financing, the Board of Directors of the Company will consist of 3 (three) directors (NOTE: this is typical but not 100% consistent):

  • One nominee of the Common Stockholders, who shall be the Company’s CEO,
  • One nominee of the holders of Registrable Securities, who shall be designated by [[Investor Name]] so long as it holds any Registrable Securities,
  • And one independent director designated by the majority vote of the remaining directors.

Terms of the Stock

Purchase Agreement:

The purchase of the Series A Preferred will be made pursuant to a Stock Purchase Agreement, Investors’ Rights Agreement, Right of First Refusal and Co-Sale Agreement, Voting Agreement and related documents (the “Transaction Documents”) drafted by counsel to the Investors and acceptable to the Company, which shall contain, among other things, appropriate representations and warranties of the Company, covenants of the Company reflecting the provisions set forth herein and other provisions typically found in such agreements, and appropriate conditions of closing which will include, among other things, qualification of the shares under applicable Blue Sky Laws, the filing of a Certificate of Incorporation, and an opinion of counsel of the Company.

Proprietary Information

Agreements:

Prior to closing, the Company will enter into Proprietary Information Agreements with all key employees designated by [[Investor Name]] and the Company.  The Proprietary Information Agreements will contain provisions with respect to confidentiality, corporate ownership of inventions and innovations during employment, and non‑competition and non‑solicitation of employees and customers covenants during and after employment for one year. Thereafter, each new employee and officer of the Company will enter into similar agreements.

Expenses:

The Company and the Purchasers will each bear their own legal and other expenses with respect to the financing, except that the Company will pay at the closing of the financing the reasonable fees, not to exceed $[[amount of money]] and expenses of [[Law Firm Name]], counsel to [[Investor Name]].

Closing Conditions:

The closing of the financing will be subject to the following conditions:

1. The business, assets, financial condition, operations, results of operations and prospects of the Company are substantially as have been represented to [[Investor Name]] and no change shall have occurred which is or may be materially adverse to the Company.

2. The negotiation and execution of definitive Transaction Documents setting forth representations and warranties of the Company, covenants and other provisions consistent with this summary of terms and customary in transactions of this nature.

3. The completion of due diligence satisfactory to [[Investor Name]] in its sole discretion and the approval of this investment by the Investment Committee of [[Investor Name]].

4. The approval of the financing by the current Board of Directors and stockholders of the Company.

5. The delivery by the Company to [[Investor Name]] of evidence of insurance of adequate casualty and liability insurance of the Company.

6. If appropriate, the conversion by the Company to a Delaware corporation.

II.  BINDING NON-SOLICITATION AND CONFIDENTIALITY PROVISIONS

Non‑Solicitation:

From the date of acceptance of this summary of terms until the earliest of (a) the consummation of the financing, (b) the agreement of [[Investor Name]] and the Company to terminate negotiations, or (c) the expiration of 30 days from the date of acceptance of this summary of terms by the Company, the Company will not directly or indirectly solicit, initiate, or participate in any discussions or negotiations with, or encourage or respond to any inquires or proposals by any person or group other than Investors, concerning any financing, acquisition, merger, sale of assets of, investment in, or business combination involving the Company or its subsidiaries.


Confidentiality:

The terms and conditions of this summary of terms, including its existence, shall be confidential information and shall not be disclosed to any third party without the consent of the Company and [[Investor Name]].


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