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term sheet with annotation

term sheet with annotation

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Published by api-3764496
term sheet with annotation
term sheet with annotation

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Published by: api-3764496 on Oct 16, 2008
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03/18/2014

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\ue000
C2 0 0 5 F a s k e n M a rtin e a u D u M o u lin L LP
TERM SHEET
F O R S E R IE S "A " R O U N D O F F IN A N C IN G O F X C O RP
A m ount of
Investm ent:
$ 3 ,0 0 0 ,0 00
In v e sto rs:
T y p e o f S e c u rity:
P re m o n e y V a lu a tio n:
A B C V entures
X Y Z C a p ital
S e rie s A C o n v e rtib le P re fe rre d S h a res
$ 7 ,0 0 0 ,0 0 01
C a p ita l S tru c tu re F o llo w ing
Series A Round
:
E x is tin g h o ld e rs o f C o m m o n S h a re s
5 5%
E m p lo y e e S to c k O p tio n P la n
1 5%
Z
Holders ofSeries A Preferred Shares
3 0%
T o ta l
1 00%
U se of Proceeds:
T h e C o m p a n y s h a ll u s e th e p ro c e e d s fro m th is fin a n c in g fo r
w orking capital purposes.
D iv id e n d s:

T h e C o m p a n y w ill n o t p a y d iv id e n d s o n its s h a re s o f C o m m o n S h a re s o r a n y o th e r c la s s o f s h a re s w h ic h is ju n io r to th e S e rie s A P re fe rre d S h a re s u n le s s a lik e d iv id e n d is p a id o n a ll s h a res

T h e f o llo w in gannotations are preparedby FaskenM a r t in e a u D u M o u lin a n d a r e d e s ig n e d t o h e lp t h e r e a d e r
b etter und erstand the various elem ents of a trad itional V C term sheet:
1 .E q u a ls th e v a lu e th e n e w in v e s to rs a re p la c in g o n th e e n te rp ris e p rio r to th e ir in v e s tm e n t. U sually, all of the

o u ts ta n d in g s h a re s o f th e c o m p a n y , to g e th e r w ith a n y o u ts ta n d in g o p tio n s a n d w a rra n ts o r o th e r rig h ts to b u y s h a re s o f th e c o m p a n y a n d a n y a d d itio n a l s h a re s w h ic h m a y b e re s e rv e d u n d e r th e o p tio n p o o l, w ill b e in c lu d e d in th is p re m o n e y v a lu a tio n.

2 .T h e n u m b e r o f s h a re s a v a ila b le u n d e r th e e m p lo y e e s to c k o p tio n p la n (" E S O P " ) th a t v e n tu re c a p ita l in v e s to rs
w ill a c c e p t te n d s to ra n g e b e tw e e n 1 0 %
and 20%
o f th e o u ts ta n d in g n u m b e r o f s h a re s o f th e c o m p a n y (o n a
fu lly d ilu te d , a s -if c o n v e rte d b a s is ). T h is p e rc e n ta g e is c a lc u la te d in c lu d in g th e S e rie s A P re fe rre d S h a re s b e in g
s o ld in th e fin a n c in g. T h e a c tu a l n u m b e r o f s h a re s a v a ila b le u n d e r a n E S O P c a n d e p e n d o n a n u m b e r o f th in g s ,
in c lu d in g th e in d u s try th a t th e c o m p a n y is in , b u t is p rim a rily re la te d to th e n u m b e r a n d ty p e s o f h ire s th a t th e
c o m p a n y w ill n e e d to m a k e in th e fo re s e e a b le fu tu re. T h u s , a c o m p a n y th a t h a s a c o m p le te m a n a g e m e n t te a m
a t th e tim e o f th e S e rie s A ro u n d w ill lik e ly n e e d a s m a lle r p o o l th a n a c o m p a n y th a t h a s o n e o r m o re to p
m a n a g e m e n t h ire s to m a k e (e a c h o f w h o m m a y c o s t th e c o m p a n y a s ig n ific a n t a m o u n t o f o p tio n s o r s h a re s fro m
th e p o o l).
\ue000
of Series A P referred Shares on a pro rata "as converted. "
b a s is.3
E ach share of Series A P referred Shares shall be convertible, at
a n y tim e , a t th e o p tio n o f th e h o ld e r, in to C o m m o n S h a re s , a t
a n in itia l c o n v e rs io n ra tio o f o n e C o m m o n S h a re fo r e a c h s h a re

o f S e rie s A P re fe rre d S h a re. M a n d a to ry c o n v e rs io n o f th e S e rie s A P re fe rre d S h a re s u p o n e x e c u tio n o f a n u n d e rw ritin g a g re e m e n t in c o n n e c tio n w ith a n u n d e rw ritte n p u b lic o ffe rin g

o f C o m m o n S h a re s o f th e C o m p a n y b y a re p u ta b le u n d e rw rite r
a c c e p ta b le to th e In v e s to rs a t a p ric e w h ic h e q u a ls o r e x c e e d s
fiv e tim e s th e p u rc h a s e p ric e p e r s h a re o f th e S e rie s A
Preferred Shares and w here the aggregate gross proceeds
re c e iv e d b y th e C o m p a n y e x c e e d s $ 2 5 m illio n (a " u a lifie d
P u b lic O ffe rin g "f
T h e te rm s o f th e S e rie s A P re fe rre d S h a re s w ill c o n ta in
s ta n d a rd " w e ig h te d a v e ra g e " a n tid ilu tio n p ro te c tio n w ith
re s p e c t to th e is s u a n c e b y th e C o m p a n y o f e q u ity s e c u ritie s a t a
p ric e p e r s h a re le s s th a n th e a p p lic a b le c o n v e rs io n p ric e th e n in
e ffe c t, s u b je c t to s ta n d a rd a n d c u s to m a ry e x c e p tio n s.' T h e
c o n v e rs io n ra te o f th e S e rie s A P re fe rre d S h a re s in to c o m m o n
s h a re s w ill b e a d ju s te d a p p ro p ria te ly to a c c o u n t fo r a n y s h a re
s p lits , re c a p ita liz a tio n s , m e rg e rs , c o m b in a tio n s a n d a s s e t s a le s ,
s to c k d iv id e n d s , a n d s im ila r e v e n ts. A n tid ilu tio n p ro te c tio n s h a ll
3 .O fte n , v e n tu re c a p ita l in v e s to rs a ls o a s k fo r a n " a c c ru in g " d iv id e n d o f b e tw e e n 8 % a n d 1 0 % o r s o p e r a n n u m
.
T h is d iv id e n d " a c c ru e s " a n d is n o t p a y a b le u n le s s (i) d e c la re d b y th e B o a rd , (ii) th e re is a liq u id a tio n e v e n t (a
s a le o f th e c o m p a n y is c o n s id e re d a liq u id a tio n e v e n t, b u t a n IP O u s u a lly is n 't), o r (iii) th e p re fe rre d , s h a re s a re
redeem ed. T h e a c c ru in g d iv id e n d is a p ro te c tiv e d e v ic e in te n d e d to p ro v id e a m in im u m ra te o f re tu rn b u t is
u s u a lly fo rfe ite d in th e e v e n t o f a n IP O o r o th e rw is e u p o n c o n v e rs io n o f th e p re fe rre d s h a re s to c o m m o n s h a re s
.
(T h e th e o ry is th a t in s u c h c a s e s th e re tu rn o n th e in v e s tm e n t w ill b e m o re th a n th e m in im u m w h ic h th e
a c c ru in g d iv id e n d p ro v id e s. T h e re fo re , th e p ro te c tio n is n o t n e e d e d a n d is fo rfe ite d ). T here are a num ber of
v a rie tie s o f a c c ru in g d iv id e n d s , in c lu d in g th o s e th a t a re p a y a b le in c a s h a n d th o s e p a y a b le in a d d itio n a l s h a re s
of preferred shares. A ls o , a lth o u g h a b a s ic " a c c r u in g d iv id e n d " in v o lv e s a s im p le in te r e s t c a lc u la tio n ,
s o m e tim e s a s o -c a lle d " c u m u la tiv e " a c c ru in g d iv id e n d is re q u e s te d , a n d it in v o lv e s c o m p o u n d in te re s t
c a lc u la tio n s.
4 .P referred shares should convert into com m on shares autom atically at the com pany's IP O
. T h e s p e c ia l rig h ts
g e n e ra lly a c c o rd e d to p re fe rre d s h a re s s o ld to e a rly -s ta g e in v e s to rs c o u ld c re a te p ro b le m s fo r a p u b lic c o m p a n y.
5 .T h e s e p ro v is io n s a re d e s ig n e d to p ro te c t a n in v e s to r a g a in s t " e q u ity " d ilu tio n (la te r s a le s o f s h a re s a t a p ric e
lo w e r th a n w h a t th e in v e s to r p a id ). A lth o u g h th e " w e ig h te d a v e ra g e " v e rs io n is th e m o s t c o m m o n , a n
a lte rn a tiv e is " fu ll ra tc h e t" a n tid ilu tio n p ro te c tio n . F u ll-ra tc h e t a n tid ilu tio n p ro te c tio n is fa r m o re a d v a n ta g e o u s
to th e in v e s to r (b u t p u n itiv e to th e c o m p a n y ) th a n w e ig h te d a v e ra g e , b u t it is u s u a lly re s e rv e d fo r v e ry e a rly -
s ta g e d e a ls o r o th e r s itu a tio n s w h e re th e re is s ig n ific a n t c o n c e rn a s to w h e th e r th e v a lu a tio n w ill h o ld u p o v e r

th e lo n g te rm . P u t s im p ly , w e ig h te d -a v e ra g e a n tid ilu tio n p ro te c tio n a c c o u n ts m o re a c c u ra te ly fo r th e a c tu a l d ilu tiv e e ffe c t w h ic h a p a rtic u la r is s u a n c e h a s o n t h e in v e s to r's e q u ity p o s itio n in th e c o m p a n y. F u ll-ra tc h e t a n tid ilu tio n p ro te c tio n , o n th e o th e r h a n d , tre a ts a ll la te r s h a re is s u a n c e s b e lo w th e in v e s to r's p u rc h a s e p ric e a s if they w ere the sam e, reg ardless of the num ber of shares issued.

C onversion:
A n tid ilu tio n:
2
n o t b e trig g e re d b y th e is s u a n c e o f u p to 1 ,0 0 0 ,0 0 0 C o m m o n
S h a re s (o r o p tio n s th e re fo r) is s u e d in a c c o rd a n c e w ith th e
C o m p a n y 's E S O P.
V o tin g R ig h ts: O n a ll m a tte rs s u b m itte d fo r s h a re h o ld e r a p p ro v a l, e a c h S e rie s
A P re fe rre d S h a re s h a ll b e e n title d to s u c h n u m b e r o f v o te s a s
is e q u a l to th e n u m b e r o f C o m m o n S h a re s in to w h ic h s u c h
shares are convertible. In a d d itio n , th e C o m p a n y s h a ll n o t,
w ith o u t th e p rio r c o n s e n t o f th e h o ld e rs o f a t le a s t a m a jo rity o f
the then issued and outstanding Series A P referred Shares,
voting as a separate class
:
a )
is s u e o r c re a te a n y s e rie s o r c la s s o f s e c u ritie s w ith rig h ts
superior to or on a parity w ith the Series A P referred Shares

or increase the rig hts or preferences of any series or class h a v in g rig h ts o r p re fe re n c e s th a t a re ju n io r to th e S e rie s A P referred Shares so as to m ake the rights or preferences of

such series or class equal or senior to the Series A P referred
S h a re s.
b )
p a yd iv id e n d s o n s h a r e so f th e C o m p a n y.
c )
e ffe c t a n y e x c h a n g e o r r e c la s s ific a tio n o f a n y s h a r e s
a ffe c tin g th e S e r ie s A
P re fe rre d S h a re s o r a n y
re c a p ita liz a tio n in v o lv in g th e C o m p a n y a n d its s u b s id ia rie s
ta k e n a s a w h o le.
d )
repurchase or redeem , or ag ree to repurchase or redeem ,
a n y s e c u ritie s o f th e C o m p a n y o th e r th a n fro m e m p lo y e e s
o f th e C o m p a n y u p o n te rm in a tio n o f th e ir e m p lo y m e n t
p u rs u a n t to p rio r e x is tin g a g re e m e n ts a p p ro v e d b y th e
B o a rd o f D ire c to rs o f th e C o m p a n y.
e )
e n te r in to a n y tra n s a c tio n w ith m a n a g e m e n t o r a n y m e m b e r
o f th e b o a rd o f d ire c to rs , e x c e p t fo r e m p lo y m e n t c o n tra c ts
a p p ro v e d b y th e B o a rd o f D ire c to rs a n d tra n s a c tio n s
e n te re d a t a rm s -le n g th te rm s w h ic h a re n o le s s fa v o ra b le to
th e C o m p a n y th a n c o u ld b e o b ta in e d fro m u n re la te d th ird
p a rtie s.
e ffe c t a n y a m e n d m e n t o f th e C o m p a n y 's C e rtific a te o f
In c o rp o ra tio n o r B y la w s w h ic h w o u ld m a te ria lly a d v e rs e ly
a ffe c t th e rig h ts o f th e S e rie s A P re fe rre d S h a re s.
in c u r o r g u a ra ntee debt in excesso f $ 1 0 0 ,0 0 0.
0g )
3

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