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SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR APPLICABLE STATE SECURITIES LAWS AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR SUCH LAWS COVERING THE TRANSFER OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH TRANSFER IS EXEMPT FROM SUCH REGISTRATION. ________________________, Inc. 2008 CONVERTIBLE PROMISSORY NOTE $______,000 August ____, 2008
FOR VALUE RECEIVED, the undersigned, ________________________, Inc., a Delaware corporation (the "Company"), promises to pay to the order of INVESTOR NAME, or its registered assigns (the "Holder"), the principal amount of $____,000 – __________ US Dollars - (the “Note Amount”), plus interest at a rate equal to five percent (5%) per annum payable upon maturity. Interest shall be calculated monthly on the basis of actual number of full calendar months elapsed. Notwithstanding any other provision of this Note, the holder hereof does not intend to charge and the Company shall not be required to pay any interest or other fees or charges in excess of the maximum permitted by applicable law; any payments in excess of such maximum shall be refunded to the Company or credited to reduce principal hereunder. All payments received by the holder hereunder will be applied first to costs of collection, if any, then to interest and the balance to principal. Payments of principal and interest will be made by check in immediately available United States funds sent to the holder at the address furnished to the Company for that purpose. This is one of a series of the Company's notes known as its 2008 Convertible Promissory Notes (collectively referred to herein as the "Notes"), all of like tenor, except as to the name of the holder, the date of issuance, and the principal amount thereof and other non-material details. The Notes are limited in aggregate principal amount to [anticipated total face value of notes] and are intended to provide financing to the Company in anticipation of an Equity Financing (as defined below). The Company, may, by written notice to the Holder, increase the aggregate principal amount of the Notes at any time. The following is a statement of the rights of the Holder of this Note and the conditions to which this Note is subject to and to which the Holder hereof, by the acceptance of this Note, agrees: 1. Maturity Date. Unless earlier converted in accordance with Section 2, the principal and accrued interest on this Note shall be due and payable on demand at any time following September 1, 2010 (the "Maturity Date"). 2. Note Conversion.
2.1. Conversion upon Equity Financing. If the Company shall obtain an arms' length preferred stock equity investment from an investor or a group of investors (the "Investors") in a transaction or related series of transactions of at least $2,000,000, not including for such purpose the outstanding principal amount of the Notes (an "Equity Financing"), prior to the Maturity Date, then, upon the date of the closing of such Equity Financing (the "Closing Date"), this Note and all accrued interest shall be automatically converted into such number of shares of the type of equity securities (the "Equity Securities") to be issued in the Equity Financing at a conversion rate equal to the lowest per share price the Equity Securities are issued in the Equity Financing multiplied by the Applicable Percentage. For purposes of this Section 2.1, the Applicable Percentage shall equal 75%. Notwithstanding anything set forth herein, if 75% of the premoney valuation of the Company (on a fully diluted basis) based on the Equity Financing (“Premoney Valuation”) exceeds _________ [conversion cap amount], then the Applicable Percentage will be reduced to the percentage which when multiplied by the Premoney Valuation equals _____________________. Premoney Valuation” shall be defined as the product of (i) the number of shares of Company stock outstanding or reserved for issuance pursuant to outstanding stock options or warrants prior to the Equity Financing, and (ii) the price per share at which shares will be issued in the Equity Financing. The Company shall not be obligated to issue certificates evidencing the shares of the securities issuable upon such automatic conversion unless the Note is either delivered to the Company or its transfer agent, or the Holder notifies the Company or its transfer agent that the Note has been lost, stolen or destroyed and executes a customary lost note agreement. 2.2. Conversion or Payment upon Change of Control. If prior to the Maturity Date, there is a Change of Control (as defined below) and the Notes have not previously converted, the Holder may, upon 10 days notice, elect to have this Note converted or repaid in one of the following two ways: (a) the Holder may elect to receive from the Company an amount in cash equal to the sum of the original principal amount and interest then accrued under the Note or (b) the Holder may elect to convert this Note plus all accrued interest into shares of Common Stock immediately prior to the closing of such Change of Control. Such number of shares shall be determined by dividing the principal on this Note plus all accrued interest by the quotient of (a) ________________[conversion cap amount], plus the aggregate amount of funds raised pursuant to the Notes divided by (b) the Outstanding Securities (as defined below), each calculated as of immediately prior to the closing of such Change of Control. In the event that the Holder does not make an election within 10 days of the notice from the Company (with email being adequate notice), the Company shall determine, in its reasonable discretion, to convert or repay the Note, based upon whether the value of the consideration that would be payable to the
Holder in a Change of Control if the Holder converted this Note is greater than the principal and interest on this Note. A "Change of Control" for purposes of this Note shall mean any consolidation or merger of the Company with or into any other corporation or other entity or person, or any other corporate reorganization in which the Company shall not be the continuing or surviving entity of such reorganization or any transaction or series of related transactions by the Company in which in excess of 50% of the Company's voting power is transferred, or a sale of all or substantially all of the assets of the Company, other than any transaction or series of related transactions which is primarily for the purpose of financing the Company or a reincorporation of the Company. "Outstanding Securities" for purposes of this Note shall mean that number which is the sum of (i) all outstanding stock of the Company, (ii) all outstanding options, warrants or other convertible securities of the Company (other than pursuant to the Notes). 2.3. Conversion Procedure. 2.3.1 Notice of Conversion. Upon the conversion of this Note, written notice shall be delivered to the Holder of this Note at the address shown on the records of the Company for the Holder or given by the Holder to the Company for the purpose of notice or, if no such address appears or is given, at the place where the principal executive office of the Company is located, notifying the Holder of the conversion to be effected, specifying the conversion price, the principal amount of the Note to be converted, the date on which such conversion will occur and calling upon such Holder to surrender to the Company, in the manner and at the place designated, the Note. 2.3.2 Delivery of Stock Certificates. As promptly as practicable after the conversion of this Note and delivery of this Note to the Company, the Company at its expense will issue and deliver to the Holder of this Note a certificate or certificates for the number of full shares of Common Stock or other Equity Securities, as the case may be, issuable upon such conversion. 2.3.3 Mechanics and Effect of Conversion. No fractional shares of the Company's capital stock shall be issued upon conversion of this Note. In lieu of the Company issuing any fractional shares to the Holder upon the conversion of this Note, the Company shall pay to the Holder the amount of outstanding principal that is not so converted, such payment to be in the form as provided below. Upon the conversion of this Note pursuant to Sections 2.1 or 2.2 above, the Holder shall surrender this Note, duly endorsed, at the principal office of the Company. At its expense, the Company shall, as soon as practicable thereafter, issue and deliver to such Holder at such principal office a certificate or certificates for the number of shares of the Company's Common Stock or other Equity Securities, as the case may be, to which the Holder shall be entitled upon such conversion, together with any other securities and property to which the Holder is entitled upon conversion of this
Note, including a check payable to the Holder for any cash amounts payable in lieu of fractional shares as described above. Upon conversion of this Note, the Company shall be forever released from all its obligations and liabilities under this Note. 3. Unsecured and Subordinated. The indebtedness represented by this Note is unsecured and the Holder acknowledges and agrees that the obligation of the Company to make payment on this Note is expressly subordinated in right of payment to the prior payment in full of all of the Company's commercial finance lenders, insurance companies, lease financing institutions or other lending institutions approved by the Board of Directors and regularly engaged in the business of lending money. 4. Registration and Other Rights. Upon the occurrence of the Equity Financing, the Holder shall have the rights provided to a purchaser of Equity Securities in the Equity Financing, including without limitation, to the extent granted therein, information and registration rights and subject to any minimum share ownership thresholds, and the Holder agrees to execute a counterpart to the relevant transaction documents entered into among the Company and the purchasers of shares of Equity Securities in the Equity Financing, including without limitation any Stockholders Agreement, Stock Transfer Agreement or similar agreement. 5. Waiver of Notice; Fees. The Company hereby waives notice, presentment, protest and notice of dishonor. If the Holder is required to commence legal proceedings or incur any other cost to collect amounts due and payable hereunder or to enforce its rights under this Note, the Company shall be liable to pay or reimburse the Holder for all reasonable costs and expenses incurred in connection with the collection of such amounts and any such legal proceedings, including without limitation attorneys' fees. 6. Transfer of this Note or Securities Issuable on Conversion Hereof. With respect to any offer, sale or other disposition of this Note or securities into which such Note may be converted, the Holder will give written notice to the Company prior thereto, describing briefly the manner thereof, together with a written opinion of such Holder's counsel to the effect that such offer, sale or other distribution may be effected without registration or qualification (under any federal or state law then in effect). Upon receiving such written notice and reasonably satisfactory opinion, if so requested, the Company, as promptly as practicable, shall notify such Holder that such Holder may sell or otherwise dispose of this Note or such securities, all in accordance with the terms of the notice delivered to the Company. Each Note thus transferred and each certificate representing the securities thus transferred shall bear a legend as to the applicable restrictions on transferability in order to ensure compliance with the Act, unless in the opinion of counsel for the Company such legend is not required. The Company may issue stop transfer instructions to its transfer agent in connection with such restrictions.
Representations. 7.1. Representations of Holder. 7.1.1 Holder represents and warrants to the Company that Holder is acquiring this Note and the underlying securities for Holder's own account for investment only and not with a view to distribution or resale of the Note or underlying securities. The Holder represents that it is an "accredited investor" as such term is defined in Rule 501 under the Act. Holder understands that this Note and the underlying securities are being issued to Holder pursuant to an exemption from the registration requirements of the Act and, accordingly, must be held indefinitely by Holder unless later transferred in transactions that are either registered under the Act or exempt from registration. Holder understands that the Company is under no obligation to register this Note or the underlying securities under the Act or to file for or comply with an exemption from registration, and recognizes that exemptions from registration, in any case, are limited and may not be available when Holder may wish to sell, transfer or otherwise dispose of the Note or the underlying securities. 7.1.2 Holder represents and warrants to the Company that Holder has such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of an investment in the Note and the underlying securities and that Holder is able to incur a complete loss of Holder's investment and to bear the risk of such a loss for an indefinite period of time. Holder understands that the Note and the underlying securities are a risky and speculative investment. 7.2. Company Representations. The Company represents that sufficient authorized but unissued shares of the Company's capital stock have been reserved or will be reserved by appropriate corporate action in connection with the prospective conversion of this Note. The issuance of the capital stock issuable on conversion of this Note will not require any further corporate action and are not in conflict with any provision of any agreement to which the Company is a party or by which it is bound. The issuance of this Note and the conversion of this Note are not in conflict with the Company's Articles of Incorporation or By-laws. 7.3. Legend. Any certificate representing shares of the Company's capital stock issued upon conversion of this Note shall be stamped or otherwise imprinted with a legend substantially in the following form:
"THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR APPLICABLE STATE SECURITIES LAWS AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE ACT OR SUCH LAWS COVERING THE TRANSFER OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED." 9.Miscellaneous. 9.1Successors and Assigns. Subject to the exceptions specifically set forth in this Note, the terms and conditions of this Note shall inure to the benefit of and be binding upon the respective executors, administrators, heirs, successors and assigns of the parties. 9.2 Loss or Mutilation of Note. Upon receipt by the Company of evidence satisfactory to the Company of the loss, theft, destruction or mutilation of this Note, together with indemnity reasonably satisfactory to the Company, in the case of loss, theft or destruction, or the surrender and cancellation of the Note, in the case of mutilation, the Company shall execute and deliver to Holder a new Note of like tenor and denomination as this Note. Principal is payable only to the registered Holder of the Note. 9.3 Titles and Subtitles. The titles and subtitles of the Sections of this Note are used for convenience only and shall not be considered in construing or interpreting this agreement. 9.4 Notices. Any notice, request or other communication required or permitted hereunder shall be in writing and shall be delivered personally or by facsimile (receipt confirmed electronically) or shall be sent by a reputable express delivery service or by certified mail, postage prepaid with return receipt requested, addressed as follows: if to the Company to: [address] if to the Holder to the Holder's address included on the signature page of this Note. Either party hereto may change the above specified recipient or mailing address by notice to the other party given in the manner herein prescribed. All notices shall be deemed given on the day when actually delivered as provided above (if delivered personally or by facsimile, provided that any such facsimile is received during regular business hours at the recipient's location) or on the day shown on the return receipt (if delivered by mail or delivery service). 9.5 Note Holder Not Shareholder. This Note does not confer upon Holder any right to vote or to consent to or to receive notice as a shareholder of the Company, as such, in respect of any matters whatsoever, or any other rights or liabilities as a shareholder, prior to the conversion hereof.
9.6 Governing Law. The terms of this Note shall be construed in accordance with the laws of the State of California, as applied to contracts entered into by California residents within the State of California, which contracts are to be performed entirely within the State of California. 9.7 Waiver and Amendment. Any term of this Note may be amended, waived or modified with the written consent of the Company and Holder of this Note; provided, that if such amendment is to be made to all the Notes and affects all holders of the Notes equally (except for such differences as arise solely from the differing principal amounts of such Notes), then the Holder of this Note agrees with the Company that such amendment may be effected upon the written consent of holders owning together in excess of 50% of the aggregate principal amounts received by the Company under the Notes.
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IN WITNESS WHEREOF, the Company has caused this Note to be signed in its name this ____ day of ____________, 2008. ________________________, INC. Signature: By: Title: ________________________
ACCEPTED AND AGREED: Signature: By: Title: ________________________