Model Email:

Dear Alice and Bill,

Congratulations on getting a term sheet from Alpha Fund. I’ve reviewed the attached term sheet for
consistency with the terms you told us had been agreed to.

First, there were a few terms in the term sheet that conflict with what was agreed:

1. Amount Raised – The term sheet proposes a $3 million total round instead of a $5 million
round.
2. Liquidation Preference – The term sheet includes participating preferred, not the non-
participating preferred as agreed. Participating preferred stock is very investor-favorable.
Furthermore, the liquidation preference multiple (“two times the Original Purchase Price”)
makes this even more favorable to the investors.
3. Dividends – The term sheet specifies a cumulative dividend instead of the non-cumulative
dividend agreed to.
4. Option Pool – The proposed option pool in the term sheet is 8% of the fully-diluted, post-
money capitalization instead of 10%.
5. Protective Provisions - The “Protective Provisions” section requires 55% of the Series A
Preferred to approve the waiver of these protective provisions. As described in greater detail
on LathamDrive, founders should avoid agreeing to high voting thresholds for these protective
provisions, which could give any hold-out investors a great deal of leverage. A 55% threshold
is very high and gives Alpha Fund the right to block any waiver of these protections (Alpha is
investing $3 million into a $5 million round and will thus own 60% of the Series A Preferred →
3 million / 5 million = .6 or 60%).

I also saw a few provisions that weren’t in the list of agreed terms you sent over but which may not be
the most favourable positions for Cool Corp. [NOTE – these are optional. If you found any of them,
great job!]. Even if you don’t feel strongly about any of these potential issues, it may be beneficial to
push back on them and, if possible, use them as negotiating points to get better terms elsewhere:

1. Alpha fund has proposed “full ratchet” anti-dilution in the “Anti-dilution Provisions” section.
Founders should be extremely wary of full-rachet adjustments, which are almost never seen
(see more here). When a full-ratchet anti-dilution adjustment kicks in, it essentially “rachets”
down the earlier investors’ conversion price to the lowest price that the company’s securities
were ever issued at.
2. The vesting schedule proposed under the “Employee Stock Options” section is not market
standard. The Term Sheet proposes 10/20/30/40 employee stock option vesting, or “10%
after one year, an additional 20% after two years, an additional 30% after three years and an
additional 40% after four years.” A typical Vesting Schedule provided to employees in a start-
up is four years, with cliff vesting for the first year and monthly straight-line vesting thereafter.
3. Under the “Representations and Warranties” section, the Term Sheet provides that you will
personally make representations and warranties “regarding technology ownership, etc.” Since
you didn’t mention this was an agreed term, we’d recommend you push back because
typically it should be the company, not the founders making representations. However, the
few times it may be appropriate to include founder reps are in Series A financings, so you
may ultimately not be able to win this point.
4. The “Founders’ Stock” section of the Term Sheet requires that the founders’ stock be subject
to vesting. It specifies the shares should start vesting as of the Closing date. As addressed
during our earlier discussion about what type of founder vesting to choose, however, it is
reasonable to request that vesting commence as of the date you both started working in
earnest on Cool Corp. (about six months ago). We recommend that you push back and that
the existing founders’ vesting schedules remains unchanged.

Please let me know if you’d like to find some time to talk through any of this.

Thanks,
[A. Latham Attorney]