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UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR UNDER ANY STATE SECURITIES LAW, AND NO INTEREST THEREIN MAY BE SOLD, DISTRIBUTED, ASSIGNED, OFFERED, PLEDGED OR OTHERWISE TRANSFERRED UNLESS: (1) A REGISTRATION STATEMENT WITH RESPECT THERETO IS EFFECTIVE UNDER THE ACT OR (2) THE COMPANY RECEIVES AN OPINION OF LEGAL COUNSEL TO THE HOLDER OF THESE SECURITIES, STATING THAT SUCH TRANSACTION IS EXEMPT FROM REGISTRATION UNDER THE ACT.
_____________, INC. CONVERTIBLE PROMISSORY NOTE $ ________ __________, 2011 FOR VALUE RECEIVED, ____________, Inc. (the “Company”), a Delaware corporation duly organized under law and having an address at _______________, for value received, hereby absolutely and unconditionally promises to pay to the order of _________________ (such holder or any subsequent holder of this Note, the “Holder”) the principal sum of _____________US Dollars ($ __________) (“Principal Amount”) on ____________, 2011, (the “Maturity Date”), unless this Convertible Promissory Note (the “Note”) is earlier converted pursuant to the terms hereof, together with interest thereon (computed on the basis of a 365–day year) from the date hereof until paid on the unpaid balance of the Principal Amount, from time to time outstanding, at the rate of eight percent (8%) percent per annum, compounded annually. 1. Payment of Principal and Interest. Subject to the terms and conditions of this Note, the Company will pay or cause to be paid all sums becoming due hereon at the Maturity Date as Principal Amount and interest in immediately available funds at the Holder’s above address or to such other address as Holder may designate for such purpose from time to time by written notice to the Company against the presentation of this Note. 2. Conversion.
(a) Mandatory Conversion. This Note shall be automatically converted into New Equity Securities (as defined below) issued by the Company in a Triggering Event (as defined below) “on the same terms as” (as defined below), and at a price equal to the “Conversion Price” (as defined below) of the New Equity Securities. In this Note: “New Equity Securities” shall mean the equity securities or securities convertible or exchangeable into equity securities issued by the Company to investors in a Triggering Event. “On the same terms,” as used above in Section 2 of this Note, means that the New Equity Securities issued to the Holder have substantially same rights, privileges and preferences as the rights of the holders of other New Equity Securities (subject to any thresholds required for the exercise of certain rights, such as right of first refusal, pre emptive rights, information rights and such other rights, to the extent applicable). 1
“Triggering Event” shall mean the closing of a round of financing or series of related financing transactions that closes on or prior to the Maturity Date in which the Company sells to investors New Equity Securities therefore aggregate gross proceeds to the Company of not less than One Million ($1,000,000) Dollars (not including the conversion of this Note). (b) Number of Securities; Conversion Price. The number of New Equity Securities to be issued upon mandatory conversion of this Note pursuant to Section 2(a) shall equal to the unpaid Principal Amount plus all accrued and unpaid interest on this Note on the conversion date divided by the Conversion Price in effect at the time of conversion. The conversion price shall be the lower of: (A) the lowest per share (i.e. per New Equity Security) purchase price paid by the investors investing in the next round of financing which is a Triggering Event minus a discount of thirty percent (30%); or (B) the quotient resulting from dividing (x) US$__,000,000 by (y) the number of shares of outstanding common stock of the Company immediately prior to the closing of the Triggering Event (assuming conversion of all securities convertible into common stock, exercise of all outstanding options and warrants to purchase common stock, and including the shares reserved or authorized for issuance under the Company’s existing stock option plan or any stock option plan to be adopted in the connection with the Triggering Event but excluding, for this purpose, the conversion of debt securities (including, but not limited to, this Note) in connection with such Triggering Event (“Conversion Price”). (c) Fractional Shares. No fractional shares of the Company will be issued pursuant to this Note; any fractional amount resulting from conversion as described above shall be rounded up if one–half share or more, or down if less than one–half share. (d) Mechanics of Conversion; Certificates for Conversion Stock. Upon any conversion pursuant to this Section 2, the Company shall issue within fourteen (14) days the New Equity Securities to the Holder, provided that the Holder shall be deemed to be the holder of such shares from the date of notice of conversion. Any such security issued by the Company under this Section 2 shall be fully paid and non assessable, and will be free and clear of all liens, charges, restrictions, claims and encumbrances. (e) Assurances with Respect to Conversion Rights. The Company shall not, by amendment of its Certificate of Incorporation or By-laws or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Company, but shall at all times in good faith assist in the carrying out of all of the provisions of this Note and in taking all of such actions as may be necessary or appropriate in order to protect the conversion rights of the Holder against impairment. (f) Conversion Upon an M&A Transaction. In the event that prior to the Maturity Date, the Note was not converted into New Equity Securities and the Company enters into an M&A Transaction, then immediately prior to the closing of such M&A Transaction, the Note shall be converted into shares of the Company, at a price per share and upon such terms and conditions to be agreed upon by the Holder and the Company in good faith. "M&A Transaction" shall mean the acquisition of the Company by another entity by means of any transaction or series of related transactions (including, without limitation, a merger, consolidation or reorganization of the Company with or into another corporation), or a sale of all, or substantially all of the assets of the Company, unless, in each case, the holders of equity securities of the Company as constituted immediately prior to such acquisition or sale will immediately after such acquisition or sale hold at least fifty percent (50%) of the voting power of the surviving or acquiring entity. 2
3. Default. Notwithstanding anything to the contrary herein, unless earlier repaid or converted pursuant to Section 2, any part or all of the then outstanding Principal Amount and interest due to the Holder shall become immediately due and payable upon the occurrence of any of the following events of default, without presentment, demand, protest or other notice whatsoever, all of which are hereby expressly waived: (a) The commencement by the Company of any proceedings to be adjudicated as bankrupt or insolvent, or the consent by it to the entry of an order for relief against it in an involuntary bankruptcy or insolvency case or proceeding, or a filing by it of a petition or answer or consent seeking reorganization or release under any bankruptcy, insolvency or similar laws applicable to the Company, or the consent by it to the filing of any such petition or the appointment of a receiver, liquidator, provisional liquidator, special manager, assignee, trustee or other similar official for it or for any substantial part of its property, or the making by it of an assignment for the benefit of creditors, or the taking of corporate action by the Company in furtherance of any such action or the adoption of a winding up resolution by the Company, or the appointment of a receiver or trustee over a substantial part of or all of the Company’s assets, or the calling by the Company of a meeting of creditors for the purpose of entering into a scheme or arrangement with them, in each case provided such action shall not have been resolved in favor of the Company within 90 days after the commencement thereof; (b) The commencement by third parties of any bankruptcy, insolvency, liquidation, reorganization, dissolution or similar relief under any present or future statute, law or regulation proceeding, provided such action shall not have been resolved in favor of the Company within 90 days after the commencement thereof; (c) The Company breaches or defaults any covenant or other obligation expressed to be assumed by it in this Note, including without limitation, its failure to pay the Principal Amount and/or interest and/or any amount payable hereunder, when such amount becomes dues, and such breach or default is not remedied within twenty (20) days after the Holder has given written notice thereof to the Company; or (d) A proceeding is commenced to foreclose a security interest or lien on any material property or assets of the Company, and such proceeding is not dismissed within thirty (30) days of commencement, or a final judgment for the payment of a material sum is entered against the Company by a court of competent jurisdiction and such judgment is not paid in accordance with its terms within thirty (30) days after the date such judgment is due and payable, or an injunction is imposed with respect to a material portion of the business of Company and is not vacated within thirty (30) days. Company shall notify the Holder in writing within 48 hours from the time such event first becomes known to it of any such event described above. 4. Restrictions in Transfer. By the acceptance of this Note, the Holder represents, warrants and acknowledges to the Company that: (a) The Holder understands that this Note and the shares of stock into which this Note are convertible are being sold without registration under Act or any state securities law, based on an exemption or exemptions provided thereunder. (b) The Holder has had an opportunity to ask questions concerning the investment and he or she has received information they deem necessary for purposes of this investment. The Holder has such knowledge and experience in business and financial 3
matters that he or she is capable of evaluating the merits and risk of an investment in the Company. The Holder is experienced in investigating the investment potential in closely held companies and can afford to lose his or her entire investment. (c) The Holder represents that the Holder is an “Accredited Investor” as such term is defined in Regulation D of the Act. (d) The Holder agrees that the Note and the Securities shall only be sold, transferred, assigned, pledged, or otherwise disposed pursuant to registration under the Act, or pursuant to an available exemption from registration. Upon the transfer of this Note, the holder hereof may cause a new Note to be made and delivered by the Company upon surrender of this Note, which new Note shall be payable to such person, or persons, or order, as may be designated by such holder. 5. Company Representations, Warranties and Covenants. The Company hereby represents and warrants to the Holder that: (i) there is no legal, administrative or other proceeding pending or to the best knowledge of the Company, threatened by or against the Company and/or its subsidiary or that otherwise relates to or may affect the business of, or any of the assets owned or used by, the Company and/or its subsidiary; (ii) all corporate action on the part of the Company necessary for the authorization, execution and delivery of, and the performance of all obligations of the Company under this Note. This Note has been duly executed by the Company and are valid and binding obligations of the Company enforceable in accordance with their terms; (iii) all consents, approvals or authorizations required in connection with the consummation of the transactions contemplated herein have been obtained; (iv) the execution, delivery and performance of and compliance with this Note and the transactions contemplated hereby will not result in any violation or default, or be in conflict with or constitute, either a default under the its Certificate of Incorporation or Bylaws, other constitutive document, or any agreement or contract of the Company, or a violation of any statutes, laws, regulations or orders. 6. General.
(a) Successors and Assigns. This Note shall not be assigned, in whole or in part, without the written consent of the Company. This Note, and the obligations and rights of the Company hereunder, shall be binding on and inure to the benefit of the Company, the Holder of this Note, and their respective heirs, successors, and assigns. Without limiting the foregoing, any successor and assign of the Holder shall be subject to the terms of this Note, including the limitations on transfer and the representations contained in this Note. (b) Notices. All notices, requests, consents, and demands shall be made in writing and shall be deemed effectively given when delivered personally to the party to whom they are addressed or when deposited in the mail, by registered or certified mail, postage prepaid, addressed to the Company, at the address mentioned above
(c) Governing Law; Venue. This Note and all questions relating to its validity, interpretation and performance shall be governed by and construed in accordance with the laws of the State of ______, without regard to conflicts of laws principles. Any dispute arising out of, in connection with, or with respect to, this Note shall be adjudicated exclusively in the competent courts of ___________ and nowhere else. (d) Entire Agreement. This Note embodies the entire agreement and understanding of the parties hereto with respect to the subject matter hereof, and it supersedes all prior agreements, arrangements, understandings and undertakings, written or oral, relating to the subject matter hereof, if any. This Note may not be modified or amended except by a written agreement signed by the Company and Holder. IN WITNESS WHEREOF, this Note has been executed and delivered, under seal, on the date and year first above written. _____________, INC. By:___________________________
Agreed and accepted: By: _____________________ Name: __________________