Sample 1: Class A Common Stock
Sample 2: Series A Convertible Preferred Stock Sample 3: 15% Convertible Note due in Five Years Sample 4: 15% Note due in Five Years, together with Warrants Sample 5: Memorandum of Terms for Private Placement of Preferred Stock Valuation Example Sample 1 Class A Common Stock NewCoOnline.com, Inc. Summary of Proposed Terms I. The Offering | Issuer: | NewCoOnline.com, Inc. (the "Company'), a Pennsylvania business corporation taxable as an "S" Corporation | | | | Issue: | Private Placement of a minimum of 28,888.89 shares and a maximum of 40,000 shares of Class A Common Stock offered to accredited investors only pursuant to Rule 506 of Regulation D. | | | | Price Per Share: | $45.00 per share of Class A Common Stock | | | Minimum and Maximum Capital
To Be Raised: | Minimum of $1,300,000 and maximum of $1,800,000. | | | | Pre-Offering Valuation: | $2,700,000 | | | | Capitalization: | The Company has two classes of Common Stock which are equal in all respects except as to their voting rights. Class A Common Stock is not entitled to vote on any matter presented to shareholders except as required by law. All voting power is vested in Class B Common Stock. The Company also has blank-check preferred stock which can be issued by the Board of Directors without further shareholder approval, except that the Company will lose its Subchapter S election. The number of authorized shares of Class A Common Stock Class B Common Stock and Preferred Stock will be sufficient to permit an initial public offering without a change in the charter. | | | | Ownership by Joe Entrepreneur and Investors: | Joe Entrepreneur will invest $1,000 in the Company and will own 60,000 shares of Common Stock which consist of 10,000 shares of Class B Common Stock and 50,000 shares of Class A Common Stock. If a total of $1,800,000 is raised from the investors they will collectively own 40,000 shares of Class A Common Stock. Joe Entrepreneur will make available up to 10,000 shares of his Class A Common Stock to provide equity incentives to key employees so that investors are not diluted by stock options or other equity incentives. |
Sample 2 Series A Convertible Preferred Stock NewCoOnline.com, Inc. Summary of Proposed Terms I. The Offering | Issuer: | NewCoOnline.com, Inc. (the “Company”), a Pennsylvania business corporation, taxable as a “C” Corporation | | | | Issue: | Private Placement of a minimum of 28,888.89 shares and a maximum of 40,000 shares of Series A Convertible Preferred Stock offered to accredited investors only pursuant to Rule 506 of Regulation D. | | | | Price Per Share: | $45.00 per share | | | | Minimum and Maximum Capital To Be Raised: | Minimum of $1.3 million and maximum of $1.8 million. | | | | Pre-Offering Valuation: | $2,700,000 | | | | Capitalization: | The Company has two classes of Common Stock. Class A Common Stock is entitled to elect one-third of the members of the Board of Directors (less the number of directors, if any, elected by preferred stockholders or any debt holders) and Class B Common Stock which is entitled to elect the remaining members of the Board of Directors. In all other respects (except as required by law), the Class A and Class B Common Stock are equal, and have equal voting rights on issues presented to shareholders which do not involve the election or removal of directors. The Company also has blank-check preferred stock which can be issued by the Board of Directors, without further shareholder approval, subject to the preemptive rights of the Series A Convertible Preferred Stock and the anti-dilution provisions described below. The number of authorized shares of Class A Common Stock, Class B Common Stock and Preferred Stock will be sufficient to permit an initial public offering without a change in the charter. | | | Ownership by
Joe Entrepreneur and Investors: | Joe Entrepreneur will invest $300,000 in the Company and will own 60,000 shares of Common Stock, which consist of 10,000 shares of Class B Common Stock and 50,000 shares of Class A Common Stock. If a total of $1.8 million is raised from the investors, they will collectively own 40,000 shares of Series A Convertible Preferred Stock convertible into 40,000 shares of Class A Common Stock. Joe Entrepreneur will make available up to 10,000 shares of his Class A Common Stock to provide equity incentives to key employees so that investors are not diluted by stock options or other equity incentives. |
II. Summary of Preferred Stock Terms
Right of Conversion: Each share of Series A Preferred Stock is convertible at any time (at the
option of the holder) initially on a share-for-share basis into Class A Common Stock.
| Automatic Conversion: | Each share of Series A Preferred Stock shall automatically be
converted into shares of Common Stock at the closing of an initial public offering in which the gross proceeds to the Company are not less than $10 million (a “Qualified Public Offering”). | | | | Dividend Provisions: | The holders of the Series A Preferred Stock shall be entitled to receive dividends on an as-converted basis with the Common Stock when, as and if declared by the Board of Directors. | | | | Liquidation Preference: | In the event of any liquidation of the Company, the holders of the Series A Preferred Stock shall be entitled to receive, prior and in preference to any distribution of any of the assets of the Company or proceeds thereof to the holders of Common Stock, an amount equal to the original purchase price paid plus 8% per annum, not compounded (the “Liquidation Preference”). | | | | Merger, Consolidation or Sale: | Upon the consolidation or merger of the Company in which the holders of Common Stock of the Company own less than 50% of the voting securities of the resulting or surviving corporation, or the sale or transfer of all or substantially all the assets of the Company, the holders of the Series A Preferred Stock shall, if they so elect by a vote of a majority of then outstanding Series A Preferred Stock shall, have the option to (i) receive the Liquidation Preference or (ii) participate with the holders of Common Stock on an as-converted basis. | | | | Voting Rights: | The holders of Series A Preferred Stock shall be entitled to elect one director to represent the Series A Preferred Stock and shall be entitled to vote, together with the Class A Common Stock, on an as-converted basis. | | | | Registration Rights: | The holders of the Series A Preferred Stock will be entitled to
certain demand and piggyback registration rights for the Class A Common Stock to be received upon conversion of the Series A Preferred Stock commencing six months following a Qualified Public Offering. A “Qualified Public Offering” is a public offering in which at least $20 million is raised by the Company and the common stock is sold at least $270 per share (as adjusted for stock split, stock dividends, etc.) | | | | Anti-dilution Provisions: | The holders of the Series A Preferred Stock shall have certain anti-dilution protections which shall be calculated on a weighted average basis. Anti-dilution protections would not apply to shares issued in mergers, consolidations, divisions or other acquisitions or as an equity incentive to employees and other service providers. | | | Preemptive Right
(Rights of First Refusal): | Holders of the Series A Preferred Stock shall have a right of first refusal which permits them to purchase shares of future private offerings of equity securities (or warrants or other securities convertible into equity securities) of the Company that will enable them to maintain their fully-diluted percentage ownership of the Company. This right will not apply to shares issued in mergers, consolidations, divisions or other acquisitions or as equity incentives to employees or other service providers and shall terminate upon a Qualified Public Offering. | | | Tag-Along Provision
(Co-sale rights): | In the event that an offer is made to purchase shares of Common Stock owned by Joe Entrepreneur, the holders of the Series A Preferred Stock shall have the right to sell a pro rata portion of their shares to such purchaser at the same price per share. | | | Amendments and
Waivers of Rights: | Amendments to and waivers of the rights of the holders of the Series A Preferred Stock must be approved by the holders of a majority of the then outstanding Series A Preferred Stock. |
Sample 3 15% Convertible Note due in Five Years NewCoOnline.com, Inc. Summary of Proposed Terms I. The Offering | Issuer: | NewCoOnline.com, Inc. (the “Company”), a Pennsylvania business corporation, taxable as a “C” Corporation | | | | Issue: | Private Placement of 15% Convertible Notes due in five years, convertible into a minimum of 28,888.89 shares and a maximum of 40,000 shares of Class A Common Stock, offered to accredited investors only pursuant to Rule 506 of Regulation D. | | | | Minimum Purchase: | $100,000 | | | Minimum and
Maximum Capital
To Be Raised: | Minimum of $1.3 million and maximum of $1.8 million. | | | Pre-Offering
Valuation: | $2,700,000 | | | | Capitalization: | The Company has two classes of Common Stock, Class A Common Stock which is entitled to elect one-third of the members of the Board of Directors (less the number of directors, if any, elected by preferred stockholders or any debt holders) and Class B Common Stock which is entitled to elect the remaining members of the Board of Directors. In all other respects (except as required by law), the Class A and Class B Common Stock are equal, and have equal voting rights on issues presented to shareholders which do not involve the election or removal of directors. The Company also has blank-check preferred stock which can be issued by the Board of Directors, without further shareholder approval. The number of authorized shares of Class A Common Stock, Class B Common Stock and Preferred Stock will be sufficient to permit an initial public offering without a change in the charter. | | | Ownership by
Joe Entrepreneur
and Investors: | Joe Entrepreneur will invest $1.00 in the Company and will own 60,000 shares of Common Stock, which consist of 10,000 shares of Class B Common Stock and 50,000 shares of Class A Common Stock. If a total of $1.8 million is raised from the investors, they will collectively own Notes convertible into 40,000 shares of Class A Common Stock. Joe Entrepreneur will make available up to 10,000 shares of his Class A Common Stock to provide equity incentives to key employees so that investors are not diluted by stock options or other equity incentives. |
II. Summary of Note Terms
| Maturity Date: | The principal of the Notes is payable in a single balloon payment due in five years. | | | | Interest: | Interest is payable yearly at the rate of 15% per annum on the unpaid principal amount. | | | | Conversion: | Each $100,000 Note is convertible into 2222.22 shares of Class A Common Stock at anytime prior to the maturity date at the option of the holder of the Note. | | | | Anti-Dilution: | Full ratchet, i.e. if any security is hereafter issued by the Company which directly or indirectly permits the acquisition of a share of common stock at a price below $45 per share, the conversion price of the Note will be reduced to that lower price and the number of shares of Class A Common Stock into which each $100,000 Note is convertible will equal $100,000 provided by such lower conversion price. | | | | Board Representation: | The holder of the Note shall be entitled to elect two directors so long as the Note is outstanding. | | | | Events of Default: | Failure to pay interest or principal when due; failure to meet projections for three consecutive quarters or five non-consecutive quarters out of eight consecutive quarters. |
Sample 4 15% Note due in Five Years, together with Warrants NewCoOnline.com, Inc. Summary of Proposed Terms I. The Offering | Issuer: | NewCoOnline.com, Inc. (the “Company”), a Pennsylvania business corporation, taxable as a “C” Corporation | | | | Issue: | Private Placement of a unit consisting of a $100,000 15% Note due in five years, together with a Warrant which permits the holder to acquire a minimum of 2222.22 shares of Class A Common Stock, offered to accredited investors only pursuant to Rule 506 of Regulation D. | | | | Minimum Purchase: | $100,000 | | | Minimum and
Maximum Capital
To Be Raised: | There is no minimum and the maximum is $1.8 million. | | | Pre-Offering
Valuation: | $2,700,000 | | | | Capitalization: | The Company has two classes of Common Stock, Class A Common Stock which is entitled to elect one-third of the members of the Board of Directors (less the number of directors, if any, elected by preferred stockholders or any debt holders) and Class B Common Stock which is entitled to elect the remaining members of the Board of Directors. In all other respects (except as required by law), the Class A and Class B Common Stock are equal, and have equal voting rights on issues presented to shareholders which do not involve the election or removal of directors. The Company also has blank-check preferred stock which can be issued by the Board of Directors, without further shareholder approval. The number of authorized shares of Class A Common Stock, Class B Common Stock and Preferred Stock will be sufficient to permit an initial public offering without a change in the charter. | Ownership by
Joe Entrepreneur and Investors: | Joe Entrepreneur will invest $500 in the Company and will own 60,000 shares of Common Stock, which consist of 10,000 shares of Class B Common Stock and 50,000 shares of Class A Common Stock. If a total of $1.8 million is raised from the investors, they will collectively own Warrants convertible into 40,000 shares of Class A Common Stock. Joe Entrepreneur will make available up to 10,000 shares of his Class A Common Stock to provide equity incentives to key employees so that investors are not diluted by stock options or other equity incentives. |
II. Summary of Note Terms
| Maturity Date: | The principal of the Notes is payable in a single balloon payment due in five years. | | | | Interest: | Interest is payable yearly at the rate of 15% per annum on
the unpaid principal amount, except that interest shall accrue for the first two years and the accrued interest shall be added to the principal amount of the Note. | | | | Board Representation: | The holder of the Note will be entitled to one board seat and in the event of a default on the Note which is not cured shall be entitled to elect the majority of the board of directors. |
III. Summary of Warrant Terms | Term of Warrant: | Each Warrant will cover 2222.22 shares of Class A Common Stock and will expire in five years. | | | | Exercise of Warrant: | Warrant may be exercised for either $45 per share payable in cash at any time prior to expiration or by the surrender of the principal amount of the 15% Note which equals the exercise price. The Warrant will permit cashless exercise, i.e. the holder of the Warrant may receive without charge shares having a value equal to the profit on the Warrant without the necessity of exercising the Warrant [or, alternatively, Warrant may be exercised in full for $.01.] | | | | Anti-Dilution: | Weighted average cost clause, i.e. if any security is hereafter issued by the Company which directly or indirectly permits the acquisition of a share of common stock, and if the weighted average price is less than $45 per share, the exercise price of the Warrant will be reduced to that lower weighted average price. |
IV. IPO Rights
Each unit holder will have the right to purchase, at the initial public offering price, 1/18th of 2% of the total number of shares of common stock to be offered in the initial public offering of the Company’s stock (excluding over-allotment shares) registered under the Securities Act of 1933. Sample 5 (Typical Silicon Valley Professional Management Venture Terms)
Memorandum Of Terms
For Private Placement Of
Series __ Preferred Stock Of
[Name Of Corporation]
[Date] This memorandum summarizes the principal terms of the _____-round venture capital financing of [Name of Company]. This memorandum is for discussion purposes only and [, except as set forth in the “Publicity” and “No Shop” provisions,] is not intended to be construed as a binding agreement. The completion of the transactions contemplated by this memorandum will be subject to, among other things, satisfactory completion of financial and legal due diligence by the investors, as well as the completion of final documents acceptable to the investors and [Name of Company].
Offering Terms | Issuer: | [Name of Company], a [Delaware/California]
corporation (the “Company”). | | | | Securities to be issued:1 | [Number of Shares] of Series __ Preferred Stock. [Of the Series __ Preferred Stock, ______ shares will be issued to Investors (“Investor”) and _____ shares will be issued to ________]. [At Investor’s discretion _____ shares will be issued to [experienced investors in early-stage _____ investing/strategic partners] mutually acceptable to Investor and the Company.] | | | | [Warrants to be issued]2 | | | | | Aggregate Proceeds to the Company: | $____________ [, including $____ from the
conversion of principal [and interest] on bridge notes]. | | [Staged investment?/Milestones?]3 | | | | Use of Proceeds: | The proceedings from the financing will be used for working capital and general corporate purposes. | | | | Price: | $______ per share (based on the capitalization of the Company set forth opposite the heading “Post-Closing Capitalization” below.)4 | | | | Expected Closing Date: | On or about __________.
[Multiple Closings?] | | | | Investors: | Entities manager by Investor Partners[, and other mutually agreed investors] (hereinafter referred to as the “Investors”). [Others?] | | | Terms of Series ___ Preferred Stock
Dividends: 5 | Annual $_____ per share dividend on the Series ___ Preferred Stock, payable when and if declared by Board; dividends are [not] cumulative.6 No dividends will be declared or paid on the Common Stock unless and until a like dividend has been declared and paid on the Series __ Preferred Stock. | | | | Liquidation Preference: 7 | In the event of a liquidation, dissolution or winding up:
[Alternative 1 (full participating Preferred Stock) - First pay the original purchase price [plus premium?] plus accrued dividends on each share of Series __ Preferred Stock. Thereafter, Series ___ Preferred Stock participating with Common Stock on an as-converted basis.]
[Alternative 2 (cap on Preferred Stock participation rights) - First pay the original purchase price [plus premium?] plus accrued dividends on each share of Series __ Preferred Stock. [Thereafter, Series __ Preferred Stock participates with Common Stock on an as-converted basis [until the holders of Series __ Preferred Stock receive an aggregate of [3-5]X.]]
[Alternative 3 (In certain circumstances, the Founders may negotiate a liquidation preference for the Common Stock. This is less typical and it allows Common Stock to receive a preference after an initial payment to Preferred Stock but before Preferred Stock fully participates) - First pay the original purchase price [plus premium?] plus accrued dividends on each share of Preferred Stock [then $_____ on Common Stock]. Thereafter Series ___ Preferred Stock and Common Stock share on as-converted basis.] [Alternative 4 (non-participating Preferred Stock) - First pay the original purchase price [plus premium?] plus accrued dividends on each share of Series ___ Preferred Stock. The balance to holders of Common Stock.]8
A merger, reorganization or other transaction in which shareholders of the Company do not own a majority of the outstanding shares of the surviving corporation will be treated as a liquidation event, thereby triggering the liquidation payment.9 | | | | Redemption: 10 | [Alternative 1 (redemption in one lump sum) – Series ___ Preferred Stock redeemable at the election of holders [of 66-2/3rds] of the outstanding Series ___ Preferred Stock] on or after __________ at a price equal to the original purchase price [plus accrued dividends] [plus ___% per year] or as soon thereafter as legally permissible.]
[Alternative 2 (redemption in three tranches) – Series __ Preferred Stock redeemable at the election of holders [of 66-2/3rds] of the outstanding Series __ Preferred Stock] at a price equal to the original purchase price [plus accrued dividends] [plus accrued dividends] [plus ___% per year], to the extent of 1/3 of the shares of Series ___ Preferred Stock on the [____], [_____] and [_____] anniversary dates of the Closing of the financing or as soon thereafter as legally permissible[, but in no event will more than 1/3 of the outstanding shares of Series ___ Preferred Stock (plus 1/3 of the aggregate accrued dividends) be redeemed in any twelve month period.] To the extent that the Company's available cash flow does not permit such redemption, the remainder shall be paid in the form of a one-year note to each unredeemed holder of Series ___ Preferred Stock bearing [8]% interest per annum, compounded quarterly, and the holders of a majority of the Series __ Preferred Stock shall be entitled to elect a majority of the Company's Board of Directors until such amounts are paid in full.11
[Alternative 3 – No other capital stock of the Company is redeemable prior to the Series __ Preferred Stock without the prior written consent of holders of a [66-2/3rds/majority] of the Series __ Preferred Stock.] | | | | Conversion: | Series __ Preferred Stock convertible into one share of Common Stock (subject to anti-dilution adjustment) at any time at the option of the holder. Series __ Preferred Stock automatically converts into Common Stock (i) the election of [66-2/3rds] of the outstanding shares of Series __ Preferred Stock or (ii) the consummation of underwritten public offering with a price of $[3-5 times cost]12 and aggregate proceeds in excess of $10-20,000,000] (a "Qualified Public Offering").13 | | | | Anti-dilution Adjustments: | [Conversion ratio for Series __ Preferred Stock adjusted on [ratchet14/Broad or narrow]15 weighted average] basis in the event of a dilutive issuance [so long as investor purchase full pro rata share of dilutive issuance ("pay to play")16]. "Dilutive issuance" shall not include the sale of ___ shares of Common Stock reserved for employees [and the issuance of warrants to purchase Common Stock in connection with bank lines of credit, equipment lease transactions and real estate transactions.]17 Proportional adjustments for stock splits and stock dividends. | | | | Voting Rights: 18 | Votes on an as-converted basis, but also has [class/series] vote as provided by law and on (i) the creation of any senior or pari passu security, [(ii) payment of dividends on [Common Stock/on any class of Stock]], (iii) any redemptions or repurchase of Common Stock or Preferred Stock except for purchases at cost upon termination of employment], (iv) any merger, acquisition, recapitalization, reorganization or sale of all substantially all of the assets of the Company, (v) an increase or decrease in the number of authorized shares of [Series __] Preferred Stock or Common Stock, (iv) any [adverse] change to the rights, preferences, and privileges of the Series __ Preferred, [(vii) any IRC Section 30519 transaction], [(viii) an increase or decrease in the size of the Board of Directors], [(ix) [material] amendments or repeal of any provision of the Company's Charter or Bylaws], [(x) changes the nature of the company's Charter or Bylaws], [(x) changes the nature of the company's business] and [(xi)] authorization of any amount of indebtedness in excess of $__.]20
[other special concerns?] | | | | Terms of Preferred Stock Purchase Agreement | | | | Representations and Warranties: | Standard representations and warranties by the Company. [Representations and warranties by Founders regarding [technology ownership, etc.].]21 | | | | Conditions to Closing: | Standard conditions to Closing, which shall include, among other things, satisfactory completion of financial and legal due diligence, qualification of the shares under applicable Blue Sky laws, the filing of a Certificate of Incorporation establishing the rights and preferences of the Series __ Preferred Stock and an opinion of counsel to the Company. | | | Assignment of Inventions and
Confidentiality Agreement: | All employees and consultants shall enter into Company's standard form inventions and proprietary information agreement in form and substance acceptable to the Investors | | | | Non-Competition Agreement: | __________ and ___ will each enter into a non-competition agreement in a form acceptable to the Investors.] | | | | Expenses: | Counsel to the Company [Company/Investors] will draft documents. The Company shall pay reasonable fees [, not to exceed $___,] and expenses of Investors' counsel. |
Terms of Investor Rights Agreement
Registration Rights:22 (a) Demand Rights. Beginning on the earlier of [3-5 years from Closing], or [three/six]23 months after the Company's initial public offering ("IPO"), [1-2] demand registrations [for underwritten public offerings] upon initiation by holders of at least [30]% of outstanding Series __ Preferred Stock (or Common Stock issuable upon conversion of the Series __ Preferred Stock or any combination thereof) for aggregate proceeds in excess of $______. Expenses paid by Company, including expenses of one counsel for the selling shareholders. (b) Piggyback Rights. Investors in Series __ Preferred Stock will have [unlimited] piggyback registration rights subject to pro rata cutback at the underwriter's discretion. Full cutback upon the IPO; [30% minimum inclusion thereafter]. Investors will not be subject to cutback unless all other selling shareholders are excluded from registration. Expenses paid by Company, including expenses of one counsel for the selling shareholders.24 (c) S-3 Rights. [Unlimited] S-3 Registration of at least $500,000 each [upon initiation by holders of [20%] of the outstanding Series __ Preferred Stock (or Common Stock issuable upon conversion of the Series __ Preferred Stock or any combination thereof)]. [No more than two S-3 Registrations in any 12-month period.] Expenses paid by Company, including expenses of one counsel for the selling shareholders. | Registration rights terminate [(1) [3-7] years25 after the Qualified Public Offering;] or (ii) when [the Company is publicly traded and] all shares can be sold [in any 90-day period] under Rule 144, whichever occurs first.] [, provided that this clause (ii) shall not apply to any 5% holder deemed to be
an affiliate of the Company.]
[Alternative 1 – No future registration rights may be granted without consent of a [majority] of the Series __ Preferred Stock unless subordinate to investor's rights.]
[Alternative 2 – Subsequent purchasers of the Company's securities may be granted registration rights only upon the consent of a [majority] of the Series __ Preferred Stock).] | | | | Market Stand-Off: | Prior to the Closing, all shareholders of the Company shall agree that in connection with the IPO not to sell any shares of Preferred Stock or Common Stock issuable upon conversion thereof for a period of up to 180 days following the IPO [(provided (i) directors and officers of the Company and [5]% shareholders agree to the same lock-up and (ii) such agreement shall provide that any discretionary waiver or termination of the restrictions of such agreements by the Company or representatives of the underwriters shall apply to all persons subject to such agreements pro rata based on the number of shares held)]. Such shareholders also shall agree to sign the underwriter's standard lock-up agreement reflecting the foregoing.26 | | | | Right of First Refusal: | The Investors shall have a pro rata, based on their percentage equity ownership of [Preferred Stock] [Common Stock, on a fully diluted basis], to participate in subsequent financings of the Company (excluding the sale of ____ shares of Common Stock reserved for employees [and the issuance of warrants to purchase Common Stock in connection with bank lines of credit, equipment lease transactions and real estate transactions.]).27 Such right will terminate immediately prior to a Qualified Public Offering. | | | | Right to Purchase Shares at IPO: | After the one year anniversary of the Closing, Investor shall have the right to purchase up to 10% of the offered shares at the Company's IPO. If the IPO occurs on or prior to the one year anniversary of the Closing, Investor shall have the right to buy up to 10% of the offered shares in a concurrent private placement.28 | | | | Financial Information: | The Investors shall receive standard information rights including [audited] financial reports within [90] days after the end of the fiscal year [and subject to minimum holdings requirements] quarterly [unaudited] financial reports with [45] days after the end of the fiscal year, monthly [unaudited] financial reports within __ days after the end of the month and annual budget and business plan within [30] days of the beginning of a fiscal year, as well as standard inspection rights. [The annual financial reports and the quarterly financial reports shall be audited in the case of the annual financial statements and unaudited in the case of the quarterly financial reports by an accounting firm of national reputation.]
[Board visitation rights?] | | | | Board of Directors: | [The Company's Certificate of Incorporation shall provide that the] Board shall consist of ____ members, with the holders of a majority of Series ___ Preferred Stock entitled to elect ___ member(s) [and the holders of a majority of the Common Stock entitled to elect ____ member(s)]. [The Company and the Investors intend to select ____ outside director with relevant industry experience as soon as possible after Closing.] Board composition at Closing shall be ______, [with ___ vacancy].29 | | | | Expense Reimbursement for Outside Directors: | The Company shall reimburse outside directors for all reasonable expenses incurred in their services as a director of the Company. | | |
Post-Closing Capitalization | Series __ Preferred Stock: | _________ shares | ________% | | Series __ Preferred Stock Outstanding: | _________ shares | ________% | | Common Stock Outstanding: | _________ shares | ________% | | | | | Common Stock Reserved for Employee (of which ___ have not yet been issued or committed to as options): | _________ shares | ________% | | | | | [Warrants?]: | _________ shares | ________% | | | | Total | _________ shares | 100% | | | | | Post-Closing Valuation: | $_____________ | |
Other Matters
| Stock Option Plan: | The number of shares of Common Stock received for issuance under the Company's stock option plans and any similar plan shall not exceed ___ shares without prior written approval of the Board of Directors[, including each director nominated by holders of Series ___ Preferred Stock]. | | | | Common Stock Vesting: | Common Stock shall vest as follows: After 12 months of employment, 25% will vest, the remainder will vest monthly over the following 36 months. Repurchase option on unvested shares at cost. | | | | Restrictions on Common Stock Transfer: | (a) No transfers allowed prior to vesting.
(b) No transfers or sales permitted during lock-up period of up to [120-180] required by underwriters in connection with stock offerings by the Company. | | | | Right of First Refusal; Co-Sale Right: 30 | Any [vested] Common Stock acquired by employees shall be subject to a right of first refusal of the Company to repurchase any stock, at the bona fide offered price.
Until the Qualified Public Offering, the Investors shall have the right to participate on a pro rata basis in transfers of any shares of [Preferred Stock or] Common Stock [held by the Founders of any [major] shareholder], [and a right of first refusal on such transfers, [subordinate to[ [prior to] the Company's right of first refusal. [Any shares not subscribed for by an Investor may be allocated among the other eligible Investors.] | | | | Right of Repurchase of Founders Stock: | [The Company/the Investors] will have the right to purchase Common Stock at cost owned by the Founders on the following schedule: if a Founder voluntarily terminates his or her employment with the Company or is terminated for cause, then the [Company/the Investors] will have the right to repurchase 100% of the Founders' shares less 1/48th of those shares for each complete month of service the employee served with the Company.31 | | | | Drag-Along Right: | So long as the Investors own shares of Series __ Preferred Stock representing at least 25% of the Company's Common Stock on a fully-diluted basis (i.e., assuming conversion of Preferred Stock into Common Stock [and the conversion or exercise of all warrants, options or convertible notes]), the Investors shall have drag-along rights with respect to securities of any of the Founders or principal Common Stock holders in the event of a proposed sale of the Company to a third party (whether structured as a merger, reorganization, asset sale or otherwise). Such right will terminate at and upon a Qualified Public Offering).]32 | | | | Transfer of Rights: | Any rights accorded to the Investors may be transferred to (i) any partner or retired partner of any holder which is a partnership, (ii) any member or former member of any holder which is a limited liability company and (iii) any transferee who acquires at least __ shares; provided that the Company is given written notice thereof. | | | | Closing Conditions: | Closing subject to the negotiations of definitive legal documents and completion of legal and financial due diligence by Investors. | | | | Publicity: | The Company will not discuss the terms of this Term Sheet with any person other than key officers, members of the Board of Directors of the Company or the Company's accountants or attorneys without the written consent of Investor, except as required by law. In addition, the Company shall not use the Investor name in any manner, context or format (including, reference on or links to websites, press releases, etc.) without the prior review and approval of Investor. | | | | No Shop: | From the signing date hereof until 5:00 P.M. California Time on ______, the Company and the Founders agree that they shall not solicit, encourage others to solicit, encourage or accept any offers for the purchase or acquisition of any capital stock of the Company, of all or any substantial part of the assets of the Company, or proposals for any merger or consolidation involving the Company, and they shall not negotiate with or enter into any agreement or understanding with any other person with respect to any such transaction. | | | | | | AGREED AND ACCEPTED: | | | | [Name of Company]
By: ______________________________
Name: ____________________________
Date: _____________________________
| | | | INVESTOR
By: ______________________________
Name: ____________________________
Date:_____________________________ |
Footnotes 1 Companies typically sell Preferred Stock to investors. These shares of Preferred Stock typically contain liquidation preferences and superior voting rights over stock issued to the Founders. These provisions help justify a higher per share stock price for Preferred Stock and allows companies to grant stock options at the lower Common Stock price without adverse tax consequences for the employee and without adverse accounting consequences for the company. 2 In certain situations as part of the valuation discussion, the parties may decide that warrant coverage should be granted to the Investors. The warrants can be for Common Stock or Preferred Stock. 3 Typically, financings are not done with a staged investment or with milestones, in part because it is difficult to agree upon appropriate milestones. Instead, an appropriate valuation is established to reflect future uncertainties. 4 It is important to tie the per share price to the capitalization of the Company. The helps ensure that we will receive X% of the Company at the Closing regardless of any outstanding shares or warrants “discovered” between the signing of this Term Sheet and the Closing. 5 Most investors expect that the Company will not pay dividends. If a dividend is to be paid or if dividends accrue, a 6% to 8% dividend typically is paid on the Preferred Stock before any dividend are paid on the Common Stock. Sometimes, it is possible to negotiate a dividend that is cumulative, which means that it accrues from year to year until it is paid. 6 In follow-on financing rounds, we should specify whether we will be senior to or pari passu with a prior series of Preferred Stock. 7 This provision gives investors the right to receive their money back before the Founders or other shareholders get any funds. Four of the most common alternatives are listed. The difference between the alternatives is whether investors will get any additional return beyond getting their money back. In addition to selecting one of these alternatives, in follow-on financing founds, we should specify whether we will be senior to or pari passu with a prior series of Preferred Stock. 8 If we select this alternative, we will have to convert our Preferred Stock into Common Stock to participate in any gain on our investment. If effect, we receive our money back, all gains will be allocated to the Founders until they catch-up to us. For example, we may pay $5 per share and the Founders may have paid $0.01 per share. If a liquidation event were to occur, we would get the first $5 per share. Then the Founders get the next $5 (unless we convert into Common Stock). In this hypothetical, there would be an obvious economic incentive to convert. 9 This relatively standard definition clarifies the treatment in a merger, reorganization or similar transaction. Note that typical Preferred Stock includes a standard protective provision that
allows the investors to block a merger. 10 We sometimes request this redemption provision, which allows us to force the Company to redeem our shares at cost plus a small guaranteed rate of return. In practice, redemption provisions are not often used; however they do provide a form of exit and some possible leverage over the Company. 11 This default provision could be construed as a harsh penalty and is often resisted by companies. 12 We should estimate the minimum return we will want before the Company goes public (i.e., we should ensure that we choose a number so that the Company will be a success before conversion occurs). For example, if you believe that the Company should not go public below a $300 million valuation and the valuation at the Preferred Stock financing is $75 million, you would establish a 4X cost on a per share basis. 13 This provision provides somewhat less protection in that most reputable banks will not underwriter an IPO with less than $______ million in aggregate proceeds. 14 A "full ratchet" anti-dilution provision is the most favorable to investors but is difficult to negotiate. If we have "full ratchet" protection, if the Company sells stock at a lower price per share in a subsequent round, our conversion-to-Common Stock price will adjust so that we receive the full benefit of the lower price. For example, assume we had invested at $2 per share with a conversion price is $2. This means that we will receive 1 share of Common Stock for each share of Preferred Stock when we convert. If the Company thereafter sells stock at $1 per share, our conversion price will adjust to $1. This means that we will receive 2 shares of Common Stock for each share of Preferred Stock when we convert. This may seem harsh to the
Company because the conversion price will adjust regardless of how many shares it sells. 15 Weighted average is the most typical anti-dilution protection. It adjusts our conversion ratio based on a formula that takes into account the lower price per share in the "down round" and the number of shares actually sold in the "down round." The broad-based weighted average formula is less favorable to investors because it takes into account unexercised options and outstanding convertible notes and warrants. This means that he effect of the issuance of shares in the "down round" is diluted or spread over a "broader base." The less typical narrow-based weighted average formula does not take into account unexercised option and outstanding convertible notes and warrants, and therefore is more favorable to investors. 16 A "pay to play" provision is not typical. This provision requests us to buy our pro-rata share of any subsequent down-rounds to receive the benefit of price-protection. 17 These are typical carve-outs. If we are worried about being diluted, we can limit the issuance to 1% of the Company or require the directors elected by the Series __ Preferred Stock to vote in favor of the transaction. 18 We should pay particular attention to the voting thresholds to ensure that we can control the series of Preferred Stock. If not, we should consider a Voting Agreement. 19 A Section 305 transaction refers to certain distributions of stock by a company to its
shareholders. 20 The last two provisions can be particularly onerous. 21 In early stage financings and especially in cases where the Founders have transferred technology to the Company, we should get the Founders to stand behind the representations and warranties. 22 In follow-on financing rounds, we should discuss whether we should have registration rights separate and independent from those granted to other shareholders. If we are lumped in with other shareholders, we need to make sure that the other shareholders can't use up all of the demand registration rights and that we have sufficient shares to make a demand on our own (or with a like-minded investor). 23 This is typically six months because the underwriters of the Company's IPO will want us to agree to lock-up our shares for 180 days after the IPO. 24 The Company may wish to grant piggyback rights to the Founders. This will be acceptable if, in the event of an over-subscription to sell in the offering, the Founders are completely cutback before we are cut-back. 25 We should avoid having our registration rights terminate at a fixed date. 26 Underwriters will ask that all or most of the shares of stock owned by shareholders of the Company at the time of the IPO be subject to lock-up agreements. As investors, we should ensure that other investors can't delay or prevent an IPO by refusing to sign the underwriters' lock-up agreements. We should consider whether any large shareholders should agree in advance that they will not be subject to the lock-up agreement with respect to follow-on offerings. 27 The exclusions here should match the exclusions from "Dilutive Issuances" in the anti-dilution provision. 28 The SEC Staff takes the position that the right to receive registered securities (i.e., an IPO allocation right) may constitute a Section 5 violation because the right would be an unregistered offer of securities unless granted pursuant to a registration statement. Currently, based on informal advice, the SEC Staff takes the position that the granting of an IPO allocation right that is only exercisable after the first anniversary of grant will not constitute a violation of Section 5. Prior to the first anniversary, the Investor could receive shares in a concurrent private placement (see the Black Box and Squadron Ellenoff no-action letters) if the Investor is Black Box-eligible. IPO allocation rights may also affect various NASD rules, including the Corporate Financing Rule and the Hot Issues Rule, depending on the nature and character of the Investor. IPO allocation rights are frequently used where the Investor must maintain a minimum ownership percentage in the Issuer. These types of Investors include publicly traded incubators and holding companies. 29 Consider the need for a Voting Agreement/Trust, especially if Investor will not own enough shares of a series of Preferred Stock to elect a member of the Board on its own of if the Company can increase and sell additional shares of Preferred stock to dilute Investor, thereby preventing Investor from electing a member of the Board. 30 This provision gives us some protection against Founders selling their interest to a third party. 31 This provision discourages Founders from quitting their jobs and keeping a lot of stock because it allows the Company to buy back the stock at the same (presumably low) price that the Founders paid. 32 A drag-along provision is not always present in venture deals. It could allow investors to force other shareholders to the Company to agree to sell their shares in or vote for a merger. Valuation Example Assumptions: Estimation of exit year: 7 years Net Income projections in exit year or in new markets, an index of value: $25,000,000 Average P/E of industry comparables: 11 Existing capital structure of company: 1,000,000 shares of Common Stock (CS) Investor's targeted rate of return per year for portfolio company profiled: 50% Investor's investment amount in round 1: $3,500,000
A Six Step Approach
Step 1: Estimate the company's terminal value at a future date (this may be the exit phase for the Investor) when the company has achieved positive cash flows and profitability. Calculate by using a P/E multiple times the exit year's net income: $25,000,000 x 11PE = $275,000,000
Step 2: Calculate the company's discounted terminal value ($16,095,049), which is the Present Value (PV) of the future income streams over the holding period: = $275,000,000
(1 + 50%) ^7 = $16,095,049
Step 3A: Calculate the Required Final % Ownership at the Exit Date: = $3,500,000 divided by $16,095,049 = 21.746% This will be unchanged if there are no further financing rounds anticipated.
Step 3B: Calculate the number of new Common Stock (CS) shares with no dilution: = 1,000,000 existing shares of CS divided by (1 - 21.746%)
less 1,000,000 existing shares = 1,000,000 existing shares divided by 78.254%
less 1,000,000 existing shares = 1,277,890 total shares less 1,000,000 existing shares = 277,890 new shares of Common Stock
Step 4A: Calculate the Retention Ratio: the % retained after 1 subsequent Common Stock financing round of 20% and incentive options for 25% of CS have been awarded: Retention Ratio = (1 / 1.2) / 1.25) = 66.667%
Calculate the Required Current Percent Ownership (32.61%) on Day 1: This % accounts for how much of the equity is retained after subsequent rounds and options have been awarded. The Required Current Percent Ownership: = Required Final % Ownership (21.746%)
divided by the Retention Ratio (66.667%) = 21.746% / 66.667% = 32.619%
Step 4B: Calculate the number of New Shares of Common Stock with dilution and options: = 1,000,000 shares divided by (1 - 32.619%)
less 1,000,000 shares = 1,000,000 divided by 67.381%
less 1,000,000 shares = 1,484,098 shares
less 1,000,000 shares = 484,098 new shares of Common Stock need to be issued
Step 5A: Calculate the Price per New Share of CS with no dilution: = Total amount to be invested
divided by the number of new shares = $3,500,000 divided by 277,890 new shares of CS = $12.59 per new share of CS
Step 5B: Calculate the Price per New Share of CS with full dilution: = Total amount to be invested
divided by Number of new shares = $3,500,000 / 484,098 new shares of CS = $7. 23 per new share of CS, fully diluted
Step 6A: Pre-money Valuation with no dilution: = Existing number of shares of CS outstanding
times the price per new share. = 1,000,000 shares x $12.59/new share = $12,590,000
Step 6B: Post-money Valuation with no dilution (should be close to the amount in step 2): = Existing number of shares of CS plus new shares of CS times the price per new share. = 1,277,890 shares x $12.59/new share = $16,088,635
Step 6C: Pre-money Valuation with full dilution: Total number of existing shares outstanding times the price per new share: = 1,000,000 shares x $7.23 / new share (fully diluted) = $7,230,000
Step 6D: Post-money Valuation with full dilution: Existing number of shares of CS plus new shares of CS times the price per new share = 1,484,098 shares x $7.23 / new share (fully diluted) = $10,730,029
Also see:
Private Placement Memorandum and Offering Guide and Samples How to Raise Capital and Comply with the SEC Stock and Debt Offering Options For Small Businesses Back to Business Financing and Planning
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