TERM SHEET FOR CONVERTIBLE PROMISSORY NOTE FINANCING OF [COMPANY]
This term sheet is an expression of intent only, does not express the agreement of the parties, is not meant to be binding on the parties and is meant to be used as a negotiation aid by the parties. The parties do not intend to be bound until they enter into a definitive agreement regarding the subject matter of this term sheet.
| Issuer: | [COMPANY], a [State] [corporation] (the “Company”). |
| Financing Amount: | Up to $[AMOUNT] from investors identified by the Company (the “Investors” and each an “Investor”), each of which shall be an “accredited investor,” as such term is defined under Rule 501(a) of the Securities Act of 1933, as amended. Amounts may be funded in multiple closings. |
| Promissory Notes: | The Company shall issue promissory notes (the “Notes”) in exchange for amounts invested by the Investors. |
| Maturity of the Notes: | Unless earlier repaid or converted, outstanding principal and unpaid accrued interest on the Notes shall be due and payable upon request of the holders of a majority (by unpaid principal amount) of the Notes (the “Majority Holders”)[1] made on or after the date which is [NUMBER][2] months from the initial closing (the “Maturity Date”).[3] |
| Interest on the Notes: | Simple interest shall accrue on an annual basis at the rate of [INTEREST RATE][4]% per annum. If the Notes are converted as provided below, all interest on the Notes shall be deemed to have stopped accruing as of a date selected by the Company that is up to 10 days prior to the signing of the definitive agreement for such event. |
| Conversion of the Notes at Qualified Financing: | In the event the Company consummates, on or prior to the Maturity Date, an equity financing pursuant to which it sells shares of its equity securities (“Next Round Securities”), with an aggregate sales price of not less than $[TOTAL PRICE][5], excluding any and all indebtedness under the Notes that is converted into Next Round Securities, and with the principal purpose of raising capital (a “Qualified Financing”), then all principal, together with all unpaid accrued interest under the Notes, shall automatically convert into shares (or a series of shares) of Next Round Securities at the lesser of (i) [100%-DISCOUNT RATE][6]% of the cash price per share paid by the other purchasers of Next Round Securities in the Qualified Financing and (ii) the price obtained by dividing $[VALUATION CAP][7] by the number of outstanding shares of common stock of the Company immediately prior to the Qualified Financing (assuming conversion of all securities convertible into common stock and exercise of all outstanding options and warrants and any shares reserved under the Company’s equity incentive plan as of immediately prior to the Qualified Financing, but excluding the shares of equity securities of the Company issuable upon the conversion of the Notes or other indebtedness). If the conversion price of the Notes is less than the cash price per share at which Next Round Securities are issued in the Qualified Financing, the Company may, solely at its option, elect to convert the Notes into shares of a newly created series of capital stock having the identical rights, privileges, preferences and restrictions as the Preferred Stock issued in the Qualified Financing, and otherwise on the same terms and conditions, other than with respect to (if applicable): (i) the per share liquidation preference and the conversion price for purposes of price-based anti-dilution protection, which will equal the conversion price; and (ii) the per share dividend, which will be the same percentage of the conversion price as applied to determine the per share dividends of new investors in the Qualified Financing relative to the purchase price paid by such investors. |
| Optional Conversion of the Notes at Non-Qualified Financing: | In the event the Company consummates, on or prior to the Maturity Date, an equity financing pursuant to which it sells shares of Next Round Securities in a transaction that does not constitute a Qualified Financing, then the Majority Holders shall have the option to treat such equity financing as a Qualified Financing on the same terms set forth herein.[8] |
| Optional Conversion of the Notes at Maturity: | In the event that the Note remains outstanding on the Maturity Date, then the outstanding principal balance of the Investor’s Note and any unpaid accrued interest shall, at the Company’s election without any further action by such Investor, convert into shares of a newly created series of the Company’s preferred stock on the terms and conditions set forth on Exhibit A at a conversion price equal to the quotient resulting from dividing $[VALUATION CAP] by the number of outstanding shares of common stock of the Company as of the Maturity Date (assuming conversion of all securities convertible into common stock and exercise of all outstanding options and warrants and any shares reserved under the Company’s equity incentive plan as of immediately prior to the Qualified Financing, but excluding the shares of equity securities of the Company issuable upon the conversion of the Notes or other indebtedness). |
| Change of Control: | If the Company consummates a Change of Control (as defined below) prior to otherwise converting the Notes, then at the Company’s election[9] the Company will either (i) pay each Investor an amount equal to the sum of (x) all accrued and unpaid interest due on such Investor’s Note, and (y) [one (1)][10] times the outstanding principal amount of such Investor’s Note, or (ii) the Note will convert into that number of shares of common stock equal to the quotient (rounded down to the nearest whole share) obtained by dividing (x) the outstanding principal balance and unpaid accrued interest of the Note by (y) the quotient resulting from dividing (A) $[VALUATION CAP] by (B) the number of outstanding shares of common stock immediately prior to the consummation of the acquisition (assuming conversion of all securities convertible into common stock and exercise of all outstanding options and warrants, but excluding the shares of equity securities of the Company issuable upon the conversion of Notes or other convertible securities issued for capital raising purposes (e.g., simple agreements for future equity)). A “Change of Control” means (i) a consolidation or merger of the Company with or into any other corporation or other entity or person, or any other corporate reorganization, other than any such consolidation, merger or reorganization in which the shares of capital stock of the Company immediately prior to such consolidation, merger or reorganization continue to represent a majority of the voting power of the surviving entity immediately after such consolidation, merger or reorganization; (ii) any transaction or series of related transactions to which the Company is a party in which in excess of 50% of the Company’s voting power is transferred; or (iii) the sale or transfer of all or substantially all of the Company’s assets, or the exclusive license of all or substantially all of the Company's material intellectual property; provided that a Change of Control does not include any transaction or series of transactions principally for bona fide equity financing purposes in which cash is received by the Company or any successor, indebtedness of the Company is cancelled or converted or a combination thereof. |
| Prepayment: | The principal and accrued interest may not be prepaid unless approved in writing by the Majority Holders. |
| Security: | The Notes shall be unsecured obligations of the Company. |
| Expenses: | The Company and Investors will each bear their own legal and other expenses with respect to the Note financing. |
[Signature Page Follows]
This term sheet is non-binding and is intended solely as a summary of the terms that are currently proposed by the parties. The parties acknowledge that they neither intend to enter, nor have they entered, into any agreement to negotiate a definitive agreement pursuant to this term sheet, and either party may, at any time prior to execution of such definitive agreement, propose different terms from those summarized herein or unilaterally terminate all negotiations pursuant to this term sheet without any liability whatsoever to the other party. Each party shall be solely liable for all of its own fees, costs and other expenses in conjunction with negotiation and preparation of a definitive agreement pursuant to this term sheet.