Sample venture capital term sheet

CONFIDENTIAL

[NAME OF ISSUER]

 

MEMORANDUM OF TERMS

 

[Except with respect to the provisions entitled [“Exclusive negotiations“] [and] [“Confidentiality“], which are intended to be, and are, legally binding agreements among the parties hereto, this] [This] Memorandum of Terms represents only the current thinking of the parties with respect to certain of the major issues relating to the proposed private offering and does not constitute a legally binding agreement. This Memorandum of Terms does not constitute an offer to sell or a solicitation of an offer to buy securities in any state where the offer or sale is not permitted.

 

THE OFFERING

 

Issuer:  [__________], a [Delaware] corporation (the “Company“)

Securities:  Series [A] Preferred Stock (the “Preferred”)

Valuation of the Company:  $[__________] pre-money

Amount of the offering:  $[__________]

Number of shares:  [__________] shares

Price per share:  $[__________]

Investor(s):  [__________] or its affiliated entities (the lead investor(s)), [__________] and other investors acceptable to the Company.

Capitalization:  See Exhibit A for the pre-financing capitalization of the Company [and the pro forma capitalization following the proposed offering].

Anticipated closing date:  Initial closing on or before [__________], with one or more additional closings within [60] days thereafter.

 

TERMS OF THE PREFERRED

 

Dividends:  Non-cumulative dividends at an annual rate of 8% of the purchase price per share in preference to the common stock, when and if declared by the board. Any dividends in excess of the preference will be paid to the common stock.

Liquidation preference:  In the event of a liquidation, dissolution or winding up of the Company, the Preferred will have the right to receive the original purchase price plus any declared but unpaid dividends prior to any distribution to the common stock. The remaining assets will be distributed pro rata to the holders of Preferred and the holders of common stock on an as-converted basis, provided that the total amount distributed to the Preferred (including the initial liquidation preference) will be limited to [__________] times the initial liquidation preference]. A sale of all or substantially all of the Company’s assets or a merger or consolidation of the Company with any other company will be treated as a liquidation of the Company.

Redemption:  The Preferred will not have redemption rights.

Conversion:  The Preferred may be converted at any time, at the option of the holder, into shares of common stock. The conversion rate will initially be 1:1, subject to anti-dilution and other customary adjustments.

Automatic conversion:  Each share of Preferred will automatically convert into common stock, at the then applicable conversion rate, upon (i) the closing of a firmly underwritten public offering of common stock at a price per share that is at least [three] times the purchase price of the Preferred with gross offering proceeds in excess of $[__________] million (a “Qualified Public Offering“), or (ii) the consent of the holders of at least [50]% of the then outstanding shares of Preferred.

Anti-dilution:  The conversion price of the Preferred (which will initially equal the purchase price of the Preferred) will be subject to adjustment, on a broad-based weighted average basis, if the Company issues additional securities at a price per share less than the then applicable conversion price.

There will be no adjustment to the conversion price for issuances of (i) shares issued upon conversion of the Preferred; (ii) shares or options, warrants or other rights issued to employees, consultants or directors in accordance with plans, agreements or similar arrangements, but not to exceed a total of [__________] shares issued after the closing date [or such greater number as unanimously approved by the board]; (iii) shares issued upon exercise of options, warrants or convertible securities existing on the closing date; (iv) shares issued as a dividend or distribution on Preferred or for which adjustment is otherwise made pursuant to the certificate of incorporation (e.g., stock splits); (v) shares issued in connection with a registered public offering; (vi) shares issued or issuable pursuant to an acquisition of another corporation or a joint venture agreement approved by the board; (vii) shares issued or issuable to banks, equipment lessors or other financial institutions pursuant to debt financing or commercial transactions approved by the board; (viii) shares issued or issuable in connection with any settlement approved by the board; (ix) shares issued or issuable in connection with sponsored research, collaboration, technology license, development, OEM, marketing or other similar arrangements or strategic partnerships approved by the board; (x) shares issued to suppliers of goods or services in connection with the provision of goods or services pursuant to transactions approved by the board; or (xi) shares that are otherwise excluded by consent of holders of a majority of the Preferred.

General voting rights:  Each share of Preferred will have the right to a number of votes equal to the number of shares of common stock issuable upon conversion of each such share of Preferred. The Preferred will vote with the common stock on all matters except as specifically provided herein or as otherwise required by law.

Voting for directors:  [So long as [__________]% of the Preferred is outstanding, the [The] holders of Preferred will be entitled to elect [two] director[s]. The holders of common stock will be entitled to elect [two] director[s]. The remaining director(s) will be elected by the holders of Preferred and common stock voting together.

Protective provisions:  So long as [any] of the Preferred is outstanding, consent of the holders of at least [50]% of the Preferred will be required for any action that (i) alters any provision of the certificate of incorporation [or the bylaws] if it would [adversely] alter the rights, preferences, privileges or powers of or restrictions on the preferred stock or any series of preferred; (ii) changes the authorized number of shares of preferred stock or any series of preferred; (iii) authorizes or creates any new class or series of shares having rights, preferences or privileges with respect to dividends or liquidation senior to or on a parity with the Preferred or having voting rights other than those granted to the preferred stock generally; (iv) approves any merger, sale of assets or other corporate reorganization or acquisition; (v) approves the purchase, redemption or other acquisition of any common stock of the Company, other than repurchases pursuant to stock restriction agreements approved by the board upon termination of a consultant, director or employee; (vi) declares or pays any dividend or distribution with respect to the [preferred stock (except as otherwise provided in the certificate of incorporation) or] common stock; [or] (vii) approves the liquidation or dissolution of the Company[; (viii) increases the size of the board;] [(ix) encumbers or grants a security interest in all or substantially all of the assets of the Company in connection with an indebtedness of the Company;] [(x) acquires a material amount of assets through a merger or purchase of all or substantially all of the assets or capital stock of another entity;] [or (xi) increases the number of shares authorized for issuance under any existing stock or option plan or creates any new stock or option plan].

 

INVESTOR RIGHTS

 

Information rights:  The Company will deliver to each holder of at least [500,000] shares of Preferred, (i) [un]audited annual financial statements within [90] days following year-end, (ii) unaudited quarterly financial statements within [45] days following quarter-end, (iii) unaudited monthly financial statements within [30] days of month-end, and (iv) annual business plans. The information rights will terminate upon an initial public offering.

Registration rights:

Registrable securities. The common stock issued or issuable upon conversion of the Preferred will be “Registrable Securities.

Demand registration. Subject to customary exceptions, holders of at least [50]% of the Registrable Securities will be entitled to demand that the Company effect up to [two] registrations (provided that each such registration has an offering price of at least $[10.00] per share with aggregate proceeds of at least $[20] million) at any time following the earlier of (i) [five] years following the closing of the financing and (ii) 180 days following the Company’s initial public offering. The Company will have the right to delay such registration under certain circumstances for [up to] [two] period[s] of up to [90] days [each] in any twelve month period.

“Piggyback” registration. The holders of Registrable Securities will be entitled to “piggyback” registration rights on any registered offering by the Company on its own behalf or on behalf of selling stockholders, subject to customary exceptions. In an underwritten offering, the managing underwriters will have the right, in the event of marketing limitations, to limit the number of Registrable Securities included in the offering, provided that, in an offering other than the initial public offering, the Registrable Securities may not be limited to less than [25]% of the total offering. In the event of such marketing limitations, each holder of Registrable Securities will have the right to include shares on a pro rata basis as among all such holders and to include shares in preference to any other holders of common stock.

S-3 rights. Subject to customary exceptions, holders of Registrable Securities will be entitled to an unlimited number of demand registrations on Form S-3 (if available to the Company) so long as those registered offerings are each for common stock having an aggregate offering price of not less than [$1,000,000]. The Company will not be required to file more than [two] such Form S-3 registration statements in any twelve month period.

Expenses. Subject to customary exceptions, the Company will bear the registration expenses (exclusive of underwriting discounts and commissions) of all demand, piggyback and S-3 registrations, provided that the Company will not be required to pay the fees of more than one counsel to all holders of Registrable Securities.