1. CRITICAL ISSUES IN
NEGOTIATING VENTURE
CAPITAL INVESTMENT
FOR TECHNOLOGY AND
ECOMMERCE
COMPANIES
Scott L. Allen
Morris Manning & Martin, LLP
Atlanta, Georgia

2. Table of Contents
Sections
1) MMM - Critical Issues In Negotiating Venture Capital Investment
2) Cambridge Associates – U.S. Venture Capital Index and Selected
Benchmark Statistics
3) Release: Annual Venture Investment Increases for First Time Since 2007,
According to the MoneyTree Report
4) Release: Confidence Grows in Start-Up Economy as Venture Capitalists
and CEOs Predict Industry & Economic Improvement in 2011
5) Release: Venture-Backed Acquisitions Break All-Time Annual Record;
Driven by Chinese Companies, Number of IPOs at Highest Quarterly Level
Since 2000

3. CRITICAL ISSUES IN NEGOTIATING
VENTURE CAPITAL INVESTMENT
FOR TECHNOLOGY AND ECOMMERCE COMPANIES
By Scott L. Allen
I. Introduction
A. Venture Capital Raising Process. This article addresses key issues for a
technology company in raising venture capital. These issues are addressed from a
practical perspective with the objective of presenting a checklist of important legal and
business considerations for the technology company in raising its initial capital from the
venture community. The venture capital raising process is addressed in the following
stages --
1. Pre-Funding Considerations
2. VC Selection Process
3. Mechanics of the VC Process
4. Terms of the VC Financing
B. Checklist Features. The checklist of practical pointers presented below is
from the perspective of a technology company with the following features --
1. This is the initial round of VC financing
2. Any capital raised to date has been minimal (and probably from
friends and family)
3. There is minimal (or no) revenue to date
4. A Business Plan (or at least an Executive Summary) has been
prepared
5. A broker or investment/merchant banker has not been retained
C. Attachments.
The attachments include:
1. Attachment 1 - Flowchart of Practical Pointers in the VC Process
2. Attachment 2 - Preparation of the Executive Summary
3. Attachment 3 - Proposed Capital Structure - Rounds 1, 2 and 3

4. 2
4. Attachment 4 - Venture Capital Investment Termsheets
5. Attachment 5 - Due Diligence Checklist
Please note that the checklist items presented below are based on experiences
in dealing with U.S. and international venture capitalists investing in start-up technology
companies. Each transaction may have unique aspects requiring special attention to
other issues which are beyond the scope of this article. In particular, there may be
unique tax and securities considerations associated with the formation of the legal entity
which will require input from the company accountant. The goal of this article is to
provide a practical focus on the key issues for a technology company in raising its VC
financing.
II. Pre-Funding
A. Pointer 1 - Prepare an Executive Summary - The process of raising
venture capital starts with the preparation of an Executive Summary describing the
proposed business. The objective of this document is to obtain the interest of
prospective VCs and to encourage them to read the entire Business Plan. Consider
limiting the length of the Executive Summary to 2-5 pages (the shorter the better). This
document should succinctly address the following topics (which are discussed in greater
detail at Attachment 2).
1. Introductory paragraph on the business
2. Summary of management team
3. The market and its problem
4. The company's solution
5. Your strategy
6. Description of products and services
7. Revenue stream model
8. Sales and marketing plan
9. Competition
10. Proposed investment and use of proceeds
The first paragraph of the Executive Summary may be the most important. This
paragraph should be carefully drafted (and redrafted) to present a compelling reason for
the VC to read the Business Plan and consider investment in the company. Remember
that VCs receive a constant stream of investment opportunities, and they cannot fully
investigate all of them. A well-crafted Executive Summary will present a compelling
reason for a VC to investigate further.

5. 3
B. Pointer 2 - Prepare the Business Plan - The Executive Summary provides
the outline for the full Business Plan. The Business Plan is an expansion of the
Summary, but should include additional detail regarding:
1. Size of the market (as supported by market research)
2. Biographical information on the management team
3. Financial forecasts and assumptions
4. Enhanced description of the problem being addressed by the
Company and its products/services
5. Enhances description of the company's solution for addressing the
problem in the market.
6. Detailed description of products and services (especially focusing
on differentiators)
7. Detailed description of the sales and marketing plan
8. Description of target markets and competition
9. Detailed list of risk factors
10. Capital to be raised and detailed use of proceeds
11. Media and press articles regarding the market and the problem
being addressed by the company
12. Information regarding possible nominees to the Board and
additional management team members (to the extent these
individuals consent to having information included in the Business
Plan)
Additionally, the Business Plan will need to include a description of the current
status of the company in which the investments are proposed to be made by the VC,
including:
h current capital structure (shares and options outstanding, size of
the Option Plan and reserved shares for future issuance, proposed
grants of stock and options to Founders, etc.)
i structure of legal entity (S-corporation, C-corporation, limited
liability company, partnership, etc.)
i agreements among Shareholders/Founders
i other agreements (such as with strategic partners)

6. 4
i employment agreements with Founders
i proposed strategic investors (such as corporate venture funds or
strategic partnerships with key customers/suppliers)
i Any legal disputes or litigation
Note that the VC may require the legal structure of the company to be adjusted to
accommodate the proposed form of investment. For example, some venture funds are
prohibited from investing in partnerships or limited liability companies, thus requiring
that these entities be converted to a C-corporation. Similarly, if the technology company
is an S-corporation, the company will be required to convert to a C-corporation to
accommodate the venture investment. These issues should be addressed with the
company's accountant and tax advisor early in the capital-raising process.
C. Pointer 3 - Select the Management Team - A prerequisite to raising capital
involves a commitment from members of the management team. In many cases, this
may require prospective managers to make a legal commitment to the company,
leaving their existing employer and displaying their commitment to the new venture. In
any case, the VC firm will generally require that key members of the management team
have signed Non-competition/Non-disclosure Agreements and formally joined the new
venture prior to funding of the company. Also, this is the time to identify any “holes” in
the management team that need to be filled. In evaluating and selecting the
management team, consider the following practical pointers --
1. Are managers prepared to reduce their salaries with the
expectation of significant upside in the form of equity appreciation?
2. Is one of the managers capable of serving as Interim Chief
Financial Officer (until the company is large enough to retain a full-
time CFO)?
3. Is the Founder capable of growing with the business (and does the
Founder recognize the possibility that a more experienced manager
may need to be hired as the company accelerates its growth)?
4. Do the managers have experience in the budgeting process and
operating “hand-to-mouth” during early stages of growth?
5. Are the managers committed to the enormous time commitment
required to develop and launch the product/service during the early
years of the business?
D. Pointer 4 - Anticipate the Capital Structure -- Now and in the Future - The
Founders should plan the capital structure of the company through the multiple rounds
of financing. While these plans will likely evolve over time, it is important for the
Founders to determine their ultimate expectations as to the return on their investment of
capital and sweat equity.

7. 5
A common process involves the preparation of several pie charts setting forth the
capitalization at each stage of financing up to the major liquidity event (which is usually
the initial public offering (IPO) or sale of the business). Starting from this liquidity event
(and moving back in time), the Founders should determine the desired value of their
stock at the time of an IPO or sale of the business. Then, the Founders can move
backwards in time to determine the appropriate capital structure during the earlier
rounds of financing. Of course, the actual results of this process may be altered,
especially if additional unexpected rounds of financing are required in order to meet the
goals in the Business Plan and achieve desired revenues and profitability.
Consider preparing a pie chart of the capital structure for each of the following
stages in the life cycle of the technology company --
i company inception
i initial angel round (capital from friends and family)
i VC Round 1
i VC Round 2
i VC Round 3 (if required)
i immediately prior to the IPO
At each of these stages, consider the following “slices” of the pie chart with
regard to capitalization of the Company:
i stock/options owned by the Founders
i stock/options owned by other officers
i stock/options to be reserved for key executives
i initial stock issued to angels/friends and family (probably in the form
of common stock)
i VC Round 1 investment (probably Series A convertible preferred
stock)
i VC Round 2 investment (probably Series B convertible preferred
stock)
i VC Round 3 (if necessary) (probably Series C convertible preferred
stock)
i shares/options reserved for other officers/employees/consultants

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i options reserved for outside directors
i warrants reserved for strategic investors or debt financing
(frequently granted to commercial lenders or strategic partners)
In preparing the pie charts, you will notice that there are two key variables that
determine relative value for the shareholders:
i the amount of outside capital raised (which is a function of the
capital needed to establish and grow the business)
i valuation of the company (which determines the number of shares
issued for the outside capital)
An example of a capitalization structure using this pie chart process is included at
Attachment 3.
E. Pointer 5 - Assess Existing Employment Issues and Restrictions - Early in
the process of raising capital, the Founders should assess any restrictions placed on
them in establishing the new business venture. These restrictions could include:
1. Restrictive covenants in existing Employment Agreements with a
current employer (such as non-competition, non-solicitation of
customers or non-solicitation of employees).
2. Non-disclosure Agreements with the former employer or other third
parties.
3. Forfeiture provisions requiring a Founder to lose options or sell
stock back to a former employer as a result of the Founder
establishing a competitive venture.
4. Alleged breach of fiduciary duties or duty of loyalty (if the Founder
has been planning or operating the competitive business while still
employed by the former employer).
5. Alleged breach of duty of good faith (if the Founder was an
officer/director of the former employer and has solicited co-workers
to join the new competitive venture).
Prior to approaching a venture capitalist, these issues should be carefully
reviewed and steps should be taken to minimize legal exposure to the former employer.
Additionally, the Founders should carefully review existing agreements with their current
employers, especially with regard to vesting and forfeiture of stock and options in their
current employer. Failure to address these issues head on in the capital raising process
can result in a delay or derailment of the capital raising process.

9. 7
F. Pointer 6 - Consider Strategic Members of Your Board of Directors - The
Founders should consider possible nominees for their Board of Directors who can
provide strategic value to the new business. If the Founders are young and
inexperienced, then a well-known Director may add credibility to the new venture’s
ability to raise capital. This may be particularly the case where the Board member is
from a complimentary business or has strategic contacts in the market being pursued by
the start-up venture.
A word of caution is in order. The venture capitalists are investing in the
management team and its business concept -- not the outside members of the Board of
Directors. While a strong Board can compliment the management team, VCs will be
unimpressed by a company which is preoccupied with establishing a “superstar” Board
of Directors (or Board of Advisors) to the exclusion of addressing the fundamentals of
planning and operating the business. Also, the VCs will place their own representatives
on the Board, which will add depth of experience and contacts but also dilute the
influence of the Founders. In fact, the Founders may soon find themselves in a minority
position on the Board.
III. VC Selection Criteria
A. Pointer 7 - Achieve the Desired Valuation - A technology company will
seek the highest valuation in its venture capital financing. In the case of a start-up
business, the valuation process is more an art than a science. Traditional means of
valuing a business based on discounted cash flow or other financial metrics are
generally irrelevant at this stage. Rather, the determination of valuation may be based
on subjective, rather than objective, criteria established by a venture firm, which may
include some or all of the following:
1. Projected revenue growth
2. Projected time to profitability
3. Anticipated time to a liquidity event (such as an IPO or sale)
4. Strength of the management team and its prior performance in the
technology area
5. Comparable companies in the market (and their valuations in IPOs
and acquisitions)
6. Anticipated rate of return on the investment
7. Industry/market sector
Since an objective formula does not exist for determining exact valuation, a
technology company will need to obtain a preliminary valuation from selected venture
capitalists. Keep in mind that VCs generally do not encourage heavy “shopping” of a

10. 8
technology deal. Therefore, the VC firms should be carefully selected based on the
criteria set forth below.
IV. VC Selection Process
A. Pointer 8 - Understand the Extent of the VC's Control - The Founders of a
technology company will often misinterpret their ownership of 51% or more of the
company's stock as retaining “control” of the business. While this may be true before a
venture investment, it will not be true after. VCs typically invest in preferred stock that
gives them a number of control provisions, such as
i a specified number of directors (which could be a majority)
i approval rights over certain significant corporate actions
i covenants to undertake certain actions
i purchase and redemption rights with respect to the company's
stock.
The founders of a technology company need to understand the control they will
inevitably lose to the VCs and be comfortable with it before going down this path.
B. Pointer 9 - Determine a Pool of Prospective VCs - A technology company
should do its homework in selecting a small group (no more than 7-10, and preferably 2-
3) VC firms to approach for a possible investment. The entrepreneur should obtain
information regarding these firms through their websites, contacts with professional
advisors and a review of comparable public companies in which the VC firms have
invested. Before contacting any VCs, the entrepreneur should determine the
investment criteria used by the venture fund in making investments. These criteria may
include:
1. The stage of financing (earlier start-up vs. later stage)
2. The size of an investment (note that many firms have substantially
increased their minimum investment and have established $10
million as their floor)
The method of introduction to a VC is also important. Cold calls have a much
lower percentage of success than introductions made by mutual contacts.
C. Pointer 10 - Select a VC with Industry Contacts - For a “hot” technology
company, a number of VC firms will likely express an interest. The technology company
will then need to select the firm with the appropriate industry focus and that can provide
an “added value” component to the investment. Among the key questions to be asked
by a technology company in selecting a VC are:

11. 9
1. Has the firm made similar investments in companies in the same
market area?
2. Can the firm provide significant industry contacts (particularly with
prospective strategic partners and customers)?
3. Does the VC have strong contacts with executive search firms to
enhance the management team of the company?
4. Does the firm actively participate in meetings of the Board (as
opposed to simply showing up without having read the Board
materials)?
5. Who is the representative from the VC firm to serve on the Board
(and is it a partner or associate)?
6. Can the VC firm assist in strategic planning and direction for the
company (or does it have contacts with strategic planning firms)?
7. Will the VC agree to co-invest along with other funds?
8. Does the VC have significant contacts with the media, PR firms,
and marketing consulting?
9. Does the VC firm have sufficient capital to invest in follow-on
rounds?
In the long run, there should be a cultural and personality “fit” of the
partner/associate at the venture firm and the Founders. One way to determine this level
of compatibility is for the Founders to contact portfolio companies in which the VC firms
have made investments and obtain references on the funds.
D. Pointer 11 - Do the VC and Founders agree on the Management Team? -
This is a pivotal question to be honestly discussed with the prospective venture investor.
There should be a convergence of opinion as to such matters as:
1. The ability of the Founders to serve in the capacities of
CEO/President
2. The willingness of the Founders to add new members to the
management team (and to delegate or relinquish responsibility)
3. The willingness to hire a CFO within a designated period of time
4. The proposed salaries for members of the management team
(keeping in mind the desire of most VC investors to keep salaries at
a low or moderate level, with an equity upside based on
appreciation of stock and options)

12. 10
5. Willingness of the Founders to be diluted by the addition of key
members of the management team and additional rounds of
investment
6. Acceptance of the fact that a new CEO may be required as the
company advances to later rounds of financing
E. Pointer 12 - Are There Benefits to Having Local VC Involvement? - There
are benefits to having local VC involvement. These benefits include:
1. Contacts with local media
2. Contacts with local executives and proposed Board members
3. Assistance with local governmental and political leaders
4. Hands-on and personal participation by the VC with critical
business issues requiring fact-to-face involvement
V. Mechanics of the VC Process
A. After following the pre-funding steps and selecting a group of prospective
VC investors, consider the following action items for proceeding toward a closing of the
fund raising process:
1. Pointer 13 - Schedule VC Meetings - Schedule these meetings in
close proximity to allow the opportunity to compare VC firms. Make
sure the company presentation is well rehearsed and highlights the
differentiating features of your business, as set forth in your
Executive Summary. Note that most VC firms will refuse to sign
Nondisclosure Agreements, so care should be taken in the depth of
disclosure provided in the initial meetings.
2. Pointer 14 - Check on VC References - With regard to the “best
few” VC funds selected, check on references with executives in
their portfolio companies. Confirm the information provided by the
venture funds regarding the “added value” they claim to provide to
their portfolio companies.
3. Pointer 15 - Obtain a Range of Valuation - For those VC funds
interested in the business, encourage them to provide a pre-money
valuation range for the company. Even if this valuation range is
provided verbally, it allows the Founders to assess the seriousness
of the venture fund in moving forward with the investment at an
acceptable valuation.
4. Pointer 16 - Select a Lead Investor - From among the interested VC
firms, the Founders will need to select a lead firm. This firm may be
the VC with the highest valuation and will also be the lead on

13. 11
conducting due diligence on the company. Additionally, the lead
investor will be instrumental in selecting co-investors from the other
interested VC funds. Note that some VC funds prefer to be the sole
investor and may object to having other firms involved in the
financing group.
5. Pointer 17 - Obtain VC Termsheets - If the Founders have attracted
a group of interested VCs, each of the firms should be encouraged
to submit Termsheets as to the relevant provisions of the financing
and proposed valuation. In the best case, the most desirable VC
firms will submit their Termsheets for review and comparison by the
Founders. The Founders can then select the desired firm to serve
as lead investor and to pull together the financing group.
6. Pointer 18 - Finalize the Termsheet - The relevant provisions of the
Termsheet will need to be negotiated. Samples of VC Termsheets
are included at Attachment 4.
7. Pointer 19 - Prepare for Due Diligence - The lead venture firm will
provide a due diligence checklist (see Attachment 5). The
Founders should prepare for the materials to be provided to the
VCs and have these materials well organized before the request is
made.
8. Pointer 20 - Review Draft Documents - Legal counsel for the VC
will provide drafts of the relevant documents for the venture
financing. These will include the Stock Purchase Agreement and
other documents as referenced in the Termsheets at Attachment
4.
9. Pointer 21 - Close the Transaction and Monitor On-going
Compliance with Covenants - After the financing is closed, note that
the Founders will need to maintain a checklist of the covenants
included in the Stock Purchase Agreement.
VI. Terms of the Financing
Attachment 4 contains several sample termsheets with commentary as to a
description of the typical terms, the reasons behind the terms and areas for negotiation.

14. 12
ATTACHMENT 1
FLOWCHART OF PRACTICAL POINTERS IN THE VC PROCESS
Pointers
Pointer 1. Prepare an Executive Summary
Pointer 2. Prepare the Business Plan
Pointer 3. Select the Management Team
Pointer 4. Anticipate the Capital Structure --
Now and in the Future
Pointer 5. Assess Existing Employment Issues and Restrictions
Pointer 6. Consider Strategic Members of
Your Board of Directors
Pointer 7. Achieve the Desired Valuation
Pointer 8. Understand the Extent of the VC's Control
Pointer 9. Determine a Pool of Prospective VCs
Pointer 10. Select a VC with Industry Contacts
Pointer 11. Do the VC and Founders agree on
the Management Team?
Pointer 12. Are There Benefits to Having Local
VC Involvement?
Pointer 13. Schedule VC Meetings
Pointer 14. Check on VC References
Pointer 15. Obtain a Range of Valuation
Pointer 16. Select a Lead Investor
Pointer 17. Obtain VC Termsheets
Pointer 18. Finalize the Termsheet
Pointer 19. Prepare for Due Diligence
Pointer 20. Review Draft Documents
Pointer 21. Close the Transaction and Monitor
On-going Compliance with Covenants

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ATTACHMENT 2
PREPARATION OF THE EXECUTIVE SUMMARY
In preparing the Executive Summary for your Company, review the following
outline. The objective of this document is to obtain the interest of the prospective
venture capitalist, angel investor or other potential source of capital. The Executive
Summary will be supplemented by the full Business Plan. Please keep in mind that the
first paragraph may be the most important, along with information on your management
team. Finally, please limit the length of the Executive Summary to 2-5 pages.
Introductory Paragraph - This paragraph should provide a carefully
worded description of your business, the problem experienced in the market which you
are resolving, your Company's solution, and your business objective.
Management Team - If your management team is experienced and
well known in the market, you may want to include biographical information in the
second section of the Executive Summary. Otherwise, this section can be included at
the end of the document. Please note that biographical information should be included
as an attachment to the full Business Plan. The Business Plan will also indicate any
management positions which you expect to fill and your timetable for filling them.
The Market and its Problem - This paragraph should address the
market in which your Company provides products and services. In particular, define the
problem experienced in the market. If possible, include market research data to verify
the size of the market and the scope of the problem being addressed by your Company.
Company Solution - After you have described the problem in the
market, the next section will address the solution provided by your Company.
Emphasize any unique or differentiating features of this solution (for example, if your
solution is more responsive in addressing the customer’s needs, is more cost-effective
or lower priced, is more easily implemented, etc.). Often, a company's solution will
include three or four key bullet points which also highlight the differences between your
Company and the competition.
Strategy - This section generally sets forth your strategic business
direction, outlining the steps you plan to take to deliver your Company's solution to the
market. Again, the strategy may include three to five key strategic elements (such as
the establishment of a dealer network, expansion into international markets, strategic
alliances with third parties, etc.).
Description of Products and Services - Include a paragraph
describing the services and products of the Company, highlighting any distinguishing or
differentiating features. This should also include any intellectual property protection for
products (especially patents). This section can include a description of research and
product development activities and plans.

16. 14
Revenue Stream Model - Describe how your solution is going to
generate revenue. Discuss whether your model is sales-based, advertising-based, etc.
Also, discuss your pricing of products/services and the factors that determine price.
This discussion will also be the basis for the assumptions in your financial forecast.
Sales and Marketing - Describe the sales and marketing strategies
for the Company. If applicable, indicate the experience of the members of the
management team with regard to the sales and marketing plans. Again, highlight any
differentiating features of your strategies.
Competition - This section should briefly describe your competitors,
as well as ways in which your firm can be differentiated in the competitive environment,
including a summary of the competition and their strengths and weaknesses.
Financial Statements and Forecasts - Include a summary of the
financial statements for the Company and forecasted financial information. Be careful
with your financial forecasts and make sure that appropriate assumptions are included.
The financial forecasts can be summarized in a couple of sentences, as opposed to
including detailed financial information.
Risk Factors - You may want to consider including a summary of
potential risks associated with the business venture. These risk factors do not need to
be as detailed as would be included in a prospectus for an IPO, but they should
highlight those areas of significant concern.
Attachments - Consider attaching one or more of the following, if
applicable
• Biographical information on management team
• Information about the Board of Directors (and possible nominees)
• Press/media information and articles

17. 15
ATTACHMENT 3
PROPOSED CAPITAL STRUCTURE -- Rounds 1, 2 and 3
ROUND 1
$10,000,000 Post-Money Valuation
1,000,000 shares outstanding
VC Investment = 300,000 shares at $10 per share ($3,000,000)
SR = 15%
(150,000 Shares)
VC = 30% F = 55%
(550,000 Shares)
(300,000 Shares) Estimated Value = $5,500,00
Legend
F = Founders
VC = Venture Capitalists
SR = Shares Reserved for Key
Employees and Directors

18. 16
ROUND 2
$15,000,000 Post-Money Valuation
1,300,000 Shares Outstanding
Additional VC Investment = 250,000 Shares at $12 per share ($3,000,000)
SR = 15.4%
(200,000 Shares)
F = 42.3%
(550,000 Shares)
VC = 42.3% Estimated Value = $6,345,000
(550,000 Shares)
Legend
F = Founders
VC = Venture Capitalists
SR = Shares Reserved for Key
Employees and Directors

19. 17
ROUND 3
$30,000,000 Post-Money Valuation
1,610,624 Shares Outstanding
Additional VC Investment = 260,624 Shares at $19.18 per share ($5,000,000)
SR = 15.5%
(250,000 Shares)
VC = 50.3%
(810,624 Shares)
F = 34.2%
(550,000 Shares)
Estimated Value = $10,260,000
Legend
F = Founders
VC = Venture Capitalists
SR = Shares Reserved for Key
Employees and Directors

20. 18
ATTACHMENT 4
VENTURE CAPITAL INVESTMENT TERMSHEETS
SERIES A FINANCING – ROUND #1
(with commentary)
1. Company Generic Software, Inc. (the “Company”)
2. Amount of Investment $2,000,000
3. Form of Investment 2,000,000 shares of Series A Convertible Preferred Stock,
$.01 par value (the “Preferred A”). [VCs almost always
invest in preferred stock that is convertible into
common stock. This allows the VC to take advantage of
the preferred liquidation and other rights customary to
preferred stock while the company is private while
retaining the right to convert to common stock at the
IPO or sale of the company to realize their appreciation.]
4. Use of Proceeds Software development, patent development and general
working capital purposes. [Use of proceeds is typically an
important factor for VCs. The VCs want to make sure
that their money is used to grow the Company and
make their investment more valuable.]
5. Stock Option Plan 10% of the fully diluted shares outstanding post-financing
will be reserved for issuance to employees and consultants
according to a stock option plan. [VCs know that
motivated employees are the key to a Company’s
success, so a portion of the capital is almost always set
aside for employee/director options. The typical option
pool is 10% - 20% of the outstanding stock.]
6. Rights, Preferences, Privileges and (1) Dividend Provisions: Dividends will be cumulative and
Restrictions of Preferred accrue at a 10% annual rate and be payable in-kind, upon
liquidation, redemption, merger, consolidation, or conversion
of Preferred A. [VCs usually want a minimum fixed
return without burdening the Company with periodic
payments, and they like the option of getting it in either
cash or stock.]
(2) Liquidation Preference: In the event of liquidation, sale,
merger, consolidation or winding up of the Company, the
holders of Preferred A will be entitled to receive in
preference to holders of common stock an amount equal to
the purchase price of the shares plus all accrued and unpaid
dividends. [If the Company liquidates, the VCs want their
money first. A liquidation is usually defined to include
a sale of the Company, which impacts the amount of

21. 19
proceeds that will remain for the common shareholders.
Some preferred stock is structured as “participating
preferred” which gives the preferred stock this
liquidation preference plus the right to participate in the
remaining proceeds as if the preferred stock had been
converted into common stock.]
(3) Conversion Price: The total number of shares of
common stock into which Preferred A may be converted will
be determined by multiplying the number of shares of
Preferred A to be so converted by the purchase price and
dividing the result by the conversion price. The conversion
price initially shall be equal to the purchase price but will be
subject to adjustment as provided in paragraph (5) below.
[The VCs have the right to convert into common stock
at anytime, but they never will unless the Company is
sold or goes public.]
(4) Automatic Conversion: Upon the closing of an Initial
Public Offering of shares of the Common at a public offering
price that is not less than 5 times the per share price of the
Preferred A, with net proceeds to the Company of at least
$10 million, the Preferred A will automatically convert into
common stock at the then applicable conversion price. [The
public markets will rarely invest in the IPO of a company
with preferred stock. As a result, if the Company goes
public, the VCs know that their preferential rights go
away, but they want to know that it’s a “real” IPO, that
is, an IPO that will result in a liquid market in which they
can sell their shares.]
(5) Antidilution Provisions: If the Company issues additional
shares at a purchase price less than the applicable
conversion price of Preferred A, the conversion price used to
determine the number of shares of common stock into which
shares of Preferred A may be converted will be reduced on
a weighted average formula basis. [If the Company sells
cheap stock (i.e. below the price of the preferred stock),
the VCs have been diluted and they will want more
stock. The key issue here is “weighted average” versus
“full” ratchet. A “full” ratchet will reduce the
conversion price to the price at which the dilutive
shares were issued (without regard to the number of
dilutive shares issued). A “weighted-average” ratchet
will reduce the conversion price in accordance with a
formula that takes into account the price and amount of
the dilutive shares. The weighted average ratchet is
more favorable to the company and is relatively
standard.]
(6) Voting Rights: Except with respect to election of
directors and certain protective provisions or as required by
law, the Preferred A will vote together with the common
stock with the right to that number of votes equal to the
number of shares of common stock issuable upon

22. 20
conversion of the Preferred A. [The VCs will probably
have a minority position, but the protective provisions
give them the real power.]
(7) Protective Provisions: For so long as at least 25% of the
Preferred A remain unconverted, consent of the holders of at
least a majority of the Preferred A will be required for:
(i) any sale by the Company of all or substantially all of its
assets, (ii) any merger of the Company with another entity,
(iii) any liquidation or winding up of the Company; (iv) any
amendment of the Company's charter in a manner adverse
to this class of stock, (v) the issuance of any equity or debt
security senior to or on parity with the Preferred A, or (vi) the
payment of any dividend on or the purchase, redemption or
other acquisition of any security junior to the Preferred A.
[Some of these rights are provided by law, the
remainder by negotiating leverage. These approval
rights are fairly common. VCs may also seek approval
rights over more “business judgment” matters in earlier
stage companies.]
(8) Redemption: Holders of at least a majority of the
Preferred A may elect to cause the Company to redeem the
Preferred A in two equal annual installments commencing
on the fifth anniversary of the issuance of the Preferred A at
a redemption price equal to the greater of the fair market
value or purchase price plus all accrued and unpaid
dividends. Upon default in the payment of any required
redemption installment, the unpaid balance shall accrue
interest at the rate of 15% per annum, payable quarterly in
arrears. Default in the payment of any required redemption
installment that continues for more than ninety days after
notice shall be a voting right event permitting the Preferred A
to elect a majority of the Board of Directors during the
continuance of such default. [The VCs won’t invest unless
they have an exit strategy. If the Company doesn’t have
the money to redeem the Preferred A after five years
(which is likely), the VCs may use this provision to take
over the Board (or more likely threaten to do so) and
force a sale or refinancing of the Company. The
concept is usually not negotiable, but the term and/or
payout schedule may have some flexibility.]
7. Board of Directors The Company's Board of Directors shall be comprised of
two representatives of the Common Shareholders, of which
one shall be the CEO; two nominees of the holders of
Preferred A, and one mutually agreed upon industry
representative who shall not otherwise be affiliated with the
Company. The Company will reimburse all non-employee
directors for their reasonable expenses to attend Board
meetings. [The VCs are your new business partners and
they will want Board representation. The VC
representatives may be in the minority, but beware of
“veto” rights (usually relating to compensation or
related party transactions). Also, be aware that VCs

23. 21
who invest in later rounds will also have Board seats,
which may result in the VCs as a group having control
of the Board.]
8. Information Rights So long as any of the Preferred are outstanding, the
Company will deliver to each investor audited annual and
unaudited quarterly and monthly financial statements,
annual budgets and other information reasonably requested
by any investor owning shares of Preferred A, provided that
such investor is not employed by or associated with a
competitor of the Company. [The VC is already on the
Board, so he’ll have access to everything anyway.]
9. Registration Rights (1) Demand Rights: The holders of a majority of the
Preferred A (voting together) may request that the Company
file a registration statement under the Securities Act of 1933,
as amended, covering the shares of common stock
requested to be registered, and the Company will use its
best efforts to cause such shares to be so registered. The
Company will not be obligated to effect and consummate
more than two demand registrations (other than on Form S-
3 or any equivalent successor form) under this provision. A
registration will not count for this purpose unless it is closed
or withdrawn at the request of the Investors (other than as a
result of a material adverse change to the Company). The
Company shall not be required to effect any registration
within one hundred eighty days of the effective date of any
other registration statement on Form S-1. [If the Company
goes public, the VC will want to sell its stock as soon as
possible. Registration is at the Company’s expense,
and it isn’t cheap, so the Company will want to limit the
number of demand registrations. The Company will
also want to protect the rights of its common
shareholders to participate in the IPO as well.]
(2) Piggy-Back Registration: The Investors will be entitled
to unlimited “piggy-back” registration rights on registrations
of the Company, subject to customary underwriter's cutback.
[Not as important an issue for the Company, but make
sure that the VC can’t keep the founders from
participating in the IPO.]
(3) Registration Expenses: The Registration expenses
(exclusive of underwriting discounts and commissions but
including the fees of one counsel for the selling
shareholders) of each of the registrations under paragraphs
(1) and (2) above will be borne by the Company. [VCs
never want to spend their money, even after the
Company goes public.]
10. First Refusal Right for Purchase of Until the initial public offering of the Company, or until fewer
New Securities than 25% of the Preferred A remains outstanding, if the
Company proposes to offer any shares for the purpose of
financing its business (other than shares issued to
employees in the form of stock options, shares issued in the

24. 22
acquisition of another company, or shares offered to the
public pursuant to an underwritten public offering), the
Company will first offer all such shares to the Investors. [If
the Company needs a second round of financing, the
VC will want the first opportunity at the deal.]
11. Stock Restriction Agreement The Founders and the Company's key employees will each
execute a Stock Restriction Agreement with the Investors
and the Company pursuant to which the Company first, and
the Investors second, will have a right of refusal with respect
to any shares proposed to be sold by such persons. The
Stock Restriction Agreement will contain a right of co-sale in
favor of the Investors providing that before any such person
may sell any of his or her common shares, he or she will
give the Investors an opportunity to participate in such sale
on a basis proportionate to the amount of securities held by
the seller and those held by the Investors. [If the founders
find a buyer for their stock, the VC wants the option of
either buying the stock itself or selling stock along with
them.]
12. Noncompetition, Nonsolicitation Following the closing, the Company will cause each Founder
and Nondisclosure Agreement and key employee to enter into a two-year noncompetition,
nonsolicitation and nondisclosure agreement, all such
agreements to be in a form reasonably acceptable to the
Investors. [VCs usually take this opportunity to make
sure the Company is protecting itself the way it should.]
13. The Purchase Agreement The purchase of the Preferred A will be made pursuant to a
Series A Convertible Preferred Stock Purchase Agreement
drafted by counsel to the Investors. Such agreement shall
contain, among other things, appropriate representations
and warranties of the Company and the Founders;
covenants of the Company reflecting the provisions set forth
herein and other typical covenants; and appropriate
conditions of closing. [The key points for negotiation are
usually the representations and warranties and
indemnification for breaches of the representations and
warranties.]
14. Expenses The Company will pay the Investors' expenses for legal
fees. [VCs usually get their legal fees paid by the
Company, but insist on one counsel for all VCs and a
reasonable cap on fees.]
15. Conditions to Closing The proposed transaction is subject to satisfactory
completion of due diligence by the Investors.

25. 23
VENTURE CAPITAL INVESTMENT TERM SHEET
SERIES B FINANCING – ROUND #2
XXX=
(the “Company”)
1. Investment Amount $3,500,000 Series B Convertible Preferred Stock (the
“Securities”), representing 25% ownership on a fully diluted
basis (inclusive of the Employee Pool described below and
all other options and warrants).
2. Investors Venture Capital Firm (“YYY”) will invest up to $2,000,000
and will work with the company to arrange additional
investors suitable to all parties for the remaining $1,500,000.
3. Use of Proceeds The proceeds from the sale of the Series B Preferred will be
used for working capital and general corporate purposes.
4. Employee Pool Included in the ownership calculated above, the Company
will provide for an incentive stock option plan representing
12% of the post-financing fully-diluted common stock
equivalents. All stock options issued under the plan will vest
to a schedule agreed by the board and be issued at an
exercise price not less than current fair market value. Any
increase to the Employee Pool must be approved by the
Compensation Committee of the Board of Directors
including the approval of the director serving on such
committee selected by the holders of the Series B Preferred.
5. Board of Directors The Board of Directors will initially consist of five people.
The holders of the Series B Preferred will have the right to
elect two directors.
The Board of Directors will meet at least six times annually,
and preferably will meet monthly. The Company will pay
reasonable expenses incurred by directors in attending
board meetings.
6. Conversion The holders of the Series B Preferred will have the right to
convert the Series B Preferred at any time into common
stock of the Company. The initial conversion rate shall be
on a one-to-one basis and shall be subject to adjustment
and dilution protection.
7. Automatic Conversion Upon the closing of a firmly underwritten public offering of
shares of the Company for total offering proceeds to the
Company of not less than $15 million at an offering price
(prior to underwriters’ commissions and expenses) that is
not less than 300% of the conversion price of the Series B
Preferred, the Series B Preferred will be automatically

26. 24
converted into common stock at the then applicable
conversion rate.
8. Preference on Liquidation, Merger In the event of any liquidation or winding up of the
or Consolidation Company, the holders of the Series B Preferred will be
entitled to receive the amount paid for the Series B
Preferred plus all accrued but unpaid dividends on such
shares and a premium of 20% per annum compounded from
the date of purchase of the Series B Preferred (the
“Preferential Amount”), prior to any distributions made to the
holders of common stock. In the event of a merger,
consolidation, or other corporate reorganization or sale of
control, or any transaction in which a majority of the assets
of the Company are sold (other than a merger into a wholly-
owned subsidiary), the holders of the Series B Preferred will
be entitled to convert or receive in cash or securities in the
amount they would have received upon a liquidation or
conversion, whichever is greater.
9. Anti-Dilution In the event that the Company issues additional shares of
common stock, convertible securities or warrants or grants
stock options or issues other common stock equivalents
(excluding shares reserved for issuance to officers,
employees, directors, consultants or advisors pursuant to
stock option or restricted stock purchase plans) at a
purchase price less than the applicable conversion price,
then the conversion price of the Series B Preferred will be
subject to full adjustment to prevent dilution to such
purchase price.
10. Adjustments In the event of any stock splits, stock dividends or
combinations, an adjustment will be made such that the
holders of the Series B Preferred will hold the same relative
ownership position after such action as they had
immediately prior to such action.
11. Dividends Dividends on each share of the Series B Preferred shall be
cumulative and shall accrue on a daily basis at the rate of
6% per annum. No dividends shall be paid on the common
stock or any other series of preferred stock so long as any
shares of the Series B Preferred remain outstanding. The
Company will be precluded from purchasing, redeeming or
paying dividends on any capital stock other than the Series
B Preferred.
12. Redemption Mandatory redemption upon demand of holders of the
Series B Preferred after five years. Such redemption to be
one-half of the total of the Series B Preferred in each of the
two years following such demand; redemption price to be
the greater of the Preferential Amount or fair market value
(not discounted for minority interest).

27. 25
13. Registration Rights Commencing five years from the closing, the holders of a
majority of the Series B Preferred will have the right to
demand two registrations of common stock into which the
Series B Preferred are convertible and will have unlimited
piggyback registration rights. In addition, such holders will
be entitled to two demand registrations on Form S-3 per
year, so long as such registered offerings are not less than
$1,500,000. The Company will bear registration expenses
(exclusive of underwriting discounts and commission) of all
demand and piggyback registrations. The registration rights
may be transferred with an investor’s shares.
The investors will agree to a reasonable lock-up upon the
Company’s initial public offering, not to exceed 180 days,
and subject to management and other investors owning 1%
or more of the Company’s shares agreeing to the same
lock-up.
Senior management will be entitled to piggyback registration
rights, subject to customary cutback provisions with priority
for primary shares and shares to be sold by holders of the
Series B Preferred. The Company will not grant or permit to
exist any other registration rights in favor of holders of its
capital stock without the consent of the holders of the Series
B Preferred.
14. Rights of First Refusal The holders of the Series B Preferred will have a right of first
refusal to purchase shares in other equity offerings made by
the Company (except for shares issuable pursuant to the
Employee Pool). The Company will have the right of first
refusal to purchase any shares offered for sale by
shareholders. Should the Company not exercise the right in
full, said shares must then be offered to holders of the
Series B Preferred on a pro rata basis.
15. Restrictive Covenants; Protective Consent of a majority of the holders of the Series B
Provisions Preferred will be required for a number of actions, including
any actions which:
(a) Amend the Company’s charter or bylaws;
(b) Alters or changes the rights, preferences or
privileges of the Series B Preferred;
(c) Increases or decreases the authorized number of
shares of the Series B Preferred stock;
(d) Creates (by reclassification or otherwise) any new
class or series of shares having rights, preferences
or privileges senior to or on a parity with the Series
B Preferred;
(e) Results in the sale of any security at a common-
equivalent price less than that paid for the Series B
Preferred, other than shares in the Employee Pool;
(f) Results in any merger, other corporate
reorganization, sale of control, or any transaction in

28. 26
which all or substantially all of the assets of the
Company are sold;
(g) Results in a material change in the Company’s
line(s) of business;
(h) Enters the Company into material business activities
not contemplated in the original business plan
presented to the holders of the Series B Preferred;
(i) Results in the Company acquiring the stock, assets
or business of any other entity in any form of
transaction;
(j) Creates or commits the Company to enter into a
joint venture, licensing agreement, or exclusive
marketing or other distribution agreement with
respect to the Company’s products, other than in the
ordinary course of business.
16. Events of Non-Compliance and An event of non-compliance shall occur if (i) the Company
Remedies breaches in any material respect any of the covenants or
any of its obligations to the holders of the Series B Preferred
and fails to cure such breach after notice and a reasonable
opportunity to cure or (ii) the Company incurs a bankruptcy,
receivership, assignment for the benefit of creditors or any
unsatisfied judgment in a material amount.
If any event of non-compliance occurs and continues for 90
days, and until such event of non-compliance is cured, the
holders of a majority of the Series B Preferred then
outstanding shall have the right to elect a majority of the
Company’s Board of Directors. The foregoing remedy is not
exclusive, and all other legal remedies may be pursued by
such shareholders upon the occurrence of an event of non-
compliance.
17. Capital Expenditures, Assumption A capital budget will be approved by the Board of Directors.
of Debt And Guarantees Approval of the Board of Directors is required for any capital
expenditure beyond that approved in the annual capital
budget. Approval of the holders of the Series B Preferred is
required for any assumption of debt in excess of a total of
$1,000,000 outstanding at any time and any guarantees of
debt or other obligations of another entity.
18. Information Requirements All holders of the Series B Preferred or their assigns will
receive annual audited and quarterly unaudited financial
statements. Sixty days prior to the start of each fiscal year,
the Company will provide to such investors a
comprehensive operating budget forecasting the Company’s
revenues, expenses and cash position on a month to month
basis for the upcoming fiscal year.
19. Voting Rights Each share of the Series B Preferred will carry one vote for
each share of common stock (including fractions) then
issuable upon its conversion. The Series B Preferred will

29. 27
vote together with the common stock and not as a separate
class, except as specifically provided herein or as otherwise
required by law.
20. Purchase Agreements The investment shall be made pursuant to a stock purchase
agreement reasonably acceptable to the Company and the
Investors, which agreement shall contain, among other
things, appropriate representations and warranties and
covenants of the Company reflecting the provisions set forth
herein and appropriate conditions of closing, including an
opinion of counsel for the Company. The purchase
agreement, charter provisions and related documents shall
be drafted by counsel for the Investors.
21. Management Compensation The Compensation Committee of the Board of Directors will
consist of three directors at least one of which will be a
representative of the holders of the Series B Preferred and
at least one of which will be an outside director.
Compensation for senior management will not exceed that
which is reasonable and customary.
22. Proprietary and Inventions Each officer and other key employee of the Company will
Agreement enter into an acceptable proprietary information and
inventions agreement.
23. Key Person Insurance Prior to closing the Company will obtain key person
insurance in the amount of $1,000,000 on the life of the
Founder.
24. New Hires A CFO or VP of Finance will be recruited and selected by
mutual agreement between the Company and the holders of
the Series B Preferred with 180 days of the closing of this
financing.
25. Non-Compete Agreement Each officer and other key employee of the Company will
enter into an acceptable non-compete agreement for a
period of two years after leaving the Company.
26. Stockholders’ Agreement; Co-Sale The holders of the Series B Preferred will have a right of co-
sale for any stock sales by any shareholder in excess of
10% of their respective holdings.
27. Transactions with Affiliates Transactions with affiliates require approval of the Board of
Directors acting by majority of disinterested directors.
28. No Brokers The Company and each of the Investors represent and
warrant that it has incurred no liability for any brokerage
fees, agents’ fees, commissions or finders’ fees in
connection with this Term Sheet or the consummation of the
transactions contemplated hereby.
29. Professional Advisors Corporate counsel, CPA and commercial banker to be
mutually agreed upon by the Company and the Preferred
Stockholders.
30. Investor’s Counsel AAA or BBB or CCC

30. 28
31. Fees and Expenses The Company shall pay reasonable fees and expenses
related to the transaction for one legal counsel for the
holders of the Series B Preferred. It is anticipated that their
fees will not exceed $25,000 (plus reasonable expenses),
but such fees may exceed that amount in the event that
unanticipated legal issues arise in connection with this
transaction. In the event this transaction does not close for
any reason, the Company will pay the reasonable fees and
expenses of the legal counsel for the proposed holders of
the Series B Preferred.
32. Conditions To Closing Closing is subject to the satisfactory completion by the
Investors of all due diligence they deem necessary. The
proposed investment is subject to agreement upon final
documentation and other customary conditions and any
amendments to the terms and rights of the holders of the
Series A Preferred Stock, so as not to conflict with the rights
and preferences for the Series B Preferred. This term sheet
does not represent a legal commitment to consummate the
transaction described herein or any other transaction,
except that the Company agrees to be bound by the “No
Shop” commitment set forth below, and the foregoing
agreement with respect to the payment of legal fees and
expenses. It is understood and agreed that the Investors
may undertake background examinations of key
management of the Company as part of the due diligence
investigations conducted by the Investors, and that such
Investors may utilize such information in connection with
their investment decision with respect to this transaction.
33. “No Shop” The Company agrees that for a period of thirty (30) days
from the date this term sheet is accepted by both parties
and thereafter so long as the Investors continue to conduct
due diligence in good faith and/or document the transaction
(and the Company has not given written notice to the
Investors to discontinue same), neither the Company nor
any of its representatives or agents shall directly or indirectly
approach, contact or discuss with, or provide any
information to, any other investment entity or person
concerning the sale by the Company of any debt, equity or
assets to any such entity or person, other than as necessary
to complete, with the Investor’s participation, the financing
contemplated by this document.
This proposal shall remain open until 6:00 p.m. on _________, 2001.
ACCEPTED:
XXX YYY
By: By:
Its: Its:

31. 29
ATTACHMENT 5
PRELIMINARY DUE DILIGENCE CHECKLIST
“XXX” (Company)
The following is a preliminary list of documents and other information to be provided to “YYY”
(VC) for review as part of our due diligence investigation to be conducted in connection with the
proposed private placement of Series D Convertible Preferred Stock by “XXX” (the “Company”).
To the extent any of the documents or information requested are not applicable, please so
indicate. Items may subsequently be added, deleted or modified, as appropriate, as the due
diligence review progresses. All requests are for information since the date of incorporation of
the Company, unless otherwise noted. In each case, the requested information should also be
provided for the Company's subsidiaries, if any.
1. Formation and Qualification to do Business
1.1 Articles of Incorporation and by-laws, including any amendments thereto, of the
Company (including any predecessor company).
1.2 A list of each jurisdiction in which the Company is qualified to do business as a
foreign corporation, owns or leases real property or is otherwise operating.
2. Corporate Proceedings and Capital Stock
2.1 The minutes of meetings held since the Company's organization of (a) shareholders,
(b) Board of Directors and (c) all committees of the Board of Directors. Authorizing resolutions
for the proposed private placement.
2.2 A list of all classes of stock of the Company, the number of shares authorized and
issued, respectively, in each class, the number of shareholders in each class, the names of the
Company's shareholders for each class of stock, the capacities in which shares are held (i.e.,
individually, as a trustee, as a guardian, administrator, etc.) and the amount of such holdings.
2.3 A list of all holders of options or warrants to purchase securities of the Company
setting forth each holder's name, the date of grant of each option or the date on which each
warrant was acquired, the title and amount of securities subject to each such option or warrant,
and the exercise price.
2.4 A list of subsidiaries and other entities in which the Company has an equity
investment.
2.5 Copies of any agreements to which the Company or any of its subsidiaries is a party
relating to:
a. a commitment to insure or sell securities
b. a commitment or option to repurchase securities
c. past issuances of securities (debt and equity)
d. voting of stock
e. registration rights
f. rights of first refusal
g. preemptive rights
h. restrictions on transfer of stock
i. warrants.

32. 30
2.6 Documents pertaining to any recapitalization, merger or acquisition involving the
Company.
3. Litigation, Etc.
3.1 Letters from lawyers to auditors concerning litigation and other legal proceedings for
the Company.
3.2 A list of all concluded litigation and other legal proceedings, a list (and status) of all
threatened or pending litigation, proceedings, investigations, inquiries or disputes involving the
Company and a list of all asserted and threatened claims involving the Company.
3.3 List of any consent decrees, injunctions, writs, orders or the like that currently bind
the Company.
4. Government Regulation
4.1 All material communications to and all filings with domestic and foreign governmental
agencies relating to the Company (including the Securities and Exchange Commission, state
securities agencies, the Internal Revenue Service and any state or foreign taxing authority),
including permits and consents.
4.2 A list of all federal, state and foreign agencies which license, regulate, inspect or
register the Company and any of its activities.
4.3 Any reports, notices or correspondence relating to any purported violation or
infringement by the Company of government regulations, including, but not limited to, the areas of
insurance, equal opportunity, occupational safety and health and environmental protection, and
copies of all other material correspondence with federal, state or other regulatory agencies.
5. Management and Employees
5.1 A list of all directors, officers and key employees of the Company, their salaries and,
if less than full-time, the amount of business time devoted to the Company's business by each.
5.2 Non-competition, confidentiality, non-disclosure, assignment of invention and similar
agreements with any entity to which any director, officer, or key employee of the Company is a
party (please indicate any employees not covered by such agreements).
5.3 A schedule (and any related agreements) of all material transactions involving the
Company and any current or former stockholder, officer, key employee or director of the
Company.
5.4 Copies of all employee stock option plans or other stock option or employee bonus or
incentive plans.
5.5 Copies of Employment Contracts (other than those set forth above).
5.6 Copies of Employee benefit plans.
5.7 Copies of Contracts with unions, if any.
5.8 List of “Key Person” Insurance Policies.

33. 18
6. Consultants
6.1 A list of all consultants of the Company and copies of such consultants' agreements
with the Company.
7. Property
7.1 Summary of property owned, if any.
7.2 Copies of mortgages, if any, on property, plant and equipment owned by the
Company.
7.3 Copies of deeds, if any, on property, plant and equipment owned by the Company.
7.4 Schedule and copies of leases and related agreements for all property, plant and
equipment leased by or to the Company with rental, expiration and renewal terms.
7.5 Appraisal reports, if any, on property, plant and equipment owned by the Company.
7.6 List of Insurance policies on the Company's property.
8. Operational Matters
8.1 Copies of all material contracts of the Company.
8.2 List of all franchisees, franchise locations and Company operated offices.
8.3 Any written business plans of the Company, an explanation of material developments
expected to occur during the next 12 months, including any anticipated material acquisition of
plant and equipment and the capacity thereof.
8.4 Copies of documents relating to acquisitions of capital stock or assets.
8.5 A list of significant or sole-source suppliers, setting forth annual dollar amounts
purchased, with copies of contracts and agreements with such suppliers.
8.6 Forms of franchise agreements and customer agreements used by the Company.
8.7 All records maintained by the Company relating to customer complaints.
9. Financial Data
9.1 Auditors' reports to management and any management responses thereto, and
internal memoranda (particularly internal audit or regulatory compliance memoranda) concerning
the Company.
9.2 Copies of the Company's financial statements covering the last two years.
9.3 Year-to-date financials.
9.4 Budgets or projections for the Company made on a quarterly, annual or other basis.
9.5 Reports to security holders, if any.

34. 19
10. Financial Matters
10.1 Credit agreements, loan agreements and lease agreements.
10.2 Security agreements and mortgages.
10.3 Guarantees of third party obligations.
10.4 Convertible note agreements.
10.5 Copies of any other contracts and agreements with financial institutions.
11. Intellectual Property Matters
11.1 Schedule of all trademark, copyright and patent registrations and related filings.
11.2 List of unregistered trademarks and service marks.
11.3 License and technology agreements.
11.4 All documents, materials and correspondence relating to any clams or disputes with
respect to any intellectual property rights of the Company or any of its subsidiaries or any third
party.
12. Miscellaneous
A copy of any other document that the Company believes is material with respect to its
operations.