1. A Co.
SERIES A PREFERRED STOCK FINANCING
PRINCIPAL TERMS
The following summarizes the principal terms of a proposed Series A Preferred Stock
financing of A. Co., a [Delaware] corporation (the "Company"). This term sheet is qualified in its
entirety by the actual terms of the investment documents for this transaction. In the event of any
conflict or inconsistency between this term sheet and the investment documents, the terms of the
investment documents will govern. Except for the provisions under “Confidentiality” and “No
Shop” below, this term sheet is intended solely as a basis for further discussion and is not intended
to be and does not constitute a legally binding obligation.
I. SUMMARY
Amount: $X million
Type of Security: Up to Y,Y00,000 shares of Series A Preferred
Stock ("Preferred")
Price per Share: $0.ZZ ("Original Purchase Price")
Closings: First Closing on or around __________, 2010.
Minimum of $A00,000 to be raised for First
Closing. Subsequent Closings until round closed,
but not later than __________, 2010.
II. PROPOSED CAPITAL
STRUCTURE
Outstanding(1) Pro-Forma(1)
Shares % Shares %
Founder Common Stock
Series A 0 0
Employee Reserve(2)
Totals: 100.0
(1)
On a fully-diluted and as-converted basis.
(2)
Subject to stock/options vesting over four years. As of the date hereof, the Company has
granted no options, but has committed options for _________ to [aaaaaaaa].

2. Capitalization: The Company has authorized capital stock
consisting of 30,000,000 shares of Common Stock
and 10,000,000 shares of Preferred Stock. No
Preferred Stock is currently issued or outstanding.
For the proposed financing, approximately
4,250,000 shares would be designated as Series A
Preferred Stock.
III. RIGHTS, PREFERENCES,
PRIVILEGES AND
RESTRICTIONS OF Dividends will be payable on Preferred when and if
PREFERRED declared by the Board of Directors and are non-
cumulative. Holders of Preferred will be entitled to
Dividends: receive, prior to any payment of dividends to
holders of the Common Stock of the Company (the
"Common"), annual dividends in the amount of 7%
of the Original Purchase Price per share.
Liquidation Preference: In the event of any liquidation or winding up of the
Company, the holders of Preferred will be entitled
to receive in preference to the holders of Common
an amount equal to the Original Purchase Price,
plus any declared but unpaid dividends. After
payment of that amount to the holders of Preferred,
the remaining assets will be distributed to the
holders of Common. A merger, acquisition or sale
of substantially all of the assets of the Company in
which the shareholders of the Company do not own
a majority of the outstanding shares of the surviving
corporation will be deemed to be liquidation.
Conversion: The Preferred will be convertible into Common at
any time at the option of the holder. Initial
conversion ratio 1:1, subject to adjustment as
provided under “Antidilution Protection” below.
Automatic Conversion: All Preferred will be automatically converted into
Common, at the then applicable conversion ratio, in
the event that (i) the holders of at least a majority of
the Preferred consent to the conversion to Common
or (ii) upon the closing of a firm commitment
underwritten public offering of shares of the
Common of the Company at a public offering price
per share (prior to underwriting commissions and
expenses) of not less than $5.00 in an offering with
proceeds of not less than $15,000,000.
Antidilution Protection: The conversion ratio for Preferred will be subject to
adjustment on a “broad based” formula basis for
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3. future issuances of capital stock at a purchase price
less than the Original Purchase Price, with
customary carve-outs, including issuances to
employees, consultants, officers or directors of the
Company, mergers or business combinations, or
issuances in connection with debt or equipment
financings approved by the Board of Directors.
Proportional antidilution protection for stock splits,
stock dividends, recapitalizations and the like.
Redemption: The Preferred is not redeemable.
Voting Rights. Each share of Preferred carries a number of votes
equal to the number of shares of Common then
issuable upon its conversion. The Preferred will
vote together with the Common and not as a
separate class, except as required by law and as
provided below.
Protective Provisions. So long as at least 1,800,000 shares of Preferred
remain outstanding, consent of the holders of a
majority of the outstanding Preferred will be
required for: (i) any adverse amendment or change
to the rights, preferences, privileges or powers of,
or the restrictions provided for the benefit of, the
Preferred; (ii) any action that authorizes shares of
any class of stock having preferences superior to or
on parity with the Preferred; (iii) any action that
reclassifies any outstanding shares into shares
having preferences or priority as to dividends or
assets senior to or on parity with the preference of
the Preferred; (iv) any merger or consolidation of
the Company with one or more other corporations
in which the shareholders of the Company
immediately after such merger or consolidation
hold stock representing less than a majority of the
voting power of the outstanding stock of the
surviving corporation; (v) the sale of all or
substantially all the Company's assets; (vi) the
liquidation or dissolution of the Company; (vii) the
declaration or payment of a dividend on the
Common (other than a dividend payable solely in
shares of Common); or (viii) the repurchase by the
Company of any shares of its capital stock, except
redemption or repurchase of shares of Common
from employees, directors or consultants upon
termination of their employment or service pursuant
to agreements providing for such repurchase.
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4. IV. REGISTRATION AND
OTHER RIGHTS
One demand registration exercisable six months
after the Company's initial public offering by
Demand Rights: Holders of 50% or more of the Preferred (or
Common issued upon conversion of Preferred or a
combination of such Common and Preferred), for
an offering to the public of not less than
$10,000,000, subject to customary limitations.
Registrations on Form S-3: One demand registration exercisable annually by
Holders of 30% or more of the Preferred (or
Common issued upon conversion of the Preferred
or a combination of such Common and Preferred)
for offerings with proceeds of at least $2,000,000
on Form S-3 (if available to the Company).
Piggy-Back Registration: The Investors and the Founders will be entitled to
"piggy-back" registration rights with respect to
offerings registered by the Company, subject to the
right of the Company and its underwriters to reduce
the number of shares of the Investors and Founders
proposed to be registered in view of market
conditions. All shares proposed to be registered by
the Founders will be cut back prior to any reduction
of the number of shares proposed to be registered
by the Investors.
Registration Expenses: The registration expenses (exclusive of
underwriting discounts and commissions) of all
demand registrations, Form S-3 registrations and
piggy-back registrations will be borne by the
Company.
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5. Other Registration Other provisions will be contained in the Investor
Provisions: Rights Agreement with respect to registration
rights, including cross indemnification, the
agreement by purchasers of Preferred not to sell any
Common that they hold for a period of 180 days
following the effective date of the registration
statement for the initial public offering or 90 days
following subsequent public offerings (subject to
officers and all significant shareholders of the
Company entering into similar agreements).
Termination of The registration obligations of the Company to each
Registration Rights: Investor will terminate upon the earlier of five years
after the initial public offering or once all such
stock held by an Investor may be sold under
Rule 144 during any ninety day period.
Information Rights: The Company will deliver unaudited annual
financial statements to all Investors.
Right of First Offer: Preferred shareholders [who hold at least 500,000
shares] will have a right to participate in future
financings in order to maintain their pro rata
ownership interest.
Stock Restriction Each employee will execute a stock restriction
Agreement; Right of First agreement with the Company pursuant to which the
Refusal: Company will have a repurchase option to buy back
at cost a portion of the shares of Common held by
such person in the event that such shareholder's
employment with the Company is terminated, prior
to the expiration of 36 months from the date of
employment. The Company will also have a right
of first refusal with respect to any vested shares
proposed to be resold or transferred, which right
will terminate immediately prior to a public
offering.
Right of First Refusal and Each Investor, each Founder and the Company will
Co-Sale Agreement: enter into an agreement pursuant to which any
Investor who proposes to sell all or a portion of
their shares to a third party will offer the Company
an assignable right to purchase the offered shares on
terms no less favorable to the transferror than those
offered by the propose transferee, and each
Founder, if he proposes to sell all or a portion of his
shares to a third party (subject to a 15% carve out),
will offer the Investors the right to participate in
such sale on a pro rata basis.
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6. V. MISCELLANEOUS
Proprietary Information Each officer and key employee or consultant of the
and Inventions Agreement: Company will enter into a customary proprietary
information and inventions agreement with the
Company.
The Purchase Agreement: The purchases of Preferred will be made pursuant
to a preferred stock purchase agreement reasonably
acceptable to the Company and the Investors, which
agreement will contain, among other things,
appropriate representations and warranties of the
Company, covenants of the Company reflecting the
provisions set forth herein and appropriate
conditions to closing which will include, among
other things, exemption of the offering under
applicable securities laws. The Stock Purchase
Agreement will provide that it may only be
amended and any waivers thereunder will only be
made with the approval of the investors purchasing
a majority of the Preferred.
Expenses: The Company and the Investors will each bear their
own legal and other expenses with respect to the
transaction.
Confidentiality: The Company and the Investors each agree that
neither it, nor its subsidiaries, affiliates, employees
or representatives will disclose or allow disclosure
of this Term Sheet or the information contained
herein to any party other than its own entities,
personnel and agents having a need-to-know, or to
potential investors acceptable to the Investors in
connection with the subject Series A Preferred
financing, without the express prior written
approval of the other party.
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7. No Shop: In consideration of the Investors’ commitment of
substantial resources to perform and complete a due
diligence review of the Company, by signing this
Term Sheet, the Company agrees on behalf of itself,
its officers, directors, shareholders, agents,
representatives and affiliates, not to directly or
indirectly initiate, solicit, encourage, discuss,
negotiate or accept any offers or proposals
regarding the sale of debt or equity securities of the
Company or a substantial portion of the Company’s
business or assets from any third parties or any
other signatory to this Term Sheet other than
consistent with securing other investors that have
been mutually agreed to by Company and the lead
investor, for a period of 30 days from the date of
the Company’s signature below.
This Term Sheet will expire if not accepted by December __, 2010.
Agreed and Accepted
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