ENTR510, Entrepreneurship: New Venture
Review the sample term sheet located in the Doc Sharing folder. After examining the various provisions of the agreement, prepare a one- to two-page paper explaining: a) What should you be concerned about as an entrepreneur; b) What do you think the investors are concerned about; and c) What are both of you concerned about? APA format with references Keller School of Management ENTR510, Entrepreneurship: New Venture Sample Term Sheet is Below: SAMPLETERMSHEET– FORDISCUSSIONPURPOSES ONLY XYZ,INC. SALEOFSERIESACONVERTIBLEPREFERREDSTOCKTERMSHEET Confidential This term sheet summarizestheprincipal termswithrespecttoapotential privateplacement ofequitysecuritiesofXYZ,Inc.(the“Company”)byagroupofinvestors(the“InvestorCo”).Thistermsheetisintendedsolelyasabasisforfurtherdiscussionandisnotintendedto beanddoesnotconstitutealegallybindingobligationexceptasprovidedunder“Confidentiality”below. Nootherlegallybindingobligationswillbecreated,implied,orinferreduntiladocumentinfinalformentitled“StockPurchaseAgreement,”isexecutedanddeliveredby allparties.Withoutlimitingthegeneralityoftheforegoing,itisthepartiesintentthat,untilthatevent,noagreementshallexistamong them and there shall be no obligations whatsoever basedon such things as parol evidence,extendednegotiations, “handshakes,” oral understandings, or coursesof conduct (including reliance and changes ofposition),except as provided under “Confidentiality”below.TheCompanyandtheInvestorsarediscussinga privateplacementofsharesof SeriesAConvertiblePreferredStockon thefollowingterms: Issuer: XYZ,Inc.(the"Company") Investors/Amountof Investment: InvestorCo,oroneormoredesigneesofInvestorCo,andcertainotherinvestorstobedeterminedforanamountupto$ millionwithaninitialclosingof $______. TheCompany andInvestorCo shallhavetherighttoapproveallmembers of the investment syndicate and such approval shallnotbe unreasonablywithheld. TypeofSecurity: Shares of the Company’s Series AConvertible Preferred Stock (“Series APreferredStock”), convertible intoshares oftheCompany’s CommonStock“Common”).Uponconversion,butpriortoapublicsale,theCommonintowhichtheSeriesA PreferredStockhasbeenconvertedwillbereferredtoasConversionShares.”(Assumenoexistingpreferred.) Numberof Shares: Upto_____sharesof SeriesAPreferredStock Founders: ________and(“Founders”) PricePerShare: $ pershare(“OriginalPurchasePrice”). Capitalizationof theCompany: Current % Post-Financing % Common % % ConvertibleDebt(Common) % % ConvertibleDebt(SeriesAPreferred) % % SeriesAPreferred % % Options % % % % Rights,Preferences,Privileges: (1)DividendProvisions: TheholdersoftheSeriesAPreferredStockwillbeentitled to receive dividends at an annual rate of 8% of the thenOriginalPurchasePricewheneverfundsarelegallyavailableandwhenandasdeclaredbytheBoard. NodividendshallbepaidontheCommonatarategreaterthantherateatwhich dividends arepaidonSeries APreferredStock (based onthenumber of shares of Common into which theSeries A Preferred Stock is convertible on the date the dividend isdeclared). Dividends on Series APreferred Stock will be in preferenceto dividends paid on the Common.Dividendson the SeriesAPreferredwillbe cumulative. (2) LiquidationPreference: In the event of any liquidation, dissolutionor windingupoftheCompany, theholdersofSeriesAPreferred Stockwillbeentitledtobepaidasfollows: First,theholdersoftheSeriesAPreferredStockshallbeentitledtoreceive inpreferencetotheholdersofCommonanamount(“Liquidation Preference”) equal to the OriginalPurchase Price plusanydividendsdeclaredontheSeriesAPreferredbutnotpaid.Second,theholdersofSeriesAPreferredStockandtheholdersofCommonwillbe entitledtoreceiveprorata,onaparipassubasiswiththeSeriesAPreferredStockbeingdeemedto have been converted to Commonimmediately prior to such liquidation, theremaining amounts or assetstoholders of capital stock of theCompany,providedthattheholdersoftheSeriesAPreferredStockshallnotbeentitledto receivepursuanttothissentenceanamountinexcessofthreetimestheOriginalPurchasePrice.TheeffectuationbytheCompanyorthird-partyacquirorsofatransactionor seriesoftransactionsinwhichmorethan50%ofthevotingpoweroftheCompanyisdisposedoftoasinglepersonorgroupofaffiliatedpersonsor theconsolidationormergeroftheCompanywithorintoanyothercorporation orcorporationsorthesaleofallorsubstantiallyallofitsassetsshallbedeemedtobealiquidation, dissolution orwindingupforpurposesoftheliquidationpreference. (3)Conversion: AholderofSeriesAPreferredwillhavetherighttoconvertSeriesAPreferredStock,attheoptionoftheholder,atanytime,intosharesofCommon.ThetotalnumberofsharesofCommonintowhichSeriesAPreferredmay be converted initially will be determined bydividing the LiquidationPreferenceby the conversion price. The initialconversionpricewillbetheOriginalPurchasePrice. Theconversionpricewillbesubjecttoadjustmenttoreflect stock dividends, stock splits andsimilar events and as provided in paragraph(4)below. TheSeriesAStockwillbeautomatically convertedintoCommon, at the thenapplicable conversion price, in the event of (a)anunderwrittenpublicofferingofsharesofCommonatapublicofferingpricepersharethatwouldvaluetheCompanyatnotlessthan$3.00pershare(subjectto adjustment) inanofferingofnotlessthan$10,000,000or(b)thevoteoftheholdersoftwo-thirdsofthe outstandingSeriesA PreferredStock. (4)AntidilutionProvisions:The conversionpriceof theSeriesAPreferredStockwillbesubject toadjustment (a) for stockdividends, stocksplits,orsimilarevents,and(b)onaweightedaveragebasistopreventdilutionintheeventthattheCompanyissuesadditionalsharesatapurchasepricelessthantheOriginalPurchasePrice,asadjustedhereunder. Noadjustmenttotheconversionpricewilloccurforanyissuanceofadditionalsharesatapurchasepriceinexcessof theOriginalPurchasePrice,asadjustedhereunder.Conversionpriceswillnotbeadjusted because of (a) conversionof Series APreferred Stock, or (b)theissuance andsaleof,orthegrantofoptionstopurchase,10%sharesofCommonpursuant tothe Company'semployee stock purchase or option plans(the“ReservedEmployeeShares”). (5)VotingRights:ExceptasprovidedbylawandwithrespecttoelectionofDirectors,aholderofSeriesAPreferredStockwillhavetherighttothatnumberofvotesequaltothenumberofsharesofCommonissuableuponconversionofitsSeriesAPreferredStockatthetimethesharesarevoted.ElectionofDirectorswillbe as describedunder“BoardRepresentation”below. (6)ProtectiveProvisions:WithoutthewrittenconsentofatleastoneSeriesA Preferred Director,whichconsentwillnotbeunreasonablywithheld, conditionedordelayed,theCompanywillnotagreetoandthe Boardwillnotauthorizeanyofthefollowingmatters:(1)approvaloftheCompany’sannualcapitalexpenditurebudget; (2) approval of the Company’s annualperformance budget;(3)incurrenceofanyindebtednessinexcessof$_____;(4)incurrenceofanylienuponanyofitspropertyorrevenuesinexcessof$_____;(5)transactionswithaffiliatesoftheCompany,providedthatanaffiliateshallnotincludeasubsidiaryoftheCompany,whetherornotwholly-owned;(6)appointmentordismissalofthe Company’s ChiefExecutive Officer and any other member ofseniormanagement;(7)approvaloftheChiefExecutiveOfficer’sandeachothermemberofseniormanagement’srespectiveemploymentarrangements;or (8)creationof a subsidiaryotherthana wholly-ownedsubsidiary. Written consent of the holders of fifty-one percent (51%) of the SeriesA PreferredStockwillberequiredfor:(1)authorization,creationand/orissuanceof aseniorclassorseriesofequitysecuritiesovertheSeriesAPreferredStockora parityclassorseriesofequitysecurities;(2)amendmentstotheCertificateofIncorporationorBy-Laws oftheCompany;(3)anincreaseordecreasein thesizeoftheBoardofDirectors;(4)paymentofdividends,orredemptionorrepurchaseofstockorstockoptions;(5)liquidationordissolutionoftheCompanyorthesale,leaseorotherdisposalofallorsubstantiallyalloftheCompany’sassets;and(6)anyreorganization,consolidationormergeroftheCompanywithanotherentity inwhich more than 50% of the voting power of the Companyis transferred. Informationand RegistrationRights: (1)InformationRights: SolongasanInvestorholdsSeriesAPreferredStock(orConversionShares),theCompanywilldelivertosuchInvestorannualauditedandquarterlyunauditedfinancialstatements. SolongastheInvestorholdsatleast 25% of the capital stock (in the form of Series APreferred Stock orConversionShares)heldonthedateoftheClosing,theCompanywilltimelyfurnish each Investor with annual budgetsafter such budgets havebeenapproved bythe Company'sBoardofDirectors. (2) Demand Rights If, at any time after the earlier of the Company’s initial public offering and the datethreeyearsfromthepurchaseoftheSeriesAPreferredStock(butnotwithin180daysoftheeffectivedateofaregistration),investorsholdingatleast25%ofaggregatevotingpoweroftheSeriesAPreferredStockandConversionSharesrequestthattheCompanyfileaRegistrationStatementforatleast25%oftheCommonissuedorissuableuponconversionoftheSeries APreferredStock(oranylesserpercentageiftheaggregateofferingpricetothepublicwouldexceed$5,000,000),theCompanywilluseitsbesteffortstocausesuchsharestoberegistered.TheCompanywillnotbeobligatedtoeffectmorethantworegistrations(otherthanonFormS-3)underthesedemandregistrationright provisions. (3) PiggybackRegistration: The Investors will be entitled to“piggyback”registration rights on registrations of the Company oron anydemandregistrations,subjecttotherightoftheCompanyanditsunderwriters,inviewof marketconditions,toreduceoreliminatethenumberofsharesoftheInvestorsproposedtoberegistered. (5)RegistrationExpenses:Allregistrationexpenses(exclusiveofunderwritingdiscountsandcommissions andspecialcounselfeesofasellingshareholder)shallbebornebytheCompany. (6)OtherRegistrationProvisions: Other provisionswillbecontainedintheInvestorRightsAgreementwithrespecttoregistrationrightsasarecustomary,including theagreement by the holders of the Series APreferred Stock (ifrequestedbytheunderwriter inconnection withtheinitialpublicofferingof securitiesoftheCompany)nottosellanyunregisteredCommontheyholdfora periodof180daysfollowingtheeffectivedateoftheRegistrationStatementofsuchoffering. BoardRepresentation: TheauthorizednumberofdirectorsoftheCompanywillbefixedat .The BoardofDirectors(the“Board”)shallinclude:(i)atleasttwo(2)representativesdesignated by the Series APreferred Stock (eacha“Series APreferredDirector”);and(ii)three(3)representativesdesignatedbytheFounders(eachaFounder-Director). InvestorCoshallbeentitledtoelectoneoftheSeriesA PreferredDirectorsintheeventthatInvestorCo(oritsdesignees)purchasesat least $_____of theSeriesAPreferredStock. UseofProceeds: TheproceedsfromthesaleoftheSeriesAPreferredwillbeusedforworkingcapital. EmploymentRelationships: TheCompanyhasorwillhavepriortotheclosingemploymentagreementswithpersonsmutuallyagreedtobytheCompanyandInvestors(the“ManagementTeam”). Drag-AlongRights: In the event that oneormore holders ofthecapital stock oftheCompanyholdingmorethan75%ofthevotingpowerofthecapitalstockoftheCompany(withtheSeriesAPreferredStockvotingonanasconvertedtoCommonbasis)accept an offer to sell all of their stock toathirdparty,andsuch saleis conditioneduponthesaleofallremainingcapitalstockoftheCompanytosuchthirdparty, allofthe holders ofthe capitalstock ofthe Company shallberequiredtoselltheirstockinsuchtransaction,on thesameterms andconditions. RightofFirstRefusal: IntheeventthattheCompany offersequitysecurities (other thanReservedEmployeeShares,oruponconversionofoutstandingSeriesAPreferredStock,oruponexerciseofoutstandingoptionsorwarrants,orinconnectionwithanacquisitionorinapublicoffering),eachInvestorshallhavearightoffirstrefusaltopurchaseaproratapercentageofsharesinthenewoffering,basedontheholder's percentageownershipinterestintheCompany. Tag-AlongRights: IntheeventaFounderproposestosellsharesoftheCompany,eachInvestorwillbeentitledtoparticipateinsuchsalebysellingthesamepercentageofhisstockassuchFounderissellingofhisstock. ConfidentialInformationand InventionsAssignment Agreement: Each officer, director and key employee of the Company will enterinto a Confidential Information and Inventions Assignment Agreementin aformreasonablyacceptabletothe CompanyandtheInvestors. TheStockPurchaseAgreement: Thepurchaseof theSeriesAPreferred,ifconsummated,willbemadepursuanttoaStockPurchaseAgreement(withexhibits)draftedbycounseltotheCompanyandacceptabletotheInvestors.TheStockPurchaseAgreementwillcontain,amongotherthings,representationsandwarrantiesoftheCompany,covenantsofthe Company,andconditionstotheobligationsoftheInvestors. Redemption: If the Series A Preferred Stock hasnot been converted toCommonbeforeDecember31,2012 heholdersshallhavetheoptiontoforcetheCompanytoredeemtheSeriesAPreferredStockinthreeequalyearlyinstallmentsbeginningMarch1,2013, theredemptionamountshallbeequaltotheoriginalSeriesA Preferred Stockpurchaseprice,plusanyaccruedbutunpaiddividends. VotingAgreement: TheFounderswillenterintoavotingagreementwiththeInvestorstoenforcetheir obligationshereunder. Conditionsof Closing: Theclosingfor the purchaseofthe SeriesA Preferredwillbeconditionedupon: (1)CompletionofduediligencetothesatisfactionoftheInvestorsintheirsole discretion. (2) Execution by the Company of a Stock Purchase Agreement andrelatedagreementssatisfactorytothe Investorsintheirsolediscretion. (3)Complianceby theCompanywithapplicablesecuritieslaws. (4)OpinionofcounseltotheCompanyrenderedtotheInvestorsinformand substancesatisfactorytotheInvestors. (5)Othermaterialconditions,tobediscussed. (6) Suchotherconditionsasare customaryfor transactionsofthistype.(7)Executionbythe FoundersofaVotingAgreement. Expenses: The Company and the Investors will each bear their own legal andotherexpenseswithrespecttothetransaction(exceptthattheCompanywillpaythefeesandexpenses of(a)counsel totheInvestorsand(b)consultantstotheInvestors, subject to a maximum aggregate amount forboth (a) and (b)of $______).TheInvestorsshallbeentitledreviewbytheirattorneysofmaterialagreements,attheInvestors'solecostandexpense,followingthetransaction;provided,however,thattheCompanyshallhavenoobligationtoprovidesuchinformation to Investors if the Company reasonablydetermines thattheinformationcontainsconfidentialinformationoftheCompany. Finders: TheCompanyandtheInvestorseachwillindemnifytheotherforanyfinder’sfees for whichthatpartyisresponsible. Closing: Theinitialclosing ofthesaleof$ ofSeriesAPreferred Stock, ifallconditions are met,isexpectedtooccuronorbefore_____,2012 headditional Series APreferred Stock may be sold by the Company on arollingbasisthereafter. Expirationof Proposal: ThisTermSheetwillautomaticallyexpire,andbeofnofurtherforceoreffect,if(1)the Investors have not received from theCompany acopyofthisletteracknowledgedandagreedtobytheCompanyonorbefore5:00p.m.EasternStandardTimeon______,2001or(2)priortoanysuchreceipt,theInvestorsorallyorinwriting,givenoticeofwithdrawalhereof.Inaddition,theProposalwillexpireiftheInvestorsdonotpurchasetheSeriesAPreferredStockforcashby ,2012 Confidentiality: ThetermsoftheProposalareconfidential,andneitherthecontentsofthisletternorthe details ofthe Proposal may beshownordisclosedbytheCompanyexcepttothoseindividualsattheCompanywhohaveaneedtoknowasaresultofbeinginvolvedintheproposedtransactionand,aftersigningthisProposal,theCompanymaydisclosethecontentstootherindividualswhohaveaneedtoknowasaresult ofbeing involved intheproposed transaction ortootherindividuals or entities for purposes ofmaking such individuals orentities"Investors" intheCompany'sSeriesAPreferredStock. CounseltotheInvestors:______________________________________Phone: Fax: Attn: CounseltotheCompany: McDermott,Will&Emery THEFOREGOINGSUMMARYSETSFORTHTHETERMSOFTHISLETTEROF INTENT,WHICHTERMSARENON-BINDINGEXCEPTFORTHECONFIDENTIALITY PROVISIONSWHICHSHALLBEBINDINGANDSURVIVEEXECUTIONOFTHISAGREEMENT. Dated: ,_______2012 INVESTORCO XYZ,INC. By: ______________________________ By:__________________________________ Name: Name: Title: Title: