TERM SHEET FOR CONVERTIBLE PROMISSORY NOTE FINANCING OF [COMPANY NAME]
This term sheet is an expression of intent only, does not express the agreement of the parties, is not meant to be binding on the parties and is meant to be used as a negotiation aid by the parties. The parties do not intend to be bound until they enter into a definitive agreement regarding the subject matter of this term sheet.
Issuer:
[Company Name], a Delaware corporation (the "Company").
[Financing Amount:
Up to $[_________] from investors identified by the Company (the "Investors," each an "Investor"). Amounts may be funded in multiple closings.]
[Investors:
Investors shall be identified by the Company (the "Investors," each an "Investor"). Amounts may be funded in multiple closings.]
Promissory Notes:
The Company shall issue promissory notes (the "Notes") in exchange for amounts invested by the Investors. The Notes will have the following principal provisions:
Maturity: Unless earlier repaid or converted, outstanding principal and unpaid accrued interest on the Notes shall be due and payable upon request of the Majority Holders made on or after [date][the date which is [___] months from the initial closing] (the "Maturity Date").
Interest: [Simple i][I]nterest shall accrue on an annual basis at the rate of [___]% per annum[, compounded annually].
[Future Notes: If, while the Notes are outstanding, the Company issues other indebtedness of the Company convertible into equity securities of the Company with material terms that are more favorable to the Investor (the "Other Debt"), than the terms of the Notes, then the Company will provide each Investor with written notice thereof, together with a copy of all documentation relating to the Other Debt and, upon request of such Investor, any additional information related to the Other Debt as may be reasonably requested by such Investor. The Company will provide such notice to the Investors promptly (and in any event within 30 days) following the issuance of the Other Debt. In the event an Investor determines that the terms of the Other Debt are preferable to the terms of the Notes, such Investor will notify the Company in writing within 5 days following such Investor's receipt of such notice from the Company. Promptly after receipt of such written notice from such Investor, but in any event within 30 days, the Company will amend and restate such Investor's Note to be substantially identical to the promissory note evidencing the Other Debt, excluding the principal and accrued interest.]
[Conversion at Qualified Financing: In the event the Company consummates, [on or prior to the Maturity Date][while the Notes are outstanding], an equity financing pursuant to which it sells shares of its preferred stock ("Next Round Stock"), with an aggregate sales price of not less than $[_________], excluding any and all indebtedness under the Notes that is converted into Next Round Stock, and with the principal purpose of raising capital (a "Qualified Financing"), then all principal, together with all unpaid accrued interest under the Notes, shall automatically convert into shares of Next Round Stock at [___]% of ]the cash price per share paid by the other purchasers of Next Round Stock in the Qualified Financing.[ If the conversion price of the Notes is less than the cash price per share at which Next Round Stock is issued in the Qualified Financing, the Company may, solely at its option, elect to convert the Notes into shares of a newly created series of capital stock having the identical rights, privileges, preferences and restrictions as Next Round Stock issued in the Qualified Financing, and otherwise on the same terms and conditions, other than with respect to (if applicable): (i) the per share liquidation preference and the initial conversion price for purposes of price-based anti-dilution protection, which will be set in proportion to the conversion price; and (ii) the per share dividend, which will be the same percentage of the conversion price as applied to determine the per share dividends of new investors in the Qualified Financing relative to the purchase price paid by such investors.]]
[Conversion at Qualified Financing: In the event the Company consummates, [on or prior to the Maturity Date][while the Notes are outstanding], an equity financing pursuant to which it sells shares of its preferred stock ("Next Round Stock"), with an aggregate sales price of not less than $[_________], excluding any and all indebtedness under the Notes that is converted into Next Round Stock, and with the principal purpose of raising capital (a "Qualified Financing"), then all principal, together with all unpaid accrued interest under the Notes, shall automatically convert into shares of Next Round Stock at the lesser of (i) [___]% of ]the cash price per share paid by the other purchasers of Next Round Stock in the Qualified Financing and (ii) the price obtained by dividing $[_________] by the number of outstanding shares of common stock of the Company immediately prior to the Qualified Financing (assuming conversion of all securities convertible into common stock and exercise of all outstanding options and warrants,[ including all shares of common stock reserved and available for future grant under any equity incentive or similar plan of the Company, and/or any equity incentive or similar plan to be created or increased in connection with the Qualified Financing,] but excluding the shares of equity securities of the Company issuable upon the conversion of the Notes or other indebtedness). [ If the conversion price of the Notes is less than the cash price per share at which Next Round Stock is issued in the Qualified Financing, the Company may, solely at its option, elect to convert the Notes into shares of a newly created series of capital stock having the identical rights, privileges, preferences and restrictions as Next Round Stock issued in the Qualified Financing, and otherwise on the same terms and conditions, other than with respect to (if applicable): (i) the per share liquidation preference and the initial conversion price for purposes of price-based anti-dilution protection, which will be set in proportion to the conversion price; and (ii) the per share dividend, which will be the same percentage of the conversion price as applied to determine the per share dividends of new investors in the Qualified Financing relative to the purchase price paid by such investors.]]
[Optional Conversion at non-Qualified Financing. In the event the Company consummates, [on or prior to the Maturity Date][while the Notes remain outstanding], an equity financing pursuant to which it sells equity securities in a transaction that does not constitute a Qualified Financing, then [the Majority Holders ][Investor ]shall have the option to treat such equity financing as a Qualified Financing on the same terms set forth herein.]
[Conversion at Maturity: In the event that the Notes remain outstanding on the Maturity Date, then the outstanding principal balance of the Investor's Note and any unpaid accrued interest shall [automatically without any further action by such Investor][upon the election of the Majority Holders][upon the election of such Investor] convert into shares of [the Company's common stock][a newly created series of the Company's capital stock on the terms and conditions set forth on Exhibit A] at a conversion price equal to the quotient resulting from dividing $[_________] by the number of outstanding shares of common stock of the Company as of the Maturity Date (assuming conversion of all securities convertible into common stock and exercise of all outstanding options and warrants, [including all shares of common stock reserved and available for future grant under any equity incentive or similar plan of the Company,] but excluding the shares of equity securities of the Company issuable upon the conversion of the Notes or other indebtedness).]
Change of Control: If the Company is acquired prior to the Qualified Financing, [then at each Investor's option, either (i) such][each] Investor shall receive a cash repayment equal to the outstanding principal and unpaid accrued interest[, plus an additional payment equal to [___]% of the principal amount of such Investor's Note][, or (ii) such Investor's Note shall be converted into shares of common stock at a conversion price equal to the quotient resulting from dividing $[_________] by the number of outstanding shares of common stock of the Company immediately prior to the acquisition (assuming conversion of all securities convertible into common stock and exercise of all outstanding options and warrants, but excluding the shares of equity securities of the Company issuable upon the conversion of the Notes or other indebtedness)].
Pre-Payment: The principal and accrued interest may not be prepaid unless approved in writing by the Majority Holders.
Security: The Notes shall be unsecured obligations of the Company.
Documentation:
The investments will be made pursuant to documentation prepared by the Company's legal counsel using forms substantially similar to those made available via an automated document generator located at https://cooleygo.com/seednotes/. The Notes may be amended by the Company and the holders of a majority (by unpaid principal amount) of the Notes (the "Majority Holders").
Expenses:
The Company and Investors will each bear their own legal and other expenses with respect to the Notes financing.
[Diversity Rider:
In order to advance diversity efforts in the venture capital industry, the Company and the lead investor, [_______], will make commercial best efforts to offer and make every attempt to include as a co-investor in the financing at least one Black[ or other underrepresented group including, but not limited to LatinX, women, LGBTQ+] check writer (DCWs), and to allocate a minimum of [___]% or $[_________] of the total round for such co-investor.]
[Signatures on next page]
This term sheet is non-binding and is intended solely as a summary of the terms that are currently proposed by the parties. The parties acknowledge that they neither intend to enter, nor have they entered, into any agreement to negotiate a definitive agreement pursuant to this term sheet, and either party may, at any time prior to execution of such definitive agreement, propose different terms from those summarized herein or unilaterally terminate all negotiations pursuant to this term sheet without any liability whatsoever to the other party. Each party shall be solely liable for all of its own fees, costs and other expenses in conjunction with negotiation and preparation of a definitive agreement pursuant to this term sheet.
COMPANY:
[COMPANYNAME]
Signature: ____________________________________________
Name: ____________________________________________
Title: Chief Executive Officer
[FOR ENTITY INVESTOR USE FOLLOWING SIGNATURE BLOCK:]
Signature: ____________________________________________ Name: ____________________________________________ Title: ____________________________________________ Subscription Amount: $____________________________________________
[FOR INDIVIDUAL INVESTOR USE FOLLOWING SIGNATURE BLOCK:]
INVESTOR: ____________________________________________
Signature: ____________________________________________
Subscription Amount: $____________________________________________
[EXHIBIT A
TERMS OF SERIES PREFERRED
Securities:
A newly created series of preferred stock ("Series Preferred").
Liquidation preference:
In the event of a liquidation, dissolution or winding up of the Company, Series Preferred will have the right to receive the original purchase price prior to any distribution to common stock. The remaining assets will be distributed pro rata to the holders of common stock. A sale of all or substantially all of the Company's assets or a merger or consolidation of the Company with any other company will be treated as a liquidation of the Company.
Conversion:
Series Preferred may be converted at any time, at the option of the holder, into shares of common stock. The conversion rate will initially be 1:1, subject to customary adjustments.
Automatic conversion:
Each share of Series Preferred will automatically convert into common stock, at the then applicable conversion rate, upon (i) the closing of a firm commitment underwritten public offering of common stock, or (ii) the consent of the holders of a majority of the then outstanding shares of Series Preferred.
General voting rights:
Each share of Series Preferred will have the right to a number of votes equal to the number of shares of common stock issuable upon conversion of each such share of Series Preferred. Series Preferred will vote with common stock on all matters except as specifically provided herein or as otherwise required by law.
Protective provisions:
So long as any Series Preferred is outstanding, consent of the holders of a majority of Series Preferred will be required for any action that: (i) alters any provision of the certificate of incorporation if it would adversely alter the rights, preferences, privileges or powers of Series Preferred; or (ii) changes the authorized number of shares of Series Preferred.
Market Stand Off:
Holders of Series Preferred will agree not to effect any transactions with respect to any of the Company's securities within 180 days following the Company's initial public offering, provided that all officers, directors and 1% stockholders of the Company are similarly bound.
[INVESTOR RIGHTS
[Right to maintain proportionate ownership:
Each holder of Series Preferred (or one or more of its affiliates) will have a right to purchase its pro rata share of any offering of new securities by the Company, subject to customary exceptions. The pro rata share will be based on the ratio of (x) the number of shares of common stock held by such holder (on an as-converted basis) to (y) the Company's fully-diluted capitalization (on an as-converted and as-exercised basis). This right will terminate on the earlier of (i) immediately prior to the Company's initial public offering or (ii) seven years after the financing.]
[Information rights:
As soon as practicable, the Company will deliver to each holder of Series Preferred, (i) unaudited annual financial statements and (ii) unaudited quarterly financial statements. The information rights will terminate upon an initial public offering.]
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