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    • 1. --------- Term Sheet 1
    • 2. - Advisory board- A set of limited partners or outsiders who advise a private equity organization. The board may, for instance, provide guidance on overall fund strategy or ways to value privately held firms at the end of each fiscal year. Agency problem- A conflict between managers and investors or, more generally, an instance where an agent does not intrinsically desire to follow the wishes of the principal that hired him. Agreement among underwrites- The contract between members of an underwriters’ syndicate. Allotment- The number of shares each underwriter has to sale in securities offering. American Depositary Receipt (ADR)- A security issued in the United States to represent share of a foreign company. Analyst- A research analyst usually employed by an investment bank “follow” companies and issues reports regarding their prospects. Ability to provide analyst’s coverage following the IPO is a key factor in selecting an underwriter. Angel- A wealthy individual who invests in entrepreneurial firms. Although angels perform many of the same functions as venture capitalists, they invest their own capital rather than that of institutional and other individual investors. Asset allocation- The process through which institutional or individual investors set targets for how their investment portfolios should be divided across the different asset classes. Asset class- One of a number of investment categories – such as bonds, real estate, and private equity – that institutional and individual investors consider when making asset allocations. Asymmetric information problem- A problem that arises when, because of his day-to-day involvement with the firm, an entrepreneur knows more about his company’s prospects than investors, suppliers, or strategic partners. Auditor- A firm of certified public accountants that review the books of the company and provide a report. Best efforts- An agreement where investment bankers agree to do their best to sell an issue to the public. Beta- A measure of the extent to which a firm’s market value varies with that of an index of overall market value. For instance, a stock with a beta of zero displays no correlation with the market, that with a beta of one generally mirrors the market’s movements, and that with a beta greater than one experiences more dramatic shifts when the index moves. 2
    • 3. - Blue sky laws- A law passed by many states that requires sellers of new issues to register their IPOs and provide financial details on their company. Boilerplate- Standard terms an conditions. Books- In an IPO context the preliminary indications of interest of the public in the offering. Book runner- The managing underwriter for a new issue. The book runner maintain the book of securities sold. Book-to-market ratio- The ratio of a firm’s accounting (book) value of its equity to the value of the equity assigned by the market (i.e., the product of the number of shares outstanding and the share price). Bought deal- A firm commitment to purchase an entire issue of a company. Broker- Person who acts as an intermediary between the buyer and the seller. A commission is usually charged. Call option- The right, but not the obligation, to buy a security at a set price (or range of prices) in a given period. Callable- A security on which the security issuer has an option to repurchase from the security holder. Capital Gain- The difference between an asset's purchase price and selling price, only when the difference is a positive amount. Capitalization- Equal to a company's stock price multiplied by the number of shares owned by the public (that is, outstanding shares). For example, if a company is selling for $50 per share and has 1,000,000 shares outstanding, then the capitalization is $50,000,000 ($50 multiplied by 1,000,000). Capital structure- The mixture of equity and debt that a firm has raised. Capital under management- See Committed capital. Carried interest- Either (a) The substantial share, often around 20%, of profits that are allocated to the general partners of a private equity partnership or (b) the valuation of the portion of the company owned by a shareholder, after the financing. Carried interest = (post-money valuation) * (% ownership post- money). Close- The price of the final trade of a security at the end of a trading day. Closed-end fund- A publicity traded mutual fund whose shares must be sold to other investors (rather than redeemed from the issuing firm, as is the case with open-end mutual funds). Many early venture capital funds were structured in this manner. 3
    • 4. - Closing- The signing of the contract by an investor or group of investors that binds them to supply a set amount of capital to a private equity fund. Often a fraction of that capital is provided at the time of the closing. A single fund may have multiple closings. Co-investment- Either (a) the syndication of a private equity financing round (b) an investment by an individual general or limited partner alongside a private equity fund in a financing found. Collar- A combination of an equal number of call and put options at slightly different exercise prices. Comfort Letter- The independent auditor's letter in an underwriting agreement that assures the information in the registration statement is correct and that no changes have been made. Committed capital- Pledges of capital to a private equity fund. This money is typically not received at once, but rather is taken down over three to five years starting in the year the fund is formed. Hence, there is a risk that under extrem circumstances the capital will not be received by the fund. Common stock- The equity typically held by management and founders. Typically, at the time of an initial public offering, all equity is converted into common stock. Consolidation- A private equity investment strategy that involves merging several small firms together and exploiting economies of scale or scope. Conversion ratio- The number of shares for which a convertible debt or equity issue can be exchanged. Convertible equity or debt- A security that under certain conditions can be converted into another security (often into common stock). The convertible shares often have special rights that the common stock does not have. Corporate venture capital- An initiative by a corporation to invest either in young firms outside the corporation or in business concepts originating within the corporation. These are often organized as corporate subsidiaries, not as limited partnerships. Dilution- The reduction in the fraction of a firm’s equity owned by the founders and existing shareholders associated with a new financing round. Disbursement- An investment by a private equity fund into a company. Distressed debt- A private equity investment strategy that involves purchasing discounted bonds of a financially distressed firm. Distressed debt investors frequently convert their holdings into equity and become actively involved with the management of the distressed firm. Distribution- The transfer of shares in a (typically publicity traded) portfolio firm or cash from a private equity fund to each limited partner and (frequently) each general partner. Draw down- See take down. 4
    • 5. - Due diligence- The review of a business plan, the assessment of a management team and the legal affairs of the company prior to a private equity investment. Due diligence meeting- A meeting held by the underwrites of a new offering at which brokers can ask representatives of the issuer questions about the background, finances and intended use of the proceeds from the new issue. Earnings before interest and taxes- (EBIT) A measure of the firm’s profitability before any adjustment for interest expenses or tax obligations. This measure is often used to compare firms with different levels of indebtedness. Another common measure is EBITDA (Earning before Interest, Tax, Depreciation and Amortization). Endowment- The long-term pool of financial assets held by many universities, hospitals, foundations, and other nonprofit institutions. Equity kicker- A transaction in which a small number of shares or warrants are added to what is primarily a debt financing. Exercise price- The price at which an option or a warrant can be exercised. Financing round- The provision of capital by a private equity group to a firm. Since venture capital organizations generally provide capital in stages, a typical venture-backed firm will receive several financing rounds over a series of years. Firm commitment- Arrangement where investment bankers purchase from the issuer of securities to be offered to the public. First fund- An initial fund raised by a private equity organization; also known as a first-time fund. Float- In a public market context, the percentage of the company’s shares that is in the hands of outside investors, as opposed to being held by corporate insiders. Follow-on fund- A fund that is subsequent to a private equity organization’s first fund. Form 10-K- An annual filing required by the U.S. Securities and Exchange Commission of each publicly traded firm, as well as certain private firms. The statement provides a wide variety of summary data about the firm. Foreign private issuers are required to file Form 20-F. Free cash-flow problem- The temptation to undertake wasteful expenditures with cash not needed for operations or investments often poses. Fund- A pool of capital raised periodically by a private equity organization. Usually in the form of limited partnerships, private equity funds typically have a 10-year life, though extensions of several years are often possible. 5
    • 6. - Fund of funds- A fund that invests primarily in other private equity funds rather than operating firms, often organized by an investment adviser or investment bank. Gatekeeper- See Investment adviser. General partner- A partner in a limited partnership is responsible for the day-to-day operations of the fund. In the case of a private equity fund, the venture capitalists either are general partners or own the corporation that serves as the general partner. The general partners assume all liability for the fund’s debts. Green Shoe- See over allotment. Hedging- A securities transaction that allows an investor to limit the losses that may result from the shifts in value of an existing asset of financial obligation. For instance, a farmer may hedge his exposure to fluctuating crop prices by agreeing before the harvest on a sale price for part of his crop. Herding problem- A situation in which investors, particularly institutions, make investments that are more similar to one another than is desirable. Hot issue market- A market with high demand for new securities offerings, particularly for initial public offerings. Hurdle rate- Either (a) the set rate of return that the limited partners must receive before the general partners can begin sharing in any distributions, or (b) the level that the fund’s net asset value must reach before the general partners can begin sharing in any distributions. In the money- An option or a warrant that would have a positive value if it was immediately exercised. Initial public offering (IPO)- The sale of shares to public investors of a firm that has not been traded on a public stock exchange. An investment bank typically underwrites these offerings. Insider- A director, an officer, or a shareholder with at least a certain percentage (often 10%) of a company’s equity. Intangible asset- A patent, trade secret, informal know-how, brand capital, or other nonphysical asset. Investment adviser- A financial intermediary who assists investors, particularly institutions, with investments in private equity and other financial assets. Advisers assess potential new venture funds for their clients and monitor the progress of existing investments. In some cases, they pull their investors’ capital in funds of funds. Investment bank- A financial intermediary that, among other services, may underwrite securities offerings, facilitate mergers and acquisitions, and trade for its own account. 6
    • 7. - Investment committee- A group, typically consisting of general partners of a private equity fund, that reviews potential and/or existing investments. Initial Public Offering (IPO)- A company's first offering of stock to the public. Lead Underwriter- The underwriters managing the underwriter’s syndicate (also called Managing Underwriter). Leveraged buyout (LBO)- The acquisition of a firm or business unit, typically in a mature industry, with a considerable amount of debt. The debt is then repaid according to a strict schedule that absorbs most of the firm’s cash flow. Leveraged buyout fund- A fund, typically organized in a similar manner to a venture capital fund, specializing in leveraged buyout investments. Some of these funds also make venture capital investments. Leveraged re-capitalization- A transaction in which the management team (rather than new investors as in the case of a LBO) borrows money to buy out the interests of other investors. As in a LBO, the debt is then repaid. Licensee- In a licensing agreement, the party who receives the right to use a technology, product, or brand name in exchange for payments. Licensor- In a licensing agreement, the party who receives payments in exchange for providing the right to use a technology, product, or brand name that it owns. Limit order- In an underwritten IPO, the price-dependent orders made by individual or institutional investors; for example, the agreement by an investor to purchase 10,000 shares, conditional on the price of the offering being under $12 per share. Limited partner- An investor in a limited partnership. Limited partners can monitor the partnership’s progress but cannot become involved in its day-to-day management if they are to retain limited liability. Limited partnership- An organizational form that entails a finitely lived contractual arrangement between limited and general partners, governed by a partnership agreement. Lock up- A provision in the underwriting agreement between an investment bank and existing shareholders that prohibits corporate insiders and private equity investors from selling at the time of the offering. Management buyout (MBO)- A European term for a LBO initiated by an existing management team, which then solicits the involvement of a private equity group. 7
    • 8. - Management fee- The fee, typically a percentage of committed capital or net asset value, that is paid by a private equity fund to the general partners to cover salaries and expenses. Market Maker- Brokerage and securities firms that are required by the rules of a stock market or exchange to both buy and sell securities of a quoted company, for which they act as market maker, at bid and offer prices which they quote. Mezzanine- Either (a) a private equity financing round shortly before an initial public offering, or (b) an investment that employs subordinated debt that has fewer privileges than bank debt but more than equity and often has attached warrants. Milestone payments- In a licensing agreement, the payments made by the licensee to the licensor at specified times in the future or else when certain technological or business objectives have been achieved. NASDAQ- The U.S. “over the counter” tracking system where most IPOs are listed and most firms that were formerly backed by private equity investors trade. Net asset value (NAV)- The value of a fund’s holdings, which may be calculated using a variety of valuation rules. The value does not include funds that have been committed but not drawn down. Net income- A firm’s profits after taxes. Net present value (NPV)- A valuation method that computes the expected value of one or more future cash flows and discounts them at a rate that reflects the cost of capital (which will vary with the cash flows’ riskiness). Option- The right, but not the obligation, to buy or sell a security at a set price (or range of prices) in a given period. Order- Instruction to a broker or dealer to buy or sell securities or commodities. There are four basic categories for securities orders: market order, limit order, time order, and stop order. Out of the money- An option or a warrant that would have a negative value if it was immediately exercised. Over allotment option (Green show)- The option granted to an underwriter in a public offering giving it the option, for a period of anywhere from 15 to 45 days (usually 30 days) after the effective date, to purchase additional securities from the issuer (usually up to 15% of the shares being sold) at the initial price to the public, for the purpose of covering over-subscriptions for the securities. Participating preferred stock- Convertible stock where, under certain conditions, the holder receives both the return of his original investment and a share of the company’s equity. 8
    • 9. - Partnership agreement- The contract that explicitly specifies the compensation and conditions that govern the relationship between the investors (limited partners) and the venture capitalists (general partners) during a private equity fund’s life. Occasionally used to refer to the separate agreement between the general partners regarding the internal operations of the fund (e.g., the division of the carried interest). Patent- A government grant of rights to one or more discoveries for a set period, based on a set of criteria. Placement agent- A financial intermediary hired by private equity organizations to facilitate the raising of new funds. Post-money valuation- The product of the price paid per share in a financing round and the shares outstanding after the financing round. Primary Offering- issue of new securities by a firm. Preferred stock- Stock that has preference over common stock with respect to any dividends or payments in association with the liquidation of the firm. Preferred stockholders may also have additional rights, such as the ability to block mergers or displace management. Pre-money valuation- The product of the price paid per share in a financing round and the shares outstanding before the financing round. Price-earnings ratio (P-E ratio)- The ratio of the firm’s share price to the firm’s earnings per share (net income divided by shares outstanding). Private equity- Organizations devoted to venture capital, leveraged buyouts, consolidation, mezzanine, and distressed debt investments, as well as a variety of hybrids such as venture leasing and venture factoring. Private placement- The sale of securities not registered with the U.S. Securities authority and Exchange Commission to institutional investors or wealthy individuals. These transactions are frequently facilitated by an investment bank. Pro forma- Financial statements that project future changes in a firm’s income statement or balance sheet. These often form the basis for valuation analyses of various types. Prospectus- A condensed, widely disseminated version of the registration statement that is also filed with the Securities authority and Exchange Commission. The prospectus provides a wide variety of summary data about the firm. Proxy statement- A filing with the U.S. Securities and Exchange Commission that, amount other information, provides information on the holdings and names of corporate insiders. 9
    • 10. - Put option- The right, but not the obligation, to sell a security at a set price (or range of prices) in a given period. Putable- A security which the security holder has an option to sell back to the issuer. Red herring- A preliminary version of the prospectus that is distributed to potential investors before a security offering. The name derives from the disclaimers typically printed in red on the front cover. Registration statement- A filing with the U.S. Securities and Exchange Commission (e.g. an S-1 or F- 1 form) that must be reviewed by the Commission before a firm can sell shares to the public. The statement provides a wide variety of summary data about the firm, as well as copies of key legal documents. Residual value- The fair-market value of the equipment at the end of the use term. Restricted stock- Shares that cannot be sold under U.S. Securities and Exchange Commission regulations or that can only be sold in limited amounts. Right of first refusal- A contractual provision that gives a corporation or private equity fund the right to purchase, license, or invest in all opportunities associated with another organization before other companies or funds can do so. A weaker form of this provision is termed the right of first look. Road show- The marketing of a private equity fund or public offering to potential investors. Royalties- In a licensing agreement, the percentage of sales or profits that the licensee pays to the licensor. Rule 10(b)-5- The U.S. Securities and Exchange Commission regulation that most generally prohibits fraudulent activity in the purchase or sale of any security. Rule 144- The U.S. Securities and Exchange Commission regulation that prohibits sales for one year after the purchase of restricted stock and limits the pace of sales between the first and second year after the purchase. Seasoned equity offering- An offering by a firm that has already completed an initial public offering and whose shares are already publicly traded. Secondary offering- An offering of shares that are not being issued by the firm but rather are sold by existing shareholders. Consequently, the firm does not receive the proceeds from the sales of these shares. Staging- The provision of capital to entrepreneurs in multiple installments, with each financing conditional on meeting particular business targets. This provision helps ensure that the money is not squandered on unprofitable projects. 10
    • 11. - Stabilization- Intervention in the market by a managing underwriter in order to keep the market price from falling below the public offering price. Standby underwriting- The underwriter that contracts (for a fee) to purchase for resale any portion of a new issue that is not subscribed to during a pre-defined standby period (this is the method of underwriting common in Israel). Sweet Equity- the founders carried interest which is the value assigned to their technology and work. Syndication- The joint purchase of shares by two or more private equity organizations or the joint underwriting of an offering by two or more investment banks. Take down- The transfer of some or all of the committed capital from the limited partners to a private equity fund. Term sheet- A preliminary outline of the structure of a private equity partnership or stock purchase agreement, frequently agreed to by the key parties before the formal contractual language is negotiated. Tombstone- An advertisement, typically in a major business publication, by an underwriter to publicize an offering that it has underwritten. Uncertainty problem- The array of potential outcomes for a company or project. The wider the dispersion of potential outcomes, the greater the uncertainty. Underwriting- The purchase (or the promised to purchase under certain terms) of securities issues from a company by an investment bank and its (typically almost immediate) resale to investors. Valuation rule- The algorithm by which a private equity fund assigns values to the public and private firms in its portfolio. Venture capital- Independently managed dedicated pools of capital that focus on equity or equity- linked investments in privately held high-growth companies. Many venture capital funds, however, occasionally make other types of private equity investments. This phrase is often used a synonym for private equity. Venture capital method- A valuation approach that values the company at some point in the future, assuming that the firm has been successful, and then discounts this projected value at some high discount rate. Vesting- Over a period of time an employee of a company earns rights to receive benefits (e.g. stock) as a result of that employment, though until such rights are earned the employee can claim no ownership of the related benefits and those potential benefits may be forfeited. Restricted stock or options, or warrants to purchase stock, that may not be sold or exercised, or that are subject to risk of forfeiture, for 11
    • 12. - a period of time, are 'unvested'. That portion of the stock which is not subject to risk of forfeiture and which may be sold, or the options and warrants that may be exercised, are referred to as "vested". Window dressing problem- The behavior of money managers of adjusting their portfolios at the end of the quarter by buying firms whose shares have appreciated and selling “mistakes”. This is driven by the fact that institutional investors may examine not only quarterly returns, but also end-of-period holdings. 12
    • 13. - -- - -r - Systematic risk total risk Specific risk default risk reinvestment risk resale risk 13
    • 14. - PV 1 PVn (future cash flow) * (1 k)n k n PV = 100 * 1/(1+0.1) = 90.909 yield curve FV FV : FVn = (investment) * (1+k)n FV = 100 * (1+0.1) = 110 14
    • 15. - NPV NPV NPV NPV>0 n Cn NPV C0 n i 1 (1 k) n C0 n Cn k NPV = (-100) + 110/1.15 = - 4.348 15
    • 16. - ROR y>k y = (C0 + Cn)/-C0 y = (-100 + 110)/100 = 10% k 16
    • 17. - IRR IRR>k NPV - IRR NPV= 0 IRR IRR = (C1/C0)1/n – 1 IRR = (200/100)1/5 – 1 = 14.9% IRR - 17
    • 18. - Expected Return ER = Pi x (returni) -Pi Pi x Return Return Pi Pi x Return Return Pi ER = 6 ER = 6 NPV = C0 + ER/ (1+k)n k (ER - 18
    • 19. - Variance Diversification Σ = pi x (returni-ER)2 Pi (returni- pi x (returni- Pi (returni-ER)2 pi x (returni- 2 ER)2 ER)2 ER) 0.25 (10-6)2 4 0.25 (12-6)2 9 0.5 (6-6)2 0 0.5 (6-6)2 0 0.25 (2-6)2 4 0.25 (0-6)2 9 =8 = 18 Covariance- Standard Deviation - 19
    • 20. - Diversification 1/n -- ER VAR Pi x pi x (returni- (returni) ER)2 30 10 -10 10 266.66 -10 10 30 10 266.66 10 10 10 10 0 discount rate systematic risk 20
    • 21. - 21
    • 22. - Capital Asset Pricing Model CAPM Capital Market Line Rf Ri = Rf + (Rm-Rf)B Rf Ri Beta ---- S&P 500 22
    • 23. - Term Sheet Term Sheet for a Proposed Investment The Company NewCo. Inc., a company incorporated under the laws of Delaware, U.S.A. (the “Company”) The Founders Mr. ______ and Ms. __________ (the “Founders”) Current Capitalization The current capitalization of the Company is as set forth in Exhibit A hereto. Investment Amount $2 million (the “Investment”) Investors ___________________________ (together: the “Investors”). Valuation of the Company $6 million, pre money, on a fully diluted basis. Type of Securities Preferred A Stock convertible into one Common Share of the Company, nominal value _____, (“Common Share”), subject to adjustments as described below. Number of Securities _____ Preferred Shares that shall constitute 14% of the Company share capital on a fully diluted basis and Warrant as described below. The Preferred Shares purchased including the preferred shares covered by the Warrant shall represent 20% of the Company share capital on a fully diluted basis immediately after the Closing. Warrant Warrant to purchase within 24 months following the Closing, for their par value, Preferred Shares representing 6%, immediately after the Closing, of the Company share capital on a fully diluted basis. Notwithstanding the above, in case any of the following occurs within 12 months of the Closing, the exercise price under the Warrant shall be adjusted to equal the relevant price per share paid under (i), or in case of (ii) below, the Warrant shall terminate: (i) the Company has completed a financing round of at least US$4,000,000 from a third party based on a pre-money valuation of at least US$25,000,000, or (ii) the Company has sold its technology for at least US$25,000,000 or was acquired by third party for at least such amount. Use of Proceeds The proceeds of the Investment shall be used by the Company for the purposes set forth in a budget to be submitted to and approved by, the Investor prior to Closing, and as will be modified from time to time by the Board of Directors of the Company. Conversion of Preferred The preferred Shares shall be convertible into Common Shares at any Shares time, at the election of each Investor. Initially, such conversion shall be on a one to one basis, but such conversion ratio shall be adjusted in the event of any recapitalization event (stock splits, distribution of bonus shares, reclassifications) etc., and as a result of the anti dilution provisions set forth below. 23
    • 24. - Liquidation Preference The Preferred Shares shall be senior to all other equity securities of the Company in the event of the liquidation, bankruptcy or reorganization of the Company. At the discretion of the Investors, the sale of all or substantially all of the assets of the Company, the acquisition of the Company, or a merger of the Company in which the shareholders of the Company do not own a majority of the shares of the surviving entity, shall be deemed and treated as a liquidation, but only if the total proceeds are less than $25 millions or the equivalent. In the event of liquidation, or deemed liquidation, the Investors shall be entitled to receive an amount per each Preferred Share (in cash, cash equivalents or, if applicable, securities) equal to the US$ price per share paid for each Preferred Share, plus interest at the rate of 10% per annum, compounded annually, from the date of the investment to the date of liquidation. Or deemed liquidation (subject to adjustment for recapitalization etc.), senior to the holders of all other equity securities of the Company, Thereafter, the Common shares, and the preferred shares will participate on an as-converted basis in the distribution of any remaining proceeds. Anti-Dilution Until an IPO if the company issues new securities at a price per share lower than the price per share applicable to this Investment (as may be adjusted from time to time), the conversion ratio of the Preferred Shares shall be reduced, for no additional consideration, so that upon the conversion thereof the Investors shall be entitled to additional Common Shares as if the Investors had made their investment based on such lower price (standards weighted average basis anti-dilution provisions). The aforesaid shall not apply to the issuance to employees, directors or consultant pursuant to then existing stock purchase/option plan, as well or other agreed upon recipient of shares or options. Preemptive Rights Prior to an IPO, the Investors shall have the right to maintain their then percentage ownership in the Company (calculated on an as-converted basis) by purchasing a pro rata portion of any further issuance of securities by the Company at the offering price. Tag-along In any event, prior to an IPO, of sale or transfer of securities by a Founder, the Investors shall have the right to participate in such transaction prior to any sale of any securities by the founders, on a pro- rata basis. Notwithstanding the aforesaid, if a Founder shall sell securities of the Company in a transaction or series of transactions that result in a change in control of the Company, the Investors shall have the right to participate in such transaction and to sell a pro-rata share of their securities in the Company. 24
    • 25. - Bring-along Prior to the IPO, in the event that shareholders holding more than 85% of the voting power in the Company accept an offer to sell all of their share to a third party, and such sale is conditioned upon the sale of all remaining shares of the Company to such third party, all other shareholders shall be required to sell their shares in such transaction, on the same terms and conditions, except that the Investors shall not be required to sell their shares as aforesaid unless the price per share in such transaction shall yield to them an annual internal rate of return on their investment of at least 40%. Right of First Refusal Prior to an IPO, all shareholders shall have a right of first refusal to purchase any share of the Company offered for sale by any shareholder to any person or entity, subject to standard exceptions for transfer to affiliates and family members. It is agreed that this section will not apply to transfer of shares among the Founders in the first 3 month after signing the agreement. Employee Stock Option Prior to Closing, the Company shall adopt employee stock option Plans plan(s) , for future allocation to employees, consultants and directors of the Company. Employment Agreements Prior to Closing Founders and certain other key employees shall enter into employment agreements with the Company, the terms of which should be acceptable to Investors. Such employment agreements shall be for a period of 2 years from Closing. Board of Directors The Company’s Board of Directors shall consist of 5 directors, 4 of which shall be elected by the holders of the majority of the Common Shares and 1 shall be nominated by the Investor. The director appointed by the Investor shall be a member of any committee of the board of director and a member of the Board of any subsidiary of the Company. Restrictive Provisions Until an IPO, any action or resolution of the Company’s general meeting, or of the Company’s Board of Directors (or any committee thereof), as applicable, or of any subsidiary of the Company, regarding any of the following issues shall require the consent of majority the holders of the Preferred Shares or, if applicable, of the director(s) appointed by the holders of the Preferred Shares: (1) amendment to the Incorporation Documents of the Company; (2) a material change in the business of the Company; ; (3) for a period of 24 month, merger, consolidation or acquisition, or the sale, lease or other disposal of all or substantially all of the Company’s assets for less than $25 million; (4) transactions with any officer, director, shareholder or other interested party, or any other party related, directly or indirectly, to any of them; (5) declaration and payment of any dividends or other distributions; (6) liquidation, dissolution or winding-up of the Company; (7) any transaction of the Company exceeding $100,000 or which is not in the Company’s ordinary course of business;.(8) create, incur, or suffer to exist any liens, encumbrances, pledges or mortgages on material its properties or assets, now existing and that will exist in the future, including, without limitation, with respect too any intellectual property thereof, but for bank credit or other transactions in the ordinary course of business. 25
    • 26. - Information Rights Prior to an IPO, the Investors shall be entitled to receive from the Company information as may be reasonably requested by the Investors and as shall be specified in more details in the Definitive Agreement. Internal Reporting The Company’s management shall submit to the Board of Directors Requirements for its approval, annually, an annual operating plan and budget, at least 30 days prior to the first day of the year covered by such plan. In addition the Company’s management shall submit to the Board of Directors monthly and other reports in such format, and containing such information, as the Board shall reasonably require. Registration Rights The Investor shall have two Demand and unlimited number of F-3 and Piggyback registration rights, which will be subject to an underwriter approval. Other Terms and Other terms and conditions, including representations and warranties Conditions by the Company and the Founders, will include those standard for a transaction of this type, as well as any others that may arise as a result of the due diligence. Expenses The Company shall pay legal and other fees and costs incurred by Investors in connection with the investment contemplated hereby, including in connection with the due diligence process and the negotiations and preparation of the Definitive Agreement, up to $20,000, plus VAT. If no agreement will be concluded, each party will be responsible for its own costs. Exclusivity For a period of 45 days (subject to a mutually agreed extension of 15 days) from the date of the Company’s agreeing to this term sheet, the Company agrees not to negotiate with any other persons or companies in respect of an investment of equity or other capital in the Company or take any action that could result in the investment not being concluded. The Company represents and warrants that no other entity has any option or any other right to acquire any portion of the security or assets of the Company. Confidentiality The Company, the Founders the Investors and any other person acting on their behalf shall keep this Term Sheet and related correspondence in strict confidence, and shall not issue any public statement or press release concerning this transaction without the other party prior written approval of the substance and form of any such statement or release. Closing Conditions This Term Sheet is a non-binding document, except for No-Shop and Confidentiality that will remain in full force and effect, prepared for discussion purposes only, as a statement of the Investors present intent. Closing of the transaction contemplated hereunder is subject to satisfaction of the Investors due diligence requirements, including financial and legal diligence, approval by the respective boards of directors or investment committees of the Investors, and the signing of mutually acceptable definitive agreements containing additional provision customary in transaction of this type (the “Definitive Agreement”). In addition Investors shall not be obligated to invest in the Company if, in their sole judgement, the Company’s condition or prospects deteriorate before the closing. 26
    • 27. - Anticipated Closing _______________, 2001 Agreed and accepted on ______________, 2001 . ________________________________ ___________________________ By: _____________________________ By: ________________________ 27
    • 28. - IP off shore LLC LLC off shore (IP) % IP off shore off shore % off shore (IP) % % 28
    • 29. Estimated Cost of Going Public Offering Value: $25 million $50 million Total Shares Outstanding 5,880,000 shares 5,880,000 shares Item Estimated Fee Estimated Fee Underwriting Discounts & Commissions 1,750,0001 $3,500,0001 Item 13 from Registration Statement SEC Fees 9,9142 19,8282 NASD Fees 3,3753 6,2503 Printing and Engraving 100,0001 100,0001 Accounting Fees & Expenses 160,0001 160,0001 Legal Fees & Expenses 200,0001 200,0001 Blue-Sky Fees 15,0001 15,0001 Miscellaneous 34,2001 34.2001 Nasdaq Listing Fees 63,7254 63,7254 Transfer Agent & Registrar Fees 5,0001 5,0001 Total $2,341,214 $4,104,003 1 Mean value (7%); all aspects of the relationship, including underwriting, can be negotiated. 2 1/129 of 1 percent of the offering value, inclusive of over allotment shares. 3 $500 + .01 percent of the offering value, inclusive of over-allotment shares, not to exceed $30,500. 4 Includes a $5,000 one-time company initial fee and a fee based on 5,880,000 total shares outstanding. 29
    • 30. 2 years 1-6 months 1-3 1 Before Effective Date After Effective Date months - 1 day 1 5 days 0-30 days 4 - (optional) Company Act like a Select the team; Select Executive I EProvide certificates; Provide public Execute letter of printer & perform 1 s xCollect proceeds additional w 0 company intent transfer “road e s e certificates; agent show” e u c Collect d e u additional k a s t proceeds y p e s r e u s n s d e r r e w l r e i a t s i e n g a g r e e m e n t 31
    • 31. Company’s P Prepare & C RDeliver Update counsel e file l e documents/opinions closing r preliminar e q documents f y a u o registration r e r statement s m S t E “ C a h c o c c u o e s m l e m e k e r e n a e t t p s i i o n n g ; ” F o i f l e c o f m i p n a a n l y r r e e g c i o s r t d r s a ; t i D o r n a f s t t a F t - e 1 m ; e n F t i l e w / t h e S E C , f i l e N a s d 32 a q l
    • 32. Company “Prepare P D D Deliver “bring down Second CPA C draft r e e comfort letter” “bring down l “comfort e l l comfort e letter” p i i letter” a a v v n r e e - e r r u p u d f ” p r i d a n a a f a n t t l d e d “ “ r c c e f o o s i m m t n f f a a o o t n r r e c t t i b a l l a l e e l t t a s t t n t e e c a r r e t ” ” e a m n e d n t s s h , e e i t f ; n P e r c e e p s a s r a e r y & r e v i e w a u d i t e d f i n a n c i a l s t 33 a t e m
    • 33. Investment Assess market; Continue Orchestrate Form EProvide net Exercise Banker Make presentation to due “road syndicate; xproceeds overallotment board diligence show”; Place e option; Make Solicit “tombstone” c determination expressions u about issuing of interest t research e report u n d e r w r i t i n g a g r e e m e n t Investment Begin due diligence Prepare Clear Continue Assist in closing Assist in Banker’s NASD NASD due second Counsel Regulation Regulation diligence closing filling; comments Undertake “blue-sky” fillings 34
    • 34. Financial Print preliminary Produce P Printer registration SEC & r statement/prospectus NASD i Regulation n “filling t packages” f i n a l r e g i s t r a t i o n s t a t e m e n t / p r o s p e c t u s 35
    • 35. SEC C R D o e e n v l f i i e e c r w a t r p e e r g e o a l f r i f d m e i i r n n i g a n r g “ y p e r r f o e f b g e l i c e s t m t i s r v ” a e , t i i o f n n s e t c a e t s e s m a e r n y t ; I s s u e c o m m e n t l e t t e r 36
    • 36. NASD Request prefilling Resolve R D Regulation advice, if necessary commentse e v c i l e a w r e p r n e o l i o m b i j n e a c r t y i o r n e s g i s t r a t i o n s t a t e m e n t ; I s s u e c o m m e n t l e t t e r 37
    • 37. Average costs of going public Underwriter(s) and advisor(s) compensation From 5% to 10% of the total funds raised + out-of-pocket expenses Legal fees From $50,000 to $100,000 Accounting and audit fees From $30,000 to $100,000 PR costs From $60,000 to $100,000 Printing costs From $25,000 to $80,000 Other costs Listing fees + miscellaneous Source: 38
    • 38. Month 1 & 2 Chose your local advisor for selecting appropriate European Stock Exchange. Assess the company’s valuation with the local advisor and define together its financial needs. Preparing proposal and required documents (Business Plan, financial projections, valuation, etc.) to contact underwriters. Contract underwriters Month 3 Mandate for Lead Management Work out detailed listing timetable Select PR/IR agency Begin public relation work Invitation to underwriting syndicate (and confirmation) Work out equity story Begin offering prospectus Call general meeting Stock Exchange authorities starts preliminary examination Month 4 Meeting of the syndicated research analysts Official listing application including signed Prospectus General Meeting Presentation of the research reports to the company and Lead Manager and distribution Source: 39
    • 39. Begin research blackout-period Begin pre-marketing period Publication of prospectus Invitation to road-shows Setting of book-building range Analyst-meeting / press conference Start of road-shows Start of book-building Month 5 Decision on admission to listing End or road-show and book-building Signing of underwriting agreement; registration of capital increase; syndicate takes over stock Analysis of book; pricing and allocation Publication of issue price and allocation to syndicate, stock exchange and press Completion and distribution of final prospectus Listing, start of trading Payment and settlement Transfer of issuing proceeds to existing shareholders Start price stabilization and after-market support End of exercise period for the Green-shoe End of research blackout-period 40