This document outlines key terms for a $4 million venture capital financing round involving the issuance of Series A preferred stock. It discusses the stock purchase price, post-financing capitalization, liquidation preferences, conversion rights, voting rights, dividends, board representation, registration rights, protective provisions, rights of first refusal, and redemption terms. Additional details are left for the lawyers to address in documents like stock purchase agreements, investor rights agreements, and co-sale agreements.

1. This presentation is made possible by the support of the American People through the United States Agency
for International Development (USAID). The contents of this presentation are the sole responsibility of Rick
Rasmussen and do not necessarily reflect the views of USAID or the United States Government.
Venture Capital Financing
Term Sheets

2. Selecting your V.C. Firm
• Funds Available for Investment
• Stature of the Firm
• Chemistry – philosophy match
• Syndicating the round
• Valuation
– Market Driven
– Competition for the Deal

3. Negotiating Term Sheet
• Work with an experienced lawyer
• Work out a list of top half dozen things you
want to negotiate
• Agree on the rest and work on bigger issues
• Valuation is NOT the most important
– You ownership at exit will vary only a “little”
• “Win-Win” is best for all
3

4. GENERAL TERMS OF THE FINANCING
Security: Series A Preferred Stock (“Series A”)
Amount of Offering: $4,000,000
Number of Shares: 8,000,000
Purchase Price: $0.50 per share
Capitalization: Immediately following the sale and
issuance of the Series A, the Company’s
capitalization will be as follows:
Shares Outstanding Percentage
Common Stock $8,000,000 44.45%
Incentive Stock Plan(1) 2,000,000 11.10%
Series A Preferred Stock 8,000,000 44.45%
Totals: 18,000,000 100.00%
(1) The Company’s board of directors has adopted a stock option plan to be administered by the
board authorizing the Company to grant options and stock purchase rights to employees and
consultants. The Company plans to grant options to new employees. At the current time 850,000
shares are subject to outstanding options and 1,150,000 shares remain available for future
issuance.

5. Terms of the financing
• You’re offering Preferred Stock
• A special class of shares with features not possessed
by common stock
– Preference in assets, in the event of liquidation
• Dissolution of company
• Exit via M&A
– Convertible to common stock.
– Callable, at the option of the corporation
– Preference in dividends
– Special voting rights

6. Price/Valuation
• Valuation is often a highly contested issue
• In the end, the value of a company is the price at
which a willing buyer and seller can complete a
transaction.

7. Preferred Stock
• Investors typically receive convertible preferred stock
• Convertible preferred stock has priority over common
stock if the company is acquired or liquidated and assets
are distributed
• The higher priority of the preferred stock justifies a higher
price, compared to common stock.
• "Convertible" means that the shares may be exchanged
for a fixed number of common shares.

8. Liquidation preference options
• When the company is sold or liquidated, preferred stockholders
receive a certain fixed amount before any assets are distributed to the
common stockholders
• Non-participating:
– Preferred Stock gets investment back first,
– Then convert to Common and share in proceeds
• Participating:
– Preferred Stock gets investment back (sometimes 2x or 3x investment back)
– Then Preferred Stock and Common Stock share equally
• Priority of one series over another
– e.g. Series C has liquidation preference over Series A and B

9. Liquidation Preference: In the event of any liquidation or,
winding up of the Company, the
holders of the Series A shall be
entitled to receive in preference to
the holders of Common an amount
equal to $0.50 per share plus any
declared and unpaid dividends. All
remaining assets available for
distribution shall be distributed
ratably to the holders of Common
Stock. A merger or sale of
substantially all of the assets of the
Company shall be treated as a
liquidation or winding up for
purposes of the liquidation
preference.

11. Priority of Claims under Liquidation
1. Liquidators costs
2. Creditors with fixed charge over assets
3. Costs incurred by an administrator
4. Amounts owing to employees for wages/superannuation
5. Payments owing in respect of workers’ injuries
6. Amounts owing to employees for leave
7. Retrenchment payments owing to employees
8. Creditors with floating charge over assets
9. Creditors without security over assets
10. Shareholders (Liquidating Distribution)

12. Conversion Rights
• Optional Conversion:
– Preferred stock may be converted into common stock at a
certain conversion price, generally whenever the stockholder
chooses
• Automatic Conversion:
– Conversion may happen in response to certain events such
as when the company goes public

13. Conversion: Optional Conversion: The holders
of the Series A shall have the right
to convert their shares of Series A,
at their option, at any time into
shares of Common Stock, at the rate
of one share of Series A for one
share of Common Stock, subject to
adjustment as described below.

14. TERMS OF INVESTORS RIGHTS AGREEMENT
Information Rights: So long as an Investor continues to
hold at least 500,000 shares of
Series A, the Company shall
deliver audited annual and
unaudited quarterly financial
statements. The obligation of the
Company to furnish such
information shall terminate upon
the Company’s first underwritten
public offering.

15. Anti-dilution Protection
• Preferred stock is typically protected against certain
diluting events, such as stock splits or stock dividends
• Preferred stock is typically subject to "price protection,”
– an adjustment based on sales of stock at prices below the
conversion price (a down round)
• Antidilution possibilities:
– (a) Stock splits only, no price based anti-dilution
– (b) Weighted average price based anti-dilution
– (c) Ratchet based anti-dilution
– (d) Pay to play provisions

16. Anti-dilution: typical types
• Weighted Average (most fair and most common):
– Broad-based: Adjusts the conversion price according to a formula that
incorporates the number and price of new shares being issued
– Narrow-based: Excludes options not outstanding, entire option pool
and Common Stock
• “Ratchet" protection (common during dot-com)
– lowers the conversion price to the price at which any new stock is sold
no matter the number of shares
• Often some shares are exempted from this protection to cover
key employees, consultants, and directors
– i.e. they are “kept whole”

17. Weighted average anti-dilution formula
• NCP = OCP * ((CSO + CSP) / (CSO + CSAP))
– NCP = new conversion price
– OCP = old conversion price
– CSO = common stock outstanding
– CSP = common stock purchasable with consideration
received by company (i.e. “what the buyer should have
bought if it hadn’t been a ‘down round’ issuance”)
– CSAP = common stock actually purchased in subsequent
issuance (i.e., “what the buyer actually bought”)

18. Full Ratchet
• Original price of $0.50
• Sell 2,000,000 Shares at $0.25
• Conversion Price “Rachets” to $0.25
• New Conversion Ratio: 1 share Series A converts into 2
shares of Common Stock
• Thereafter 8,000,000 Shares of Series A Preferred Stock
Converts into 16,000,000 Shares of Common Stock

19. Conversion: Anti-dilution Provisions: Proportional
adjustments will be made for capital
reorganizations, stock splits, reclassifications,
etc. In the event the Company issues additional
shares (other than shares issued to employees,
consultants, directors, officers and licensors of
technology pursuant to arrangements approved
by the board of directors, and other customary
exclusions) at a purchase price below the
Series A conversion price then in effect,
adjustments will be made on a broad-based
weighted average basis. The initial conversion
price for the Series A shall be $0.50 per share.

20. Weighted Average Antidilution (Broad Based)
• Sell 2,000,000 Shares at $0.25 = $500,000
■ 18,000,000 Shares x $0.50 = $9,000,000
+ $500,000 = 9,500,000
20,000,000 shares
= $.475
■ New Conversion Ratio: 1 share Series A converts
in 1.05 shares of Common Stock
■ Thereafter 8,000,000 shares of Series A Preferred
Stock converts into 8,421,053 shares of Common
Stock

21. Conversion: Automatic Conversion: The Series A shall
be automatically converted into Common
Stock, at the then applicable conversion rate,
(i) in the event of the closing of an
underwritten public offering of the
Company’s securities in which the aggregate
gross proceeds to the Company equals or
exceeds $10,000,000, at a per share offering
price equal to or exceeding $2.50 per share
(subject to proportionate adjustment for
future stock splits, dividends, or
combinations), or (ii) upon the election of
the holders of a majority of the shares of
Preferred Stock then outstanding.

22. Voting Rights
• Preferred stock has a number of votes equal to the
number of shares of common stock into which it is
convertible
• Plus Preferred stock usually has special voting rights,
such as
– the right to elect one or more of the company’s directors, or
– to approve certain types of corporate actions, such as
amending the articles of incorporation, or
– creating a new series of preferred stock.

23. Voting: A holder of Series A shall have the right to
that number of votes equal to the aggregate
number of shares of Common Stock issuable
upon conversion of such holder's shares of
Series A. The Series A shall vote together
with the Common Stock on all matters
except as otherwise provided herein.

24. RIGHTS, PREFERENCES AND PRIVILEGES
Dividends: The holders of the Series A shall
be entitled to receive noncumulative
dividends of $0.04 per share per
annum (8%) in preference to the
common Stock (“Common”) when
and if declared by the board of
directors.

25. Dividend Preference
• Dividends are typically a fixed amount (i.e. cents per
share and/or a %) owed to holders of Stock
• Dividends are paid first to preferred stock, and then
common stock.
• Dividends may be
– Cumulative – accrue from year to year until paid in full, or
– Non-cumulative and discretionary to be awarded by the
board

26. Election of Directors: The Company’s Board will consist
of five (5) directors. The holders of
Series A, voting as a separate class,
shall be entitled to elect two (2)
members of the Company’s Board.
The holders of Common Stock,
voting as a separate class, shall be
entitled to elect two members of the
Company’s Board. All remaining
members of the Board shall be
elected by the Common Stock and
Preferred Stock, voting together as
a single class.

27. Vesting on Founders’ Stock
• Founders often vest 100% with a repurchase clause
• If a founder leaves the company a percentage of
founders’ stock, which decreases over time, can be
repurchased by the company at cost
• This is a protection for the investors against founders
leaving the company after it gets funded.

28. Other Financing Issues
• Details for the attorneys to work through
• Use industry standard boilerplate. If someone tries hard
to negotiate these terms, it’s a bad sign
– Stock Purchase Agreement
– Registration Rights
– Lockup Agreement
– Termination
– Co-sale Agreement
– Redemption
– Right of First Refusal

29. Stages in a Venture Round
• Introduction
• Offering (the pitch)
• Private placement memorandum (optional)
• Negotiation of terms.
• Non-binding term sheets, letters of intent, etc.
• Signed term sheet. (non-binding, may be exclusive)
• Definitive transaction document()s
– Stock purchase agreement
– Buy-sell agreement
– Co-sale agreement
– Right of first refusal, etc.
– Investor rights agreement
– board seats
– covenants not to obtain additional financing or sell company
– inspection rights
– information rights

30. Venture Round…
• Fix any company issues
– New employment contracts
– Stock vesting schedules for key executives
• Representations and warranties regarding disclosures
• Final agreement
• Closing
– Investors provide the funding
– Company provides stock certificates
– May be "rolling closings" or "tranched,”
• Post-closing
– Conversion of outstanding convertible notes.
– State securities filing
– Filing of amended Articles of Incorporation

31. Term Sheet Summary
• Probably the most important documents you’ll ever
sign as CEO
• May seem arcane at first
• Try to understand as best you can
• Hire a great attorney to help explain and negotiate

32. This presentation is made possible by the support of the American People through the United States Agency
for International Development (USAID). The contents of this presentation are the sole responsibility of Rick
Rasmussen and do not necessarily reflect the views of USAID or the United States Government.
Supplemental Details
Items for the Lawyers to handle

33. Registration Rights
• Registration rights are generally given to preferred
investors as part of their investment.
• These rights provide investors liquidity by allowing
them to require the company to register their shares
for sale to the public
– either as part of an offering already planned by the company
(called piggyback rights), or
– in a separate offering initiated at the investors’ request
(called demand rights).

34. Protective Provisions: A majority of the Preferred Stock
must approve (i) any amendment of
the Articles of Incorporation which
would change the authorized
number of Series A or the rights,
preferences and privileges of the
Series A, (ii) creation of shares
having dividend or liquidation
rights equal or superior to the
Series A or (iii) any merger,
reorganization or sale of
substantially all assets of the
Company.

35. Right of First Refusal
• Holders of preferred stock typically have the right to
purchase additional shares when issued by the
company, up to their current aggregate ownership
percentage
• Also known as “peri passu”

36. RIGHT OF FIRST REFUSALAND CO-SALE AGREEMENT
Right of First Refusal: The Company will be entitled to a
right of first refusal on any proposed
transfer by Jane Founder and Joe
Founder (the “Founders”), subject to
customary exceptions for transfers
in connection with estate planning,
bona fide loan transactions and sales
of up to 15% of the total number of
shares of capital stock held by a
Founder. To the extent not exercised
by the Company, the right of first
refusal will be transferred to the
holders of Series A on a pro rata basis.

37. Redemption
• Preferred stock may be redeemed or retired
– At the option of the company or the investors,
– Or on a mandatory basis
– Frequently at some premium over the initial purchase price
of the stock.
• Venture firms want this right due to the finite life of
each a fund managed by the firm.

38. Co-Sale Right
• A co-sale right gives investors some protection for
investors against founders selling their interest to a
third party
• Gives investors the right to sell part of their stock as
part of such a sale.