Transcript Term Sheet - Baker Donelson
Startup Newco, Inc.
Series A Participating Preferred Stock
David Rieveschl
Baker Donelson
David Cusimano
Goldman Sachs 10,000 Small Businesses
Chris Sloan
Baker Donelson
Clayton White
South Coast Angel Fund
Players
David Cusimano
Founder of Startup Newco, Inc., an emerging company with a new battery technology that could effectively double the fuel efficiency of a hybrid engine.
David Rieveschl
Attorney representing Startup Newco.
Clayton White Chris Sloan
Managing Partner of BigMoney VC Fund I, a venture capital partnership.
Attorney representing Big Money.
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Background
• BigMoney has committed to an investment in Startup Newco at a $2,500,000 pre-money valuation, subject to agreement on legal terms. BigMoney will invest $750,000 of its own money and will act as lead investor in a proposed $1,000,000 financing.
• Clayton White believes the valuation is too high, but he agreed to it in order to get the deal. Because of the high valuation, Clayton has presented Startup Newco with a tough set of legal terms. The proposed term sheet is attached.
• • Clayton is very excited about Startup Newco's new battery technology, but he is not sure that David Cusimano is the right person to lead the company.
David Cusimano is inexperienced at raising venture capital. He was pleasantly surprised that Clayton agreed to the $2,500,000 pre-money valuation and does not want to lose the benefit of that deal.
• David Rieveschl has a long working relationship with David Cusimano and believes the term sheet needs major revisions to be acceptable. He is hoping that Chris Sloan is responsible for the tough set of terms and that Clayton will be quick to back away from some of the more onerous provisions.
• Chris Sloan has done many deals for BigMoney and, therefore, is not surprised by the tough set of terms.
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Startup Newco, Inc.
Series A Participating Preferred Stock
Term Sheet March 28, 2014
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Term Sheet
Issuer
•Startup Newco, Inc. (the "
Company
").
Purchasers
•BigMoney VC Fund I ("
BigMoney
") and other investors (collectively, the "
Purchasers
") mutually agreed to by BigMoney and the Company. All of the Purchasers will be "accredited investors" as defined in Rule 501 of Regulation D issued pursuant to the Securities Act of 1933, as amended, as approved by the Company.
Security
•Series A Participating Preferred Stock (the "
Preferred A Stock
").
Amount
•$1,000,000 as follows: BigMoney (and affiliates)* Other Investors Total
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© 2014 Baker, Donelson, Bearman, Caldwell & Berkowitz, PC $750,000 $250,000 $1,000,000 *BigMoney will adjust its investment amount in order to accommodate additional investors if approved by both BigMoney and the Company.
5
Term Sheet
Purchase Price
•The purchase price of the Preferred A Stock will be calculated based on a fully-diluted, pre-money valuation of $2,500,000. The company will issue 1,000,000 shares of Preferred A Stock at a price of $1.00 per share.
Use of Proceeds
•Working Capital to allow for the growth and maturation of the Company.
Closing Date
•Subject to the satisfaction of the conditions set forth herein, the closing of the sale of the Preferred A Stock is anticipated to occur on April 30, 2014, or as soon as practicable thereafter upon completion of due diligence and documentation (the
"Closing Date"
).
Closing Conditions
•The Closing shall be contingent on the following conditions, each of which must be met to each Purchaser's satisfaction:
1.
The Purchasers will have completed their due diligence investigation, including legal, financial, and technical due diligence;
2.
The Documentation (as defined below) will be in form mutually acceptable to the Company and the Purchasers; and
3.
No material adverse change shall have occurred with respect to the Company.
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Term Sheet
Dividends
•The Preferred A Stock shall receive preferential dividends of 5% per annum. Such dividends shall be simple, accruing, and cumulative from the date of issuance, and shall be payable in cash upon conversion, redemption or liquidation. The holders of the Preferred A Stock shall be entitled to participate pro rata in any dividends paid on the Common Stock on an as-if-converted basis. Dividends are payable only when, as and if declared by the Company's Board of Directors.
Liquidation
•In the event of any liquidation, dissolution or winding up (a " dividends on the Preferred A Stock (the " •Thereafter, any remaining assets will be distributed
pro rata
Liquidation Event
share equal to the Preferred A Stock purchase price per share (the "
Preferred A Liquidation Dividend
").
") of the Company, each holder of Preferred A Stock will be entitled to receive, in preference to all other stockholders, an aggregate amount per
Preferred A Liquidation Principal
").
•After payment in full of the Preferred A Liquidation Principal, each holder of Preferred A Stock will be entitled to receive, in preference to all other stockholders, an aggregate amount per share equal to accrued but unpaid among the holders of Common Stock and Preferred A Stock, on an as-converted basis.
•A merger, consolidation or stock sale of the Company in which its stockholders do not retain a majority of the voting power in the surviving corporation, or a sale of all or substantially all the Company's assets, will be deemed to be a Liquidation Event (a
"Deemed Liquidation Event"
). A Deemed Liquidation Event may be waived upon the election of a majority of the outstanding shares of Preferred A Stock.
Conversion
•The Preferred A Stock will be convertible at the option of the holders of a majority of the Preferred A Stock, at any time, into shares of Common Stock on a one-for-one basis, subject to adjustment as set forth below. The Preferred A Stock shall automatically convert into Common Stock upon the closing of a qualified, underwritten public offering that generates net proceeds to the Company of at least $15,000,000.
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Term Sheet
Anti-Dilution:
•The conversion price will be adjusted proportionally for stock splits, stock dividends, recapitalizations, and similar circumstances and will be subject to a full ratchet anti-dilution adjustment in the event the Company issues additional shares of Common Stock (or securities exercisable for or convertible into Common Stock) at a purchase price less than the then-effective conversion price, subject to customary carve outs and exceptions.
Redemption:
•Commencing upon the earlier of the sixth anniversary of the Closing Date, or a material default under the Documentation, each holder of Preferred A Stock shall have the right to require the Company to purchase or redeem their Preferred A Stock by paying in cash an amount equal to the greater of (a) the fair market value of their Preferred A Stock or (b) the sum of the Preferred A Liquidation Principal and Preferred A Liquidated Dividend.
Voting Rights:
•The holders of Preferred A Stock will have the right to the number of votes equal to the number of shares of Common Stock issuable upon conversion of the Preferred A Stock.
Covenants:
•The transaction documents (collectively, the
"Documentation"
) will contain covenants customarily found in agreements for similar transactions and any other additional covenants deemed appropriate by the Purchasers in the context of the proposed transaction. Subject to mutually agreed upon exceptions, such covenants shall include but not be limited to, limitations on (whether such actions occur directly or by amendment, merger, consolidation, or otherwise): (i) indebtedness, liens, guaranties and other contingent obligations, (ii) loans, advances, and investments, (iii) mergers, consolidations, acquisitions, sales of assets (including sale-leasebacks) and changes in control, (iv) issuances of equity and equity-linked securities, (v) capital expenditures and operating leases, (vi) dividends and other distributions with respect to equity or other interests, (vii) investments in new subsidiaries, (viii) transactions with affiliates, (ix) amendments and prepayments of debt, and (x) amendments of material contracts, including the Company's Certificate of Incorporation and Bylaws. So long as a majority of shares of Preferred A Stock issued to the Purchasers remain outstanding, the consent of the holders owning a majority of the issued and outstanding shares of Preferred A Stock voting together as a class, will be required for any amendment to the Documentation or any waiver of covenants.
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Term Sheet
Founder Equity:
•Shares and options held by all David Cusimano and all other founders of the Company (collectively, the also enter into a two year post-termination non-compete agreement with the Company.
"Founders"
) will be subject to a four-year vesting period commencing on the Closing Date and vesting monthly. Each of the Founders will
Information Rights
•The Company shall provide in a reasonable timeframe to each Purchaser unaudited annual and quarterly financial statements. The Company will also provide a quarterly CEO update newsletter to each Purchaser. These information and financial rights will terminate upon an initial public offering.
Rights of First Refusal:
•Except for certain permitted transfers, any transfer of shares by an existing member of the Company shall be subject to the Company's first right to purchase such shares at the price offered by the proposed transferee, followed by the Purchasers' right to purchase any remaining shares at the price offered by the proposed transferee.
Registration Rights:
•The Company shall grant the Purchasers demand registration rights, unlimited piggyback rights with respect to Company registrations, and unlimited short-form registration rights.
Drag-Along Rights:
•The stockholders of the Company shall be required to enter into an agreement with the Purchasers that provides that such stockholders will vote their shares in favor of a Deemed Liquidation Event or transaction (i) in which 50% or more of the voting power of the Company is transferred, (ii) which is approved by the holders of the Series A Preferred, and (iii) in which the net proceeds from such transaction payable to either the shareholders of the Company or the Company, after deducting any transaction expenses or payments of indebtedness in connection with the transaction but without deduction for any amounts placed in escrow pursuant to the transaction, is at least equal to the amount of the liquidation preference payable to the holders of the Series A Preferred in the aggregate.
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Term Sheet
Other Investor Rights:
• The Documentation will provide for co-sale rights, preemptive rights, and other provisions customarily found in documentation for similar financings, in each case subject to customary exceptions and limitations.
Restrictive Covenants:
• If not already in place, each officer and key employee or consultant of the Company will enter into agreements in form and substance satisfactory to the Company and the Purchasers containing non-disclosure and development agreements. Any and all intellectual property rights will be assigned to Company.
Board Representation:
• The Board will consist of five (5) directors: two (2) directors designated by the holders of Preferred A Stock, who shall initially be [__________] and [__________], two (2) directors designated by the holders of Common Stock voting as a separate class, provided that one of such directors shall always be the then current CEO of the Company and the other shall initially be [__________], and one (1) director selected by the other four directors. The right of the Preferred A Stock to designate directors shall terminate in the event that no shares of Preferred A Stock remain issued and outstanding. The Company shall reimburse directors and observers for travel expenses incurred in attending board meetings. Board meetings shall take place no less frequently than once every quarter.
D&O Insurance:
• Prior to the Closing, the Company will purchase Directors and Officers insurance for Board Members acceptable to the Purchasers.
Expenses:
• The Company will pay the Purchasers' out-of-pocket expenses related to their due diligence investigation and documentation of the transaction including reasonable legal fees and expenses. Such expenses shall be due and payable regardless of whether the transaction closes or not.
Confidentiality
: • This Term Sheet and information contained herein is strictly confidential and shall not be duplicated or disclosed to anyone other than the Company, its counsel and retained professional advisors, its existing stockholders, and any additional investors mutually agreed by the Company and BigMoney.
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Term Sheet
Except with respect to the sections labeled "Expenses" and "Confidentiality," this term sheet merely constitutes a statement of our mutual intentions with respect to the proposed transaction and is not intended to be, should not be construed as being, and is not, a legally binding contract. This term sheet does not contain all matters upon which agreement must be reached in order for the proposed transaction to be consummated and, therefore does not constitute a binding commitment with respect to the proposed transaction and it shall not be construed as creating, except as set forth in the sections labeled "Expenses" and "Confidentiality," any legal rights or remedies.
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Startup Newco, Inc.
Pro-Forma Capitalization Table
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Pro-Forma Capitalization Table
Common Stock Outstanding: David Cusimano Other Founders Preferred A Stock Outstanding Total Fully Diluted Shares Common Stock Outstanding: David Cusimano Other Founders Preferred A Stock Outstanding Total Fully Diluted Shares
Pre-Investment Capitalization
Shares 1,500,000 1,000,000 2,500,000 -0 2,500,000
Post-Investment Capitalization
Shares 1,500,000 1,000,000 2,500,000 1,000,000 3,500,000 Percentage Percentage 60.0% 40.0% 100.0% -0 100.0% 42.86% 28.57% 71.43% 28.57% 100.0% * Note that an option pool is often included in these transactions, but has been left out of this particular term sheet in the interest of time.
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Total Sale Price
Total Sale Price Preferred A Liquidation Principal Preferred A Liquidation Principal Preferred A Liquidation Dividend Preferred A Liquidation Dividend Remaining Distribution for All Shareholders Remaining Distribution for All Shareholders Remaining Distribution per Shareholder: Remaining Distribution per Shareholder: Jerry Lenaz David Cusimano Other Founders Other Founders Series A Preferred Series A Preferred Total Distribution to Series A Preferred Total Distribution to Series A Preferred Assumptions: Assumptions:
$1,000,000
$1,000,000 $1,000,000 $1,000,000 $0 $0 $0 $0
Hypothetical Sale in 5 Years Hypothetical Sale in 5 Years $2,000,000
$2,000,000 $1,000,000 $1,000,000 $250,000 $250,000 $750,000 $750,000
$4,000,000
$4,000,000 $1,000,000 $1,000,000 $250,000 $250,000 $2,750,000 $2,750,000
$8,000,000
$8,000,000 $1,000,000 $1,000,000 $250,000 $250,000 $6,750,000 $6,750,000 $0 $0 $0 $0 $0 $0 $1,000,000 $1,000,000 $321,450 $321,450 $214,275 $214,275 $214,275 $214,275 $1,464,275 $1,464,275 $1,178,650 $1,178,650 $785,675 $785,675 $785,675 $785,675 $2,035,675 $2,035,675 $2,893,050 $2,893,050 $1,928,475 $1,928,475 $1,928,475 $1,928,475 $3,178,475 $3,178,475 1. All 1,000,000 shares of Preferred A Stock were sold.
1. All 1,000,000 shares of Preferred A Stock were sold.
2. None of the shares of Preferred A Stock have been converted to Common Stock.
2. None of the shares of Preferred A Stock have been converted to Common Stock.
3. No dividends have been paid on the Preferred A Stock.
3. No dividends have been paid on the Preferred A Stock.
4. The conversion price of the Preferred A Stock has not changed.
4. The conversion price of the Preferred A Stock has not changed.
5. No additional shares of capital stock of the Company have been issued.
5. No additional shares of capital stock of the Company have been issued.
$16,000,000
$16,000,000 $1,000,000 $1,000,000 $250,000 $250,000 $14,750,000 $14,750,000 $6,321,850 $6,321,850 $4,214,075 $4,214,075 $4,214,075 $4,214,075 $5,464,075 $5,464,075
$32,000,000
$32,000,000 $1,000,000 $1,000,000 $250,000 $250,000 $30,750,000 $30,750,000 $13,179,450 $13,179,450 $8,785,275 $8,785,275 $8,785,275 $8,785,275 $10,035,275 $10,035,275
$64,000,000
$64,000,000 $1,000,000 $1,000,000 $250,000 $250,000 $62,750,000 $62,750,000 $26,894,650 $26,894,650 $17,927,675 $17,927,675 $17,927,675 $17,927,675 $19,177,675 $19,177,675
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