Transcript NOTHING VENTURED NOTHING GAINED© Venture Capital Term Sheets by Barry Burgdorf Vice Chancellor and General Counsel July 25, 2007

NOTHING VENTURED
NOTHING GAINED©
Venture Capital Term Sheets
by
Barry Burgdorf
Vice Chancellor and General Counsel
July 25, 2007
TERM SHEETS
GENOMICS, INC.
SERIES [A] PREFERRED STOCK
FINANCING
2
PURPOSE
The intent of this document is to describe,
for negotiation purposes only, certain
principal terms of the proposed Series [A]
Preferred Stock financing of Genomics,
Inc. (the “Company”). Until execution
and delivery of such definitive
agreements, the Company and the
investors shall each have the absolute
right to terminate all negotiations for any
reason without liability or obligation.
3
CONFIDENTIALITY
The terms and conditions of this term sheet,
including its existence, shall be confidential
information and shall not be disclosed to any
third party without the consent of the Company
and each investor, except to
1) employees, agents, etc. with a need to
know and a duty to keep confidential; and
2) if required by law.
Note: As public universities, U. T. System and System
institutions must include language relating to the Texas
Public Information Act.
4
VALUATION AND INVESTORS
PRE-MONEY
VALUATION:
$25 million (on a fully-diluted
basis, including all options and
warrants, and all authorized but
unissued options)
INVESTORS:
Name
Bill & Ted’s Excellent
VC Fund (“BT”)
[Other Investors]
Total
Amount
$________
________
__________
$________
5
THE CAPITALIZATION TABLE
The capitalization of the Company on a fullydiluted basis (including all options and
warrants, and all authorized but not issued
options) after giving effect to the financing
would be as follows:
Class of Stock
Common
Options
Series A Preferred
Warrants
TOTAL
# of Shares
_____
_____
_____
_____
_____
Fully-Diluted
___%
___%
___%
___%
100%
6
THE STOCK OPTION PLAN:
WHAT ABOUT ME BOSS?
The Company’s Stock Option Plan, will be
implemented as part of this financing as
necessary to establish the total shares reserved
under the Option Plan to 20% of the outstanding
shares of the Company after the proposed
financing. [Specific terms of option plan -- i.e.,
vesting, Company’s repurchase rights, etc.]
7
THE STOCK OPTION PLAN:
WHAT ABOUT ME BOSS? (cont’d)
Note: If U. T. employees will be involved in Company
management, they will need independent personal legal
advice on the option plan and executive compensation.
Issues to consider:
1. institutional rules on outside employment;
2. conflicts of interest management plan;
3. agreements on intellectual property;
4. tax consequences;
5. SEC issues regarding cheap stock and backdating.
8
DIVIDEND RIGHTS:
THE VC’S VIG
The Series [A] Preferred would be entitled to an
annual per share dividend equal to [7-9%] of
the Purchase Price, payable when and if
declared by the Board of Directors (the
“Board”). The dividends would be [non-]
cumulative beginning _________.
9
DIVIDEND PREFERENCE:
ME FIRST!
Dividends on the Series [A] Preferred would be
paid prior to payment of any dividend with
respect to the Common Stock and any other
class or series of stock.
10
DIVIDEND PARTICIPATING
WITH THE COMMON:
ONCE MORE WITH FEELING
After payment of the preferential dividend to
the holders of the Series [A] Preferred and any
other series of Preferred Stock, other series of
Preferred Stock, any further dividends would be
paid pro rata to the holders of the Series [A]
Preferred and the Common Stock on an asconverted basis.
11
LIQUIDATION PREFERENCE:
SEEMS LIKE WE JUST GOT STARTED
In the event of any liquidation [define] of the
Company, the holders of the Series [A]
Preferred would be entitled to receive, prior to
any distribution to the holders of any other
series of Preferred Stock or the Common Stock,
an amount equal to the Purchase Price [or [2X]
the Purchase Price] plus all accrued or
declared but unpaid dividends thereon (the
“Preference Amount”).
Note: Definition of liquidation event is a key term –
who controls?
12
LIQUIDATION PARTICIPATION
WITH THE COMMON: I’LL TAKE
SOME OF YOURS TOO, PLEASE!
After the payment of the Preference Amount,
distribution pro rata among the holders of the
Series [A] Preferred, other series of Preferred
Stock and the Common Stock on an asconverted basis until the holders of Series A
Preferred have received an amount per share
equal to [3X the Purchase Price, as adjusted].
13
REDEMPTION: SHOULD I
STAY OR SHOULD I GO?
Beginning on the _______th Anniversary of
Closing, [each holder] or [the holders of a
majority/66-2/3%] of the then outstanding
Series [A] Preferred may require the Company
to redeem all of the outstanding Series [A]
Preferred [in equal annual installments over a
________-year period]. The redemption price
is generally the same as the Liquidation
Preference.
14
CONVERSION RIGHTS: I SAW
THE LIGHT
The holders of the Series [A] Preferred would
have the right to convert the Series [A]
Preferred into shares of Common Stock at any
time. The initial conversion rate for the Series
[A] Preferred would be 1-for-1.
15
AUTOMATIC CONVERSION:
THE LIGHT SAW ME
The Series [A] Preferred would automatically
be converted into Common Stock, at the then
applicable conversion rate, upon the closing of
an underwritten public offering of shares of
Common Stock of the Company at a public
offering price of at least $[2 to 3 times the
Purchase Price] per share and gross proceeds
to the Company in excess of $[__,000,000] (a
“Qualified IPO”).
16
ANTIDILUTION PROVISIONS: IS
THERE ANY ALCOHOL IN THIS
DRINK?
Basic Conversion Formula:
Each share of Preferred Stock is convertible into
that number of shares of Common Stock
determined by dividing the Original Issue Price
by the Conversion Price then in effect. The
Conversion Price shall initially be $[Series [A]
Purchase Price], i.e., 1-to-1 conversion.
17
ANTIDILUTION PROVISIONS: IS
THERE ANY ALCOHOL IN THIS
DRINK? (cont’d)
Basic Conversion Formula can be written as:
SH PS convertible
into No. SH CS = OIP
CP then in effect
Antidilution Provisions:
1. Stock Splits, etc.
In the event of stock dividends, stock splits,
reverse stock splits or similar events, then
conversion price will be proportionately
increased or decreased, as the case may be.
18
ANTIDILUTION PROVISIONS: IS
THERE ANY ALCOHOL IN THIS
DRINK? (cont’d)
2. Formula, or Weighted Average, Adjustment
of Conversion Price
In the event of a diluting issuance (other than
excluded issuances) at a price lower than the
conversion price then in effect, the
conversion price shall be reduced to a price
determined by multiplying the conversion
price by a fraction:
[CS IOS prior to deal] + [CS issuable for CON at CP]
[CS IOS prior to deal] + [CS issued in deal]
19
PROTECTIVE PROVISIONS:
NOT SO FAST THERE PARTNER!
Consent of the holders of ___________ of the
outstanding Series [A] Preferred would be
required for:
• any amendment or change of the rights,
preferences, privileges or powers of, or the
restrictions provided for the benefit of, the
Series [A];
20
PROTECTIVE PROVISIONS:
NOT SO FAST THERE PARTNER! (cont’d)
• any action that authorized, created or issued
shares of any class of stock having preferences
superior to [or on a parity with] the Series [A]
Preferred;
• any action that reclassified any outstanding
shares into shares having preferences or priority
as to dividends or assets senior to or on a parity
with the preference of the Series [A] Preferred;
• any amendment of the Company’s Articles of
Incorporation that adversely affected the rights
of the Series [A] Preferred;
21
PROTECTIVE PROVISIONS:
NOT SO FAST THERE PARTNER! (cont’d)
• any increase in the number of authorized shares of
the Series [A] Preferred;
• any merger or consolidation of the Company with
one or more other corporations in which the
shareholders of the Company immediately after such
merger or consolidation held stock representing less
than a majority of the voting power of the
outstanding stock of the surviving corporation;
• the sale of all or substantially all the Company’s
assets [or the exclusive licensing of all or
substantially all of the Company’s intellectual
property];
22
PROTECTIVE PROVISIONS:
NOT SO FAST THERE PARTNER! (cont’d)
• the liquidation or dissolution of the Company;
• the declaration or payment of a dividend on the
Common Stock (other than a dividend payable
solely in shares of Common Stock);
• incurrence of indebtedness in excess of
[$50,000];
• material changes in the Company’s business
plan; or
• any increase in the authorized number of shares
issuable pursuant to the Company’s Stock Option
Plan.
23
BOARD OF DIRECTORS: WHO’S
RUNNING THIS SHOW ANYWAY?
At the closing of the sale of the Series [A]
Preferred Stock, the Board of Directors of the
Company will consist of ______________ or
for so long as it continues to hold _________
shares of Series [A] Preferred Stock, it shall
have board observation rights and visitation
rights [and information rights].
Note: If a U. T. System employee is to serve on
the Board:
1. Approvals needed;
2. Make sure you understand the duties,
responsibilities, and liabilities of a
Board member
24
PREEMPTIVE RIGHTS:
HEY DON’T FORGET ME!
Each holder of Series [A] Preferred would have
a preemptive right to purchase up to its pro rata
share (based on its percentage of the Company’s
outstanding common shares, calculated on a
fully-diluted as-converted basis for all
outstanding shares) of any equity securities
offered by the Company or a subsidiary (other
than in a transaction registered under the
Securities Act of 1933, as amended (the “1933
Act”), on the same price and terms and
25
PREEMPTIVE RIGHTS:
HEY DON’T FORGET ME! (cont’d)
conditions as the Company or the subsidiary
would propose to offer such securities to other
potential investors (with a right of
oversubscription if any holder of Series [A]
Preferred elected not to purchase its full pro rata
share). This right would not apply to the
issuance by the Company of up to ______
shares of Common Stock (or options therefor)
issued to employees, officers or directors of the
Company pursuant to stock purchase or stock
option plans approved by the Board.
26
RIGHT OF FIRST REFUSAL AND
CO-SALE AGREEMENT: “YOU FIRST”
“NO, NO, I INSIST – YOU FIRST”
The Company, each holder of Series [A]
Preferred, the founders of the Company (the
“Founders”) and the other principal
shareholders of the Company (the “Principal
Shareholders”) would enter into a Co-Sale
Agreement which would give the holders of the
Series [A] Preferred first refusal rights and cosale rights that any Founder or Principal
Shareholder who proposed to sell all or a
portion of his shares to a third party must permit
27
RIGHT OF FIRST REFUSAL AND
CO-SALE AGREEMENT: “YOU FIRST”
“NO, NO, I INSIST – YOU FIRST” (Cont’d)
the holders of the Series [A] Preferred
hereunder, at their option, to either (i) purchase
such stock on the same terms as the proposed
transferee, with the right of the participating
investors to purchase all shares of nonparticipating investors [(a/k/a “gobble up”)], or
(ii) sell a proportionate part of their shares on
the same terms offered by the proposed
transferee. This right would terminate upon the
closing of a Qualified IPO.
28
REGISTRATION RIGHTS:
LET’S GO PUBLIC
Demand, S-3 and Piggy-back Rights
The holders of Series [A] Preferred would have
registration rights.
• Demand
• S-3
• Piggyback
29
OTHER ISSUES:
DID WE FORGET ANYTHING?
1. Confidential Information and Invention
Assignment Agreement
2. Legal Fees
3. Key Man Life Insurance Policies
4. Subject Founders to Vesting
5. Technology Transfers Complete
6. Who Drafts?
7. Closing – When are we going to tie the
knot?
30
NOTHING VENTURED
NOTHING GAINED©
Venture Capital Term Sheets
by
Barry Burgdorf
Vice Chancellor and General Counsel
July 25, 2007