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TERM SHEET FOR THE PURCHASE AND SALE OF SECURED CONVERTIBLE PROMISSORY NOTE OF XYZ CORPORATION
THIS TERM SHEET (the “Term Sheet”) sets forth the principal terms proposed by _________________________ (the “Investor”) for the purchase of a Convertible Promissory Note from XYZ Corporation, an <State> corporation (the “Company”). These terms when finalized will be memorialized in a binding Convertible Note Purchase Agreement executed between the Company and the Investor along with other documents as described herein.
Type of Security:
Convertible Note, bearing interest at a simple interest rate of _____ (__%) percent calculated on the basis of a 360-day year consisting of twelve, 30-day months (the “Notes”).
The Investor named at the beginning of this Term Sheet, as well as other investors designated by and reasonably acceptable to the Company (collectively, the “Investors”).
Total Amount Invested:
As soon as practicable following the Company¡¦s acceptance of this Term Sheet and execution of all other required documentation designated by the Company but no later than <Date> (the ¡§Initial Closing¡¨). Additional closings may occur at any time following the Initial Closing in the Company¡¦s discretion.
TERMS OF THE NOTES:
Term of Payment:
The day that is one year following the date of the Initial Closing shall be the end of the term of the Note (the “Maturity Date”). All principal and accrued interest under the Note is due and payable on the Maturity Date. The Note may be prepaid at any time by the Company without penalty upon five days prior written notice to the Holder.
Terms of Conversion:
The Note would be convertible on the following terms. In the event the Company consummates, prior to the Maturity Date (as defined below) an equity financing pursuant to which it sells shares of its Series A Preferred Stock (the “Series A Preferred Stock”) with an aggregate sales price of not less than $_____________, including any and all convertible notes which are converted into preferred stock (including the Notes issued under this Note Purchase Agreement), and with the principal purpose of raising capital (a “Qualified Financing”), then the Note shall automatically convert all principal and accrued interest under the Note into the Series A Preferred Stock at __% of the price paid by investors in the Qualified Financing. The Note shall convert into shares of Series A Preferred Stock on the same other terms as the other investors purchasing Series A Preferred Stock in the Qualified Financing.
If a Liquidity Event occurs before repayment or conversion of the Note into equity, the Company will pay the holder of the Note an amount equal to ___% of the outstanding principal amount of the Note plus any accrued interest due under the Note upon the closing of such Liquidity Event. (For example the Holder of a $_________ note earning __% interest, upon a Liquidity Event would be paid $_________ plus accrued interest of __% on $_______.) For purposes of this provision, a “Liquidity Event” shall mean (a) a merger of the Company with or into another entity (if after such merger the holders of a majority of the Company’s voting securities immediately prior to the transaction do not hold a majority of the voting securities of the successor entity), (b) a sale by the Company of all or substantially all of its assets or (c) the closing of the Company’s first firm commitment underwritten public offering of the Company’s common stock registered under the Securities Act of 1933, as amended.
Security and Subordination:
Repayment of the Note would be secured by a first priority security interest in collateral consisting of all of the assets of the Company. The Note shall be subordinated to all indebtedness of the Company to banks, commercial finance lenders, insurance companies, leasing or equipment financing institutions or other lending institutions regularly engaged in the business of lending money (excluding venture capital, investment banking or similar institutions which sometimes engage in lending activities but which are primarily engaged in investments in equity securities), which is for money borrowed, or for the purchase or leasing of equipment in the case of lease or other equipment financing, whether or not secured.
The transaction would be documented by counsel of the
Company with the documents containing the provisions described above and consisting of the following:
- Note Purchase Agreement;
- Risk Factor Statement;
- Convertible Promissory Note; and
- Security Agreement.
Representations & Warranties:
The Convertible Note Purchase Agreement would contain customary representations from the Company including, without limitation: organization and qualification, execution and delivery, validity and enforceability of agreements, issuance of the Note, no litigation and compliance with laws. Customary representations from the Investor would include without limitation: suitability to invest, restrictions on the securities that will be issued in the event of conversion, “lock-up” provisions related to a potential public offering.
Except for the provisions set forth in the captions below entitled ¡§Exclusivity¡¨ and “Expenses,” this Term Sheet is not an offer subject to acceptance or a legally binding commitment by Investor, and no obligation will be created by execution of this Term Sheet unless and until definitive documents have been executed and delivered.
The Company shall not disclose the terms of this Term Sheet to any person or entity except for the Company’s accountants and attorneys and other potential Investors acceptable to Investor, without the written consent of Investor.
This Term Sheet expires on _____________, 20__ if not accepted by the Company by that date.
Holders of a majority in interest of the principal amount of the Notes may amend or waive any provision of the Notes and such amendment or waiver shall be binding on all holders of the Notes.
The Company and the Investors will each bear their own legal and other expenses with respect to the transactions contemplated herein.
The undersigned hereby agree to the foregoing terms. This instrument may be executed in one or more counterparts and by facsimile, each of which will constitute an original, and all of which will constitute one and the same instrument.
ACCEPTED AND AGREED TO AS OF THE DATE SET FORTH BELOW:
THE COMPANY: XYZ CORPORATION, an <State> corporation
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