A Delaware-based corporation, [REDACTED] Inc., is raising $15 million in a Series B financing round, with a pre-money valuation of $40 million. This round will involve the issuance of Series B Preferred Stock.
A prominent investor, [REDACTED], will invest $8 million for a 14.54% fully-diluted interest. The remaining $7 million will be invested by existing or new investors acceptable to [REDACTED].
The company’s unallocated option pool will be increased on a pre-money basis to a maximum of 15.0% of the company’s fully-diluted capitalization immediately post-closing. The founders will be granted a portion of this pool to increase their aggregate ownership to 30.0% fully-diluted on a post-closing basis.
The Series B Stock will have dividend rights, liquidation preference, conversion rights, mandatory conversion, anti-dilution provisions, voting rights, and protective provisions. The company’s board will consist of five members, including representatives from Series A and Series B stockholders, founders, and a mutually acceptable independent non-executive director.
Major investors will have preemptive rights to participate in subsequent issuances of equity securities. [REDACTED] will have a “super pro rata right” to purchase up to 150% of its pro rata share of the equity securities offered by the company in its next bona fide financing transaction.
The company agrees to give [REDACTED] exclusivity for up to 45 days to complete its due diligence and make an investment in the company on the terms outlined in the memorandum of terms. All parties will bear their own expenses incurred in connection with due diligence, legal and accounting reviews, and legal documentation of the investment, with the company paying reasonable fees and expenses of legal counsel and due diligence advisors to [REDACTED], up to a maximum of $50,000.
The memorandum of terms is non-binding, except for the exclusivity, confidentiality, and governing law clauses.
MEMORANDUM OF TERMS FOR PRIVATE PLACEMENT OF SERIES B PREFERRED STOCK OF COMPANY
This memorandum summarizes the principal terms of the proposed Series B financing of COMPANY, a Delaware corporation. The completion of the transactions contemplated by this memorandum will be subject to, among other things, satisfactory completion of financial and legal due diligence by the investors, as well as the completion of final documents acceptable to all of the parties thereto.
COMPANY, a Delaware corporation (the “Company”).
Securities to be issued:
Series B Preferred Stock (“Series B Stock” and, together with the Series A Preferred Stock of the Company (the “Series A Stock”), the “Preferred Stock”) of the Company.
An aggregate of $15.0 million in new money. All amounts in the financing round will be invested at a single closing.
Price / Pro Forma Capitalization:
Pre-money valuation of $40.0 million, which pre-money valuation will include all outstanding capital shares, options (including reserved but unallocated options, the option pool increase described below under “ESOP” and promised but not yet granted options), warrants and any other convertible securities of the Company on an as-exercised, as-converted basis.
The Company’s unallocated option pool shall be increased on a pre-money basis such that the unallocated pool shall a maximum of 15.0% of the Company’s fully-diluted capitalization immediately post-closing, a portion of which shall granted to the Founders (as defined below) so as to increase their aggregate ownership to 30.0% fully-diluted on a post-closing basis.
[REDACTED] (together with its affiliates “Investors”), will invest $8.0 million for a 14.54% fully-diluted interest. The remaining $7.0 million will be taken by existing investors in the Company or new investors acceptable to Investors (along with Investors, “Investors”).
Founders (the “Founders”):
Existing Financing Documents:
All terms set forth herein are subject to a review of the Company’s current Certificate of Incorporation and other constitutive documents (the “Existing Documents”) to ensure that the Series B Stock has rights and preferences that are at least as favorable as those applicable to the Series A Stock, except as otherwise set forth in this memorandum of terms, and that such Existing Documents otherwise reflect customary terms.
Terms of Series B Stock
Dividend payable on each series of Preferred Stock, pari passu, payable when and if declared by the Board. For any other dividends or similar distributions, the Preferred Stock will participate with the Common Stock of the Company on an as-converted basis.
lx non-participating liquidation preference pari passu with the Series A Stock.
The holders of a majority of the outstanding Preferred Stock (voting together as a single class on an as-converted basis), which majority must include the vote of the holders of a majority of Series B Stock (voting together as a separate class) (collectively the “Requisite Preferred”) may waive the treatment of such a transaction as a “Deemed Liquidation Event” pursuant to the Company’s current Certificate of Incorporation.
The holders of Preferred Stock shall have the right to convert their shares of Preferred Stock, at any time, into the Company’s Common Stock. The initial conversion rate shall be 1:1, subject to adjustments for share dividends, splits, combinations and similar events as described below under “Anti-dilution Provisions.”
The Preferred Stock will automatically convert into Common Stock upon (i) the consummation of an underwritten public offering with aggregate proceeds to the Company in excess of $100,000,000, following which the Company’s shares are listed for trading on the NYSE, Nasdaq or another exchange or marketplace approved by the Board (as defined below) or (ii) the vote of the Requisite Preferred.
Customary broad-based weighted average anti-dilution protection. Any adjustment to the conversion price of a series of Preferred Stock may be waived only with the vote of the Requisite Preferred.
Shares of Preferred Stock will vote together with the Common Stock on an as-converted basis and will also have class and series votes as provided by law.
The shares of Preferred Stock will vote together as a single class and on an as-converted basis on all protective provisions, which shall remain substantially the same as in the Existing Documents, except all approvals shall be obtained with the vote of Requisite Preferred.
Board of Directors (the “Board”):
The Board shall consist of five members, comprised of (i) one member who shall be appointed by the holders of the Series A Stock, (ii) one member who shall be appointed by the holders of the Series B Stock, to be designated by Investors (ii) three members who shall be appointed by the Founders, and one independent non-executive director who shall not otherwise by an employee or affiliate of the Company and who is mutually acceptable to each of the other members of the Board, and which seat shall initially be vacant.
In addition, Investors will have the right to one Board observer seat, subject to customary exceptions and parameters. Each of the Preferred Directors shall be invited to join all Board committees and the board of any subsidiary of the Company.
Major Investors (as mutually defined by Investors and the Company) shall have a pro rata right, based on their percentage equity ownership in the Company (assuming the conversion of all outstanding Preferred Stock into Common Stock and the exercise of all options outstanding under the Company’s stock plans), to participate in subsequent issuances of equity securities of the Company, subject to customary exclusions. In addition, should any Major Investor choose not to purchase its full pro rata share, the remaining Major Investors shall have the right to purchase the remaining pro rata shares.
Notwithstanding the foregoing, Investors (and Investors alone) shall have a “super pro rata right” to purchase up to 150% of its pro rata share of the equity securities offered by the Company in its next bona fide financing transaction. In addition, to accommodate South African tax-planning purposes, Investors shall have a priority pro rata right, but not an obligation, to maintain a 10.01% shareholding on a fully-diluted basis upon the issuance of any additional securities that would dilute Investors below such threshold.
Drag Along Rights:
If (i) the Requisite Preferred and (ii) the holders of a majority of the shares of Common Stock held by the Key Holders (as defined in the Existing Documents) who are then providing services to the Company shall approve a proposed sale of more than 50% of the company or other Deemed Liquidation Event, the other holders of Common Stock and holders of the remaining Preferred Stock will vote their shares in favor of such transaction.
Other Investor Rights:
Investors will be provided with customary registration rights, information rights (including annual audited consolidated financials, monthly consolidated financials (including cash flows, P&L and balance sheet), monthly KPI reports as mutually agreed to by Investors and the Company, and quarterly cap tables), first refusal and co-sale rights, and other customary rights, in each case on terms that are no less favorable than the terms provided to any other Investor.
The Company agrees that Investors shall have the right to complete its due diligence and make an investment in the Company on the terms outlined herein for a period of up to 45 days. As part of the cooperation, the Company will not solicit or engage in any discussions with or provide any information to any third party regarding any transaction except for discussions with existing shareholders or other members of the investment syndicate for this financing round.
Until the initial closing of the financing contemplated by this Memorandum of Terms, the existence and terms of this Memorandum of Terms and all discussions relating to the proposed investment will not be disclosed to any third party without the consent of the Company and the Investors, except as may be (i) reasonably required to consummate the transactions contemplated hereby, including to each party’s professional advisors and to other potential Investors in the round, or (ii) required by law.
This Memorandum of Terms shall be governed in all respects by the laws of Delaware.
All parties shall bear their own expenses incurred in connection with due diligence, legal and accounting reviews, and legal documentation of the investment except that the Company will pay reasonable fees and expenses of legal counsel and due diligence advisors to Investors, up to a maximum of $50,000.
Conditions to Closing:
(a) Standard conditions to closing, which shall include, among other things, satisfactory completion of market, business, technical, financial and legal, etc. due diligence by Investors and a management rights letter at Investors’s request.
(b) Counsel to the Company shall provide a customary legal opinion.
Legal counsel to the Company shall draft the financing documents.
This term sheet is non-binding, except for the Exclusivity, Confidentiality, and Governing Law clauses, and is intended solely as a summary of the terms that are currently proposed by the parties. The parties acknowledge that they neither intend to enter, nor have they entered, into any agreement to negotiate a definitive agreement pursuant to this term sheet. If the terms of this memorandum are acceptable to the Company, please so indicate below and return it to the undersigned no later than 5:00 PM PDT on Wednesday, June 2, 2021, after which this memorandum shall be void,