The Capital Network:

Anatomy of a Series A Term Sheet

Robert E. Bishop Partner, Goodwin Procter LLP

rbishop@goodwinprocter.com

October 8, 2014

•  Generally, convertible notes more favorable to founders than an equity round ›  Avoid setting valuation

▪  Potentially less dilution

▪  Helpful for early equity grants

›  Save time and money with convertible notes (Usually)

▪  Convertible notes with “bells & whistles” may not be less expensive and may not be faster

›  Valuation caps and discounts common

•  ~$750,000 raise as a rule-of-thumb demarcation point for notes vs. equity round

•  And…some professional investors won’t do convertible note deals

Preliminary Consideration – Convertible Notes vs. Equity

•  Valuation. ›  “Pre-Money Valuation” - What investor is valuing company at today

›  “Post-Money Valuation” – Pre-Money + Money raised

›  Price per share = pre-money valuation divided by the total number of shares issued and outstanding or reserved for issuance on a fully-diluted basis.

›  Option pool – size, and “in the pre” or “in the post”? Usually the “in the pre”. Important to understand the ramifications of this.

›  More art than science. Best approach: competition

Series A Term Sheet - Economics

•  Liquidation Preference.

›  Participating Preferred vs. “Straight” or “Convertible” Preferred.

•  Dividend.

›  Participating with Common Dividend or Accruing Dividend (and Cumulative / Non-Cumulative).

•  Vesting – Founders and Employees.

›  Founder vesting – can be different than employee vesting.

›  Schedule (typically 4 years).

›  Acceleration (usually none for employees).

•  Anti-dilution. Standard broad based weighted average.

•  Redemption Rights.

Series A Term Sheet - Economics

•  Board of Directors. ›  Responsible for managing the business and affairs of the company.

›  Important control provision. Most key decisions about the company go through the board – i.e. sale, financing, debt, exec hires, etc.

›  3 and 5 member boards typical. Make up is key, currently and prospectively.

•  Investor Protective Provisions (Look out for inadvertent vetoes). ›  Sell the company

›  Future financing

›  Change terms of investor securities

›  Incur debt

›  Dividends and repurchases of stock

›  Change size of board ›  Hire/Fire or change compensation of execs

Series A Term Sheet - Control

•  Drag-Along.

›  Provides a group with the right to force other stockholders to agree to a sale of the company.

›  Who has the right to trigger the drag-along?

▪  Board, Investors, Founders / Majority of Common

•  Mandatory Conversion.

›  Subset of investors can force conversion of preferred to common. Facilitates recapitalization financing or IPO.

›  Upon qualified IPO, all preferred converts to common.

Series A Term Sheet - Control

•  Founders Reps. •  Information Rights.

•  Registration Rights. A “rich problem”. ›  Demand Rights (pre or post IPO)?

›  Piggy-back Registration Rights.

•  Right to Participate in Future Financings. ›  Pro rata definition

›  Major Investors only?

•  Right of First Refusal/Co-Sale Rights. ›  In favor of Company then investors

•  Closing Conditions (employee agreements, key person insurance, diligence, etc.).

•  Pay-to-Play (unusual at this stage)

•  Term Sheet non-binding except for: ›  Investor’s Legal Fees – should be only if transaction closes.

›  No Shop.

Series A Term Sheet – Other Terms

@FoundersWkbench

www.foundersworkbench.com

Bob Bishop, Partner Goodwin Procter LLP

Direct: (617) 570-1591 rbishop@goodwinprocter.com