CONVERTIBLE NOTE TERM SHEET
This is a summary of the principal terms of (i) a restructuring of [Startup Name] so that it is a wholly-owned
subsidiary of a Delaware limited liability company (“Company”), followed by (ii) a convertible note financing of the
Company led by Canary Fund (the “Lead Investor”). This term sheet is an expression of intent only and, except as set
forth under “Confidentiality,” is not meant to be binding on the parties.
Formation of Delaware LLC
The Company will be organized as a newly formed Delaware limited liability company.
Exchange of Quotas for
The founders of [Startup Name] will exchange their quotas in [Startup Name] for an
equivalent number of Common Units issued by the Company, so they continue to own
the same percentage of the equity in the Company as they did in [Startup Name].
Similarly, all other security holders of [Startup Name] shall exchange their securities for
equivalent securities issued by the Company. This results in [Startup Name] becoming
a wholly owned subsidiary of the Company (except to the extent that applicable law
requires the founders to retain one quota).
The Company will issue unsecured, convertible promissory notes (“Notes”) in exchange
Securities to Be Issued
for amounts loaned by the investors.
up to $_________
up to $_________
The Company may close the sale of the Notes (as defined below) in multiple closings,
provided that an aggregate of at least $________ shall be raised at the initial closing.
The initial closing shall occur on or before __________, 20__, and the final closing
shall take place not later than three (3) months after the initial closing.
Principal and unpaid accrued interest on the Notes will be due and payable twenty-four
(24) months after the initial closing date (the “Maturity Date”).
Interest shall accrue on an annual basis at the rate of 5% per annum, payable upon the
Conversion of Notes
Each Note shall automatically be converted into units of the Company issued in the first
equity financing closing after the initial closing date resulting in aggregate gross
proceeds to the Company of at least $1.0 million, excluding conversion of any of the
Notes (the “Next Equity Financing;” such conversion, a “Financing Conversion”). If the
Next Equity Financing has not closed by the Maturity Date, at the option of the holders
of a majority in interest of the Notes, the Notes may be converted into Common Units of
the Company (a “Maturity Conversion”).
Upon a Financing Conversion, the Lead Investor will be entitled to the same rights,
preferences and privileges as the other investors purchasing equity securities in the
Next Equity Financing, including any rights granted to holders of a minimum amount of
units of in the Company (i.e., “major investors”), regardless of the number of units by
the Lead Investor.
The conversion price of the Notes with respect to a Financing Conversion shall be the
lesser of (i) a 20% discount to the lowest cash price per unit paid by investors in the
Next Equity Financing or (ii) the price obtained by dividing a $_____ million valuation
(the “Valuation Cap”) by the Company’s fully diluted pre-money capitalization
immediately prior to the Next Equity Financing). The conversion price of the Notes with