Term Sheet Template - National Venture Capital Association (Page 21 of 25) in pdf

made so that successors of the Company assume Company’s

obligations with respect to indemnification of Directors.

Employee Stock Options:

Unless otherwise approved by the Board [or a committee established

by the Board], [which approval must include the affirmative vote of

[____] of the Series A Director(s),] all employee options to vest as

follows: [25% after one year, with remaining vesting monthly over

next 36 months].

[Immediately prior to the Series A Preferred Stock investment,

[______] shares will be added to the option pool creating an

unallocated option pool of [_______] shares.]

Key Person Insurance:

Company to acquire life insurance on Founders [name each

Founder] in an amount satisfactory to the Board. Proceeds payable

to the Company.

[IPO Directed Shares:

To the extent permitted by applicable law and SEC policy, upon an

IPO consummated one year after Closing, Company to use

commercially reasonable efforts to cause underwriters to designate

[1-5]% of the offering as directed shares, 50% of which shall be

allocated by Major Investors.]

[QSB Stock:

Company shall use commercially reasonable efforts to cause its

capital stock to constitute Qualified Small Business Stock unless the

Board determines that such qualification is inconsistent with the best

interests of the Company.]

All rights under the Investor Rights Agreement, other than

Termination:

registration rights, shall terminate upon the earlier of an IPO or a

Deemed Liquidation Event.

RIGHT OF FIRST REFUSAL/CO-SALE AGREEMENT

AND VOTING AGREEMENT

Right of first Refusal/

Company first

and Investors second [(to the extent assigned by the

SEC Staff examiners have taken position that, if contractual right to friends and family shares was

granted less than 12 months prior to filing of registration statement, this will be considered an “offer” made prematurely

before filing of IPO prospectus. So, Investors need to agree to drop shares from offering if that would hold up the IPO.

While some documents provide for alternative parallel private placement where the IPO does occur within 12 months,

such a parallel private placement could raise integration issues and negatively affect the IPO. Hence, such an

alternative is not provided for here.

Investors may take the position that they should be granted the primary right of first refusal with respect

to transfers by the Founders based on the arguments that (a) a redemption of Founder stock by the Company may

constitute a preferred distribution that would deplete the Company of cash that ought to be reinvested into operations or

otherwise used to pay accumulated dividends on the Series A Preferred Stock, and (b) the Investors want the first

opportunity to increase their percentage ownership, rather than having a Company redemption increase all shareholders’

percentage ownership pro rata. Note the interplay between this provision and the Investors’ protective provision with

ABA Comments to NVCA Term Sheet - Final Version.DOC

Term Sheet Template - National Venture Capital Association Page 21

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