Term Sheet Template - National Venture Capital Association (Page 9 of 25) in pdf

manner adverse to the holders of Series A Preferred Stock];

(iii) create or authorize the creation of any new class or series of

shares, having rights, preferences or privileges senior to or on parity

with the Series A Preferred Stock, or increase the authorized number

of shares of Series A Preferred Stock; (iv) purchase or redeem or

pay any dividend on any capital stock prior to the Series A Preferred

Stock, [other than (a) stock repurchased from former employees or

consultants

connection

with

the

cessation

their

employment/services, [at the lower of fair market value or cost;]

(b) stock repurchased from third parties pursuant to previously

disclosed contract rights, or (c) as a result of the Company’s

exercise of its right of first refusal pursuant to the [First Refusal and

Co-Sale Agreement dated _________, 200_]

; (v) create or

authorize the creation of any debt security or enter into new (or

extend existing) bank lines of credit [if the Company’s aggregate

indebtedness would exceed $[____] [other than equipment leases or

bank lines of credit] [other than debt with no equity feature] [unless

such debt security has received the prior approval of the Board of

Directors, including the approval of at least [________] Series A

Director(s)]; (vi) increase or decrease the size of the Board of

Directors; (vii) authorize any action that results in the sale, lease or

transfer of material assets of the Company to any person other than a

wholly-owned subsidiary of the Company; [(viii) terminate the

existing, or appoint a new, chief executive officer], or [(x) change

the Company’s material accounting practices or auditors].

Optional Conversion:

The Series A Preferred Stock initially converts 1:1 to Common

Stock at any time at option of holder, subject to adjustments for

stock dividends, splits, combinations and similar events and as

Note that as a matter of background, Section 242(b)(2) of the Delaware General Corporation Law

provides that if any proposed charter amendment would adversely alter the rights, preferences and powers of one series

of Preferred Stock, but not similarly adversely alter the rights, preferences and powers of the entire class of all Preferred

Stock, then the holders of that series are entitled to a separate series vote on the amendment. This protective provision

is broader because it would not require that the Series A Preferred Stock be treated in a manner different from the other

series of Preferred Stock.

For California corporations, one cannot reference to a contractual agreement outside the Articles of

Incorporation. Regardless of state law requirements, some lawyers prefer not to have a charter document rely, though

incorporation by reference, on a non-public document.

The Company may also request that the preferred holders vote together in favor of a merger or sale so

long as the preferred holders have received a designated return on their investment (i.e., any merger or sale pursuant to

which the preferred holders would receive less than a threshold amount (e.g., 3 times their preference amount) would

require consent of the preferred holders). Occasionally, and depending upon specific circumstances, Investors may

request non-standard protective covenants (e.g., no change in the business or entry into a new line of business; no

guarantees of any obligation, etc.) These requests are unusual, and if they are acceded to, non-objectively verifiable

covenants should be placed in the Investors’ Rights Agreement so that disputes can be addressed as breaches of contract

actions possibly resolved through arbitration.

ABA Comments to NVCA Term Sheet - Final Version.DOC

Term Sheet Template - National Venture Capital Association Page 9

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