SUMMARY OF TERMS
FOR THE SERIES A PREFERRED FINANCING OF
_____________
__________, 20___
This Summary of Terms (this “Summary of Terms”) sets forth the principal terms
proposed by the Grand Angels® (“Grand Angels”) for the purchase of Series A Preferred Stock
of _________________, a __________ corporation to be formed by ________________ a
Michigan limited liability company (the “Company”).
GENERAL:
Type of Security:
Series A Convertible Preferred Stock, $0.001 par value per
share (the “Series A Preferred”), initially convertible on a
one-to-one (the “Conversions Ratio”) basis into shares of the
Company’s Common Stock (the “Common Stock”).
Investors:
Grand Angels, as well as other investors designated by
Grand Angels and reasonably acceptable to the Company
(collectively, the “Investors”). Grand Angels would itself
invest not less than [$0] and would lead the investment.
Amount Invested:
A minimum of [$0] and a maximum of [$0], based upon a
pre-money valuation of the Company of [$0] and the
capitalization described below.
Price Per Share:
[$0] per share (the “Original Purchase Price”).*
Option Pool:
As contemplated by the following capitalization table and
taking into account a conversion of _________________ to a
_________ C-Corporation, the Company would reserve an
option pool equal to [0] shares of the Common Stock prior to
the Closing so that it represents approximately [0%] of the
fully diluted equity of the Company.*
The Company’s capital structure before and after the
Closings is set forth on EXHIBIT A attached hereto.
Capitalization:
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Closing:
As soon as practicable following the Company’s acceptance
of this Summary of Terms and satisfaction of the conditions
described below under the caption “Conditions to Closing”
(the “Initial Closing”).
Milestones:
After the Initial Closing, the Company would agree to sell,
and Grand Angels would agree to purchase: (1) $0 in
additional shares of the Series A Preferred, on the
certification by the Company to Grand Angels (to Grand
Angels’ satisfaction) that the events specified in EXHIBIT B
attached to this Summary of Terms have occurred; (2) $0 in
additional shares of the Series A Preferred, on the
certification by the Company to Grand Angels (to Grand
Angels’ satisfaction) that the events specified in EXHIBIT C
attached to this Summary of Terms have occurred; (3) $0 in
additional shares of the Series A Preferred, on the
certification by the Company to Grand Angels (to Grand
Angels’ satisfaction) that the events specified in EXHIBIT D
attached to this Summary of Terms have occurred; and (4)
$0 in additional shares of the Series A Preferred, on the
certification by the Company to Grand Angels (to Grand
Angels’ satisfaction) that the events specified in EXHIBIT E
attached to this Summary of Terms have occurred.
TERMS OF SERIES A
PREFERRED:
Liquidation Preference:
Upon the occurrence of any (i) liquidation, dissolution or
winding up of the Company, (ii) a merger or consolidation
(other than one in which stockholders of the Company own a
majority by voting power of the outstanding shares of the
surviving or acquiring corporation), or (iii) a sale, lease,
transfer or other disposition of all or substantially all of the
assets of the Company (the events described in the foregoing
clauses (ii) and (iii) are each referred to herein as a “Deemed
Liquidation Event”), the holders of the Series A Preferred
would receive an amount per Series A Preferred share, in
preference to the holders of the Common Stock, equal to the
Original Purchase Price, plus accrued but unpaid dividends
on each share of the Series A Preferred. Thereafter, the
Series A Preferred would participate with the Common
Stock on an as-converted to Common Stock basis.
Dividends:
Dividends on the Series A Preferred would be cumulative
and accrue, in preference to any dividend on shares of the
Common Stock, at a rate of 0% per annum of the Original
Purchase Price, compounded quarterly. Dividends on the
Series A Preferred would be payable upon a Deemed
Liquidation Event or upon conversion or redemption. For
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any other dividends or distributions, participation with
Common Stock on an as-converted basis.
Optional Conversion:
The Series A Preferred would initially convert on a one for
one basis into shares of the Common Stock at any time at the
option of the holder, subject to adjustments for stock
dividends, splits, combinations and similar events and as
described below under
the caption “Anti-dilution
Provisions.”
Mandatory Conversion:
Each share of the Series A Preferred would automatically be
converted into shares of the Common Stock at the then
applicable conversion rate (i) in the event of the closing of a
firmly underwritten public offering of shares of the Common
Stock with a price of not less than three times the Original
Purchase Price (subject to adjustments for stock dividends,
splits, combinations and similar events) and gross proceeds
to the Company of not less than $____ million (a “QPO”),
or (ii) upon the written consent of the holders of a majority
of the Series A Preferred.
Anti-dilution Provisions:
Unless otherwise waived by the holders of at least two-thirds
of the Series A Preferred, in the event that the Company
issues additional securities at a purchase price less than the
current Series A Preferred conversion price, such conversion
price would be adjusted on a full ratchet basis, provided that
no such adjustment would occur with respect to (i) securities
issuable upon conversion of any of the Series A Preferred, or
as a dividend or distribution on the Series A Preferred;
(ii) securities issued upon the conversion of any debenture,
warrant, option, or other convertible security outstanding as
of the date of the Initial Closing; (iii) shares of the Common
Stock issuable upon a stock split, stock dividend, or any
subdivision of shares of Common Stock; (iv) shares of the
Common Stock (or options to purchase such shares of
Common Stock) issued or issuable to employees or directors
of, or consultants to, the Company pursuant to any plan
approved by the Board, including both of the Series A
Directors (as defined); (v) shares of the Common Stock
issued or issuable to banks, equipment lessors pursuant to a
debt financing, equipment leasing or real property leasing
transaction approved by the Board, including the Series A
Directors; and (vi) shares of the Common Stock issued or
issuable for consideration other than cash pursuant to a
technology license, business combination, strategic
partnership or joint venture transaction approved by the
Board, including both the Series A Directors (as defined
herein).
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Redemption Rights:
The Series A Preferred would be redeemable from funds
legally available for distribution at the option of holders of at
least 50% of the Series A Preferred commencing any time
after the fourth anniversary of the Initial Closing at a price
equal to the Original Purchase Price plus all accrued but
unpaid dividends. Redemption would occur in three equal
annual installments. Upon a redemption request from the
holders of the required percentage of the Series A Preferred,
all of the Series A Preferred shares would be redeemed
(except for any holders of shares of the Series A Preferred
who affirmatively opt-out of such redemption).
Registration Rights:
Registrable Securities:
All shares of the Common Stock issuable upon conversion of
the Series A Preferred and any other shares of the Common
Stock held by the Investors would be “Registrable
Securities.”
Demand Registration:
Upon earlier of (i) three years after the Initial Closing; or (ii)
six months following an initial public offering (“IPO”),
persons holding not less than an aggregate of 50% of
Registrable Securities may demand not more than two
registrations by the Company of their shares, but only if the
aggregate offering price is at least $5 million. A registration
would count for this purpose only if (A) not less than 75% of
all Registrable Securities requested to be registered are
included in the registration, or (B) it is closed, or withdrawn
at the request of the demanding Investors (other than as a
result of a material adverse change to the Company).
Holders of Registrable Securities would have priority in all
registrations over all other shares except for in registrations
initiated by the Company in which case the shares being sold
by the Company for its own account shall have priority.
Registration on Form S-3:
The holders of not less than 20% of the Registrable
Securities would have the right to require the Company to
register on Form S-3, if available for use by the Company,
Registrable Securities for an aggregate offering price of at
least $1 million. There would be no limit on the aggregate
number of such Form S-3 registrations, provided that there
are no more than two per year.
Piggyback Registration:
The holders of Registrable Securities would be entitled to
“piggyback” registration rights on all registration statements
of the Company, subject to the right, however, of the
Company and its underwriters to reduce the number of
shares proposed to be registered to a minimum of 30% on a
pro rata basis and to complete reduction on an IPO at the
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underwriter’s discretion. In all events, the shares to be
registered by holders of Registrable Securities would be
reduced only after all other stockholders’ shares are reduced.
Expenses:
The registration expenses (exclusive of stock transfer taxes,
underwriting discounts and commissions) would be borne by
the Company. The Company would also pay the reasonable
fees and expenses, not to exceed $0, of one special counsel
to represent all the participating holders of Registrable
Securities.
Lock-up:
The Investors would agree in connection with the IPO, if
requested by the managing underwriter, not to sell or transfer
any shares of Common Stock of the Company for a period of
up to 180 days following the IPO provided all directors and
officers of the Company agree to the same restriction.
Termination of Registration
Rights:
Upon the earlier of: (i) two (2) years after IPO, (ii) a Deemed
Liquidation Event, or (iii) when all Registrable Securities of
an Investor are eligible to be sold without restriction under
Rule 144(k) within any 90-day period.
The Company may grant no future registration rights without
consent of the holders of a majority of the Registrable
Securities unless subordinate to the registration rights of
such holders in all respects.
GOVERNANCE:
Voting Rights:
The Series A Preferred would vote together with the
Common Stock on an as-converted basis, and not as a
separate class, except (i) with respect to election of directors
as described below, (ii) as provided under the caption
“Protective Provisions” below, or (iii) as required by law.
The Company’s Certificate of Incorporation would provide
that the number of authorized shares of the Common Stock
may be increased or decreased with the approval of a
majority of the Series A Preferred and the Common Stock,
voting together as a single class, and without a separate class
vote by the Common Stock.
Protective Provisions:
The Company would not, without the written consent of the
holders of at least two thirds of the Series A Preferred, either
directly or by amendment, merger, consolidation, or
otherwise (i) liquidate, dissolve or wind-up the affairs of the
Company, or effect any Deemed Liquidation Event;
(ii) amend, alter, or repeal any provision of the Articles of
Incorporation or Bylaws; (iii) create or authorize the creation
of or issue any other security convertible into or exercisable
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for any equity security, having rights, preferences or
privileges senior to, or on parity with, the Series A Preferred,
or increase the authorized number of shares of the Series A
Preferred; (iv) purchase or redeem or pay any dividend on
any capital stock prior to the Series A Preferred, other than
stock repurchased from former employees or consultants in
connection with the cessation of their employment/services,
at the lower of fair market value or cost or other than as
approved by the Board, including both of the Series A
Directors (as defined herein); (v) license or transfer all or any
portion of the intellectual property rights of the Company; or
(vi) sell any material assets of the Company other than
inventory in the ordinary course.
The Company will not, without the approval of the Board,
including the approval of the Series A Directors: (i) adopt an
annual operating budget (the “Budget”); (ii) create or
authorize the creation of any debt in excess of $20,000 or
$50,000 in the aggregate other than equipment leases or bank
lines of credit incurred in the ordinary course and with the
approval of the Board, including both of the Series A
Directors; (iii) make any capital expenditure in excess of
$25,000 individually or $50,000 in the aggregate that are not
contemplated by the then-approved Budget; (iv) increase or
decrease the size of the Board; (v) hire or terminate any
senior executive; (vi) enter into or amend any insider
transactions; (vii) make any loan or advance to any person,
including, any employee or director, except advances and
similar expenditures in the ordinary course of business or
under the terms of a employee stock or option plan approved
by the Board; (viii) guarantee any indebtedness except for
trade accounts of the Company; or (ix) engage an investment
banker to raise funds for additional rounds of financing for
the Company.
Board of Directors/Committees:
The Board will initially, after the Initial Closing, consist of
not more than five (5) persons. The holders of the Series A
Preferred, voting as a separate class, would be entitled to
elect two (2) members of the Board (the “Series A
Directors”), who would initially be _____________ and
______________. The holders of the Common Stock,
voting as a separate class, would be entitled to elect one (1)
member of the Board, who would initially be ____________.
Holders of the Series A Preferred and Key Holders (as
hereinafter defined) would additionally agree to elect the two
(2) remaining members of the Board who would consist of
(i) the person then serving as Chief Executive Officer of the
Company, which individual would initially be
_______________, and (ii) within six (6) months following
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the Initial Closing one (1) representative designated by a
majority in interest of the Common Stock and the Series A
Preferred, voting together as a single class, who would be
independent with relevant industry experience. The Key
Holders would enter into a voting agreement with the
investors to ensure such Board composition. Each Board
committee would include a Series A Director. The Company
would bind D&O insurance with a carrier and in an amount
satisfactory to the Investors.
ADDITIONAL RIGHTS:
Management and Information
Rights:
Each holder of the Series A Preferred would receive (a)
during 200__, monthly “dashboard” summary financial
results, and beginning in 200__, monthly financials, (b)
quarterly unaudited financials, (c) annually reviewed
statements and a budget, and (d) a quarterly brief descriptive
report from the CEO. The President of the Grand Angels
would receive all of the above and would have the right to
observe board meetings, or to send a designee to any board
meetings. The CEO would also agree to provide a brief
descriptive quarterly report for distribution to the members
of the Grand Angels and will attend the Grand Angels
receptions, Conversations, and any other events hosted by
the Grand Angels.
.
Right to Participate Pro Rata in
Future Rounds:
All Major Investors would have a pro rata right, based on
their percentage equity ownership in the Company (assuming
the conversion of all outstanding shares of the Series A
Preferred into shares of the Common Stock and the exercise
of all warrants and options outstanding under the Company’s
stock plans), to participate in subsequent issuances of equity
securities of the Company (excluding those issuances that do
not trigger operation of the adjustment described above
under “Anti-dilution Provisions” and issuances in connection
with acquisitions by the Company). In addition, should any
Major Investor choose not to purchase its full pro rata share,
the remaining Major Investors would have the right to
purchase the remaining pro rata shares.
Rights of Refusal/ Co-Sale:
The Company first and the Investors second would have a
right of first refusal with respect to any shares of capital
stock of the Company proposed to be sold by any current
stockholder and employees holding greater than 1% of the
Common Stock (assuming exercise of all options and
conversion of the Series A Preferred) (the “Key Holders”),
with a right of oversubscription for Investors of shares
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unsubscribed by the other Investors. Before any Key Holder
could sell Common Stock, such Key Holder would give the
holders of the Series A Preferred an opportunity to
participate in such sale on a basis proportionate to the
amount of securities held by the seller and those held by the
participating Investors.
Drag Along Rights:
The Key Holders would agree to vote their shares in favor of
a Deemed Liquidation Event or a transaction in which 50%
or more of the voting power of the Company is transferred,
approved by the Board and the holders of a majority of the
outstanding shares of the Series A Preferred, on an asconverted to Common Stock basis.
Employment Agreement:
The Company would enter into an employment agreement
with [insert name] in the form reasonably satisfactory to
Grand Angels.
OTHER:
Proprietary Information,
Inventions and Non-compete
Agreements:
Each officer, employee and consultant of the Company would
enter into acceptable proprietary information, inventions and
non-compete agreements.
Vesting of Employee Stock
Options:
Unless otherwise approved by the Board, all employee
options would vest as follows: 25% after one year, with
remaining vesting monthly over next 36 months.
Documentation:
The transaction would be documented by counsel to Grand
Angels with the documents containing the provisions
described above and consisting of the following:





Representations and
Warranties:
Series A Preferred Stock Purchase Agreement;
Investors Rights Agreement;
Right of First Refusal and Co-Sale Agreement;
Voting Agreement; and
Amended and Restated Certificate of Incorporation
The Stock Purchase Agreement would contain customary
representations including, without limitation, organization
and qualification, capitalization, intellectual property,
authorization, execution and delivery, validity and
enforceability of agreements, issuance of the Series A
Preferred Stock, no litigation, compliance with laws, no
governmental consent, taxes, no conflict with agreements
and charter provisions, taxes, ERISA, employment and labor
regulations, no undisclosed liabilities, no affiliate
transactions, no defaults and no material adverse change.
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Covenants:
The Investors Rights Agreement would contain customary
covenants, including, without limitation, compliance with
laws, maintenance of property, procurement of insurance,
payment of taxes and rights to inspect properties.
Conditions to Closing:
Standard conditions to the Closing, which would include,
among others: (i) satisfactory completion of intellectual
property, financial, regulatory and legal due diligence of the
Company by the Investors; (ii) qualification of the shares of
the Series A Preferred under applicable Blue Sky laws; (iii)
the filing of a Certificate of Incorporation establishing the
rights and preferences of the Series A Preferred; (iv) the
development and implementation of an operating plan that is
satisfactory to the Investors; (v) satisfactory review by the
Investors of the financial statements of the Company for the
year ended ____; (vi) an opinion of counsel to the Company;
(vii) reincorporation of __________ into a _______ CCorporation; (viii) conversion of all issued convertible
promissory notes and debt to equity arrangements and (ix)
the purchase and maintenance of a $1 million life insurance
policy on ________ that is satisfactory to the Investors.
Non-Binding Terms:
Except for the provisions set forth in the captions below
entitled “Exclusivity”, “Confidentiality” and “Legal Fees
and Expenses”, this Summary of Terms is not an offer
subject to acceptance or a legally binding commitment by
Grand Angels, and no obligation will be created by
execution of this Summary of Terms unless and until
definitive documents have been executed and delivered.
Exclusivity:
The Company agrees to work in good faith expeditiously
towards a closing. The Company agrees that it will not, at
any time prior to ______ days after its acceptance of this
Summary of Terms (the “Exclusivity Date”) take any action
to solicit, initiate, encourage or assist the submission of any
proposal, negotiation or offer from any person or entity other
than the Investors relating to the sale or issuance, of any of
the capital stock of the Company or the acquisition, sale,
lease, license or other disposition of the Company or any
material part of the stock or assets of the Company and shall
notify Grand Angels promptly of any inquiries by any third
parties in regards to the foregoing. In the event that the
Company breaches this exclusivity obligation and, prior to
_______, 200__, closes any of the above-referenced
transactions without providing Grand Angels the opportunity
to invest on the same terms as the other parties to such
transaction, then the Company shall pay to Grand Angels
$____ upon the closing of any such transaction as liquidated
damages.
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Furthermore, if this deal does not close and any investor who
has been contacted about this deal on or before the
Exclusivity Date invests within six (6) months from the
Company’s acceptance of this Summary of Terms, the
Company shall reimburse the Grand Angels for the value of
expenses and effort incurred. The parties agree that $20,000
is a fair and reasonable amount.
Confidentiality:
The Company shall not disclose the terms of this Summary
of Terms to any person or entity except for the Company’s
accountants and attorneys and other potential Investors
acceptable to Grand Angels, without the written consent of
Grand Angels.
Legal Fees and Expenses:
Grand Angels’ counsel will draft the definitive documents.
The Company will pay the pay all legal and administrative
costs of the financing incurred by the Investors at the
Closing, including reasonable fees, a Grand Angels
administrative fee of $0, and expenses of Investors’ counsel
(not to exceed $0). If the transaction contemplated by this
Summary of Terms is not completed, the Company shall
reimburse the Investors’ costs associated with due diligence
on the Company and legal expenses in an amount not to
exceed $0.
Expiration:
This Summary of Terms expires at 5:00 p.m. on ______,
20__ if not accepted by the Company by that date.
SIGNATURES ON THE FOLLOWING PAGE
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The undersigned hereby agree to the foregoing terms. This instrument may be executed in
one or more counterparts and by facsimile, each of which will constitute an original, and all of
which will constitute one and the same instrument.
Sincerely,
GRAND ANGELS
By:
Name:
Title:
,
ACCEPTED AND AGREED TO AS OF THE DATE SET FORTH BELOW:
THE COMPANY:
________________(on behalf of ______________, Inc.,
a
corporation to be formed by _______________)
By:
Name:
Title:
(INSERT NAME)__________ SUMMARY OF TERMS SIGNATURE PAGE
EXHIBIT A
CAPITALIZATION TABLE
INITIAL CLOSING
Pre-Closing
# of Shares
%
Post-Closing
# of Shares
%
%
Post-Closing
# of Shares
%
Common Stock (Founder)
Common Stock (Directors)
Common Stock for the Stock Plan (reserved)
Series A Preferred (Bridge Notes)
Series A Preferred (Warrants)
Series A Preferred (Initial Closing)
Total
SECOND CLOSING
Pre-Closing
# of Shares
Common Stock (Founder)
Common Stock (Directors)
Common Stock for the Stock Plan
(reserved)
Series A Preferred (Bridge Notes)
Series A Preferred (Warrants)
Series A Preferred (Initial Closing)
Series A Preferred (Second Closing)
Total
EXHIBIT A-1
EXHIBIT B
FIRST MILESTONES
EXHIBIT B-1
EXHIBIT C
SECOND MILESTONES
EXHIBIT C-1
EXHIBIT D
THIRD MILESTONES
EXHIBIT D-1
EXHIBIT E
FOURTH MILESTONES
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