Buzz

Term Sheet - E Round - Selected Clauses Specific to Cram Downs

Joseph W. Bartlett, Special Counsel, McCarter & English, LLP


Introduction

Herewith some selected term sheet clauses which can be folded into a term sheet if a cram down of prior preferred is in order.

Series E Pay To Play:

Holders of Existing Preferred that purchase their full pro-rata share of the $15 million in Series E Stock will be entitled to preserve the rights, preferences and privileges of their Existing Preferred by exchanging these shares of Series A Preferred, Series B Preferred, Series C Preferred, Series D Preferred and Series D-1 Preferred for shares of Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock, Series D-2 Preferred Stock and Series D-3 Preferred Stock, respectively (collectively, the "New Preferred"), on a 1:1 basis.

For example, a current stockholder that holds 100,000 shares of Series C Preferred Stock and 50,000 shares of Series D Preferred Stock that purchases its full pro-rata share of the $15 million being offered to current stockholders of the Company would exchange its Series C shares for 100,000 shares of Series C-1 Preferred and its Series D shares for 50,000 shares of Series D-2 Preferred. Except as set forth below, the terms of the New Preferred will be identical to the terms of the applicable Existing Preferred as those terms exist as of the date of this term sheet. The liquidation preference of the Series D-3 Preferred (exchanged for Series D-2 Preferred) shall be reduced from 2C to 1X, and the liquidation preference of the Series D-2 Preferred (exchanged for Series D Preferred) shall be reduced from 2X to 0.5X.

Concurrently with the first closing of the Financing, the Certificate of Incorporation, Fifth Amended and Restated Investor Rights Agreement, Fifth Amended and Restated Right of First Refusal and Co-Sale Agreement and Second Amended and Restated IPO Participation Agreement will be amended such that the Existing Preferred will lose its liquidation preference, anti-dilution protection, rights of first refusal to participate in future financings, rights of repurchase and co-sale, and any information, inspection, board representation or visitation, special voting and registration rights but retain other obligations to the Company and the Investors. Each series of the Existing Preferred will become convertible into Common Stock at on-third of the conversion rate applicable to that series of Preferred Stock immediately prior to the Financing (without taking into account the effect of any anti-dilution protection that would have resulted from the Financing on such non-participating Preferred Stock). For purposes of determining allocation amounts for this Series E Preferred Stock financing, "pro-rata share" shall be determined according to the number of shares of Existing Preferred held by each holder relative to the number of shares of Existing Preferred held by all holders (calculated to common stock basis).

Series D-1 Preferred Repricing:

In connection with the Financing, the Series D-1 holders that exchange their Series D-1 Preferred for Series D-3 Preferred shall receive full rachet antidilution protection solely in connection with this Financing (through the exchange of Series D-1 Preferred for Series D-3 Preferred and not through an adjustment to the Series D-1 Preferred conversion price)."

Antidilution Provisions

The Series E Preferred shall have in the event of future issuances of stock or other equity instruments (except issuances of equity pursuant to employee and director plans approved by a majority of the Board) at a price per share less than the purchase price paid by Investors for the Series E Preferred as antidilution protection as follows: 1) full ratchet anti-dilution protection shall be afforded to the Series E for any round (a) closing within two years of the close of this Series E Preferred, and (b) whose post money valuation is less than $15M on a fully diluted basis, including any warrants or other convertible instruments; or (2) otherwise, weighted average (narrow) antidilution protection shall be provided for the holders of the Series E Preferred.

Redemption

Series E Preferred shall be on the terms presently set forth in the Series C-1 documentation, provided, however, the earliest date upon which such redemption shall take place shall be [DATE] and that such shall be redeemed first by the Series E.

Warrants (Adjustment For The Founder By Way of Equity Rehabilitation)

Warrants to purchase common stock shall be issued to the founder, on a net exercisable basis, equal to 3.5% of the company on a fully diluted basis after the Series E Preferred financing. Such warrants shall be exercisable at then existing strike price for existing employees as follows: 1) 1.75% in the event of a sale with gross proceeds exceeding $75mm or upon an IPO with a pre-money valuation exceeding $75mm; and 2) an additional 1.75% in the event of a sale with gross proceeds exceeding $100mm or upon an IPO with a pre-money valuation exceeding $100mm. The warrants shall be subject to standard 4 year vesting with a 25% up front credit on issuance. Such warrants shall vest fully upon either an IPO at above-stated levels or acquisition at above-stated levels, and will remain exercisable for two years thereafter.

Conditions to Closing

The consummation of the transaction on the terms set forth above is subject to the satisfaction of customary closing conditions including, without limitation, the following:

  • The completion of legal, technical, financial and business due diligence to the satisfaction of Investors;
  • Negotiation, execution and delivery of definitive agreements containing terms and conditions mutually acceptable to Investors and the Company, including, but not limited to, representations and warranties customary for transactions of this type and the execution by the Company of a standard management rights letter;
  • No material adverse change in the business, condition, assets, operations, or prospects of the Company shall have occurred or be continuing;
  • Current anti-dilution protection in connection with this round is effected pre-money;
  • Current preferred rounds A, B, C and D convert to New Series E-1 E-2, E-3 and E-4, respectively (Collectively the "Series E").
  • The Company shall have received required consents and approvals to create and issue the Series E Preferred and to consummate the transaction including, without limitation, any approvals required of existing holders of preferred or common stock and waiver of anti-dilution protection;
  • All of the holders of the Company's outstanding equity securities shall have consented to the transaction;
  • A reverse stock split shall be affected in connection with this financing in a manner to reduce outstanding stock to no more than 10 million shares. Such shall not in any way change the percentages set forth in the post money cap table above.

Joseph W. Bartlett, Special Counsel, JBartlett@McCarter.com

Full Bio

McCarter & English, LLP

McCarter & English, LLP is a firm of over 400 lawyers with offices in Boston, Hartford, Stamford, New York City, Newark, Philadelphia and Wilmington. In continuous business for more than 160 years, we are among the oldest and largest law firms in America.

Clients come first at McCarter & English. Their goals and priorities are what count. Our job is to listen to our clients, stay on top of the frequent changes that can affect their goals, and implement the strategies that will lead to success. Applying this approach effectively and consistently requires dedication and constant attention to many details. This client-centered philosophy has served our clients well and is responsible for our success and stability.

We are honored to be the chosen law firm of clients ranging from Fortune 100 companies to mid-market and emerging growth companies to individual people. When our clients do great things, we are pleased to get the assist.

Forms_text