Appendix C. Term sheet for proposed investment

Anywhere, Date

This term sheet is entered into by Start-Up Company XYZ (hereinafter the “Company”), of Anywhere, U.S.A., and Investor ABC (hereinafter “Investor”), of (Insert Address).

The Company

• Start-Up Company XYZ

Founders

• AN Other
• SO Mebody

Investor

• Investor ABC

Investment

• $1,000,000

Form of Investment

• Equity: Ordinary Shares (“the New Shares”)

Structure of Transaction

• The Founders and the Investor will hold shares in the Company. References in this term sheet to the Company shall also apply to Holding as and when appropriate, for example, any restrictions on the transfer of shares or operating matters shall apply to all companies in the group. The final structure of the transaction will be determined following advice from tax and legal advisors.

Use of Proceeds

• The Company will use the proceeds from the new financing for financing business operations according to the Business Plan.

Disbursement Calendar

• By Date—$1,000,000
• In the event that the Company requires further external funding and the Company and the Investor agree on an appropriate valuation, there is the potential for the Investor to invest further in the Company.

Pre-Money Valuation

• The Pre-Money Valuation is $10,000,000 based on a fully diluted number of shares and determines the number of New Shares.

Original Purchase Price per share

• The Original Purchase Price per New Share will be based on the Pre-Money Valuation divided by all outstanding shares and shares equivalents, including options granted and options available for grant both under any existing share option plan and under the heading “Share Option Plan” below.

Dividends

• No dividends will be payable in the first three years of the Company’s life.

Valuation Adjustment & Anti-dilution Provisions

• Should further funding rounds or an IPO take place at a lower pre-money valuation than this round’s Post-Money Valuation, the Investor(s)’s effective conversion price will be adjusted in such a way that the capital contribution object of this investment round effectively takes place at the lowest pre-money valuation.

Rate of Conversion

• The number of Ordinary Shares into which each New Share may be converted will be determined by dividing the Original Purchase Price by the Conversion Price. The initial “Conversion Price” equals the Original Purchase Price. The Conversion Price will be subject to adjustment as set forth under the heading “Anti-dilution Provisions.”

Voting Rights

• Subject to the applicable law, the Investor shall vote together with the other shares of the Company (on a 1:1 basis) on the basis of the number of Shares.

Anti-Dilution/Pre-emption Rights

• In case of increase of the share capital of the Company (except for shares issued to employees/consultants upon exercise of stock options), the Investor shall be entitled to participate up to and maintain the percentage of shares it currently holds in the Company before the contemplated increase. In the circumstance of not wishing to increase their share participation, the Investor shall be entitled (for a period of 2 years from the date of this agreement) to a refund of their original investment plus a nominal 6% interest payment.

Leavers

• Should any of the Founders leave the Company as “good leavers” (to be defined) over the coming five years, their shares would be subject to a buyback by the Company at the Company’s discretion and then the remainder offered to the other shareholders pro rata to their existing shareholdings. Such buyback would take place at fair market value.

Should any of the Founders leave the Company as “bad leavers,” a certain percentage of their shares would be subject to a buyback at nominal value by the Company at the Company’s discretion and then the remainder offered to the other shareholders pro rata to their existing shareholdings as follows:

•departs on or before month 12	80%
•departs after month 12 and up to month 24	60%
•departs after month 24 and up to month 36	40%
•departs after month 36 and up to month 48	20%
•departs after month 48	0%

The balance of the shares shall be dealt with as if the Founder was a “good leaver.”

Pre-emptive Rights (Transfer)

• Right of first refusal applies among shareholders if one of them intends to sell his shareholding or part thereof.

Lock up & Co-sale

• Management shall not be allowed to sell, pledge, or otherwise dispose of their shares without the prior written consent of the Investor. After 3 years, the Founders may transfer in total up to a fifth of their respective shareholding, subject to a right of first refusal for the Investor.
• The restriction will not apply to transfers to family members, family trusts, the estate of the holder, or affiliates of institutional investors, provided that such transferees agree to such transfer and co-sale restrictions.
• The parties whose shares are subject to the foregoing first refusal and co-sale rights will agree not to sell their shares to competitors or entities who invest in competitors.

Tag Along

• Subject to the Lock up provisions as here above defined, should one or several of the existing shareholder(s) contemplate(s) to sell any share capital and/or voting right to a third party, such shareholder(s) undertake(s) not to make such transfer without allowing the other shareholders to benefit on a pro rata basis of such contemplated transfer under the same conditions than the ones provided by the third party.

Permitted Transfers

• The Investor(s) shall be allowed to transfer their shares to affiliates without triggering tag along rights, pre-emptive rights, veto rights, or other restrictions.

Share Option Plan and Phantom Share Plan

• The Investor and the Company will determine a mutually agreeable pool of options for grant under a new Share Option Plan and/or the terms of a new Phantom Share Plan, which will be approved by the board. There will be no increase in the SOP and/or PSP options or the approval of any additional option plans without the consent of the Investor.

Board of Directors

• Initially, the board of directors shall consist of five directors. The Investor shall have a right to the percentage of board seats which reflects the percentage of the share capital of the company held by the Investor. Initially the Investor will appoint one director. It will also be allowed one observer at board meetings. The Investor’s representatives shall be reimbursed for costs and expenses in attending board meetings.

The other initial directors shall be appointed as follows:

• 3 members nominated by Founders;
• 1 industry expert nominated by the Investor
• 1 or more Non-Executive Directors with industry experience nominated by founders

The Board shall meet physically at least quarterly.

The Investor has the right to nominate the Secretary of the board.

Board Committees

• The Board will establish an executive committee comprised of two executive directors and the director appointed by the Investor, which shall meet at least once a month to review the Company’s operations and performance.

Restrictive Provisions

• For so long as the Company is not listed, the following decisions shall require the prior counselling with the Investor:
  1. Altering or changing the rights, preferences, or privileges of the New Shares;
  2. Creating or issuing any class or series of shares or other securities having rights or preference equal or superior to the New Shares;
  3. Carrying-out a reclassification or recapitalization of the outstanding capital shares of the Company;
  4. Increasing or decreasing the number of authorised shares of New Shares;
  5. Declaring or paying any dividend or other distribution of cash, shares, or other assets, or the making of redemptions of ordinary shares or the Existing Ordinary Shares;
  6. Amending, altering, or waiving any provision of the Company’s articles of association that adversely affects the holders of the New Shares;
  7. Carrying out any dissolution, liquidation, or other winding up of the Company or the cessation of all or a substantial part of the business of the Company;
  8. Determining the substantive terms and conditions and consummation of an IPO;
  9. Carrying out a substantial asset sale, transfer, or disposition not in the Company’s ordinary course of business;
  10. Approval of the annual budget including forecasted burn rate and strategic plan;
  11. Changing the size of the board of directors;
  12. Become a party to any merger or consolidation with any other corporation, company, or entity;

If the Company has subsidiaries (whether now or in the future), then these restrictions shall apply equally to those subsidiary companies.

Access and Information Rights

• The Investor will be entitled to receive from the Company:
  • Annual financial statements (including a balance sheet, statement of income, and statement of cash flow), audited by an accounting firm, within 60 days after the end of each fiscal year;
  • Quarterly report containing: revenue, gross profit margin, cash flow, sales pipe status, and product development roadmap update within 30 days from the end of each quarter;
  • Quarterly review of the burn rate;
  • The two previous items will be submitted to the Board each quarter so that the Board can express its position regarding them;
  • Annual strategic plan and budget, at least 30 days prior to the first day of the year covered by such plan; and

• The Investor(s) and their counsel shall have, at reasonable times and upon reasonable notice, full access to all books and records of the Company, shall be entitled to review them at their discretion, and shall be entitled to inspect the properties of the Company and consult with management of the Company, all subject to standard confidentiality undertakings.

Representations and Warranties

• Customary representations and warranties for transactions of this type will be provided to the Investor by the Founders with several and joint liability for each warrantor in case a representation or warranty shows to be incorrect.

Intellectual Property Rights and Inventions

• Each Founder and each employee working in the Company shall be obliged to enter into an agreement with the Company to inform it about, and assign to it, all inventions which may be subject to patent or other intellectual property protection.

Covenant Not to Compete

• The Founders undertake to neither directly nor indirectly enter into competition, or hold ownership stakes in competing companies, with the Company or any of its subsidiaries as long as they work for the Company (whether as employees, managers or directors) and for a period of 12 months after any such position with the Company ceases and shall for the same period not solicit employees or active customers of the Company and shall not disclose any confidential information of the Company. Competition means any kind of business conducted by the Company at the time of termination of all of the relevant Founder’s positions with the Company.

Conditions Precedent to Signing

• Customary closing conditions for transactions of this type including but not limited to:
  • Completion of satisfying technical, financial (accounting and business plan), legal and human resources due diligence
  • Satisfactory review of legal documentation
  • Absence of economic and/or regulatory facts or circumstances that may have a direct adverse impact on the value of the Company
  • Liabilities according to the current bookkeeping
  • Final approval of XYZ’s investment committee
  • Accuracy of representations and warranties
  • Satisfaction with market conditions
  • Filing of amended charter documents establishing the rights and preferences of the New Shares

Signing Planning

Signing of this Term Sheet:	Date
Closing:	Date

Drafting

• The transaction documents except the investment agreement will be drafted by the Investor’s legal advisers.

Exclusivity

• The Company shall, and shall ensure that, for 1 month following the signature of this Term Sheet, its directors, employees, and advisers work exclusively with the Investor in the negotiation and issue of the New Shares and neither solicit, reply to offers, nor accept any new financing offers from other parties without the written consent of the Investor.

Furnishing Information

• The Company shall during the exclusivity period referred to above provide the Investor with all available information on the Company which the Investor requests.

Governing Law

• This Term Sheet shall be exclusively governed by U.S. Law. Place of jurisdiction shall be Anywhere, U.S.A.

Acceptance/Rejection

• This Term Sheet shall become effective upon signing by all parties. If this Term Sheet is not signed within one week after it has been signed by the first party, this Term Sheet shall be null and void as against all parties.

Confidentiality and Press Releases

• The contents of this Term Sheet, as well as the investment discussions presently underway between the Investor and the Company will be considered confidential by all parties. No press release will be issued at any point in relation to an eventual investment (or other outcome) without the prior approval of the Investor and the Company.

Legally Binding

• With the exception of this section and the sections on “Exclusivity,” “Governing law,” and “Acceptance/Rejection,” and “Confidentiality and Press Releases,” this Term Sheet is legally non-binding and does not create any obligation for any party.

The foregoing term sheet is intended as an outline and does not purport to include all of the terms and conditions which will be contained in the definitive investment agreement. This summary is provided for discussion purposes only and is not intended as an offer or commitment to purchase, or an offer or commitment to sell, the securities described herein. Except as provided under “Legally Binding,” which is intended to bind the parties, the terms are not intended to be binding on any of the parties unless and until definitive documents for the transaction are executed.

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Start-Up Company XYZ

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Investor