Issuer:

[Name of Corporation], a [jurisdiction of incorporation] corporation (the “Company”)

Securities to be Issued:

[Number of Shares to be issued] shares of Series B Convertible Preferred Stock (the “Preferred Stock”)

Aggregate Proceeds:

$[aggregate proceeds of offering, in dollars]

Price:

$[offering price per share] per share

Pre-money valuation:

$[pre-money valuation of corporation]

Expected Closing Date:

[closing date of offering]

Investors:

[name of each investor and amount of each investor’s commitment]

Option Pool:

A stock option pool of [percentage of common shares allocated for corporation’s employees] of the outstanding shares of Common Stock on a post-financing basis, on a fully diluted basis, shall be reserved for distribution to employees, directors, and consultants. An option pool of shares is factored into the pre-money valuation set forth above.

Dividend Provisions:

Dividends shall be payable pro rata on the Series B Convertible Preferred Stock based on the number of shares of Common Stock in to which they are convertible, but only if and when declared by the Company’s Board of Directors. No dividends shall be paid on any Common Stock unless comparable dividends are paid on all of the Series B Convertible Preferred Stock and all shares of the Series A Preferred Stock (the “Series A Preferred Stock”) based on the number of shares of Common Stock in to which they are convertible.

Liquidation Preference:

In the event of any liquidation or winding up of the Company, the holders of the Series B Convertible Preferred Stock, pari passu with the holders of the “Series A Preferred Stock, shall be entitled to receive in preference to the holders of Common Stock the amount at which the Series B Convertible Preferred Stock and the Series A Preferred Stock, as the case may be, was purchased from the Company plus any accrued but unpaid dividends. The remaining balance of the proceeds from the liquidation will then be allocated to the Series B Convertible Preferred Stock, the Series A Preferred Stock, and the Common Stock holders on an as-converted basis. At the option of the holders of the Series B Convertible Preferred Stock and the Series A Preferred Stock, a merger, sale of all or substantially all of the assets of the Company, reorganization or other transaction in which control of the Company is transferred may be treated as a liquidation, dissolution or winding up for purpose of the liquidation preference. This liquidation preference will expire if the Company is liquidated at a value of greater than $48 million. In the event of liquidation above $48 million, proceeds from the liquidation will then be allocated to Series B Convertible Preferred Stock, Series A Preferred Stock and Common Stock holders on an as-converted basis.

Redemption:

Commencing five (5) years after the original date of issuance of the Series A Preferred Stock, the Company shall redeem the Series B Convertible Preferred Stock in three equal annual amounts, one-third of the invested amount per year. Accrued, but unpaid dividends are to be paid with the final payment. If the Company has insufficient funds to fully pay the redemption, then subsequent funds shall be applied to the redemption. This redemption shall be at the option of the Investors.

Conversion:

The holders of the Series B Convertible Preferred Stock shall have the right to convert the Series B Convertible Preferred Stock at the option of the holder, at any time, into shares of Common Stock of the Company at the conversion rate of one-to-one or the conversion rate then in place. Any accrued but unpaid dividends will also have the right to be converted at the option of the Company.

Automatic Conversion:

The Series B Convertible Preferred Stock shall be automatically converted into Common Stock, at the then applicable conversion rate, in the event of an underwritten public offering of shares of the Company’s Common Stock at a per share public offering price (prior to underwriting commissions and expenses of not less than $5.00 per share (adjusted for stock splits, dividends and combinations) and for a total offering of not less than $10 million.

Anti-Dilution Provisions:

The conversion price of the Series B Convertible Preferred Stock shall be subject to appropriate adjustment in the event of a stock split, stock dividend or similar event; and shall be adjusted on a weighted average basis to prevent dilution, in the event that the Company sells additional shares of Common Stock, preferred stock or convertible debt convertible into Common Stock or preferred stock (other than shares which are presently authorized and, which may be issued from time to time to employees, consultants or directors) at a purchase price less than the applicable conversion price of the Series B Convertible Preferred Stock.

Voting Rights:

Except as set forth herein, each holder of Series B Convertible Preferred Stock shall have the right to that number of votes equal to the number of shares of Common Stock issuable upon conversion of the Series B Convertible Preferred Stock held by such holder and shall vote with the Common Stock.

Protective Provision:

So long as at least 50% of the issued Series B Preferred Stock is outstanding, except as otherwise required by law and as described below, the holders of a majority of the outstanding shares of Common Stock, Series A Preferred Stock, and Series B Convertible Preferred Stock (voting together as a single class on an as-converted to Common Stock basis) shall be required to approve matters which require stockholder vote; provided, however, that, on the following matters the holders of Series B Convertible Preferred Stock, voting together as a single class, will have a separate class vote requiring majority approval of the total number of votes:

(i)the creation of any senior or pari passu security;

(ii)payment of dividends on Common Stock;

(iii)repurchase of stock;

(iv)an increase or decrease in the number of authorized shares of Series B Convertible Preferred Stock;

(v)any adverse change to the rights, preferences and privileges of the Series B Convertible Preferred Stock;

(vi)any other action materially affecting only the Series B Convertible Preferred Stock;

(vii)any redemption, repurchase, or other acquisition for value of any of the Company’s equity securities, other than from present or former consultants, directors, or employees pursuant to the terms of a stock option plan of the Company; and

(viii)any change in the Company’s line of business.

RIGHT OF FIRST REFUSAL:

Right of First Refusal:

In the event that any of the existing shareholders, managers, employees or other shareholders propose to sell to a third party or parties a number of shares of their stock, then the stock to be sold will be offered first to the Company to purchase the shares on the same terms as the third party offer. If the Company does not purchase any, or all, of the available shares, then the Series A Preferred Stock and Series B Convertible Preferred Stock shareholders shall have the right to purchase the remaining portion at the same terms. If the Series A Preferred Stock and Series B Convertible Preferred Stock shareholders and/or the Company do not purchase all of the shares, then they may be offered to the third party.

Pre-Emptive Rights:

Each purchaser of Series B Convertible Preferred Stock in this financing will have a right of first refusal to purchase a pro rata amount of any Common Stock or securities convertible into Common Stock offered for sale by the Company, on the same terms and conditions and at the same price as offered to third parties, in order to maintain their pre-existing percentage interest in the stock of the Company. This right shall extend for a period for 15 days after the notification by the Company to the Series “B Convertible Preferred Stock shareholders. Such right shall expire upon and shall not apply to an initial public offering of Common Stock, and shall not apply to: (i) shares issued under stock option plans approved by the Board of Directors; or (ii) shares exchanged for assets or securities of another corporation in any acquisition of assets, merger, or other reorganization.

Co-Sale Rights:

Each purchaser of Series B Convertible Preferred Stock in this financing will have a co-sale right to sell shares in the event that any of the existing shareholders propose to sell to a third party or parties a number of shares of their Common Stock or securities convertible into Common Stock. This co-sale right also extends to the Company and existing shareholders if Series B Convertible Preferred Stock shareholders sell any of their stock. This clause does not apply to any holders of less than 10,000 shares of stock or any manager, board member, or employee selling less than 10,000 shares of stock in any 12 month period. This number of shares will be adjusted for any stock splits, combinations, etc. authorized by the Company.

REGISTRATION RIGHTS:

Demand Registration:

Any time after the earliest of two (2) years after the Closing or three (3) months after initial registration (but not within six months of the effective date of a registration), Investors holding at least 40% of the Series B Convertible Preferred Stock or at least 40% of the Series A Preferred Stock (or Common Stock issued upon conversion of the Series A Preferred Stock or the Series B Convertible Preferred Stock, as the case may be) may request that the Company file a Registration Statement for their shares for a registered offering of the Company. The Company will use its best efforts to cause such shares to be registered. The Company shall not be obligated to effect more than two registrations under these demand right provisions.

S-3 Registration:

After two years from the signing of this Agreement and when Form S-3 (or a successor form) is available, holders of at least one-third of the total amount of Series B Convertible Preferred Stock or at least one-third of the total amount of Series A Preferred Stock issued (or Common Stock issued upon conversion of Series A Preferred Stock or Series B Convertible Preferred Stock, as the case may be, or a combination thereof) wishing to sell a minimum of $500,000 worth of Common Stock may demand registration of such shares on Form S-3 (or a successor form). Such registration shall be kept effective by the Company until the earlier to occur of such time as (i) all shares registered thereunder have been sold, (ii) the holders whose shares are registered thereon agree to terminate the registration, (iii) the registration rights of all such holders terminate, or (iv) ninety days. The Company shall not be obligated to effect more than three registrations under this provision and shall not be required to effect such a registration within the ten months following the effective date of any other registration statement (other than an S-8 or S-3 for employees’ stock) or more than once in any fiscal year.

Piggyback Registration:

The Investors shall be entitled to “piggyback” registration rights on all registrations by the Company of its Common Stock, subject to the absolute right, however, of the underwriters to reduce the number of shares proposed to be registered on behalf of all selling shareholders (on a pro rata basis) in view of market conditions.

Expenses:

The registration expenses (exclusive of underwriting discounts and commissions or fees of counsel to the selling shareholders) of the demand, S-3 and piggyback registrations shall be borne by the Company.

Transfer of Rights:

The registration rights may be transferred to a transferee (i) who acquires at least 50% of any Investor’s shares and (ii) who is not, in the Company’s reasonable opinion, a competitor of the Company or a party who is demonstrably hostile toward the Company, provided the Company is given written notice of such assignment within 30 days after the transfer of the shares. Transfer of registration rights to a partner or member of an Investor shall be without restriction.

Termination of Rights:

All registration rights shall terminate as to a holder who holds 1% or less the outstanding shares of the Company’s Common Stock (on an as-converted basis) when all of such holder’s shares may be sold during a single three-month period under Rule 144.

Other Provisions:

Other provisions shall be contained in the Stock Purchase Agreement with respect to registration rights as are reasonable, including cross-indemnification, the period of time in which the Registration Statement shall be kept effective, underwriting arrangements and the like.

Board Representation:

Series B Convertible Preferred Stock shareholders will be entitled to and represented by one seat on the Board of Directors of the Company. This representation will be subject to the terms contained therein. The Board of Directors shall be indemnified by the Company, through the purchase of director’s liability insurance, to the fullest extent of the law. All travel expenses in attending meetings and performing Company duties shall be borne by the Company. A Compensation Committee, consisting of Directors, majorities of whom are not officers or employees of the Company, will approve compensation packages for key managers of the Company, including the President. The number of Directors on the Board cannot be increased without the approval of a two-thirds majority of the Directors. The Board of Directors will initially be composed of the following: (i) two Series A Preferred Stock representatives; (ii) one Series B Convertible Preferred Stock representative; (iii) one management representative; (iv) the President and CEO of the Company; (iv) one Common Stock representative; and (v) two outside directors approved by the other Board members.

THE STOCK PURCHASE

Agreement:

The investment shall be made pursuant to a Stock Purchase Agreement acceptable to the Company and the Investors, which agreement shall contain, among other things, appropriate representations and warranties of the Company, covenants of the Company reflecting the provisions set forth herein and appropriate conditions of closing which shall include qualification of the shares under applicable Blue Sky Laws, the filing of a Certificate of Amendment and/or Determination of Preferences to authorize the Series B Convertible Preferred Stock and delivery of opinions of counsel.

Covenants:

So long as an Investor continues to hold a minimum of 1,000 shares of Series B Convertible Preferred Stock or Common Stock issued upon conversion of the Series B Convertible Preferred Stock, the Company shall provide annual and quarterly financial statements. So long as an Investor holds at least 250,000 shares of Series B Convertible Preferred Stock (or of Common Stock issued upon conversion), such holder will be entitled to receive status reports and an annual business/operating plan. Such plan will have been approved by the Board of Directors. This right to financial information and plans shall terminate upon a public offering. The above-mentioned Investors will receive, upon request, financial statements and status reports including: cash flow statements; income statements; balance sheets; sales results; cash flow, income and balance sheet forecasts.

A mutually acceptable accounting firm will audit annual statements.

The Company will prepare an annual business plan, with financial projections, for Board approval.

There will be no material transactions with executive management or other shareholders without approval of the Board of Directors, including but not limited to salaries, bonuses, stock purchases and options.

PROPRIETY INFORMATION AND INVENTIONS AGREEMENT:

Agreement:

Each officer, director and key employee of the Company shall have entered into a proprietary information and inventions agreement in a form reasonably acceptable to the Company and the Board of Directors. As part of this agreement, the founders, managers, employees and consultants associated with the Company agree to assign all of the technology, patents, etc. to the Company. The Company agrees to pursue the protection of all technology, including the pursuit of all appropriate patents, copyrights, trademarks, etc.

Expenses:

Upon the Closing of the financing, the Company will pay or reimburse the Investors for their reasonable legal expenses incurred in connection with the transaction. This reimbursement will not exceed $10,000 in total from all Series B Convertible Preferred Stock Investors. The Series B Convertible Preferred Stock Investors will be obligated to arrive at an agreed distribution between all parties prior to submitting any request or reimbursement to the Company.

Key Man Insurance:

The Company shall take out key man life insurance on key employees, made payable to the Company. This will be at the determination of the Company and when affordable by the Company.

Use of Proceeds:

The Company intends to use the proceeds of this offering to expand its software development, to purchase equipment, to expand sales and technical support channels including international distribution and for working capital.

Finders:

The Company and the Investors shall each indemnify the other for any finder’s fees for which either is responsible.

Conditions of Closing:

Any closing of this financing will be contingent on (i) completion of due diligence, (ii) required shareholder approval, (iii) modification of the Articles of Incorporation and by-laws as noted in this term sheet, (iv) no negative material changes in the business or operations of the Company and (v) completion of legal documentation.