ANGEL VENTURE FORUM – GEORGETOWN SELECTION DAY YOU ARE OFFERED A TERM SHEET, NOW WHAT?

1. ANGEL VENTURE FORUM – GEORGETOWN SELECTION DAYYOU ARE OFFERED A TERM SHEET, NOW WHAT?

2. Why Sign a Term Sheet? • Presented by Angel or VC after initial due diligence and determination of interest • Establishes valuation • Summarizes basic deal terms • Minimizes area of dispute in definitive documentation • Flushes out problems before sunk deal costs grow large

3. Angel vs. VC Term Sheet • Angel Term Sheet (if provided) much simpler than VC Term Sheet • Often outlines terms for convertible debt or Series Seed transaction • If Convertible Debt, avoids early valuation determination (although caps are becoming common) • Usually seeks some form of discount into Series A round (through discount or warrants) • Series Seed is short form Preferred Stock financing.

4. Venture Capital (Series Seed) Term Sheet – Major Issues • Economics (dividing the pie on exit) • Control (who is going to pilot the ship) • Shareholder Rights (protecting the investment and getting to the exit)

5. Economics • Pre-Money Valuation (% of company received for the investment). • Type of security (Preferred Stock vs. Common Stock). • Dividends (Cumulative vs. Non-cumulative).

6. Valuation • Percent of company that VC receives • “Pre-money” • “Post-money” • Impact of options

7. Type of Security • Preferred Stock vs. Common Stock • Fully Participating Preferred (1x or greater), • Capped Participation (1.5x to 10x), • Non-participating Preferred.

8. Example: $5,000,000 Sale($2,000,000 Pre-Money Vale; $1,000,000 investment) Non-Participating Preferred • Founders: $ 3,333,333.33 • Investors: $ 1,666,666.67 Capped Participation at 2X • Founders: $ 3,000,000.00 • Investors: $ 2,000,000.00 Fully Participating Preferred • Founders: $ 2,666,666.67 • Investors: $ 2,333,333.33

9. Dividends • Cumulative • Similar to interest accruing on a note, the dividends accrue to the liquidation preference. • Cumulative dividends erode ownership % over time (unless only payable in cash). • Non-Cumulative • (no dividend rights unless dividends are declared).

10. Control • The Board of Directors (Remember the Board hires and fires the CEO) • A Voice (1 of 3, or 2 of 5), • Equality (2 VC directors, 2 founder directors, and 1 independent director, mutually agreed), or • Control (2 – 2 and 1 independent selected by the VC).

11. Control continued… • Voting of shares (protective provisions): • changes to organizational documents, • liquidation, recapitalization, re-organization, etc • sale of equity, • incurrence of debt, • sale of the company or material assets, • payment of dividends or redemption of shares, • Hire or fire executive officers or change compensation.

12. Shareholder Rights • Protecting the Investment (minority protections): • Anti-dilution protections, • Participation/Preemptive Rights, • Restrictions on Transfer of Shares: • Right of first offer/refusal • Co-sale rights (i.e., the right to “tag along”).

13. Shareholders Rights • Getting to the Exit: • Demand Registrations Rights • Redemption Rights • Drag-along Rights

14. Other Issues • Founder Employment Agreement • Vesting of Founder’s Shares through a Stock Restriction Agreement • 83(b) elections

15. Thank you for joining us! Karl T. Knoll kknoll@wcsr.com (703) 394-2279 Dean W. Rutley drutley@wcsr.com (703) 394-2256