VENTURE CAPITAL MOCK NEGOTIATION October 22, 2007

Transcription

1 VENTURE CAPITAL MOCK NEGOTIATION October 22, 2007 PLAYERS Jim Fulton Erik Edwards Gordon Ho Eric Anderson Founder of InfiniteWisdom, Inc., a startup seeking venture capital financing Attorney representing InfiniteWisdom Managing general partner of Gandhi Ventures, a $1Billion venture capital partnership Attorney representing Gandhi Ventures BACKGROUND Gandhi Ventures has committed to an investment in InfiniteWisdom, Inc. at a $20 million pre-money valuation, subject to agreement on legal terms. Gandhi Ventures will invest $6 million of its own money and will act as lead investor in a proposed $10 million financing. Nietsche Capital also has committed to invest $2 million and the company hopes to attract one or two other venture investors to round out the $10 million financing. Anderson believes the valuation is too high, but she agreed to it in order to get the deal. Because of the high valuation, Anderson has presented InfiniteWisdom with a tough set of legal terms. The proposed term sheet is attached. Anderson is very excited about InfiniteWisdom s technology but he is not sure that Fulton is the right person to lead the company. Fulton s co-founder, Des Cartes, is the principal scientist and is critical to the future success of the company. Fulton is inexperienced at raising venture capital. He was pleasantly surprised that Anderson agreed to the $20 million valuation. Fulton has heard stories of vulture capitalists taking companies away from entrepreneurs, and therefore, wanted to make sure that Gandhi Ventures would not be in a position to do that to him. He felt good about the fact that the venture capitalists would own only 30% of Company post-closing. Edwards is an experienced start-up company counsel. Edwards believes the term sheet needs major revisions to be acceptable. He is hoping that Ho (notorious for tough terms) is responsible for the tough set of terms and that Anderson will be quick to back away from some of the more onerous provisions. Ho has done many deals for Gandhi Ventures and therefore is not surprised by the tough set of terms. As is typical, the parties feel they re reached agreement and have forwarded the term sheet to their lawyers at the last minute. In the interests of time the parties have called this face-to-face meeting to resolve any outstanding issues v5/hn 1.

2 INFINITEWISDOM, INC. SALE OF SERIES A PREFERRED STOCK SUMMARY OF TERMS Issuer: InfiniteWisdom, Inc. ( IW or the Company ) Amount of Financing: $10,000,000 Type of Security: Series A Convertible Preferred Stock (the Series A Preferred ), initially convertible on a 1:1 basis into shares of the Company s Common Stock (the Common Stock ). Price: $1.00 per share (the Original Purchase Price ). The Original Purchase Price represents a fully-diluted (including an unissued reserved employee pool equal to 45% of the post-money capitalization) pre-money valuation of $20,000,000 and a post-money valuation of $30,000,000. A pro forma capitalization table showing the Company s capital structure immediately following the Closing is attached. Name Amount Investor(s): Gandhi Ventures, L.P. $6,000,000 Nietsche Capital, L.P. $2,000,000 Others $2,000,000 Anticipated Closing Date (the Closing ): As soon as practicable. Special Conditions to Closing: Investment to be divided into two tranches. The first tranche, equaling $5,000,000, will be invested at the Closing, divided pro rata among the Investors. The second tranche, equaling $5,000,000, will be invested at the Second Closing, divided pro rata among the Investors. The conditions precedent to the disbursement of the second tranche, which must be achieved within nine months of the first Closing, are: 1. Agreement, to the satisfaction of the Investors in their sole discretion, on definitive licensing terms for at least one pharmaceutical (or biologic) compound (or family of compounds) that, in the opinion of the Investors, is v5/hn 2.

3 capable of entering human clinical trials in the United States within six months from date of in-license; 2. Successful hiring, to the Investors satisfaction in their sole discretion, of a Vice President of Licensing and Business Development to assist with the identification and acquisition of new compounds; 3. Establishment of a scientific/clinical advisory board comprised of world-class academic, spiritual and commercial investigators and clinicians to advise of compound selection and clinical trial design; 4. Successful conclusion of a lease for a new facility. In accordance with this outline of terms, achievement of the above listed milestone events will obligate each of the Investors to participate to the full extent contemplated in the Second Closing. The Investors, at their collective sole discretion, may agree to waive any and all of these milestones at any time at or before the nine month deadline is reached. TERMS OF SERIES A PREFERRED STOCK Dividends: Liquidation Preference: The holders of the Series A Preferred shall be entitled to receive cumulative dividends in preference to any dividend on the Common Stock at the rate of 8% of the Original Purchase Price per annum, which dividends shall accrue and be paid when and as declared by the Board of Directors, or as otherwise provided below. The holders of the Series A Preferred also shall be entitled to participate pro rata in any dividends paid on the Common Stock on an as-if-converted basis. In the event of any liquidation or winding up of the Company, the holders of the Series A Preferred shall be entitled to receive in preference to the holders of the Common Stock a per share amount equal to two (2) times the Original Purchase Price, plus any accrued but unpaid dividends (the Liquidation Preference ). After the payment of the Liquidation Preference to the holders of the Series A Preferred, the remaining assets shall be distributed ratably to the holders of the Common Stock and the Series A Preferred on a common equivalent basis. A merger, acquisition, sale of voting control or sale of substantially all of the assets of the Company in which the shareholders of the Company do not own a majority of the outstanding v5/hn 3.

4 shares of the surviving corporation shall be deemed to be a liquidation. Conversion: Automatic Conversion: Antidilution Provisions: Redemption at Option of Investors: The holders of the Series A Preferred shall have the right to convert the Series A Preferred, at any time, into shares of Common Stock. The initial conversion rate shall be 1:1, subject to adjustment as provided below. The Series A Preferred shall be automatically converted into Common Stock, at the then applicable conversion price, (i) in the event that the holders of at least a majority of the outstanding Series A Preferred consent to such conversion or (ii) upon the closing of a firmly underwritten public offering of shares of Common Stock of the Company at a per share price not less than $10.00 per share and for a total offering of not less than $50 million (before deduction of underwriters commissions and expenses) (a Qualified IPO ). In addition, if such automatic conversion occurs in connection with an initial public offering of the Company, all accrued and unpaid dividends shall be paid at the election of the holders of at least a majority of the outstanding Series A Preferred in cash or shares of common stock. The conversion price of the Series A Preferred will be subject to a full ratchet adjustment to reduce dilution in the event that the Company issues additional equity securities (other than up to 13,500,000 shares issued pursuant to outstanding and reserved employee options) at a purchase price less than the applicable conversion price. Additionally, the conversion price will be adjusted to one half of the then-current conversion price in the event that the Company does not recognize revenues of at least $2,000,000 in the year ended December 31, The conversion price will also be subject to proportional adjustment for stock splits, stock dividends, recapitalizations and the like. At the election of the holders of at least a majority of the Series A Preferred, the Company shall redeem the outstanding Series A Preferred in three equal annual installments beginning on the fifth anniversary of the Closing. Such redemptions shall be at a purchase price equal to the greatest of: (i) the Original Purchase Price plus accrued and unpaid dividends; (ii) the fair market value of v5/hn 4.

5 such shares; or (iii) five times the Company s per share EBITDA for the most recent fiscal year. Voting Rights: Board of Directors: Protective Provisions: The Series A Preferred will vote together with the Common Stock and not as a separate class except as specifically provided herein or as otherwise required by law. Each share of Series A Preferred shall have a number of votes equal to the number of shares of Common Stock then issuable upon conversion of such share of Series A Preferred. The size of the Company s Board of Directors shall be set at five (5). The holders of the Series A Preferred, voting as a separate class, shall be entitled to elect two members of the Company s Board of Directors; the holders of Common Stock, voting as a separate class, shall be entitled to elect one member; and the remaining directors will be mutually agreed upon by the Common and Preferred, voting together as a single class. The Board shall initially be comprised of Jim Fulton as the founder representative, Eric Anderson and F. Nietsche as the Series A Preferred representatives, and D. Lama. Each non-employee director shall receive an option to purchase 50,000 shares of the Company s Common Stock at the beginning of each year of service. Consent of the holders of at least a majority of the Series A Preferred shall be required for any action that (i) alters or changes the rights, preferences or privileges of the Series A Preferred, (ii) increases or decreases the authorized number of shares of Common or Preferred Stock, (iii) creates (by reclassification or otherwise) any new class or series of shares having rights, preferences or privileges senior to or on a parity with the Series A Preferred, (iv) results in the redemption of any shares of Common Stock (other than pursuant to equity incentive agreements with service providers giving the Company the right to repurchase shares upon the termination of services), (v) results in any merger, other corporate reorganization, sale of control, or any transaction in which all or substantially all of the assets of the Company are sold, (vi) amends or waives any provision of the Company s Certificate of Incorporation or Bylaws relative to the Series A Preferred, (vii) increases or decreases the authorized size of the Company s board, (viii) results in the payment or declaration of any dividend on any shares of Common or Preferred Stock, (ix) results in borrowing in excess of $500,000, (x) increases the number v5/hn 5.

6 of shares reserved in the employee pool, (xi) alters or amends any provision of any employment agreement of the Company, or (xii) commits the Company to make any expenditure in excess of $25,000 not included in any budget approved by the Board. Information Rights: Registration Rights: So long as an Investor continues to hold shares of Series A Preferred or Common Stock issued upon conversion of the Series A Preferred, the Company shall deliver to the Investor audited annual and unaudited quarterly financial statements. The Company will also furnish each Investor with monthly financial statements compared against plan and will provide a copy of the Company s annual operating plan within 30 days prior to the beginning of the fiscal year. Each Investor shall also be entitled to standard inspection and visitation rights. These provisions shall terminate upon a Qualified IPO. Demand Rights: If Investors holding more than 20% of the outstanding shares of the Series A Preferred, including Common Stock issued on conversion of the Series A Preferred ( Registrable Securities ), request that the Company file a Registration Statement having an aggregate offering price to the public of not less than $5,000,000, the Company will use its best efforts to cause such shares to be registered; provided, however, that the Company shall not be obligated to effect any such registration prior to the second anniversary of the Closing. The Company shall have the right to delay such registration under certain circumstances for one period not in excess of ninety (90) days in any twelve (12) month period. The Company shall not be obligated to effect more than five (5) registrations under these demand right provisions, and shall not be obligated to effect a registration (i) during the one hundred eighty (180) day period commencing with the date of the Company s initial public offering, or (ii) if it delivers notice to the holders of the Registrable Securities within thirty (30) days of any registration request of its intent to file a registration statement for such initial public offering within 90 days. Company Registration: The Investors shall be entitled to piggy back registration rights on all registrations of the Company or on any demand registrations of any other investor subject to the right, however, of the Company and v5/hn 6.

7 its underwriters to reduce the number of shares proposed to be registered pro rata in view of market conditions. If the Investors are so limited, however, no party shall sell shares in such registration other than the Company or the Investor, if any, invoking the demand registration. In no event shall the shares to be sold by the Investors be reduced below 35% of the total amount of securities included in the registration. No shareholder of the Company shall be granted registration rights without the consent of the holders of at least two-thirds of the Registrable Securities. S-3 Rights: The Investors shall be entitled to unlimited demand registrations on Form S-3 (if available to the Company) so long as such registered offerings are not less than $500,000. Expenses: The Company shall bear registration expenses (exclusive of underwriting discounts and commissions) of all such demands, piggy backs, and S-3 registrations (including the expense of one special counsel of the selling shareholders not to exceed $50,000). Transfer of Rights: The registration rights may be transferred to (i) any partner or retired partner of any holder which is a partnership, (ii) any family member or trust for the benefit of any individual holder, or (iii) any transferee who acquires at least 50,000 shares of Registrable Securities; provided the Company is given written notice thereof. Termination of Registration Rights: The registration obligations of the Company will terminate ten (10) years after the IPO. Other Provisions: Other provisions shall be contained in the Investor Rights 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, and underwriting arrangements. Right of First Refusal: Investors holding at least 200,000 shares of Registrable Securities (each a Major Investor ) shall have the right in the event the Company proposes to offer equity securities to any person (excluding up to 13,500,000 shares issued pursuant to the employee option pool and any securities issued pursuant to acquisitions) to purchase their pro rata v5/hn 7.

8 portion of such shares. Such pro rata portion shall be determined by dividing the number of shares of Registrable Securities held by each Major Investor by the number of shares of Registrable Securities held by all Major Investors. Any securities not subscribed for by an eligible Investor may be reallocated among the other eligible Investors. Such right of first refusal will terminate upon a Qualified IPO. Purchase Agreement: Indemnification: The investment shall be made pursuant to a Stock Purchase Agreement reasonably 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, including an opinion of counsel for the Company. The Company shall indemnify and hold harmless the Investors, as well as the Investors affiliates and representatives against any and all expenses, damages, judgments, fines, settlements and the like resulting from any claim made against an Investor in connection with the offering, issuance or sale of the Series A. EMPLOYEE MATTERS Employee Option Pool: Upon the Closing of this financing there will be 6,500,000 shares of issued and outstanding Common Stock held by Jim Fulton and Des Cartes (the Founders ) and an additional 13,500,000 shares of Common Stock reserved for issuance pursuant to outstanding and reserved employee options. Stock Vesting: All stock and stock equivalents issued after the Closing to employees, directors, consultants and other service providers will be subject to vesting as follows: 25% to vest at the end of the first year following such issuance, with the remaining 75% to vest monthly over the next three years. The repurchase option shall provide that upon termination of the employment of the shareholder, with or without cause, the Company or its assignee (to the extent permissible under applicable securities law qualification) retains the option to repurchase at cost any unvested shares held by such shareholder v5/hn 8.

9 The shares of Common Stock currently held by the Founders will vest according to the schedule set forth above, with the first 25% to vest one year following the Closing. No shares of Common Stock or options currently held by the Founders will provide for acceleration of vesting upon the occurrence of any merger or other event or combination of events. Restrictions on Sales: The Company shall have a right of first refusal on all transfers of Common Stock, subject to normal exceptions. In the event the Company elects not to exercise this right, it will be assigned to the holders of the Series A Preferred. In addition, upon the termination of employment of Mr. Fulton, the Company shall have the right to repurchase all shares of Common Stock then held by such Founder at the fair market value thereof as determined in good faith by the Board of Directors. Proprietary Information and Inventions Agreement: Co-Sale Agreement: Drag-Along Agreement: Key-Man Insurance: Each officer, employee and consultant of the Company shall enter into an acceptable proprietary information and inventions agreement. The shares of the Company s securities held by the Founders shall be made subject to a co-sale agreement with the holders of the Series A Preferred such that the Founders may not sell, transfer or exchange their stock unless each holder of Series A Preferred has an opportunity to participate in the sale on a pro-rata basis. This right of cosale shall not apply to and shall terminate upon a Qualified IPO. The shares of the Company s securities held by the Founders and other executive officers shall be made subject to a drag-along agreement that provides that the Founders will vote in favor of any merger, sale of voting control or sale of substantially all of the assets of the Company if such transaction is approved by the holders of a majority of the Series A Preferred. The Company shall procure key-man life insurance policies for Des Cartes in the amount of $5,000,000, naming the Company as beneficiary v5/hn 9.

10 OTHER MATTERS Initial Public Offering Shares Purchase: No Shop Agreement: Conditions Precedent to Financing: In the event that the Company shall consummate a Qualifed IPO, the Company shall use its best efforts to cause the managing underwriter or underwriters of such IPO to offer to the Investors the right to purchase at least (5%) of any shares issued under a friends and family or directed shares program in connection with such Qualified IPO. Upon Acceptance of this term sheet, the Company shall not solicit other potential investors nor disclose the terms of this Term Sheet to other persons (other than in connection with consummation of the transactions) nor engage in any discussions or execute any agreements related to the sale or transfer of a significant portion of the Company s assets or securities to any other party other than the Investors until after the signing of definitive documents memorializing the provisions herein. Should both parties agree in writing that definitive documents shall not be executed pursuant to this term sheet, then the Company shall have no further obligations under this section. 1. Completion of legal documentation satisfactory to the prospective Investors. 2. Satisfactory completion of due diligence by the prospective Investors. Finders: Legal Fees and Expenses: Nonbinding Effect: The Company and the Investors shall each indemnify the other for any broker s or finder s fees for which either is responsible. The Company shall pay the reasonable fees (not to exceed $100,000) and expenses of one special counsel to the Investors and shall reimburse Gandhi Ventures for all due diligence expenses (not to exceed $15,000) incurred in connection with this transaction including technical and management due diligence. The Company shall reimburse all expenses set forth in the preceding sentence upon request whether or not the transactions contemplated hereby are consummated. Except for the provisions contained herein entitled No Shop Agreement and Legal Fees and Expenses, which v5/hn 10.

11 are explicitly agreed by the Investors and the Company to be binding upon execution of this term sheet, this Summary of Terms is not intended to create any legally binding obligations on either party, and no such obligation shall be created unless and until the parties enter into a stock purchase agreement as contemplated under the paragraph entitled Purchase Agreement above. InfiniteWisdom, Inc. Gandhi Ventures, L.P. By: Title: By: Title: v5/hn 11.

12 Pro-Forma Capitalization Table Common Stock Outstanding: 6,500,000 Employee Stock Options: Outstanding 0 Unissued Reserved Pool 13,500,000 Series A Preferred Stock 10,000,000 Total Fully Diluted Shares 30,000, v5/hn