DRAFTING PREFERRED STOCK/PREFERRED RETURNS First Run Broadcast: December 21, 2016 Live Replay: May 30, 2017 1:00 p.m. E.T./12:00 p.m. C.T./11:00 a.m. M.T./10:00a.m. P.T. (60 minutes) Investors in a company or transaction often want the guarantees of common equity for purposes of capturing economic success but also the protections often associated with debt or preferred stock to protect their investments. Preferred returns and their protective provisions can come in multiple forms. There can be preferred distributions, most likely on liquidation but also on an ongoing basis. As important as the specific type of preferred return are the protective provisions that often accompany preferred returns, including the right to board seats or other management and information rights, anti-dilution and anti-impairment provisions, and more. This program will provide you with a practical guide to types, uses and drafting issues with preferred returns in transactions. Structuring and drafting preferred returns in business transactions Characteristics, variations and drafting tips for preferred stock Non-corporate distribution preferences type, timing, practical issues Protecting returns through enhanced voting rights and seats on the boards of directors Liquidation preferences valuation, triggering events, restrictions Convertible instruments debt-to-equity Anti-dilution and impairment provisions Change of control provisions on the occurrence of certain events Speaker: Noah Kressler is of counsel in the New Orleans office of Baker, Donelson, Bearman, Caldwell & Berkowitz, PC, where he has extensive experience advising companies in public and private offerings of equity and debt, follow-on and secondary offerings, private placements, strategic investments and acquisition financing. He also advises clients on general corporate and business matters, corporate governance issues and securities law compliance. He is an Adjunct Professor of Law at Tulane University Law School. Mr. Kessler received his B.A. from Vassar College and his J.D., cum laude, from Tulane University Law School.
VT Bar Association Continuing Legal Education Registration Form Please complete all of the requested information, print this application, and fax with credit info or mail it with payment to: Vermont Bar Association, PO Box 100, Montpelier, VT 05601-0100. Fax: (802) 223-1573 PLEASE USE ONE REGISTRATION FORM PER PERSON. First Name Middle Initial Last Name Firm/Organization Address City State ZIP Code Phone # Fax # E-Mail Address Drafting Preferred Stock/Preferred Returns Teleseminar May 30, 2017 1:00PM 2:00PM 1.0 MCLE GENERAL CREDITS VBA Members $75 Non-VBA Members $115 NO REFUNDS AFTER May 23, 2017 PAYMENT METHOD: Check enclosed (made payable to Vermont Bar Association) Amount: Credit Card (American Express, Discover, Visa or Mastercard) Credit Card # Exp. Date Cardholder:
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PREFERRED RETURNS IN BUSINESS TRANSACTIONS Tyler J. Sewell Morrison & Foerster LLP Denver (303) 592-2215 tsewell@mofo.com SAMPLE OF MULTIPLE OF SERIES OF CONVERTIBLE PREFERRED SHARE. A. The rights, preferences, privileges, restrictions and other matters relating to the Preferred Stock and the Common Stock are set forth below. 1. Dividend Rights. (a) Series A. Holders of the Series A, in preference to the holders of the Corporation s Common Stock, Series B and Series C, shall be entitled to receive dividends which shall be cumulative and shall accrue on the Series A at the rate of [ ]% per annum (compounding annually until paid from the date of issuance of each share of Series A, whether or not declared) on the Series A Original Issue Price (the Preferred Cumulative Dividend ) and such additional dividends and other distributions as may be declared by the Corporation s Board of Directors from time to time, out of funds legally available therefor. The Preferred Cumulative Dividend shall be payable in cash or shares of Series A at the Series A Original Issue Price. Holders of the Series A shall not be entitled to receive one (1) share of Common Stock for each share of Series A issued as payment for the Preferred Cumulative Dividend. The Preferred Cumulative Dividend shall be payable if declared by the Board of Directors or, if earlier, upon the occurrence of a Liquidity Event. Notwithstanding the foregoing, no Preferred Cumulative Dividend shall be declared or paid if such declaration or payment would violate or breach the terms of any credit or loan agreement to which the Corporation may then be a party. The Series A Original Issue Price per share is $[ ] as adjusted for any future stock splits, stock combinations, stock dividends or similar transactions. To the extent not paid, the Preferred Cumulative Dividend on the Series A shall accumulate whether or not declared. (b) Common Stock, Series B and Series C. No dividends or distributions shall be paid on the Common Stock (other than dividends payable solely in shares of Common Stock) or the Series B unless the Corporation shall also declare and pay to the holders of the Series A, at the same time that it declares and pays such dividends to the holders of the Common Stock or the Series B, dividends equal to all accrued and unpaid dividends on the Series A. Dividends shall be paid on the Common Stock or Series B as, if and when declared by the Corporation s Board of Directors. No dividends or distributions shall be paid on the Series C. 1
2. Voting Rights. (a) General Rights. Except as otherwise required by law or provided herein, and subject to the rights of any other series of Preferred Stock that may from time to time come into existence, the Common Stock of the Corporation shall vote at any annual or special meeting of stockholders of the Corporation, and may act by written consent, with each share of Common Stock being entitled to one vote. Except as otherwise required by law, the Series B and Series C shall not have any voting rights. Other than as set forth in Section 4(d), or otherwise in this Certificate of Incorporation or required by law, the Series A shall not have any voting rights. 3. Liquidation Rights. The Series A, Series B, Series C and Common Stock shall have the following liquidation rights: (a) Upon any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, before any distribution or payment shall be made to the holders of any shares of Series B, Series C or Common Stock, the holders of Series A shall be entitled to be paid out of the assets of the Corporation an amount with respect to each share of Series A equal to the Series A Original Issue Price (as adjusted for any future Series A stock splits, stock combinations, stock dividends or similar transactions) plus all accrued but unpaid dividends, including all Preferred Cumulative Dividends, thereon (in the aggregate, the Series A Liquidation Value ). If, upon any liquidation, dissolution or winding up, the assets of the Corporation shall be insufficient to make payment in full to all holders of Series A, then such assets shall be distributed among the holders of Series A at the time outstanding, ratably in proportion to the full amounts to which they would otherwise be respectively entitled. (b) After the distribution provided pursuant to Section 4(a). hereof, before any distribution or payment shall be made to the holders of any shares of Series C or Common Stock, the holders of Series B shall be entitled to be paid out of the assets of the Corporation an amount with respect to each share of Series B equal to $[ ], as adjusted for any future Series B stock splits, stock combinations, stock dividends or similar transactions (the Series B Original Issue Price ), plus a rate of return equal to [ ]% per annum on the Series B Original Issue Price, compounding annually from the date of issuance of each share of Series B, plus all accrued but unpaid dividends thereon (in the aggregate, the Series B Liquidation Value ). If, upon any liquidation, dissolution or winding up, the assets of the Corporation shall be insufficient to make payment in full to all holders of Series B, then the assets shall be distributed among the holders of Series B at the time outstanding, ratably in proportion to the full amounts to which they would otherwise be respectively entitled. (c) After the Corporation has made the full payment or distribution provided for in Section 4(b) above, thereafter all payments and distributions
shall be paid ratably to the holders of the Common Stock. The holders of the Series C shall not be entitled to any payments or distributions upon a Liquidity Event. (d) Each of the following events shall be considered a Liquidity Event : (i) any liquidation, dissolution or winding-up of the Corporation whether voluntary or involuntary, or (ii) unless the holders of a majority of the outstanding shares of Series A then outstanding elect otherwise by written notice sent to the Corporation at least ten (10) days prior to the effective date of any such event, (A) any consolidation or merger of the Corporation with or into any other corporation or other entity, or any other corporate re-organization, in which the stockholders of the Corporation immediately prior to such consolidation, merger or reorganization own capital stock of the entity surviving such merger, consolidation or reorganization representing less than fifty percent (50%) of the combined voting power of the outstanding securities of such entity immediately after such consolidation, merger or reorganization (but excluding any consolidation or merger effected solely for the purpose of reincorporating the Corporation in another state), or (B) a sale, lease, license or other disposition of all or substantially all of the assets of the Corporation and its Subsidiaries on a consolidated basis by means of any transaction or a series of related transactions except where such sale is to a wholly owned Subsidiary of the Corporation. (e) Valuation. If the consideration to be received pursuant to Sections 4(a)(b) or (c) is other than cash, its value will be determined as follows: (i) Securities not subject to investment letter or other similar restrictions on free marketability: (1) If traded on a securities exchange or through the Nasdaq National Market, the value shall be deemed to be the average of the closing prices of the securities on such exchange over the twenty (20) trading days ending three (3) days prior to the closing of the liquidation as defined in Section 4(d) above; (2) If actively traded over-the-counter, the value shall be deemed to be the average of the closing bid or sale prices (whichever is applicable) over the twenty (20) trading days ending three (3) days prior to the closing of the liquidation as defined in Section 4(d) above; and shall be the Fair Value thereof. (3) If there is no active public market, the value (ii) The method of valuation of securities subject to investment letter or other restrictions on free marketability shall be to make an appropriate discount from the value determined as above in clause (i)(1), (2) or (3) to reflect the approximate Fair Value thereof.
4. Conversion Rights. The holders of the Series C shall have the following rights with respect to the conversion of the Series C into shares of Series B. Except as set forth in Section 5(h), the Series A and Series B shall not be convertible into Common Stock. (a) Series C Contingent Conversion. Subject to and in compliance with the provisions of this Section 5, upon the occurrence of a Series C Convertibility Event, all outstanding shares of the Series C shall automatically be converted into fully-paid and nonassessable shares of Series B. A Series C Convertibility Event shall be deemed to occur if 2012 EBITDA equals or exceeds $[ ]. If 2012 EBITDA does not equal or exceed $[ ], no shares of Series C shall be convertible into shares of Series B and all outstanding shares of Series C shall, on the Determination Date, automatically be redeemed by the Corporation at a price equal to $[ ] per share. (b) Conversion of Series C into Series B. Upon the occurrence of a Series C Convertibility Event, all outstanding shares of Series C shall automatically be converted into that number of shares of Series B equal to, in the aggregate, the product of: (x) the applicable Conversion Ratio, multiplied by (y) [ ]%, multiplied by (z) the Preferred Stock Outstanding. Each holder of Series C shall be entitled to receive that number of shares of Series B equal to its Pro Rata Portion of the aggregate number of shares of Series B issuable under this Section 5(b). In addition, the Corporation shall issue one (1) share of Common Stock for each share of Series B issued under this Section 5(b). (c) Series B Anti-Dilution Adjustment. Upon the occurrence of a Series C Convertibility Event, the holders of Series B shall be issued, concurrently with the issuance of the Series B under Section 5(b), that number of additional shares of Series B equal to, in the aggregate, the product of: (x) the applicable Conversion Ratio, multiplied by (y) [ ]%, multiplied by (z) the Preferred Stock Outstanding. Each holder of Series B shall be entitled to receive that number of shares of Series B equal to its Pro Rata Portion of the aggregate number of shares of Series B issuable under this Section 5(c). In addition, the Corporation shall issue one (1) share of Common Stock for each share of Series B issued under this Section 5(c). (d) Adjustment for Reclassification, Exchange and Substitution. If at any time or from time to time after the Original Issuance Date, the Series B is (i) changed into the same or a different number of shares of any class or classes of stock, whether by recapitalization, reclassification or otherwise, or (ii) the number of outstanding shares of Series B is increased or decreased due to a subdivision, combination or stock dividend (other than a reorganization, merger or consolidation provided for elsewhere in this Section 5 or pursuant to Sections 5(b) and 5(c)) in any such event each holder of Series C shall have the right to receive upon conversion thereof the kind and amount of stock and other securities or property receivable in connection with
such recapitalization, reclassification or other change with respect to the maximum number of shares of Series B into which such shares of Series C could have been converted immediately prior to such recapitalization, reclassification or change, all subject to further adjustments as provided herein or with respect to such other securities or property by the terms thereof. (e) Reorganizations, Mergers or Consolidations. If at any time or from time to time after the Original Issue Date, the Series B is converted into other securities or property, whether pursuant to a reorganization, merger, consolidation or otherwise (other than a recapitalization, subdivision, combination, reclassification, exchange or substitution of shares provided for elsewhere in this Section 5 or pursuant to Sections 5(b) and 5(c)), as a part of such transaction provision shall be made so that the holders of the Series C shall thereafter be entitled to receive upon conversion of such Series C the number of shares of stock or other securities or property to which a holder of the maximum number of shares of Series B deliverable upon conversion would have been entitled in connection with such transaction, subject to adjustment in respect of such stock or securities by the terms thereof. In any such case, appropriate adjustment shall be made in the application of the provisions of this Section 5 with respect to the rights of the holders of Series C after the capital reorganization to the end that the provisions of this Section 5 shall be applicable after that event and be as nearly equivalent as practicable. The Corporation shall not be a party to any reorganization, merger or consolidation in which the Corporation is not the surviving entity unless the entity surviving such transaction assumes, by written instrument, all the Corporation s obligations hereunder. (f) Certificate of Adjustment. In each case of an adjustment or readjustment of the number of shares of Series B or other securities issuable upon conversion of the Series C, the Corporation, at its expense, shall compute such adjustment or readjustment in accordance with the provisions hereof and prepare a certificate showing such adjustment or readjustment, and shall mail such certificate, by first class mail, postage prepaid, to each registered holder of Series C at the holder s address as shown in the Corporation s books. (g) Notices of Record Date. Upon (i) any taking by the Corporation of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend or other distribution, or (ii) any transaction that would result in an adjustment pursuant to this Section 5, or (iii) any voluntary or involuntary dissolution, liquidation or winding up of the Corporation, the Corporation shall mail to each holder of Preferred Stock at least twenty (20) days prior to the record date specified therein a notice specifying (1) the date on which any such record is to be taken for the purpose of such dividend or distribution and a description of such dividend or distribution, (2) the date on which any such transaction is expected to become effective, and (3) the date, if any, that is to be fixed for determining the holders of record of Common Stock (or other securities) that shall be
entitled to exchange their shares of Common Stock (or other securities) for securities or other property deliverable upon such transaction. (h) Automatic Conversion. Upon the closing of an underwritten public offering of Common Stock pursuant to an effective registration statement under the Securities Act of 1933, as amended (a Qualified IPO ), (i) each share of Series C shall be redeemed at $[ ] per share, and (ii) at the election of the Corporation, all or any portion of the Series A and Series B may together be converted to Common Stock with a value based on the Series A Liquidation Value or Series B Liquidation Value, as applicable. For the purpose of clarity, in the event that the Corporation makes an election to convert all or a portion of the Series A or Series B, as the case may be, into Common Stock pursuant to subsection (ii) above, the Corporation must also elect to convert all, or the same proportionate percentage of Series B or Series A, as the case may be into Common Stock pursuant to such subsection (ii). For purposes of such conversion, the Common Stock shall be valued at either the sale price to the public in such Qualified IPO or, if requested by the underwriter prior to the closing of such Qualified IPO, the mid-range of the pricing of the Corporation s final red-herring prospectus. (i) Mechanics of Conversion. Upon the occurrence of a Series C Convertibility Event, or a Qualified IPO, the outstanding shares of the applicable series of Preferred Stock shall be converted into that number of shares of capital stock into which the holder of such series of Preferred Stock is entitled automatically without any further action by the holders of such shares and whether or not the certificates representing such shares are surrendered to the Corporation or its transfer agent; provided, however, that the Corporation shall not be obligated to issue certificates evidencing the shares of capital stock issuable upon such conversion unless the certificates evidencing such shares of the series of Preferred Stock are either delivered to the Corporation or its transfer agent as provided below, or the holder notifies the Corporation or its transfer agent that such certificates have been lost, stolen or destroyed and executes an agreement satisfactory to the Corporation to indemnify the Corporation from any loss incurred by it in connection with such certificates. Upon surrender by any holder of the certificates formerly representing shares of the applicable series of Preferred Stock at the office of the Corporation or any transfer agent for such securities, there shall be issued and delivered to such holder promptly at such office and in its name as shown on such surrendered certificate or certificates, a certificate or certificates for the number of shares of capital stock into which the shares of the applicable series of Preferred Stock surrendered were convertible on the date on which such automatic conversion occurred. Until surrendered as provided above, each certificate formerly representing shares of the applicable series of Preferred Stock shall be deemed for all corporate purposes to represent the number of shares of capital stock resulting from such automatic conversion. (j) Fractional Shares. Fractional shares of capital stock may be issued upon conversion of a series of Preferred Stock or otherwise. All shares of
capital stock (including fractions thereof) issuable upon conversion of more than one share of a series of Preferred Stock by a holder thereof shall be aggregated for purposes of determination whether the conversion would result in the issuance of any fractional share. meanings: 5. Certain Definitions. The following terms shall have the indicated Convertible Securities means any stock or securities directly or indirectly convertible into or exchangeable for Common Stock, including the Series C. Conversion Ratio means the following, as applicable: (i) if 2012 EBITDA equals or exceeds $[ ], the Conversion Ratio shall equal [ ]% divided by [ ]%; (ii) if 2012 EBITDA equals or exceeds $[ ], but is less than $[ ], the Conversion Ratio shall equal: 9% divided by 61%; (iii) if 2012 EBITDA equals or exceeds $[ ], but is less than $[ ], the Conversion Ratio shall equal: [ ]% divided by [ ]%; (iv) if 2012 EBITDA equals or exceeds $[ ], but is less than $[ ], the Conversion Ratio shall equal 7% divided by 63%. Determination Date means five (5) business days after the date the EBITDA Statement is delivered. Fair Value shall mean the value in an arm s length transaction, consistent with general market value. Fair Value shall be determined in the reasonable judgment of the Board of Directors of the Corporation. Options means any rights, warrants or options to subscribe for or purchase Common Stock or Convertible Securities. Original Issuance Date means the date the initial shares of Series A and Series B were issued. Preferred Stock Outstanding means the number of shares of Series A and Series B issued and outstanding on the Original Issuance Date. Pro Rata Portion means, with respect to each stockholder, the number of shares of a series of Preferred Stock held by such stockholder, divided by the aggregate number of shares of that series of Preferred Stock outstanding on the Original Issuance Date. Subsidiary means any corporation, trust, general or limited partnership, limited liability company, limited liability partnership, firm, company or other business enterprise which is controlled by the Corporation through direct ownership of the stock or other proprietary interest of such business enterprise or indirectly through the ownership of stock or other proprietary interest in one or more other business enterprises which are
connected with the Corporation by means of one or more chains of business enterprises that are connected by ownership of stock or other proprietary interests. 2012 EBITDA shall mean the EBITDA of Holder for the fiscal year ending December 31, 2012 as reflected in the EBITDA Statement to be delivered by the Corporation to Holder. 6. Reservation of Common Stock Issuable Upon Conversion. The Corporation shall at all times reserve and keep available out of its authorized but unissued shares of Series B and Common Stock, solely for the purpose of effecting the conversion of the shares of Series A, Series B, or Series C, such number of its shares of Series B and Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of Series A, Series B, or Series C. If at any time the number of authorized but unissued shares of Series B or Common Stock, as applicable, shall not be sufficient to effect the conversion of all then-outstanding shares Series A, Series B, or Series C, the Corporation will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Series B or Common Stock, as applicable, to such number of shares as shall be sufficient for such purpose. 7. No Dilution or Impairment. The Corporation shall not amend this Certificate of Incorporation or participate in any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, for the purpose of avoiding or seeking to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Corporation.
PREFERRED RETURNS IN BUSINESS TRANSACTIONS Tyler J. Sewell Morrison & Foerster LLP Denver (303) 592-2215 tsewell@mofo.com SAMPLE PARTICIPATING PREFERRED A. The rights, preferences, privileges, restrictions and other matters relating to the Series A Preferred are as follows: 1. DIVIDEND RIGHTS. (a) From and after the date of the issuance of any shares of Series A Preferred, dividends at the rate of [ ]% of the applicable Original Issue Price (as defined below) per annum shall accrue on such shares of Series A Preferred (subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization with respect to the Series A Preferred) (the Accruing Dividends ) and are due and payable to the holders of record thereof quarterly from the assets of the Company legally available for distribution. In the event the Accruing Dividend is not paid quarterly due to the lack of assets of the Company then-legally available for distribution, the Accruing Dividends shall continue to accrue from day to day, whether or not declared, and shall be cumulative and fully payable at the end of the immediately succeeding quarter; provided, that, at such time such distribution may be made in accordance with all applicable law. (b) So long as any shares of Series A Preferred are outstanding, the Company shall not declare, pay or set aside any dividends on shares of any other class or series of capital stock of the Company (other than dividends on shares of Common Stock payable in shares of Common Stock) unless (in addition to the obtaining of any consents required elsewhere herein) the holders of the Series A Preferred then-outstanding shall first receive, or simultaneously receive, a dividend on each outstanding share of Series A Preferred in an amount at least equal to the greater of (i) the amount of the aggregate Accruing Dividends then-accrued on such share of Series A Preferred and not previously paid and (ii) (A) in the case of a dividend on Common Stock or any class or series that is convertible into Common Stock, that dividend per share of Series A Preferred equal to the product of (1) the dividend payable on each share of such class or series determined, if applicable, as if all shares of such class or series had been converted into Common Stock and (2) the number of shares of Common Stock issuable upon conversion of a share of Series A Preferred, in each case calculated on the record date for determination of holders entitled to receive such dividend or (B) in the case of a dividend on any class or series that is not convertible into Common Stock, at a rate per share of Series A Preferred determined by (1) dividing the amount of the dividend payable on each share of such class or series of capital stock by the original issuance price of such class or series of capital stock (subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization with respect to such class or series) and (2) multiplying such fraction by an amount equal to the applicable Original Issue Price; provided
that, if the Company declares, pays or sets aside, on the same date, a dividend on shares of more than one class or series of capital stock of the Company, the dividend payable to the holders of Series A Preferred pursuant to this Section 1(b) shall be calculated based upon the dividend on the class or series of capital stock that would result in the highest Series A Preferred dividend. (c) The Original Issue Price means, in the case of the Series A Preferred, $[ ] (as adjusted for any stock dividends, combinations, splits, recapitalizations and the like with respect to such shares after the filing date hereof). 2. VOTING RIGHTS. (a) General Rights. Each holder of shares of the Series A Preferred shall be entitled to the number of votes equal to the number of shares of Common Stock into which such shares of Series A Preferred could be converted (pursuant to Section 4 hereof) immediately after the close of business on the record date fixed for such meeting or the effective date of such written consent and shall have voting rights and powers equal to the voting rights and powers of the Common Stock and shall be entitled to notice of any shareholders meeting in accordance with the bylaws of the Company. Except as otherwise provided herein or as required by law, the Series A Preferred shall vote together with the Common Stock at any annual or special meeting of the shareholders and not as a separate class, and may act by written consent in the same manner as the Common Stock. (b) Separate Vote of Series A Preferred. For so long as shares of Series A Preferred remain outstanding, in addition to any other vote or consent required herein or by law, the vote or written consent of the holders of a majority (determined on an as-if-converted basis) of the outstanding Series A Preferred, voting together as a single and separate class, shall be necessary for effecting, permitting or validating the following actions (whether by merger, recapitalization or otherwise): (i) [ ] 3. LIQUIDATION PREFERENCE. (a) Upon any liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, or any Acquisition or Asset Transfer (each a Liquidity Event ), before any distribution or payment shall be made to the holders of any Common Stock, the holders of Series A Preferred shall be entitled to be paid out of the assets of the Company legally available for distribution for each share of Series A Preferred held thereby an amount per share of Series A Preferred equal to the applicable Original Issue Price plus all Accruing Dividends accrued but unpaid thereon, whether or not declared, together with any other dividends declared but unpaid thereon. If, upon any such Liquidity Event, the assets of the Company available for distribution to its shareholders shall be insufficient to pay the holders of shares of Series A Preferred the full amount to which they shall be entitled under this Section 3(a), the holders of Series A Preferred shall share ratably in any distribution of the assets available for distribution in proportion to the respective amounts that would otherwise be payable
in respect of the shares of Series A Preferred held thereby upon such distribution if all amounts payable on or with respect to such shares were paid in full. (b) In the event of any Liquidity Event, after the payment of all preferential amounts required to be paid to the holders of shares of Series A Preferred, the remaining assets of the Company available for distribution to its shareholders shall be distributed among the holders of Common Stock and Series A Preferred, pro rata based on the number of shares held by each such holder, treating for this purpose all such securities as if they had been converted to Common Stock pursuant to the terms hereof immediately prior to such Liquidity Event. (c) For the purposes of this Agreement: (i) Acquisition shall mean (A) any merger or consolidation of the Company with or into any other corporation or other entity or person, or any other corporate reorganization, other than any such consolidation, merger or reorganization in which the shareholders of the Company immediately prior to such consolidation, merger or reorganization, continue to hold at least a majority of the voting power of the surviving entity in substantially the same proportions (or, if the surviving entity is a wholly owned subsidiary, its parent) immediately after such consolidation, merger or reorganization; or (B) any transaction or series of related transactions to which the Company is a party in which in excess of 50% of the Company s voting power is transferred; provided, that, an Acquisition shall not include any transaction or series of transactions principally for bona fide equity financing purposes in which cash is received by the Company or any successor or indebtedness of the Company is cancelled or converted or a combination thereof; and (ii) Asset Transfer shall mean a sale, lease, exclusive license (other than exclusivity as to geographic scope, time or vertical/market, or a combination thereof, provided such license does not amount to a disposition) or other disposition of all or substantially all of the assets of the Company. (d) In any Acquisition or Asset Transfer, if the consideration to be received by the Company is other than cash, its value will be deemed its fair market value as determined in good faith by the Board in accordance with this Section 3(d). Any securities shall be valued as follows: (i) Securities not subject to investment letter or other similar restrictions on free marketability covered by subsection (ii) below: (A) If traded on a securities exchange or through the Nasdaq Stock Market the value shall be deemed to be the average of the closing prices of the securities on such securities exchange or quotation system over the thirty (30) day period ending three (3) days prior to the closing; (B) If actively traded over-the-counter, the value shall be deemed to be the average of the closing bid or sale prices (whichever is applicable) over the thirty (30) day period ending three (3) days prior to the closing; and (C) If there is no active public market, the value shall be the fair market value thereof, as determined in good faith by the Board.
(ii) The method of valuation of securities subject to investment letter or other restrictions on free marketability (other than restrictions arising solely by virtue of a shareholder s status as an affiliate or former affiliate) shall be to make an appropriate discount from the market value determined above in subsections (i)(a), (B) or (C) to reflect the approximate fair market value thereof, as determined in good faith by the Board. 4. CONVERSION RIGHTS. The holders of the Series A Preferred shall have the following rights with respect to the conversion of the Series A Preferred into shares of Common Stock (the Conversion Rights ): (a) Optional Conversion. Subject to and in compliance with the provisions of this Section 4, any shares of Series A Preferred may, at the option of the holder, be converted at any time into fully-paid and non-assessable shares of Common Stock. The number of shares of Common Stock to which a holder of Series A Preferred shall be entitled upon conversion shall be the product obtained by multiplying the Series A Preferred Conversion Rate or Series A-1 Preferred Conversion Rater, as applicable, then in effect (determined as provided in Section 4(b)) by the number of shares of Series A Preferred or Series A-1 Preferred, as applicable, being converted. (b) Series A Preferred Conversion Rate. The conversion rate in effect at any time for conversion of the Series A Preferred (the Series A Preferred Conversion Rate ) shall be the quotient obtained by dividing the Original Issue Price of the Series A Preferred by the Series A Preferred Conversion Price, calculated as provided in Section 4(c). (c) Series A Preferred Conversion Price. The conversion price for the Series A Preferred shall initially be the Original Issue Price of the Series A Preferred (the Series A Preferred Conversion Price ). Each initial Series A Preferred Conversion Price shall be adjusted from time to time in accordance with this Section 4. All references to a Series A Preferred Conversion Price herein shall mean such Series A Preferred Conversion Price as so adjusted. (d) Mechanics of Conversion. Each holder of Series A Preferred who desires to convert the same into shares of Common Stock pursuant to this Section 4 shall surrender the certificate or certificates therefor, duly endorsed, at the office of the Company or any transfer agent for the Series A Preferred, and shall give written notice to the Company at such office that such holder elects to convert the same. Such notice shall state the number of shares of Series A Preferred being converted. Thereupon, the Company shall promptly issue and deliver at such office to such holder a certificate or certificates for the number of shares of Common Stock to which such holder is entitled and shall promptly pay (i) in cash or, to the extent sufficient funds are not then-legally available therefor, in Common Stock (at the Common Stock s fair market value determined by the Board as of the date of such conversion), any declared and unpaid dividends on the shares of Series A Preferred being converted and (ii) in cash (at the Common Stock s fair market value determined by the Board as of the date of conversion) the value of any fractional share of Common Stock otherwise issuable to any holder
of Series A Preferred. Such conversion shall be deemed to have been made at the close of business on the date of such surrender of the certificates representing the shares of Series A Preferred to be converted, and the person entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder of such shares of Common Stock on such date. If a conversion election is made in connection with an underwritten offering of the Company s securities pursuant to the Securities Act of 1933, as amended, (which underwritten offering does not cause an automatic conversion to take place) the conversion may, at the option of the holder tendering shares of Series A Preferred for conversion, be conditioned upon the closing with the underwriters of the sale of the Company s securities pursuant to such offering, in which event the holders making such elections who are entitled to receive Common Stock upon conversion of their Series A Preferred shall not be deemed to have converted such shares of Series A Preferred until immediately prior to the closing of such sale of the Company s securities in the offering. (e) Adjustment for Stock Splits and Combinations. If at any time or from time to time on or after the date that the first share of the applicable series of Series A Preferred is issued (the Original Issue Date ) the Company effects a subdivision of the outstanding Common Stock, each Series A Preferred Conversion Price in effect immediately before that subdivision shall be proportionately decreased. Conversely, if at any time or from time to time after the Original Issue Date the Company combines the outstanding shares of Common Stock into a smaller number of shares, each Series A Preferred Conversion Price in effect immediately before the combination shall be proportionately increased. Any adjustment under this Section 4(e) shall become effective at the close of business on the date the subdivision or combination becomes effective. (f) Adjustment for Common Stock Dividends and Distributions. If at any time or from time to time on or after the Original Issue Date the Company pays to holders of Common Stock a dividend or other distribution in additional shares of Common Stock, each Series A Preferred Conversion Price then in effect shall be decreased as of the time of such issuance, as provided below: (i) Such Series A Preferred Conversion Price shall be adjusted by multiplying such Series A Preferred Conversion Price then in effect by a fraction equal to: (A) the numerator of which is the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance, and (B) the denominator of which is the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance plus the number of shares of Common Stock issuable in payment of such dividend or distribution; (ii) If the Company fixes a record date to determine which holders of Common Stock are entitled to receive such dividend or other distribution, such Series A Preferred Conversion Price shall be fixed as of the close of business on such record date and
the number of shares of Common Stock shall be calculated immediately prior to the close of business on such record date; and (iii) If such record date is fixed and such dividend is not fully paid or if such distribution is not fully made on the date fixed therefor, such Series A Preferred Conversion Price shall be recomputed accordingly as of the close of business on such record date and thereafter such Series A Preferred Conversion Price shall be adjusted pursuant to this Section 4(f) to reflect the actual payment of such dividend or distribution. (g) Adjustment for Reclassification, Exchange, Substitution, Reorganization, Merger or Consolidation. If at any time or from time to time on or after the Original Issue Date the Common Stock issuable upon the conversion of the Series A Preferred is changed into the same or a different number of shares of any class or classes of stock, whether by recapitalization, reclassification, merger, consolidation or otherwise (other than an Acquisition or Asset Transfer, or a subdivision or combination of shares or stock dividend provided for elsewhere in this Section 4), from and after any such event each holder of Series A Preferred shall then have the right to convert such stock into the kind and amount of stock and other securities and property receivable upon such recapitalization, reclassification, merger, consolidation or other change by holders of the maximum number of shares of Common Stock into which such shares of Series A Preferred could have been converted immediately prior to such recapitalization, reclassification, merger, consolidation or change, all subject to further adjustment as provided herein or with respect to such other securities or property by the terms thereof. In any such case, appropriate adjustment shall be made in the application of the provisions of this Section 4 with respect to the rights of the holders of Series A Preferred after the capital reorganization to the end that the provisions of this Section 4 (including adjustment of each Series A Preferred Conversion Price then in effect and the number of shares issuable upon conversion of the Series A Preferred) shall be applicable after that event and be as nearly equivalent as practicable. (h) Sale of Shares Below Series A Preferred Conversion Price. (i) If at any time or from time to time on or after the Original Issue Date the Company issues or sells, or is deemed by the express provisions of this Section 4(h) to have issued or sold, Additional Shares of Common Stock (as defined below) or as provided in Section 4(e), 4(f) or 4(g) above, for an Effective Price (as defined below) less than any then-effective Series A Preferred Conversion Price (a Qualifying Dilutive Issuance ), then and in each such case, such Series A Preferred Conversion Price shall be reduced, as of the opening of business on the date of such issue or sale, to a price determined by multiplying such Series A Preferred Conversion Price in effect immediately prior to such issuance or sale by a fraction equal to: (A) the numerator of which shall be (1) the number of shares of Common Stock deemed outstanding (as determined below) immediately prior to such issue or sale, plus (2) the number of shares of Common Stock which the Aggregate Consideration (as defined below) received or deemed received by the Company for the total
number of Additional Shares of Common Stock so issued would purchase at such then-existing Series A Preferred Conversion Price, and (B) the denominator of which shall be (1) the number of shares of Common Stock deemed outstanding (as determined below) immediately prior to such issue or sale plus (2) the total number of Additional Shares of Common Stock so issued. For the purposes of the preceding sentence, the number of shares of Common Stock deemed to be outstanding as of a given date shall be the sum of (a) the number of shares of Common Stock outstanding, (b) the number of shares of Common Stock into which the then-outstanding shares of Series A Preferred could be converted if fully converted on the day immediately preceding the given date, and (c) the number of shares of Common Stock which are issuable upon the exercise or conversion of all other rights, options and convertible securities outstanding on the day immediately preceding the given date. (ii) No adjustment shall be made to any Series A Preferred Conversion Price in an amount less than one cent per share. Any adjustment required by this Section 4(h) shall be rounded to the nearest one cent per share. Any adjustment otherwise required by this Section 4(h) that is not required to be made due to the preceding two sentences shall be included in any subsequent adjustment to such Series A Preferred Conversion Price. (iii) For the purpose of making any adjustment required under this Section 4(h), the aggregate consideration received by the Company for any issue or sale of securities (the Aggregate Consideration ) shall be defined as: (A) to the extent it consists of cash, be computed at the gross amount of cash received by the Company before deduction of any underwriting or similar commissions, compensation or concessions paid or allowed by the Company in connection with such issue or sale and without deduction of any expenses payable by the Company, (B) to the extent it consists of property other than cash, be computed at the fair value of that property as determined in good faith by the Board, and (C) if Additional Shares of Common Stock, Convertible Securities (as defined below) or rights or options to purchase either Additional Shares of Common Stock or Convertible Securities are issued or sold together with other stock or securities or other assets of the Company for a consideration which covers both, be computed as the portion of the consideration so received that may be reasonably determined in good faith by the Board to be allocable to such Additional Shares of Common Stock, Convertible Securities or rights or options. (iv) For the purpose of the adjustment required under this Section 4(h), if the Company issues or sells Preferred Stock or other stock, options, warrants, purchase rights or other securities convertible into Additional Shares of Common Stock (such convertible stock or securities being herein referred to as Convertible Securities ) or rights or options for the purchase of Additional Shares of Common Stock or Convertible Securities, and if the Effective Price of such Additional Shares of Common Stock is less than any Series A Preferred Conversion Price, in each case the Company shall be deemed to have issued at the time of the issuance of such rights or options or Convertible Securities the maximum number of Additional Shares of Common Stock issuable upon exercise or conversion thereof and to have received as consideration for the issuance of such shares an amount equal to the total amount of
the consideration, if any, received by the Company for the issuance of such rights or options or Convertible Securities plus: (A) in the case of such rights or options, the minimum amounts of consideration, if any, payable to the Company upon the exercise of such rights or options; and (B) in the case of Convertible Securities, the minimum amounts of consideration, if any, payable to the Company upon the conversion thereof (other than by cancellation of liabilities or obligations evidenced by such Convertible Securities); provided that if the minimum amounts of such consideration cannot be ascertained, but are a function of anti-dilution or similar protective clauses, the Company shall be deemed to have received the minimum amounts of consideration without reference to such clauses. (C) If the minimum amount of consideration payable to the Company upon the exercise or conversion of rights, options or Convertible Securities is reduced over time or on the occurrence or non-occurrence of specified events other than by reason of anti-dilution adjustments, the Effective Price shall be recalculated using the figure to which such minimum amount of consideration is reduced; provided further, that if the minimum amount of consideration payable to the Company upon the exercise or conversion of such rights, options or Convertible Securities is subsequently increased, the Effective Price shall be again recalculated using the increased minimum amount of consideration payable to the Company upon the exercise or conversion of such rights, options or Convertible Securities. (D) No further adjustment of any Series A Preferred Conversion Price, as adjusted upon the issuance of such rights, options or Convertible Securities, shall be made as a result of the actual issuance of Additional Shares of Common Stock or the exercise of any such rights or options or the conversion of any such Convertible Securities. If any such rights or options or the conversion privilege represented by any such Convertible Securities shall expire without having been exercised, any Series A Preferred Conversion Price as adjusted upon the issuance of such rights, options or Convertible Securities shall be readjusted to the Series A Preferred Conversion Price which would have been in effect had an adjustment been made on the basis that the only Additional Shares of Common Stock so issued were the Additional Shares of Common Stock, if any, actually issued or sold on the exercise of such rights or options or rights of conversion of such Convertible Securities, and such Additional Shares of Common Stock, if any, were issued or sold for the consideration actually received by the Company upon such exercise, plus the consideration, if any, actually received by the Company for the granting of all such rights or options, whether or not exercised, plus the consideration received for issuing or selling the Convertible Securities actually converted, plus the consideration, if any, actually received by the Company (other than by cancellation of liabilities or obligations evidenced by such Convertible Securities) on the conversion of such Convertible Securities, provided that such readjustment shall not apply to prior conversions of Series A Preferred. (v) For the purpose of making any adjustment to the Series A Preferred Conversion Price required under this Section 4(h), Additional Shares of Common