{"id":8313,"date":"2021-12-25T09:56:35","date_gmt":"2021-12-25T09:56:35","guid":{"rendered":"https:\/\/magilex.com\/?p=8313"},"modified":"2023-04-07T13:13:31","modified_gmt":"2023-04-07T13:13:31","slug":"term-sheet-for-convertible-promissory-note-financing","status":"publish","type":"legal_template","link":"https:\/\/www.magilex.com\/et\/legal-template\/term-sheet-for-convertible-promissory-note-financing-8313\/","title":{"rendered":"Term Sheet for Convertible Promissory Note Financing"},"content":{"rendered":"

TERM SHEET<\/b>\u00a0
<\/b>FOR CONVERTIBLE PROMISSORY NOTE FINANCING OF<\/b>
<\/b>[COMPANY NAME<\/mark>]<\/b>\u00a0<\/b><\/p>\n

[Date<\/mark>]<\/span>\u00a0<\/span><\/p>\n

The following is a summary of the basic terms and conditions of a proposed convertible promissory note financing. This term sheet is for discussion purposes only and is not binding on the Company or the Investors (as defined below), nor is the Company or any of the Investors obligated to\u00a0 consummate the convertible promissory note financing until a definitive convertible note purchase\u00a0 agreement has been agreed to and executed by the Company and the Investors.\u00a0<\/span><\/p>\n

Issuer: <\/b>[<\/span>Company\u2019s full legal name<\/span><\/mark>], a [<\/span>registered location of Company<\/span><\/mark>] corporation\u00a0 (<\/span>the <\/span>\u201cCompany\u201d<\/b>).<\/span><\/p>\n

Investors: <\/b>[Investor name<\/mark>]<\/span>, or any of its affiliates<\/span> and other investors mutually agreed upon by <\/span>Investor(s) <\/span>and the Company (collectively the <\/span>\u201cInvestors\u201d<\/b>, <\/span>each an <\/span>\u201c<\/span>Investor<\/b>\u201d<\/span>).<\/span><\/p>\n

Financing Amount: <\/b>Up to <\/span>USD<\/span>\u00a0$[<\/span>amount<\/span><\/mark>] in aggregate principal amount of convertible promissory notes (the <\/span>\u201cNotes\u201d<\/b>).\u00a0<\/span><\/p>\n

Use of Proceeds: <\/b>The Company intends to use the proceeds of this offering to [<\/span>description<\/span><\/mark>].\u00a0<\/span><\/p>\n

Closings: <\/b>The Company may close the sale of the Notes in one or more closings with one or more Investors of the Notes acceptable to the Company (the <\/span>\u201cInvestors\u201d<\/b>, <\/span>each an <\/span>\u201c<\/span>Investor<\/b>\u201d<\/span>).\u00a0<\/span><\/p>\n

Maturity Date: <\/b>Unless earlier repaid or converted, outstanding principal\u00a0 and unpaid accrued interest on the Notes will be due and payable upon request of the Majority Holders (as defined below) made on or after the date which is [<\/span>12<\/span>] months from the date of the Note Purchase Agreement (the <\/span>\u201cMaturity Date\u201d<\/b>).<\/span><\/p>\n

Interest: <\/b>[<\/span>Simple \/ Compounded<\/span><\/mark>]<\/span> interest will accrue on an annual\u00a0 basis at the rate of [<\/span>rate<\/span><\/mark>]%<\/span> per annum based on a 365 day year.\u00a0<\/span><\/p>\n

Conversion: <\/b>Automatic Conversion in a Qualified Financing<\/span>. If the\u00a0 Company issues equity securities (<\/span>\u201cEquity Securities\u201d<\/b>) in a transaction or series of related transactions resulting in aggregate gross proceeds to the Company of at least <\/span>USD<\/span>\u00a0$[<\/span>amount<\/span><\/mark>], including conversion of the Notes and any other indebtedness (a <\/span>\u201cQualified Financing\u201d<\/b>), then the Notes, and any accrued but unpaid interest thereon, will automatically convert into the equity securities issued pursuant to the Qualified Financing at a conversion price equal to the lesser of (i) [<\/span>rate<\/span><\/mark>]%<\/span> of the per share price paid by the purchasers of such equity securities in the Qualified Financing and (ii) the price obtained by dividing <\/span>USD<\/span>\u00a0$[<\/span>amount<\/span><\/mark>]<\/span> by the Company\u2019s fully diluted capitalization as of immediately prior to the initial closing of the Qualified Financing (assuming full conversion or exercise of all convertible and exercisable securities then outstanding other than the Notes).\u00a0<\/span><\/p>\n

Voluntary Conversion at the Maturity Date<\/span>. If the Notes have not been previously converted pursuant to a Qualified Financing, then, effective upon the Maturity Date, the Majority Holders may elect to convert each of the Notes into shares of a newly created series of the Company\u2019s preferred stock on the terms and conditions agreed upon <\/span>by the Company and the Investors at a conversion price <\/span>equal to the quotient of <\/span>USD<\/span>\u00a0$[<\/span>amount<\/span><\/mark>]<\/span> divided by <\/span>the number of outstanding, fully-diluted number of shares <\/span>immediately prior to the Maturity Date (including all <\/span>outstanding options, warrants and any other shares <\/span>reserved for future issuance under stock option or other <\/span>equity incentive plans of the Company, but excluding the <\/span>shares of equity securities of the Company issuable upon <\/span>the conversion of Notes or other indebtedness).\u00a0<\/span><\/p>\n

Change of Control: <\/b>If the Company is acquired prior to the Qualified Financing, then at the Investor\u2019s option, either (i) Investor <\/span>will receive an aggregate amount equal to [<\/span>2.0<\/span>]<\/span> times the <\/span>aggregate amount of outstanding principal and accrued but <\/span>unpaid interest, or (ii) such Investor\u2019s Note will be <\/span>converted into shares of Common Stock at a conversion <\/span>price implied by a <\/span>USD<\/span>\u00a0$[<\/span>amount<\/span><\/mark>]<\/span> fully-diluted <\/span>valuation.\u00a0<\/span><\/p>\n

Most Favored Nation:<\/b> If the Company issues any convertible notes, convertible\u00a0 equity certificates or similar instruments that have rights, <\/span>preferences or privileges that are more favorable than the <\/span>terms of the Notes (including any rights, preferences or <\/span>privileges that are added to the Notes in any Subsequent <\/span>Closing), the Company shall provide equivalent rights to <\/span>the Lenders with respect to the Notes (with appropriate <\/span>adjustment for economic terms or other contractual rights <\/span>acceptable to the Majority Holders).\u00a0<\/span><\/p>\n

Pre-Payment: <\/b>The principal and accrued interest may not be prepaid\u00a0 unless approved in writing by Investors holding Notes <\/span>whose aggregate principal amount represents a majority of <\/span>the outstanding principal amount of all then-outstanding <\/span>Notes (the <\/span>\u201cMajority Holders\u201d).\u00a0<\/b><\/p>\n

Security: <\/b>The Notes will be a general unsecured obligation of the Company.\u00a0<\/span><\/p>\n

Documentation: <\/b>The Notes will be issued and sold pursuant to a convertible\u00a0 note purchase agreement prepared by the [<\/span>Company\u2019s \/ <\/span><\/mark>Investors<\/mark>\u2019<\/span>] legal counsel and will contain customary <\/span>representations and warranties of the Company and the <\/span>Investors (the <\/span>\u201cNote Purchase Agreement\u201d<\/b>). The Note <\/span>Purchase Agreement and the Notes may be amended, or <\/span>any term thereof waived, upon the written consent of the <\/span>Company and the Majority Holders.\u00a0<\/span>Each Majority Holder will be granted access to Company facilities and personnel during normal business hours and <\/span>with reasonable advance notification. The Company will <\/span>deliver to each Major Holder (i) annual, quarterly and <\/span>monthly financial statements, in each case prepared in <\/span>accordance with generally accepted accounting principles <\/span>as soon as practicable but not less than 120 days following\u00a0\u00a0<\/span><\/p>\n

Information Rights \/\u00a0 Visitation and Meetings:\u00a0 <\/b><\/b>the end of the fiscal year, 45 days following the end of a <\/span>fiscal quarter and 15 days following the end of the month, <\/span>respectively, <\/span>[and annual financial statements shall be <\/span>audited by an independent nationally recognized <\/span>accounting firm]<\/span>; (ii) 30 days prior to the end of each fiscal <\/span>year, a comprehensive operating budget forecasting the <\/span>Company\u2019s revenues, expenses and cash position on a <\/span>month to month basis for the upcoming fiscal year; and (iii) <\/span>promptly following the end of each quarter, an up-to-date <\/span>capitalization table.\u00a0<\/span><\/p>\n

[Protective Provisions] <\/b>\u00a0<\/b>In addition to any other vote or approval required under the\u00a0 Company\u2019s Bylaws, <\/span>[including the existing protective <\/mark><\/span>provisions for the holders of the Existing Preferred <\/span><\/mark>Stock<\/mark>]<\/span>, the Company will not, without the written <\/span>consent of the Majority Holders, either directly or by <\/span>amendment, merger, consolidation, or otherwise: <\/span><\/p>\n

(i) Liquidate, dissolve or wind up the affairs of the <\/span>Company, or effect any merger or consolidation <\/span>or any other Deemed Liquidation Event;\u00a0
<\/span>(ii) Create or authorize the creation of or issue any <\/span>new class or series of stock or any other security <\/span>convertible into or exercisable for any equity <\/span>security (by reclassification, amendment or <\/span>alteration of any existing security, or otherwise), <\/span>having rights, preferences or privileges senior to <\/span>or on parity with the Series <\/span>[A] <\/span>Preferred Stock;\u00a0
<\/span>(iii) Amend, alter or repeal any provision of the <\/span>Bylaws;\u00a0
<\/span>(iv) Increase or decrease the authorized number of <\/span>shares of Common Stock or Preferred Stock (or <\/span>any series thereof);
<\/span>(v) Redeem or repurchase of any Common Stock or <\/span>Preferred Stock;\u00a0
<\/span>(vi) Increase or decrease the size of the Board of <\/span>Directors;\u00a0
<\/span>(vii) Purchase or redeem or pay any dividend with <\/span>respect to any capital stock other than stock <\/span>repurchased at cost from service providers of the <\/span>Company upon termination and other than the <\/span>exercise by the Company of contractual rights of <\/span>first refusal over such stock;\u00a0
<\/span>(viii) Become obligated under any loan or guarantee <\/span>of indebtedness (other than indebtedness to <\/span>financial institutions) in excess of <\/span>USD<\/span>\u00a0<\/span>$[amount<\/mark>] <\/span>in the aggregate;\u00a0
<\/span>(ix) Create or hold capital stock in any subsidiary <\/span>that is not a wholly-owned subsidiary or dispose <\/span>of any subsidiary stock or all or substantially all <\/span>of any subsidiary assets;
<\/span>(x) Cease to engage in a business that is <\/span>substantially similar to the business engaged in, <\/span>or contemplated to be engaged in, as of the <\/span>Closing;\u00a0
<\/span>(xi) Engage in, or consummate, any sale, lease, <\/span>assignment, transfer, exchange or other <\/span>conveyance (including by exclusive license or <\/span>otherwise) of all or substantial all of the assets <\/span>of the Company in a single transaction or series <\/span>of related transactions.\u00a0<\/span><\/p>\n

[Board of Directors:<\/mark><\/b>\u00a0 <\/b>The Majority Holders of the Notes may appoint [<\/span>one<\/span>] member [<\/span>s<\/span><\/mark>] to the Company\u2019s board of directors.<\/mark>]\u00a0<\/span><\/p>\n

Key Man Clause: <\/b>Mr. [<\/span>name<\/span><\/mark>] will commit to devote substantially all of his\u00a0 professional business time and effort to the proper <\/span>operation of the Company during a period of no less than <\/span>[<\/span>5<\/span>] years post-Closing.\u00a0<\/span><\/p>\n

Conditions to Closing: <\/b>The Closings will occur upon the satisfaction of customary\u00a0 closing conditions, including, but not limited to:\u00a0<\/span>(i) Completion of legal documentation satisfactory <\/span>to the Investors and the Company;\u00a0<\/span>(ii) Satisfactory completion of financial and legal <\/span>due diligence;\u00a0<\/span>(iii) <\/span>[Transformation of the Company into a SAPI <\/mark><\/span>legal entity<\/mark>;] <\/span>(iv) Approval by the Investment Committees of the <\/span>Investors.\u00a0<\/span><\/p>\n

Representations and Warranties: <\/b>Standard representations and warranties by the Company.\u00a0<\/span><\/p>\n

Fees and Expenses: <\/b>Company to pay all legal and administrative costs of the\u00a0 financing at Closing, including reasonable fees and expenses (not to exceed USD <\/span>$[amount<\/mark><\/span>]) of the <\/span>[<\/span>Company\u2019s \/ Investors<\/mark>\u2019<\/span>] counsel.\u00a0<\/span><\/p>\n

Governing Law: <\/b>The Notes shall be governed by and construed in accordance with the laws of [jurisdiction<\/mark>], without giving <\/span>effect to principles of conflicts of law.\u00a0<\/span><\/p>\n

This term sheet is non-binding and is intended solely as a summary of the terms that are currently\u00a0 proposed by the parties. The parties acknowledge that they neither intend to enter, nor have they\u00a0 entered, into any agreement to negotiate a definitive agreement pursuant to this term sheet, and\u00a0 either party may, at any time prior to execution of such definitive agreement, propose different\u00a0 terms from those summarized herein or unilaterally terminate all negotiations pursuant to this term\u00a0 sheet without any liability whatsoever to the other party. Each party will be solely liable for all of\u00a0 its own fees, costs and other expenses in conjunction with negotiation and preparation of a final\u00a0 agreement pursuant to this term sheet.\u00a0<\/span><\/p>\n

Acknowledged and agreed:<\/b>\u00a0<\/b><\/p>\n

Company<\/b><\/p>\n

[<\/span>name, title, signature<\/span><\/mark>]<\/span><\/p>\n

Investor(s)<\/b><\/p>\n

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