1. ANGEL VENTURE FORUM – GEORGETOWN SELECTION DAY YOU 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