Investment Term Sheet Sample

Many people have asked us in the last few months about documents related to the venture funding process. The Investment Term Sheet is a key document that starts serious final round discussions for funding with a serious potential investor. It is like an engagement before marriage. Here is a sample Investment Term Sheet.

INVESTMENT TERM SHEET

CONFIDENTIAL

Issuer: ABC Inc.(the “Company”)

Investor: XYZ Ltd. (“Investor”)

Initial Investment:
XYZ will purchase _____ shares of the Company’s common stock, par value $____per share (the “Common Stock”) for a purchase price of $_______.

Subsequent Investments:
Upon the achievement of each of the First and Second Commercial Milestones (as defined below), Investor shall purchase additional shares of the Company’s stock equal in value to $$5,000,000. The per share price to be paid by the Investor in subsequent closing shall be agreed mutually at a later date.

Commercial Milestones:
(a) First Commercial Milestone
The “ABC System” (as defined in the License Development Agreement between the parties dated ______) will meet the following performance criteria:
(i) _______________________________________
(ii) _______________________________________

(b) Second Commercial Milestone:
Shipment of the commercial release of the new Product Version X” (as defined in the License Development Agreement between the parties dated _____) no more than 18 months after the commercial availability of the next version of product __.

Registration Rights:
At the earlier to occur of two years after the Initial Closing or six months after a Qualified IPO, the holders of the Preferred Stock may request two demand and unlimited S-3 registrations subject to minimum proceeds limitations. The Company will pay registration expenses other than underwriters’ discounts.

Board of Directors:
The board of directors of the Company will consist of five members. The shareholders will agree to vote for directors as follows:
(1) 1 director nominated by the holders of the preferred shares.
(2) 2 outside independent directors by vote of all shareholders.
The board shall meet monthly for the first year and thereafter as determined by the board. The board shall appoint a Compensation Committee to set compensation.

Financial Information:
As long as Investor holds at least 25% of the stock acquired under the transaction contemplated herein, the Company will deliver monthly, quarterly, and annual financial information and access to the Company’s properties as is customary.

First Refusal Right for New Securities:
If the Company proposes to offer any equity securities (subject to certain exceptions, including the sale of common stock or grant of common stock options to employees), the Investors will be entitled to purchase their fully-diluted percentage of such offering.

Conditions to Closing:
The obligation of the Investor to purchase the Common Stock will be subject to customary closing conditions including, without limitation:

• Execution of mutually satisfactory definitive documentation in forms substantially similar to those attached hereto as Appendix A (Stock Purchase Agreement) and Appendix B (Registration Rights Agreement);
• Any applicable governmental and regulatory approvals;
• Closing certificates;
• Legal opinions.

Both parties will use commercially reasonable efforts to cause the foregoing closing conditions to be satisfied.

Expenses:
The Company will pay reasonable legal fees and expenses of counsel to the Investors, whether or not the contemplated transaction is consummated, with an upper cap of $_______.

Exclusivity Period:
The Company hereby agrees not to initiate contacts with, negotiate with, or aid in the due diligence of any other potential investors during a period of 45 days from the execution of this Term Sheet, without the prior written consent of the Investors. This Term Sheet is to be kept confidential and not to be disclosed to any person other than the Company’s officers and legal or financial advisors without the prior written consent of the Investors. This exclusivity period is granted inconsideration of the due diligence effort conducted and to be conducted by the Investors.

Effect:
The parties agree that this Term Sheet is binding upon both parties and neither party may unilaterally terminate the contemplated transactions described herein except based upon the other party’s failure to satisfy a closing condition listed above.

Proposed Closing Date:
The proposed closing date is ______, provided that this term sheet is executed by the Company on or before _______. If not executed by such date, this term sheet shall be deemed to be withdrawn.

Dated: __________

ABC Inc. (“Company”) XYZ Ltd. (“Investor”)
By: /s/ ABCD By: /s/ EFGH
Title: CEO Title: SVP