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TERM SHEETS – DEBT AND EQUITY Key Terms and Concepts

Presented by: Alex Kilgour and Neil Schwartz

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Overview

• Common terms in debt and equity term sheets

• Key terms in debt term sheets

• Key terms in equity term sheets

• Most negotiated terms

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Common Terms • Non-binding except for confidentiality and exclusivity (and

sometimes, expenses)

• Full legal name of the issuer and jurisdiction of incorporation

• Type of security (debenture, common shares, preferred shares)

• Size of the round

• Price per security / valuation / conversion price

• Number of closings / number of tranches / milestones

• Identity of the investors

• Targeted closing date

• Use of proceeds

• Term sheet expiration date

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Common Terms (Valuation and Conversion)

• Pre-money valuation

• Amount to be invested

• Post-money valuation

• Attach cap tables (pre-money and post-money)

• Stock option pool (pre-money (VC) or post-money (founders)?)

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Debt Offering Terms (Debt Characteristics)

• Loan / Debenture / Promissory Note / Credit Facility

• Demand or term/maturity date?

• Secured or unsecured?

• If secured, some or all assets?

• Interest – fixed, floating or none?

• Priority/ranking – deal with existing creditors/postpone or subordinate?

• Convertible – automatic and/or optional?

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Debt Offering Terms (Conversion)

• Convertible – if so, define share terms in advance?

• Fixed or indeterminate conversion price?

• Automatic conversion – significant financing/qualified change of control/maturity

• Optional conversion – at any time or only at maturity? Change of control?

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Debt Offering Terms (Control)

• Positive covenants – “thou shalt”

• Negative covenants –”thou shalt not”

• Equity kicker – “free” shares or warrants (pricing)

• Board participation

• Information rights

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Equity Offering Terms

• Common shares/preferred shares/units

• Liquidation preference – participating/non-participating

• Convertible – conversion price/valuation

• Automatic conversion – qualified IPO / qualified acquisition

• “Pay to play”

• Anti-dilution – full ratchet or weighted average

• Pre-emptive rights

• Protective provisions – “preferred majority” approval

• Voting rights

• Shareholder rights

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Liquidation Events/Exits

• Qualified IPO = $X raised for the company + listing on recognized stock exchange

• Qualified Acquisition = sale of all shares or all assets for at least $X with at least Y% in cash at closing

• Management carve-out on acquisition

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Governance

• Board nomination rights/board composition

• Board observer rights

• Quorum

• Number of meetings per year

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Shareholders Rights

• Pre-emptive right

• Right of first refusal

• Co-sale right/tag-along right

• Drag along right

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Closing Conditions

• Completion of due diligence

• Authorizing board and shareholder resolutions

• Shareholder and creditor consents and waivers

• Officer’s certificates

• Certificate of compliance / status

• Executed versions of definitive agreements

• Ancillary agreements

• Stock option plan

• Legal opinion

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Most Negotiated Terms

• Valuation (dilution)

• Type of security (voting)

• Board of directors (control)

• Significant financing threshold

• Qualified IPO threshold

• Drag along threshold

• Anti-dilution

• Pay to play

• Management carve-out

Term Sheets - Debt and Equity Key Terms and Concepts