EPISODE 1 VENTURES SUMMARY OF TERMS FOR SALE OF SERIES SEED SHARES

Transcription

1 EPISODE 1 VENTURES SUMMARY OF TERMS FOR SALE OF SERIES SEED SHARES Company [Company] Founders [Founder 1], [Founder 2], & [Founder 3] Investors Structure of Financing Conditions to Close Estimated Closing Date Type of Shares Episode 1 Investments LP acting by its General Partner Episode (GP) Limited (the Lead Investor ) in conjunction with other investors (the Investors ) mutually agreeable to the Lead Investor and the Company. The financing will be up to an aggregate of [ ] at a fully diluted pre-money valuation of [ ], including an unallocated employee share option plan ( ESOP ) which will be [ ]% post investment, ie at a share price of [ ] per share. The Lead Investor will invest up to [ ] and would hold no less than [ ]% of the Company on a fully diluted basis. (i) completion of confirmatory due diligence and anti-money laundering checks (ii) all employees having entered into service agreements containing IP assignment provisions, (iii) receipt of all necessary consents, and (iv) agreement of suitable milestones for the Company for 12 months after Closing. [Closing Date] [or later date to be set when term sheet is signed]. Newly issued series seed convertible preferred shares ( Seed Shares ), which shall rank senior to all other existing shares of the Company in all respects. [If existing shareholders wish to coinvest and take advantage of EIS tax relief, they may purchase Ordinary Shares at the same share price. The Company and the Lead Investor will endeavour to ensure the EIS can be claimed and will be maintained for 3 years but will not provide any guarantees of the same.] Liquidation Preference On a liquidation, dissolution, winding up, merger, acquisition, sale, exclusive license or other disposal of substantially all of the assets or a majority of the shares of the Company (a Change of Control ) or an IPO, the holders of the Seed Shares shall receive the higher of: (a) one times the original purchase price for the Seed Shares; or (b) (by converting to Ordinary Shares) the amount they would receive if all shareholders received their pro rata share of such assets or proceeds. Anti-Dilution Provisions In the event that the Company issues additional shares at a purchase price less than the current Seed Shares conversion price, the conversion price shall be adjusted on a broad-based weighted average basis. The following share issues will not trigger an anti-dilution adjustment: (i) shares issued on conversion of any of the Seed Shares, or as a dividend or distribution on the Seed Shares; (ii) shares issued on the conversion of any debenture, warrant, option, or other convertible security; or (iii) shares issued on a stock split, stock dividend, or any subdivision of shares; and (iv) Ordinary Shares (or options to purchase such Ordinary Shares) issued or issuable to employees or directors of, or consultants to, the Company under any plan approved by the Company s Board of Directors, subject in each case other than the granting of options over Ordinary Shares to such transaction being approved by an Investor Majority.

2 Important Decisions Conversion Pre-emption Right of First Refusal and Co-Sale Tag Along Certain important actions of the Company shall require the consent of the holders of a majority of the Seed Shares (an Investor Majority ) or the Investor Director as listed in Appendix B. Each holder of Seed Shares shall have the right to convert its shares at any time into ordinary shares of the Company ( Ordinary Shares ) at an initial conversion rate of 1:1, subject to proportional adjustment for share splits, dividends or recapitalisations and any anti-dilution adjustments. The Seed Shares shall automatically convert into Ordinary Shares if (a) an Investor Majority consents to such conversion or (b) upon the closing of a firmly underwritten public offering of shares of the Company at the rate that with additional Ordinary Shares being issuable at the time of conversion so that the holders of Seed Shares would be in the same position had the liquidation preference applied. All shareholders will have a pro rata right, but not an obligation, based on their ownership of issued capital, to participate in subsequent financings of the Company (subject to customary exceptions). Any shares not subscribed for may be reallocated among the other shareholders. The Investors may assign this right to another member of their fund group or to any of its own investors or their Associates provided that such investors or their Associates have given the assigning Investor power to vote in respect of any shares purchased pursuant to such assignment. All shareholders shall have a pro rata right, but not an obligation, based on their ownership of shares, to participate on identical terms in transfers of any shares of the Company, and a right of first refusal on such transfers (subject to customary permitted transfers, including transfers by Investors to affiliated funds). Any transfers of Seed Shares to shareholders who do not already hold some Seed Shares will be conditional on those Seed Shares being converted to Ordinary Shares. The provisions of this term will apply if a Shareholder (a Proposed Seller ) proposes to transfer any Shares (a Proposed Transfer ) which would, if put into effect, result in any person (a "Proposed Transferee") acquiring a Controlling Interest in the Company. A Proposed Seller must, before making a Proposed Transfer procure the making by the Proposed Transferee of an offer to the other Shareholders to acquire all of their Shares for a consideration per share the value of which is at least equal to the consideration per share offered to the Proposed Seller. Drag Along Restrictive Covenants and Founders Undertakings Founder Shares In the event that the holders of a majority of all shares and an Investor Majority wish to accept an offer to sell all of their shares to a third party, or enter into a Change of Control event of the Company, then all other shareholders shall be required to sell their shares or to consent to the transaction on the same terms and conditions, subject to the liquidation preferences of the Seed Shares. Each Founder will enter into a non-competition and non-solicitation agreement, and an employment agreement in a form reasonably acceptable to the Investors, and shall agree to devote their entire business time and attention to the Company and to not undertake additional activities without the consent of the Investors. Shares held by the Founders will be subject to reverse vesting provisions over three years as follows: 28% to vest on Closing and the remaining 72% to vest in equal monthly instalments over the next three years ( the Vesting Period ). During the Vesting Period, any unvested shares shall be automatically converted to deferred shares if a Founder is a Bad Leaver and will be offered for sale at a fair market price if a Good Leaver. 2

3 Bad Leaver means a Founder who leaves employment a) due to his resignation and voluntary departure; or b) being dismissed for Cause other than where he is found by an employment tribunal to have been constructively or unfairly dismissed; c) commits a material breach of the Investment Agreement which cannot effectively be remedied, or d) is made bankrupt or similar. All other situations will be classed as Good Leaver. There will be full acceleration of Founder vesting on a Change of Control. Board of Directors The board of directors of the Company (the Board ) shall consist of a maximum of three members: the holders of Ordinary Shares excluding any Founders who are Bad Leavers as a class may appoint two directors and the [Lead Investor][holders of Seed Shares] may appoint one director (the Investor Director ). The Lead Investor may also appoint a non-voting observer to attend meetings of the Board. The Board will meet at least eight times a year typically once a month excluding August and December. Information and Management Rights State Aid Terms Annual Presentation to Investors Documentation and Warranties Expenses Exclusivity Confidentiality The Investor Director shall receive: a) during the first 3 months: weekly PPP (Progress, Plans, Problems) reports, and b) from the Closing Date, monthly reporting and monthly financial information. Episode 1 invests from an Enterprise Capital Fund which has UK government support and is therefore classed as State Aid. The Company will comply with the information requirements and the restrictions arising from this State Aid. The Company agrees that once per calendar year on request of the Lead investor it will hold or attend an Investor update meeting for all shareholders and the underlying investors of any Investor which is a fund to update them on progress and future plans. Definitive agreements shall be drafted by lawyers representing the Lead Investor and shall include customary representations and warranties of the Founder (which shall be liable up to a maximum of the larger of 50,000 and the Founder s annual compensation) and the Company (which shall be liable up to a maximum of the investment amount) reflecting the provisions set forth herein and other provisions typical to venture capital transactions and which can be claimed up to 2 years after the signing of the Investment Agreement. The Founders will also complete a personal questionnaire. The Company shall pay the Lead Investor s fees and expenses in the transaction at Closing, anticipated not to exceed 12,000 excluding VAT. These expenses will cover legal expenses, commercial and technical DD. We anticipate that the Company will agree a fixed cost arrangement with its Legal Counsel. In consideration of the Lead Investor committing time and expense to put in place this financing, the Company and Founders agree not to discuss, negotiate or accept any proposals regarding the sale or other disposition of debt or equity securities, or a sale of material assets of the Company for 45 days from the date of the Company s signature below [apart from with named potential co-investors approved in advance by confirmation by the Lead Investor]. The Company and Founders agree to treat this term sheet confidentially and will not distribute or disclose its existence or contents outside the Company without the consent of the Lead Investor, except as required to its shareholders and professional advisors. 3

4 Expiry Non-binding Effect Time is of the essence in building your business, so we trust you will move quickly on this so you can get on with building a valuable business. [The offer in this term sheet remain open for [X] days until [DATE]][The offer in this term sheet remains open until we you to say it is withdrawn] This Summary of Terms is not intended to be legally binding, with the exception of this paragraph and the paragraphs entitled Expenses, Exclusivity and Confidentiality, which are binding upon the parties hereto and shall be governed and construed in accordance with the laws of England and Wales. 4

5 Acknowledged and agreed: EPISODE 1 VENTURES [COMPANY NAME] [ADDITIONAL INVESTOR] [ ] 5

6 APPENDIX A CAPITALISATION TABLE Shareholder Class of Shares No. of Shares. Ownership (%) [FOUNDER 1] [Ordinary Shares] % [FOUNDER 2] [Ordinary Shares] % [FOUNDER 3] [Ordinary Shares] % Lead Investor [Ordinary Shares] % Additional Investor [Ordinary Shares] % Option Pool [Ordinary Shares] % Total 100% 6

7 APPENDIX B INVESTOR CONSENTS Part 1: Matters requiring Investor Majority consent a) Permit or cause to be proposed any alteration to the rights attaching to its shares or create, allot, issue, buy-in or redeem any share or loan capital or grant or agree to grant any options, other than pursuant to the Share Option Plan provided the aggregate number of options granted does not exceed the Share Option Pool, or warrants for the issue of any share or loan capital or issue any securities convertible into shares, or establish any employee incentive scheme except in accordance with the New Articles or this agreement. b) Permit or cause to be proposed any amendment to the New Articles. c) Propose or pay any dividend or propose or make any other distribution (as defined under the Corporation Tax Act 2010). d) Permit any sale of Ordinary Shares including shares held by the Founders e) Subscribe or otherwise acquire, or dispose of any shares or options to subscribe for shares or rights relating to shares in the capital of any other company or acquire the whole or part of the undertaking of any other person or dispose of the whole or part of the undertaking of the Company or merge the Company or any part of its business with any other person or propose to do so. f) Negotiate or permit the disposal of shares in the Company amounting to a change of control or IPO. g) Permit the Company to cease, or propose to cease, to carry on its business or permit the Company or any of its directors to take any step to wind up the Company, save where it is insolvent (within the meaning of section 123 of the Insolvency Act 1986). h) Permit the Company or any of its directors (i) to take any step to place the Company into administration; (ii) to propose or enter into any arrangement, scheme, moratorium, compromise or composition with its creditors or to apply for an interim order under Part 1 of the Insolvency Act 1986; or (iii) to invite the appointment of a receiver or administrative receiver over all or any part of the Company s assets or undertaking. i) Adopt a detailed operating and capital budget and cash flow forecast in respect of each financial year of the Company. j) Enter into any loan, borrowings or advance of any nature or give any credit (other than in the ordinary course of business) to any person or acquire any loan capital of any corporate body (wherever incorporated). k) Create or permit the creation of or suffer to subsist any Encumbrance (other than a lien arising by operation of law) over the whole or any part of its undertaking, property or assets. Part 2: Matters requiring Investor Director consent a) Incur any capital expenditure in relation to any item exceeding 50,000. b) Dispose of any asset of a capital nature having a book or market value greater than 50,000. c) Make any material change to the nature of the Business or the jurisdiction where it is managed and controlled. d) Establish any new branch, agency, trading establishment or business or close any such branch, agency, trading establishment or business. e) Engage any employee or consultant on terms that either his contract cannot be terminated by three months' notice or less or his emoluments and/or commissions or bonuses are or are likely to be at the rate of 60,000 per annum or more, or vary the terms of, or terminate the contract of any such employee or consultant. f) Enter into or vary any contracts otherwise than on an arms length basis (whether with connected parties or otherwise) or enter into or vary any unusual or onerous contract or any other material or major or long-term contract. 7