[NAME OF ISSUER]
MEMORANDUM OF TERMS
[Except with respect to the provisions entitled [“Exclusive negotiations“] [and] [“Confidentiality“], which are intended to be, and are, legally binding agreements among the parties hereto, this] [This] Memorandum of Terms represents only the current thinking of the parties with respect to certain of the major issues relating to the proposed private offering and does not constitute a legally binding agreement. This Memorandum of Terms does not constitute an offer to sell or a solicitation of an offer to buy securities in any state where the offer or sale is not permitted.
Issuer: [__________], a [Delaware] corporation (the “Company“)
Securities: Series [A] Preferred Stock (the “Preferred”)
Valuation of the Company: $[__________] pre-money
Amount of the offering: $[__________]
Number of shares: [__________] shares
Price per share: $[__________]
Investor(s): [__________] or its affiliated entities (the lead investor(s)), [__________] and other investors acceptable to the Company.
Capitalization: See Exhibit A for the pre-financing capitalization of the Company [and the pro forma capitalization following the proposed offering].
Anticipated closing date: Initial closing on or before [__________], with one or more additional closings within  days thereafter.
TERMS OF THE PREFERRED
Dividends: Non-cumulative dividends at an annual rate of 8% of the purchase price per share in preference to the common stock, when and if declared by the board. Any dividends in excess of the preference will be paid to the common stock.
Liquidation preference: In the event of a liquidation, dissolution or winding up of the Company, the Preferred will have the right to receive the original purchase price plus any declared but unpaid dividends prior to any distribution to the common stock. The remaining assets will be distributed pro rata to the holders of Preferred and the holders of common stock on an as-converted basis[, provided that the total amount distributed to the Preferred (including the initial liquidation preference) will be limited to [__________] times the initial liquidation preference]. A sale of all or substantially all of the Company’s assets or a merger or consolidation of the Company with any other company will be treated as a liquidation of the Company.
Redemption: The Preferred will not have redemption rights.
Conversion: The Preferred may be converted at any time, at the option of the holder, into shares of common stock. The conversion rate will initially be 1:1, subject to anti-dilution and other customary adjustments.
Automatic conversion: Each share of Preferred will automatically convert into common stock, at the then applicable conversion rate, upon (i) the closing of a firmly underwritten public offering of common stock at a price per share that is at least [three] times the purchase price of the Preferred with gross offering proceeds in excess of $[__________] million (a “Qualified Public Offering“), or (ii) the consent of the holders of at least % of the then outstanding shares of Preferred.
Anti-dilution: The conversion price of the Preferred (which will initially equal the purchase price of the Preferred) will be subject to adjustment, on a broad-based weighted average basis, if the Company issues additional securities at a price per share less than the then applicable conversion price.
There will be no adjustment to the conversion price for issuances of (i) shares issued upon conversion of the Preferred; (ii) shares or options, warrants or other rights issued to employees, consultants or directors in accordance with plans, agreements or similar arrangements, but not to exceed a total of [__________] shares issued after the closing date [or such greater number as unanimously approved by the board]; (iii) shares issued upon exercise of options, warrants or convertible securities existing on the closing date; (iv) shares issued as a dividend or distribution on Preferred or for which adjustment is otherwise made pursuant to the certificate of incorporation (e.g., stock splits); (v) shares issued in connection with a registered public offering; (vi) shares issued or issuable pursuant to an acquisition of another corporation or a joint venture agreement approved by the board; (vii) shares issued or issuable to banks, equipment lessors or other financial institutions pursuant to debt financing or commercial transactions approved by the board; (viii) shares issued or issuable in connection with any settlement approved by the board; (ix) shares issued or issuable in connection with sponsored research, collaboration, technology license, development, OEM, marketing or other similar arrangements or strategic partnerships approved by the board; (x) shares issued to suppliers of goods or services in connection with the provision of goods or services pursuant to transactions approved by the board; or (xi) shares that are otherwise excluded by consent of holders of a majority of the Preferred.
General voting rights: Each share of Preferred will have the right to a number of votes equal to the number of shares of common stock issuable upon conversion of each such share of Preferred. The Preferred will vote with the common stock on all matters except as specifically provided herein or as otherwise required by law.
Voting for directors: [So long as [__________]% of the Preferred is outstanding, the] [The] holders of Preferred will be entitled to elect [two] director[s]. The holders of common stock will be entitled to elect [two] director[s]. The remaining director(s) will be elected by the holders of Preferred and common stock voting together.
Protective provisions: So long as [any] of the Preferred is outstanding, consent of the holders of at least % of the Preferred will be required for any action that (i) alters any provision of the certificate of incorporation [or the bylaws] if it would [adversely] alter the rights, preferences, privileges or powers of or restrictions on the preferred stock or any series of preferred; (ii) changes the authorized number of shares of preferred stock or any series of preferred; (iii) authorizes or creates any new class or series of shares having rights, preferences or privileges with respect to dividends or liquidation senior to or on a parity with the Preferred or having voting rights other than those granted to the preferred stock generally; (iv) approves any merger, sale of assets or other corporate reorganization or acquisition; (v) approves the purchase, redemption or other acquisition of any common stock of the Company, other than repurchases pursuant to stock restriction agreements approved by the board upon termination of a consultant, director or employee; (vi) declares or pays any dividend or distribution with respect to the [preferred stock (except as otherwise provided in the certificate of incorporation) or] common stock; [or] (vii) approves the liquidation or dissolution of the Company[; (viii)Â increases the size of the board;] [(ix) encumbers or grants a security interest in all or substantially all of the assets of the Company in connection with an indebtedness of the Company;] [(x) acquires a material amount of assets through a merger or purchase of all or substantially all of the assets or capital stock of another entity;] [or (xi) increases the number of shares authorized for issuance under any existing stock or option plan or creates any new stock or option plan].
Information rights: The Company will deliver to each holder of at least [500,000] shares of Preferred, (i) [un]audited annual financial statements within  days following year-end, (ii) unaudited quarterly financial statements within  days following quarter-end, (iii) unaudited monthly financial statements within  days of month-end, and (iv) annual business plans. The information rights will terminate upon an initial public offering.
Registrable securities. The common stock issued or issuable upon conversion of the Preferred will be “Registrable Securities.”
Demand registration. Subject to customary exceptions, holders of at least % of the Registrable Securities will be entitled to demand that the Company effect up to [two] registrations (provided that each such registration has an offering price of at least $[10.00] per share with aggregate proceeds of at least $ million) at any time following the earlier of (i) [five] years following the closing of the financing and (ii) 180 days following the Company’s initial public offering. The Company will have the right to delay such registration under certain circumstances for [up to] [two] period[s] of up to  days [each] in any twelve month period.
“Piggyback” registration. The holders of Registrable Securities will be entitled to “piggyback” registration rights on any registered offering by the Company on its own behalf or on behalf of selling stockholders, subject to customary exceptions. In an underwritten offering, the managing underwriters will have the right, in the event of marketing limitations, to limit the number of Registrable Securities included in the offering, provided that, in an offering other than the initial public offering, the Registrable Securities may not be limited to less than % of the total offering. In the event of such marketing limitations, each holder of Registrable Securities will have the right to include shares on a pro rata basis as among all such holders and to include shares in preference to any other holders of common stock.
S-3 rights. Subject to customary exceptions, holders of Registrable Securities will be entitled to an unlimited number of demand registrations on FormÂ S-3 (if available to the Company) so long as those registered offerings are each for common stock having an aggregate offering price of not less than [$1,000,000]. The Company will not be required to file more than [two] such FormÂ S-3 registration statements in any twelve month period.
Expenses. Subject to customary exceptions, the Company will bear the registration expenses (exclusive of underwriting discounts and commissions) of all demand, piggyback and S-3 registrations, provided that the Company will not be required to pay the fees of more than one counsel to all holders of Registrable Securities.
Termination. The registration rights of a holder of Registrable Securities will terminate on the earlier of (i) such date, on or after the Company’s initial public offering, on which such holder may immediately sell all shares of its Registrable Securities under Rule 144 during any 90-day period and (ii) [three] years after the initial public offering.
Market stand-off. Holders of Registrable Securities will agree not to effect any transactions with respect to any of the Company’s securities within 180 days following the Company’s initial public offering[, provided that all officers, directors and 1% stockholders of the Company are similarly bound].
Other provisions. The Investor Rights Agreement will contain such other provisions with respect to registration rights as are customary, including with respect to indemnification, underwriting arrangements and restrictions on the grant of future registration rights.
Right to maintain proportionate ownership: Each holder of at least [500,000] shares of Preferred will have a right to purchase its pro rata share of any offering of new securities by the Company, subject to customary exceptions. The pro rata share will be based on the ratio of (x) the number of shares of Preferred held by such holder (on an as-converted basis) to (y) [the Company’s fully-diluted capitalization (on an as-converted and as-exercised basis)]. [Participating holders will have the right to purchase, on a pro rata basis, any shares as to which eligible holders do not exercise their rights.] This right will terminate immediately prior to the Company’s initial public offering [or five years after the financing].
Right of first refusal and co-sale agreement: In the event [__________] proposes to transfer any Company shares, the Company will have a right of first refusal to purchase the shares on the same terms as the proposed transfer.
If the Company does not exercise its right of first refusal, holders of Preferred will have a right of first refusal (on a pro rata basis among holders of Preferred) with respect to the proposed transfer. [Rights to purchase any unsubscribed shares will be reallocated pro rata among the other eligible holders of Preferred.]
To the extent the rights of first refusal are not exercised, the holders of Preferred will have the right to participate in the proposed transfer on a pro rata basis (as among the transferee and the holders of Preferred).
The rights of first refusal and co-sale rights will be subject to customary exceptions and will terminate on an initial public offering.
[“Drag–along” right: Subject to customary exceptions, if holders of % of the Preferred approve a proposed sale of the Company to a third party (whether structured as a merger, reorganization, asset sale or otherwise), [__________] will agree to approve the proposed sale. This right will terminate upon a Qualified Public Offering.]
Board representation: [The principal stockholders of the Company will agree to elect to the board [__________] representative[s] of [__________], [__________] representative[s] of [__________] and [__________] mutually agreeable person[s].] The directors will be entitled to customary indemnification from the Company and reimbursement of reasonable costs of attendance at board meetings.
Vesting of founder shares: Shares and options held by [__________] will be subject to [four-year vesting], with % vesting on the first anniversary of [the commencement of services] and the remainder vesting [monthly] thereafter. The Company will have the right, upon termination of services, to repurchase any unvested shares.
Vesting of employee shares: Subject to the discretion of the board, shares and options issued to employees, directors and consultants will be subject to [four-year vesting], with % vesting on the first anniversary of the commencement of services and the remainder vesting [monthly] thereafter. The Company will have the right, upon termination of services, to repurchase any unvested shares.
Proprietary information agreements: The Company will have all employees and consultants enter into proprietary information and inventions agreements in a form reasonably satisfactory to the investors.
[“Key person” life insurance: The Company will obtain a “key person” life insurance policy on [__________] in the amount of $[__________], with proceeds payable to the Company.]
Legal fees and expenses: The Company will pay the reasonable fees and expenses of a single counsel to the investors [up to a maximum of $[__________]].
[Exclusive negotiations: From the date of the execution of this Memorandum of Terms until the earlier of (i) [__________], (ii) notice of termination of negotiations by the lead investor(s) and (iii) the initial closing of the financing contemplated by this Memorandum of Terms, neither the Company nor any of its directors, officers, employees or agents will solicit, or participate in negotiations or discussions with respect to, any other investment in, or acquisition of, the Company without the prior consent of the lead investor(s). [The lead investor(s) consent to the Company soliciting, and participating in negotiations and discussions with, [__________].]
[Confidentiality: Until the initial closing of the financing contemplated by this Memorandum of Terms, the existence and terms of this Memorandum of Terms shall not be disclosed to any third party without the consent of the Company and the lead investor(s), except as may be (i) reasonably required to consummate the transactions contemplated hereby or (ii) required by law.]
Conditions precedent: The investment will be subject to customary conditions, including but not limited to:
Completion of due diligence to the satisfaction of the investors;
Negotiation and execution of definitive agreements customary in transactions of this nature;
Receipt of all required authorizations, approvals and consents;
Delivery of customary closing certificates [and an opinion of counsel for the Company]; and
The absence of material adverse changes with respect to the Company.
(Signature page follows)
This Memorandum of Terms may be executed in counterparts, which together will constitute one document. Facsimile signatures shall have the same legal effect as original signatures.