ECLIPSE RETAIL (D):

TERM SHEETThe remainder of this document contains sample provisions for term sheets for private 

company financings.  The terms were developed by a group of attorneys on behalf of 

the National Venture Capital Association. They have been modified by the author for educational purposes.  This document should not be construed as legal advice.  Readers should seek advice from legal counsel prior to structuring, offering or acquiring any security. 

TERM SHEET

FOR SERIES A PREFERRED STOCK FINANCING OF

ECLIPSE RETAIL, INC.

MAY 10, 1999

This Term Sheet summarizes the principal terms of the Series A Preferred Stock Financing of Eclipse Retail, Inc., a Delaware corporation (the “Company”).  In consideration of the time and expense devoted and to be devoted by the Investors with respect to this investment, the No Shop/Confidentiality and Counsel and Expenses provisions of this Term Sheet shall be binding obligations of the Company whether or not the financing is consummated.  No other legally binding obligations will be created until definitive agreements are executed and delivered by all parties.  This Term Sheet is not a commitment to invest, and is conditioned on the completion of due diligence, legal review and documentation that is satisfactory to the Investors.  This Term Sheet shall be governed in all respects by the laws of the State of Delaware.

Offering Terms

Closing Date:

As soon as practicable following the Company’s acceptance of this Term Sheet and satisfaction of the Conditions to Closing.

Investors:

Investor No. 1:  200,000 shares (10%), $2,000,000

 as well other investors mutually agreed upon by Investors and the Company.

Amount Raised:

$10,000,000  

Price Per Share:

$10 per share (based on the capitalization of the Company set forth below) (the “Original Purchase Price”).

Pre-Money Valuation:

The Original Purchase Price is based upon a fully-diluted pre-money valuation of $10 million and a fullydiluted post-money valuation of $20 million (including an employee pool representing 5% of the fullydiluted post-money capitalization).  

Capitalization:

The Company’s capital structure before and after the Closing is set forth below:

Pre-Financing

Post-Financing

Security

# of Shares

%

# of Shares

%

Common – Founders

900,000

90

900,000

45

Common – Employee Stock Pool

Issued

Unissued

100,000

10

100,000

5

[Common – Warrants]

Series A Preferred 

0

0

1,000,000

50

Total

1,000,000

100

2,000,000

100

CHARTER

Dividends:

The Series A Preferred will carry an annual 8% cumulative dividend compounded annually, payable upon a liquidation or redemption.  For any other dividends or distributions, participation with Common Stock on an as-converted basis. 

Liquidation Preference:

In the event of any liquidation, dissolution or winding up of the Company, the proceeds shall be paid as follows: If liquidation occurs pre-IPO, First pay one times 60% of the Original Purchase Price plus accrued dividends plus declared and unpaid dividends on each share of Series A Preferred. If liquidation occurs post-IPO and market valuation is higher than projected, First pay one times 45% of the Original Purchase Price plus accrued dividends plus declared and unpaid dividends on each share of Series A Preferred. If liquidation occurs post-IPO and market valuation is lower or equal to projections, First pay one times 60% of the Original Purchase Price plus accrued dividends plus declared and unpaid dividends on each share of Series A Preferred. The balance of any proceeds shall be distributed to holders of Common Stock.

A merger or consolidation (other than one in which stockholders of the Company own a majority by voting power of the outstanding shares of the surviving or acquiring corporation) and a sale, lease, transfer or other disposition of all or substantially all of the assets of the Company will be treated as a liquidation event (a “Deemed Liquidation Event”), thereby triggering payment of the liquidation preferences described above unless the holders of 67% of the Series A Preferred elect otherwise.  

Voting Rights:

The Series A Preferred Stock shall vote together with the Common Stock on an as-converted basis, and not as a separate class, except (i) the Series A Preferred as a class shall be entitled to elect three [3] members of the Board (the “Series A Directors”), (ii) as provided under “Protective Provisions” below or (iii) as required by law.  The Company’s Certificate of Incorporation will provide that the number of authorized shares of Common Stock may be increased or decreased with the approval of a majority of the Preferred and Common Stock, voting together as a single class, and without a separate class vote by the Common Stock.

Protective Provisions: 

So long as any shares of Series A Preferred are outstanding, the Company will not, without the written consent of the holders of at least 67% of the Company’s Series A Preferred, either directly or by amendment, merger, consolidation, or otherwise: 

(i) liquidate, dissolve or windup the affairs of the Company, or effect any Deemed Liquidation Event; (ii) amend, alter, or repeal any provision of the Certificate of Incorporation or Bylaws in a manner adverse to the Series A Preferred; (iii) create or authorize the creation of or issue any other security convertible into or exercisable for any equity security, having rights, preferences or privileges senior to or on parity with the Series A Preferred, or increase the authorized number of shares of Series A Preferred; (iv) purchase or redeem or pay any dividend on any capital stock prior to the Series A Preferred, or (v) create or authorize the creation of any debt security if the Company’s aggregate indebtedness would exceed $25,000; (vi) increase or decrease the size of the Board of Directors.  

Optional Conversion:

The Series A Preferred initially converts 1:1 to Common Stock at any time at option of holder, subject to adjustments for stock dividends, splits, combinations and similar events and as described below under “Anti-dilution Provisions.”

Anti-dilution Provisions:

In the event that the Company issues additional securities at a purchase price less than the current Series A Preferred conversion price, such conversion price shall be adjusted in accordance with the following formula:

CP2 = CP1 * (A+B) / (A+C)

CP2 = New Series A Conversion Price

CP1 = Series A Conversion Price in effect immediately prior to new issue

A = Number of shares of Common Stock deemed to be outstanding immediately prior to new issue (includes all shares of outstanding common stock, all shares of outstanding preferred stock on an as-converted basis, and all outstanding options on an as-exercised basis; and does not include any convertible securities converting into this round of financing) 

B = Aggregate consideration received by the Corporation with respect to the new issue divided by CP1

C = Number of shares of stock issued in the subject transaction

The following issuances shall not trigger anti-dilution adjustment:

(i) securities issuable upon conversion of any of the Series A Preferred, or as a dividend or distribution on the Series A Preferred; (ii) securities issued upon the conversion of any debenture, warrant, option, or other convertible security; (iii) Common Stock issuable upon a stock split, stock dividend, or any subdivision of shares of Common Stock; and (iv) shares of Common Stock (or options to purchase such shares of Common Stock) issued or issuable to employees or directors of, or consultants to, the Company pursuant to any plan approved by the Company’s Board of Directors.

Mandatory Conversion:

Each share of Series A Preferred will automatically be converted into Common Stock at the then applicable conversion rate in the event of the closing of a firm commitment underwritten public offering with a price of 10 times the Original Purchase Price (subject to adjustments for stock dividends, splits, combinations and similar events) and net proceeds to the Company of not less than $20 million (a “QPO”), or (ii) upon the written consent of the holders of 67% of the Series A Preferred.

Redemption Rights:

The Series A Preferred shall be redeemable from funds legally available for distribution at the option of holders of at least 67% of the Series A Preferred commencing any time after the fifth anniversary of the Closing at a price equal to the Original Purchase Price plus all accrued but unpaid dividends. Redemption shall occur in three equal annual portions.  Upon a redemption request from the holders of the required percentage of the Series A Preferred, all Series A Preferred shares shall be redeemed (except for any Series A holders who affirmatively opt-out).

STOCK PURCHASE AGREEMENT

Representations and Warranties:

Standard representations and warranties by the Company.  

Conditions to Closing:

Standard conditions to Closing, which shall include, among other things, satisfactory completion of financial and legal due diligence, qualification of the shares under applicable Blue Sky laws, the filing of a Certificate of Incorporation establishing the rights and preferences of the Series A Preferred, and an opinion of counsel to the Company.  

Counsel and Expenses:

Investor counsel to draft closing documents.  Company to pay all legal and administrative costs of the financing, including reasonable fees (not to exceed $25,000) and expenses of Investor counsel, unless the transaction is not completed because the Investors withdraw their commitment without cause.  

Company Counsel: [

]

Investor Counsel: [

]

INVESTOR RIGHTS AGREEMENT

Registration Rights:

Registrable Securities:

All shares of Common Stock issuable upon conversion of the Series A Preferred and any other Common Stock held by the Investors will be deemed “Registrable Securities.”

Demand Registration:

Upon earliest of (i) three years after the Closing; or (ii) six months following an initial public offering (“IPO”), persons holding 5% of the Registrable Securities may request two registrations by the Company of their shares.  The aggregate offering price for such registration may not be less than $5 million.  A registration will count for this purpose only if (i) all Registrable Securities requested to be registered are registered and (ii) it is closed, or withdrawn at the request of the Investors (other than as a result of a material adverse change to the Company).  

Registration on Form S-3:

The holders of 10% of the Registrable Securities will have the right to require the Company to register on Form S-3, if available for use by the Company. There will be no limit on the aggregate number of such Form S-3 registrations, provided that there are no more than two per year.

Piggyback Registration:

The holders of Registrable Securities will be entitled to “piggyback” registration rights on all registration statements of the Company, subject to the right, however, of the Company and its underwriters to reduce the number of shares proposed to be registered to a minimum of 30% on a pro rata basis and to complete reduction on an IPO at the underwriter’s discretion.  In all events, the shares to be registered by holders of Registrable Securities will be reduced only after all other stockholders’ shares are reduced.  

Expenses:

The registration expenses (exclusive of stock transfer taxes, underwriting discounts and commissions will be borne by the Company.  The Company will also pay the reasonable fees and expenses of one special counsel to represent all the participating stockholders.  

Information Rights: 

Any Major Investor will be granted access to Company facilities and personnel during normal business hours and with reasonable advance notification. The Company will deliver to such Major Investor (i) annual, quarterly, and monthly financial statements, and other information as determined by the Board; (ii) thirty days prior to the end of each fiscal year, a comprehensive operating budget forecasting the Company’s revenues, expenses, and cash position on a month-to-month basis for the upcoming fiscal year; and (iii) promptly following the end of each quarter an up-to-date capitalization table, certified by the CFO.  

Right to Participate Pro Rata in Future Rounds:

All Investors shall have a pro rata right, based on their percentage equity ownership in the Company (assuming the conversion of all outstanding Preferred Stock into Common Stock and the exercise of all options outstanding under the Company’s stock plans) with a cap of 55%, to participate in subsequent issuances of equity securities of the Company (excluding those issuances listed at the end of the “Anti-dilution Provisions” section of this Term Sheet and issuances in connection with acquisitions by the Company). In addition, should any [Major] Investor choose not to purchase its full pro rata share, the remaining [Major] Investors shall have the right to purchase the remaining pro rata shares.

Matters Requiring Investor Director Approval:

The Company will not, without Board approval, which approval must include the affirmative vote of two out of three of the Series A Director(s):

(i) make any loan or advance to, or own any stock or other securities of, any subsidiary or other corporation, partnership, or other entity unless it is wholly owned by the Company; (ii) make any loan or advance to any person, including, any employee or director, except advances and similar expenditures in the ordinary course of business or under the terms of a employee stock or option plan approved by the Board of Directors; (iii) guarantee, any indebtedness except for trade accounts of the Company or any subsidiary arising in the ordinary course of business; (iv) make any investment other than investments in prime commercial paper, money market funds, certificates of deposit in any United States bank having a net worth in excess of $100,000,000 or obligations issued or guaranteed by the United States of America, in each case having a maturity not in excess of two years; (v) incur any aggregate indebtedness in excess of $25,000 that is not already included in a Board-approved budget, other than trade credit incurred in the ordinary course of business; (vi) enter into or be a party to any transaction with any director, officer or employee of the Company or any “associate” (as defined in Rule 12b-2 promulgated under the Exchange Act) of any such person; (vii) hire, fire, or change the compensation of the executive officers, including approving any option plans; (viii) change the principal business of the Company, enter new lines of business, or exit the current line of business; or (ix) sell, transfer, license, pledge or encumber technology or intellectual property, other than licenses granted in the ordinary course of business.  

Non-Competition and Non-Solicitation and Agreements: 

Each Founder and key employee will enter into a one year non-competition and non-solicitation agreement in a form reasonably acceptable to the Investors.

Non-Disclosure and Developments Agreement:

Each current and former Founder, employee and consultant with access to Company confidential information/trade secrets will enter into a non-disclosure and proprietary rights assignment agreement in a form reasonably acceptable to the Investors.  

Board Matters:

Each Board Committee shall include at least one Series A Director.

The Board of Directors shall meet at least monthly for the first two years, unless otherwise agreed by a vote of the majority of Directors. After the second year, the Board of Directors shall meet at least quarterly, unless otherwise agreed by a vote of the majority of Directors. 

The Company will bind D&O insurance with a carrier and in an amount satisfactory to the Board of Directors.  In the event the Company merges with another entity and is not the surviving corporation, or transfers all of its assets, proper provisions shall be made so that successors of the Company assume Company’s obligations with respect to indemnification of Directors.  

Employee Stock Options:

All employee options to vest as follows:  25% after one year, with remaining vesting monthly over next 36 months. 

Key Person Insurance:

Company to acquire life insurance on Founders in an amount satisfactory to the Board.  Proceeds payable to the Company.

Termination:

All rights under the Investor Rights Agreement, other than registration rights, shall terminate upon the earlier of an IPO, a Deemed Liquidation Event or a transfer of more than 50% of Company’s voting power. 

RIGHT OF FIRST REFUSAL/CO-SALE AGREEMENT
AND VOTING AGREEMENT

Right of first Refusal/
Right of Co-Sale (Take-me-Along):

Company first and Investors second (to the extent assigned by the Board of Directors,) have a right of first refusal with respect to any shares of capital stock of the Company proposed to be sold by Founders, with a right of oversubscription for Investors of shares unsubscribed by the other Investors.  Before any such person may sell Common Stock, he will give the Investors an opportunity to participate in such sale on a basis proportionate to the amount of securities held by the seller and those held by the participating Investors. 

Board of Directors:

At the initial Closing, the Board shall consist of seven members comprised of (i) Jim Smart as [the representative designated by Private Equity Partners, as the lead Investor, (ii) three people as the representatives designated by the remaining Investors, (iii) Joe Hary as the representative designated by the Founders, (iv) the person then serving as the Chief Executive Officer of the Company (in an ex officio capacity), and (v) two people who are not employed by the Company and who are mutually acceptable to the Founders and Investors.

Drag Along:

Holders of Preferred Stock and the Founders and all current and future holders of greater than 1% of Common Stock (assuming conversion of Preferred Stock and whether then held or subject to the exercise of options) shall be required to enter into an agreement with the Investors that provides that such stockholders will vote their shares in favor of a Deemed Liquidation Event or transaction in which 50% or more of the voting power of the Company is transferred, approved by the Board of Directors and the holders of a majority of the outstanding shares of Preferred Stock, on an as-converted basis].  

Termination:

All rights under the Right of First Refusal/Co-Sale and Voting Agreements shall terminate upon an IPO, a Deemed Liquidation Event or a transfer of more than 50% of Company’s voting power. 

OTHER MATTERS

Founders’ Stock:
 

All Founders to own stock outright subject to Company right to buyback at cost.  Buyback right for 50% for first 12 months after Closing; thereafter, right lapses in equal monthly increments over following 24 months.  

No Shop/Confidentiality:

The Company agrees to work in good faith expeditiously towards a closing.  The Company and the Founders agree that they will not, for a period of six weeks from the date these terms are accepted, take any action to solicit, initiate, encourage or assist the submission of any proposal, negotiation or offer from any person or entity other than the Investors relating to the sale or issuance, of any of the capital stock of the Company or the acquisition, sale, lease, license or other disposition of the Company or any material part of the stock or assets of the Company and shall notify the Investors promptly of any inquiries by any third parties in regards to the foregoing.  The Company will not disclose the terms of this Term Sheet to any person other than officers, members of the Board of Directors and the Company’s accountants and attorneys and other potential Investors acceptable to Private Equity Partners, as lead Investor, without the written consent of the Investors.  

Expiration:

This Term Sheet expires on May 30, 1999 if not accepted by the Company by that date.  

EXECUTED this 10th day of May,1999.