Sample Term Sheet for Convertible Note Bridge Financing

Terms sheets are generally non-binding and used as a tool to make sure the parties are on the same page with the higher-level terms before the attorneys start drafting the initial documents.  Here’s a simple form of a term sheet for a Convertible Note Bridge Financing. This is about as simple as it gets and can get a lot more complicated depending on the deal. The main provision to understand and think through is the Convertibility Provision.

 

MEMORANDUM OF TERMS

CONVERTIBLE NOTE BRIDGE FINANCING

This Memorandum of Terms summarizes the principal proposed terms in connection with a Convertible Note Bridge Financing by HASHBROWN INC., a Delaware corporation (the “Company”). 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 placement and does not constitute a legally binding agreement among the parties.

Issuer: HASHBROWN INC., a Delaware corporation
(the “Company”)

Amount of Financing: Up to $750,000 may be issued.

Type of Security: Convertible promissory notes (the “Notes”).

Interest Rate: Annual interest rate of 5%, payable at maturity.

Convertibility: In the event the Company consummates, prior to the Maturity Date (as defined below), an equity financing pursuant to which it sells shares of its Preferred Stock (the “Preferred Stock”) with an aggregate sales price of not less than $1,500,000, excluding any and all convertible bridge notes which are converted into preferred stock (including the Notes issued under the Note Purchase Agreement), and with the principal purpose of raising capital (a “Qualified Financing”), then the Note shall automatically convert all principal and accrued interest under the Note into Preferred Stock. The Note shall convert into shares of Preferred Stock on the same terms as the other investors purchasing the Preferred Stock in the Qualified Financing other than with respect to: (i) the conversion into the Preferred Stock shall be at a 20% discount (the “Conversion Price”), (ii) the per share liquidation preference and the conversion price for purposes of price-based anti-dilution protection will equal the Conversion Price; and (iii) the basis for any dividend rights will be based on the Conversion Price.

Term: The day that is two years following the date of the Note (the “Maturity Date”). If the Company does not consummate a Qualified Financing prior to the Maturity Date, the Notes may be convertible at the option of the Company into common stock at a per share conversion price equal to the fair market value of the common stock of the Company as of the date of conversion as determined in good faith by the Board of Directors.

Subordination: The Note shall be subordinated to all indebtedness of the Company to banks, commercial finance lenders, insurance companies, leasing or equipment financing institutions, or other lending institutions regularly engaged in the business of lending money, which is for money borrowed, or purchase or leasing of equipment in the case of a lease or other equipment financing, whether or not secured.

Prepayment: The principal and accrued interest may not be prepaid unless approved in writing by the Majority Holders.

Note Purchase Agreement: The Notes will be issued pursuant to a definitive Note Purchase Agreement containing customary covenants and representations and warranties of the Company.

Expenses: The Company and investors shall each bear their own legal expenses and other expenses related to the transactions contemplated by this term sheet.

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