VENTURECAPITALDEALTERMS

AGUIDETONEGOTIATINGANDSTRUCTURINGVENTURECAPITALTRANSACTIONSHARMF.DEVRIESMENNOJ.VANLOONSJOERDMOL

Copyright©2016

Publishedby:HMSMediaVofAuthors:HarmF.deVries,MennoJ.vanLoon&SjoerdMolDesigncover:GabydeVriesDesign:HaagsBureauPrint:www.pumbo.nl1stprint:July2016

www.venturecapitaldealterms.com

ISBN978-90-825623-1-6

Nopartofthispublicationmaybereproducedbyanymeans,includingprinting,photocopy,digitalfilesorinanyothermannerwhatsoever,withoutthepriorwrittenpermissionofthepublisher.Whilethepublisherandauthorshaveusedtheirbesteffortsinpreparingthisbook,theymakenorepresentationsorwarrantieswithrespecttotheaccuracyorcompletenessofthecontentsofthisbookandspecificallydisclaimanyimpliedwarrantiesofmerchantabilityorfitnessforaparticularpurpose.Theadviceandstrategiescontainedhereinmaynotapplyorbesuitableforyoursituation.Youshouldconsultwithaprofessionalwhereappropriate.Neithertheauthorsnorthepublishercanbeheldliableforanyactionstakenonthepartofthereaderbasedonthetextsandexercisesinthisbook.Thereadershallremainfullyliableforanyandallsuchactions.

ABOUTTHEAUTHORS

HarmdeVriesisco-founderandgeneralpartnerofseveralhigh-techventurecapitalfunds.Harmhasledmanyinvestmentsthroughdifferentcrucialphases,fromduediligencetonegotiationsoftermstogrowth-andexitphases.Harmservesasanon-executiveboardmemberofseveralportfoliocompanies.Hestartedhiscareerin1994asalawyerwithaninternationallawfirm.HarmholdsamastersdegreeinlawfromtheErasmusUniversityRotterdam.MoreinformationaboutHarmcanbefoundonwww.innovationindustries.com.

MennovanLoonhasbeenworkingasaninterimmanagerandlegalconsultantsince2003.Priortohiscurrentprofessionalactivities,heworkedasaninvestmentbankerandlawyerintheU.S.andtheNetherlands.OverthepasttwentyyearsMennowasinvolvedinventurecapitaltransactionsasalawyer,investmentbankerandlegalconsultant,givinghimabroadperspectiveonsuchtransactions.MennoholdsamastersdegreeinlawfromtheUniversityofGroningen.

SjoerdMolisanattorney-at-lawandpartneratBenvalorlawfirmbasedinUtrecht,TheNetherlands.Sjoerdspecialisesinmergers&acquisitionsandventurecapital.Hisclientsincludeinvestmentfunds,businessangelsandstart-ups.Sjoerdisco-founderofwww.capitalwaters.nl,aninternetplatformforearly-stagedealdocumentation,andisactiveasmentorandlegalpartnerofseveralstart-upacceleratorprogrammes.SjoerdholdsbothamastersdegreeinlawandamastersdegreeineconomicsfromtheUniversityofUtrecht.

PREFACE

In2004,afamousDutchProfessor,whosecompanywewerespinningoutoftheuniversity,askedmetoexplaintohimexactlywhatIwasaskinghimtosign.BeforehimwasatermsheetthatIhaddrafted.BecauseIdidn’thavealotoftime,IpromisedhimthatIwouldprovidehimwithawrittenexplanationofthemostimportantterms.That’showtheideaofwritingthisbookwasborn.Istartedwritingimmediately.However,combiningafull-timejobwithwritingabooktookmoretimeandeffortthanIexpected,soafterfivemonthsofscribblingduringnightsandweekends,Iaskedmygoodfriend,MennovanLoon,tohelpmeout.MennoandIdidthebarexamtogether,manyyearsbefore.Hisexperienceasalawyerandlaterasaninvestmentbanker,cameinhandy.Togetherwefinishedthebookintwelvemonths’timeandpublisheditwithReedBusinessInformationin2005,underthetitle“VentureCapitalTermSheets.Howtostructureandnegotiateventurecapitaltransactions.”

Sincethenalothashappened.Istartednewfundsandinvestedinmanyhigh-techcompanies.Thebankingcrisiscameandwentandsodidmanyventurefirms.Nichelawfirmsemerged,focusingsolelyonventuretransactions.SjoerdMol,apartneratonesuchlawfirm,suggestedtomeandMennothatourbookwasgettingoutdatedandneededadjustment.Thethreeofussetouttoupdateandrewritethebook.Wemadethebookmorecompleteandmanyoftheclauseseasiertounderstand,sincewealsoexplainedtheeconomicsbehindtheterms.Wealsoaddedtipsandsuggestionsbothfortheentrepreneurandtheinvestor.Bydoingthis,wegenuinelybelievethatwehavecreatedalevelplayingfieldforallstakeholdersinvolvedinanyventurecapitaltransaction.

Foreaseofreadingwehaveusedmalepronouns(he/his/him)throughoutthebookasagenericpronounforbothgenders.

Wecouldnothavesucceededincreatingthisendproductwithoutthehelpofourfriends.AlsoonbehalfofMennoandSjoerd,IwouldliketoespeciallythankMarlonDijkshoorn,whohelpeduswiththefinetuningofthefinancialparagraphs,andPieterJanDorhout,whoonceagainproofreadtheentiremanuscriptandchangedmanyphrasesintoimpeccableEnglish.Finally,Iwouldliketothankmysister,GabydeVries,formaking(again)abeautifulcoverfor

liketothankmysister,GabydeVries,formaking(again)abeautifulcoverforthebook.

HarmdeVries

CONTENTS

Abouttheauthors

Preface

1Introduction1.1Structureofthebook1.2Investmentprocess

2Newwaveenergycasestudy2.1Incorporation2.2Seedround2.3SeriesAround–earlystagephase2.4SeriesBround–growthphase2.5SeriesCround–furthergrowth2.6IPO(InitialPublicOffering)

3Newwaveenergytermsheet

4Termsexplained4.1Issuer4.2AmountofFinancing4.3Milestones4.4Investors4.5TypeofSecurity4.6WarrantCoverage4.7SharePriceandValuation4.8CapitalStructure4.9AnticipatedClosingDate4.10Dividends4.11Redemption4.12VoluntaryConversion4.13AutomaticConversion4.14Anti-Dilution

4.15Pay-to-Play4.16LiquidationPreference4.17FavourableTerms4.18BoardRepresentation4.19VotingRights4.20ConsentRights4.21RegistrationRights4.22RepresentationsandWarranties4.23InformationRights4.24UseofProceeds4.25Pre-EmptiveRights4.26RightsofFirstRefusal4.27Co-SaleRight4.28Drag-AlongRight4.29ManagementBoard4.30EmployeePool4.31VestingScheme4.32Founders’Shares4.33Lock-Up4.34EmploymentRelationships4.35Non-Competition/Non-Solicitation4.36Non-DisclosureAgreement4.37AssignmentInventions4.38KeyManInsurance4.39AgreementsatClosing4.40FeesandExpenses4.41Confidentiality4.42Exclusivity/No-Shop4.43GoverningLaw4.44Non-BindingCharacter4.45Indemnities4.46ConditionsPrecedent4.47Expiration

AnnexesAnnex1:TermsheettemplateAnnex2:ProfitandlossaccountandcashflowstatementcasestudyAnnex3:GlossaryoftermsAnnex4:IRRAnalysis:YearsInvestedvs.ReturnMultiple

1 INTRODUCTION

Venturecapitalhasestablisheditselfasanimportantsourceofcapitalforavarietyofcompanies,rangingfromstartupstomoreestablishedbusinesses.Consequently,thenumberofpeoplewhoareatsomepointintheircareerinvolvedinaventurecapitaltransaction,issteadilyincreasing.Whilesomepeopleinvolvedinventurecapitaltransactionshaveextensiveexperienceinthisarea,theknowledgeofothersisatbestrudimentary.Entrepreneursinwhosecompanyaventurecapitalistwillinvest,lawyersworkinginthisfieldforthefirsttime,andevenjuniorventurecapitalistsandangelinvestorsoftenlackthefullunderstandingofallaspectsofventurecapitalfinancingrequiredtoensureasuccessfultransaction.

Thepurposeofthisbookistoprovideaclearunderstandingofthemostfrequentlyusedpractices,termsandconditionstothosewithlessthanextensiveexperienceinventurecapitaltransactions.Webelieve,however,thatthisbookwillalsoserveasavaluablereferenceguideforthemoreexperiencedventurecapitalist.

Practicallyallventurecapitaltransactionsstartoutwiththeexecutionofatermsheet.Atermsheetisadocumentsummarisingthebasictermsandconditionsunderwhichinvestorsarepreparedtomakeaninvestment.Italsosetsoutthestructureofthetransaction,thepartiesinvolved,thetimelinesforduediligenceandthedeadlinefortheclosing.Awell-draftedtermsheetservesasatooltofocusattentionofthepartiesontheessentialelementsoftheinvestment,andasaninstrumenttoinvestigatewhetherthereiscommongroundbetweenthepartiesregardingthemostimportantinvestmentconditions,beforetheyspendfurthertime,energyandmoneyonnegotiatingadeal.Atermsheetcoversthemainaspectsofaventurecapitalfinancingandfacilitatestheexecutionofthefinaltransactiondocumentation.

Effectiveparticipationinthenegotiationsregardingthetermsheetispossibleonlyonceeachpartyinvolvedfullyunderstandsthescopeofthetermsincludedinthetermsheet(includingthecommercialimplicationsthereof)andtheinformationitcontains,andthealternativestothetermsinuse.Moreover,a

clearunderstandingofsuchtermsislikelytoexpeditethenegotiationofthetermsheetandcompletionoftheinvestmentprocess.Wehopethisbookwillbeofassistanceingainingsuchanunderstanding,tothebenefitofallpartiesconcerned.

1.1 STRUCTUREOFTHEBOOKThisbookisintendedtobeapracticalandeasy-to-useguide.Insection2ofthischapter,wewillfirstdiscusstheinvestmentprocessingeneral.Inchapter2,afictionalventurecapitaltransactionwillbeusedasthebasisforthediscussionofthedifferentclausesmostcommonlyusedintermsheets.Chapter3containsthetermsheetthatwillbesubmittedtothecompanytryingtoraiseaninvestmentroundinthetransactiondescribedinchapter2.Thistermsheetwillserveasthebasefortherestofthisbook,whereineachsubsequentchapterwilldealwithspecificsubjectsdealtwithinthetermsheet(e.g.liquidationpreference,anti-dilutionprotection,dragalong,andtagalong).Eachchapterdiscussingacertaintypeofclauseinthetermsheetwillincludeastandardversionofsuchaclauseand,ifapplicable,alternativestothesame,foreasyreference.AglossaryoftermscommonlyusedinventurecapitaltransactionsisattachedasAnnex3ofthisbook.

1.2 INVESTMENTPROCESSVenturecapitalfirmsinvestincompanieswithhighgrowthprospects,enablingthemtoearntheirreturnuponanexitbysellingtheirshareholdingofthosecompaniestoanothercompany(tradesale)ortothepublic(inaninitialpublicofferingorIPO).Venturecapitalfirmsusuallylooktoretaintheirinvestmentforaperiodofatleastthreetosevenyears.Thisperiodoftendependsonthestagethecompanyisin,itsgrowthprofileandtheopportunitytorealiseanexit.Thestagesaventure-backedcompanywillgothroughinchronologicalorderaregenerallyreferredtoastheSeed,EarlyandGrowth.

Thechancethatacompanywillfailtorealiseitsbusinessplanswithinthesettimeframeisconsiderable.Inordertolimittheirfinancialrisk,venturecapitalfirmsinvestincompaniesinmultiplerounds,ratherthanprovidingthetotalinvestmentrequiredfromthestart.Stagingthecapitalcontributionsthroughdifferentinvestmentroundsallowsinvestorstoassessthecompany’sprogressintermsofvalueincreasepriortoeachnewinvestmentroundandenablesthemto

taketimelymeasuresiftheviabilityofthecompanyisatstake.Italsooffersseveralopportunitiestominimiselossesbydiscontinuingtheproject.Ifthevalueofthecompanyincreases,multipleroundsmakeitpossibletoissueequityatahigherpriceineachround,thusenablingtheshareholderstocapitaliseontheprogresstheyhaveachievedbetweenconsecutiverounds.

Thetimebetweenroundsdependsonthetimerequiredforthecompanytoachievevalue-increasingmilestones(seesection3–Milestones,ofchapter4)andtypicallyrangesfrom1to2years.Overtime,theburnrate(rateatwhichthecompanyusesupitsavailablefunds)ofthecompanytendstoincrease,meaningthatmoremoneywillberequiredtobridgeanadditionalperiodofsimilarlength.Consequently,sincetheinvestmentrisksgenerallydecreaseasthecompanymovesintoamorematurephase,largeramountsareusuallycommittedinlaterrounds.

FIGURE1:VENTURECAPITALINVESTMENTS

Investorsinvestingineachroundoffinancingwillnegotiateinvestmenttermsreflectingthespecificinvestmentriskstheyperceive.Typically,theywillnotaccepttermsthatarelessfavourablethanthetermsnegotiatedinearlierrounds.Mostoftherightsnegotiatedinafinancingareattachedtothe(preferred)sharesissuedinthatspecificround.Todistinguishbetweenthesedifferentrights,eachroundwilltypicallyhaveitsownseries(class)ofshares,startingwithSeedfunding,followedbytheSeriesAinvestmentroundandafterthatasmanyotherroundsasarenecessaryuntilanIPOoracquisitionofthecompanytakesplace.

Inpractice,theinvestmentprocesscanbeatime-consumingandcostlyaffair.

Legalcostscan(andusuallydo)formalargepartofthecostsinvolvedinthatprocess.Moreoftenthannot,thelegalcostswillbehigherthananticipated.Thebestwaytoavoidexcessivelegalcostsisbybeingwellprepared.Onlyinvolvealawyerinmatterswherehetrulyhasanaddedvalue.Takeyourtimeinselectingagoodlawyerwithsolidexperienceinventurecapitaltransactions(youdon’twanttopayalawyerforprovidinghimwithanon-the-jobventurecapitallearningexperience).

Ifyouareplanningondoingaventurecapitaltransactioninacountryinwhichyouhavenotbeenactivebefore,itisimportanttoensuresupportfromknowledgeableadvisors.Notdoingsocouldresultincostlymisunderstandingsdueto(forexamplelegal)differencesbetweenthecountryyouareusedtoworkinginandthe“new”country.

Thetimerequiredtoraisemoneydiffersfromcasetocase,butgenerallyspeakingthewholeprocess,fromthefirstcupofcoffeewiththeventurecapitalisttoclosingofthetransaction,willtakefourtoeightmonths.Venturecapitalinvestorsusuallywanttoassessacompany’sperformanceoveracertainperiodoftime,ratherthanbasetheirinvestmentdecisiononthecompany’sperformanceatonemomentonly.Sotheadvicetostartupsis:startdrinkingcupsofcoffeewithventurecapitalinvestorsassoonaspossible.Sincethetimebetweenfinancingroundsisusuallynomorethanoneortwoyears,assetoutabove,investorinteractionshouldbasicallybeacontinuousactivityforanystartup’sCEO.

FIGURE2:LIFECYCLEOFSTARTUP

Thisiswhatventurecapitalisallabout:thefinancingofloss-makingcompaniestohelpthemthroughtheequitygap(alsocalled:‘valleyofdeath’).Theequity

tohelpthemthroughtheequitygap(alsocalled:‘valleyofdeath’).Theequitygaparisesfromtheperceptionthathighrisk,hightransactionalandmonitoringcosts,andthelongdevelopmenttrajectoriesassociatedwithearly-stageventuresmakethemunattractiveforinvestment.Duetothisperception,mostinvestorsfavourventuresinlaterstagesofdevelopmentthatcandemonstratemarketingandfinancialhistory.Venturecapitalinvestors,however,haveadifferentperspective.Theybelievetheriskinvolvedinearlystageinvestmentisacceptableinviewofthepotentiallyhighreturnsthatcanberealizedifastartupcompanybecomessuccessful.

2 NEWWAVEENERGYCASESTUDY

Inthisbook,thefictionalcompanyNewWaveEnergywillbeusedasthebasisfortheexplanationofthetermsofatypicaltermsheet.NewWaveEnergyisthebrainchildofBillPear.BillPearisathirty-eight-year-oldengineerwhoisintheprocessofdevelopinganew‘green’energytechnologyusingoceanwavesasenergysource.Ifsuccessful,thetechnologyisexpectedtohavehugecommercialvalue.Inthischapterwefollowthecompanythroughitsvariousstagesoffunding,fromincorporationtoIPO,eachdescribedinaseparateparagraph.ThefinancialstatementsofNewWaveEnergy,whichincludeaprofitandlossaccountandcashflowstatementateachfundinground,areattachedasAnnex2.Pleasehavealookatthosefinancialstatementsbeforereadinganyfurther.Attheendofeachparagraphwehaveincludedacapitalisationtable(captable)thatshowsthechangesinshareholdings.ThegraphsincludedinthischapterrepresentthefinanciallifecycleofthecompanyuptoandincludinganIPO,showingcashflowandthecompany’svaluationoverthevariouspointsintime.

2.1 INCORPORATIONOverthelastyearandahalf,BillPearhasdividedhistimeequallybetweenhisacademicworkatauniversityandthedevelopmentofhisrevolutionarynewenergytechnology.Ayearago,Bill’sthirty-five-year-oldfriendPeterSingh,who–likeBill–isanengineer,joinedforceswithhim.BothBillandPeterhavenowsavedenoughmoneytoexclusivelyfocusonthedevelopmentofthetechnologyforaboutayear.BillhasdecideditisnowtimetoincorporateacompanyfromwhichPeterandhewillcontinuethedevelopmentofthetechnologyonafulltimebasis.SinceBillhascomeupwiththeideaofthenewtechnologyandhasspentmosttimedevelopingit,theyagreehewillreceive60%oftheshares.Peterwillreceivetheremaining40%.Atincorporation,1,000,000commonsharesareissuedandsubscribedforatparvaluebyBillandPeter.

FIGURE3:CAPTABLENEWWAVEENERGYATINCORPORATION

Incorporation

CommonShares %

Holding

BillPear 600,000 60%PeterSingh 400,000 40%Total 1,000,000 100%

2.2 SEEDROUNDNowthattheyareworkingfulltimeonthedevelopmentofthenewtechnology,thingsarespeedingup.BillandPeterareexcited.Theyhaveworkedveryhardduringthelastninemonths.Withtheirnewtechnologytheywillbeabletoofferanew,‘green’,andrelativelycheapsourceofenergy.Theybelievetheycouldbereadytopresentaprototypeoftheirrevolutionaryproduct,the‘WaveMachine’inaboutsixmonths.However,thatwouldrequiretheemploymentoftwofulltimeequivalents(FTEs)aswellasthepurchaseofexpensiveequipment.Unfortunately,theirownsavingsaredwindlingrapidly.

FIGURE4:SEEDPHASE

NewWaveEnergyneedsseedfunding.Seedfundingisessentialtobridgethefirstpartofwhatiscalledthe‘valleyofdeath’,thefirststageafterincorporationwhererisksoffailureareveryhigh.Billmanagestoattractaseedventurecapitalfund(VC1)thatiswillingtoinvest€1,500,000inNewWaveEnergy.Itvalues

thecompanyat€2,500,000,avaluationthatBillandPeteragreewith.AfterVC1hasmadeitsinvestment,the‘post-money’valuationofNewWaveEnergyis€4,000,000.Inexchangeforitsinvestment,thefundwillreceivecommonsharesrepresenting38%ofthesharesinNewWaveEnergy.TheholdingsofBillandPeter,whodonotmakeanynewinvestment,willdiluteto38%and25%respectively.Thecapitalisationtable(captable)preseedandpost-seedfinancingreadsasfollows:

FIGURE5:CAPTABLESEEDROUND

2.3 SERIESAROUND–EARLYSTAGEPHASESeveralmonthsaftertheseedinvestmentround,aprototypeofNewWaveEnergy’srevolutionarynewproduct,theWaveMachine,ispresented.Thisisanimportantmilestone(avalueinflectionpoint)thatwillincreasethecompany’svaluation.Althoughmanychallengesmustbeovercomebeforetheprototypecanbetransformedintoaproductthatisreadyforproduction,thepresentationisasuccess.ManyrenownedenergyexpertsareimpressedbythepotentialoftherevolutionarynewgreenenergytechnologyusedintheWaveMachine.TheinterestforNewWaveEnergy’sproductandthetechnologyincorporatedinitissubstantial.NewWaveEnergy,however,stillhasalongwaytogobeforeitwillhaveaproductthatisreadyforproduction.SubstantialinvestmentswillhavetobemadeinordertofurtherdevelopNewWaveEnergy’spromisingnewproduct.Additionalengineersneedtobehired,allsortsofhigh-techequipmentandmachinesmustbepurchased,alargedevelopmentlabandofficeswillhavetoberented,etc.Inshort,NewWaveEnergyneedsasubstantialamountofnewfunds(seetheprofitandlossaccountandcashflowstatementofNewWaveEnergy,whichisattachedasAnnex2).

FIGURE6:EARLYSTAGEPHASE

ASeriesAroundisinitiated.Inthisround,anewventurecapitalfirm,VC2,becomesinvolvedinNewWaveEnergy.VC2isimpressedbyNewWaveEnergy’snewtechnologyandproduct,itsteamandthesuccesstheyhavehadsofar.ItstronglybelievesNewWaveEnergy’snewtechnologyandproductcanbecomeextremelyprofitable,providedtheyaredevelopedprofessionallyandthecompanyhasaccesstosufficientresources.ItalsobelievessubstantialinvestmentswillhavetobemadeandtheorganisationofNewWaveEnergywillhavetoberadicallychangedinordertoensureaprofessionalandefficientdevelopmentoftheproduct.VC2hasastrongtrackrecordingreenenergyventuresandbelievesitisideallyequippedtoassistNewWaveEnergyinthisimportantphaseofthecompany.

VC2andNewWaveEnergyagreeonNewWaveEnergy’sbusinessplananddeterminethataninvestmentof€8millionisrequired.VC2willinvest€6millionandVC1willco-invest€2millionunderthesametermsandconditions.WiththisinvestmenttheybelieveNewWaveEnergyshouldbeabletodramaticallyincreasethecompany’svalueinthenext18months.Theyalsoagreeonanewpre-moneyvaluationof€15million.NewWaveEnergywillusethe€8millioninvestmenttohireadditionalengineers,purchaseequipmentandmachines,rentalargedevelopmentfacilityandoffices,etc.

VC2isonlywillingtoinvestifitreceivescertainfinancialandcontrollingrightsoverthecompany.Theserightswillbeattachedtoaspecialclassofpreferredshares(SeriesAPreferredShares)tobeissuedtoVC2andVC1intheSeriesA

round.Furthermore,asaconditiontotheinvestment,itisagreedthatNewWaveEnergywillsetupanemployeestockoptionpool(ESOP)immediatelyaftertheinvestmentroundisclosed.TheESOPshouldequalapproximately5%oftheoutstandingshares,post-money.ThesharesreservedundertheESOPwillbeusedasanincentivetoolfortheemployees.ThetermsandconditionsofthefinancingandthestructureoftheSeriesAinvestmentroundaresetoutinatermsheetdraftedbyVC2andsubmittedtoCEOBillPearandtheothershareholders.ThistermsheetissetoutinfullinChapter3andservesasthebasisforthisbook.

Afteritsinvestment,VC2willhold25%oftheoutstandingsharesonafullydilutedbasis(includingtheESOP).NoneoftheinitialshareholdersotherthanVC1investedanycapitalduringthisinvestmentround.Consequently,theholdingsofeachoftheinitialshareholdersarediluted.Thepost-moneyvaluationofNewWaveEnergyaftertheSeriesAroundis€23million.

FIGURE7:CAPTABLESERIESAROUND

2.4 SERIESBROUND–GROWTHPHASEOneyearaftertheSeriesAround,theWaveMachineisinproduction.Thecompanyisalsogeneratingsomeincomefromtechnologylicensefees.Atthispoint,additionalfundsarerequiredtofurtherdeveloptheproductionandtoexpandNewWaveEnergy’ssalesorganisation.

AlthoughallpartiesinvolvedfeelNewWaveEnergyisperformingextremely

well,thecompanyhassofarbeen‘burning’cash;earningsarestillmodest.SubstantialinvestmentswillhavetobemadeinordertoenableNewWaveEnergytoincreaseproductionoftheWaveMachineandtoexpandthecompany’smarketing&salesorganisation.Iftheseinvestmentsaremade,itisbelievedNewWaveEnergycanreachbreakevenwithintwoyears(seeAnnex2fortheprofitandlossaccountandcashflowstatementofNewWaveEnergyatthisstageoffinancing).

FIGURE8:GROWTHPHASE

Currently,thecompanyisrunningoutofcash.Additionalcapitalisrequired.Inordertoobtainthisadditionalcapital,anewinvestmentroundisinitiated.Basedonthebusinessplanandsomeinitialduediligence,asyndicateformedbytwoventurecapitalfirms(VC3andVC4)submitsatermsheettofinancethecompanywith€15millionina€20millionSeriesBround.Afterseveralroundsofnegotiations,thepre-moneyvaluationissetat€45million.VC1andVC2decidetoproviderespectively€1millionand€4millionoftheremaining€5million.TheinvestorsperceivethereachingoftheinitialproductionphaseasanimportantmilestonethatwilldriveupthevaluationofNewWaveEnergyandprepareitforanewroundoffinancing.

VC3andVC4andNewWaveEnergyandtheotherinvestorscometoanagreementandtheSeriesBroundisclosedinaccordancewiththetermsheet.Newpreferredsharesareissued(SeriesBShares)atafullydilutedpriceof€17.45pershare.AllpartiesagreethattheESOPwillbeincreasedpost-money

inordertopartiallycompensatetheemployeesforthedilutiontheyincurredbecauseofthisround.AftertheincreaseoftheESOP,VC3andVC4willeachhold11%oftheoutstandingcapitalonafullydilutedbasis.

FIGURE9:CAPTABLESERIESB

2.5 SERIESCROUND–FURTHERGROWTHTwoyearsaftertheSeriesBround,allisgoingwellforthecompany.ProductionandsalesoftheWaveMachinehaveincreasedsubstantiallyandtwoothergreenenergyproductsarebeingdeveloped.Furthermore,NewWaveEnergyhasrecentlyenteredintoastrategicpartnershipwithalargemultinationaloriginalequipmentmanufacturer(OEM).UnderthisstrategicpartnershiptheOEMusesNewWaveEnergy’srevolutionarytechnologytoproduce(underitsownbrandname)agreenenergyproductsimilartotheWaveMachine.ThankstotherevenuesfromtheWaveMachineandthestrategicpartnership,NewWaveEnergyhasnearlyreachedrevenuebreakeven.Thecompany’scash-flowdeficitisatitspeakbutwill,fromnowon,decreasesteadily.Thisisanotherimportantvalueinflectionpoint.

FIGURE10:FURTHERGROWTHPHASE

Atthispoint,additionalfundsarerequiredtofurtherexpandNewWaveEnergy’ssalesorganisation,setupofficesintwoothercontinentsandperhapstheacquisitionofacompetitor.Withthisadditionalfinancing,thecompanyshouldbeabletobuildsufficientsubstancetosuccessfullyfileforaninitialpublicoffering(IPO)onaninternationalstockexchange.TogetherwiththeinvestorsVC1andVC2,NewWaveEnergydeterminesthatitrequiresatleast€40milliontoreachitsgoals.Anewbusinessplanisdraftedandsubmittedtoseveralpotentialinvestors.VC5submitsatermsheettofinancethecompanywith€25millionina€40millionSeriesCround.Thepre-moneyvaluationissetat€100million.VC3andVC4decidetoprovidetheremaining€15million.TheESOPwillbeincreasedto16%post-moneytoattractnewhighlyskilledpeopleandtomotivatethemanagementtopreparethecompanyforanIPOattheearliestpracticalpossibility.Aftertheinvestmentof€40million,thevaluationwillbe€140million.

FIGURE11:CAPTABLESERIESCROUND

2.6 IPO(INITIALPUBLICOFFERING)NewWaveEnergyhasreachedrevenuebreakevenandisabouttoreachcashflowbreakevenaswell.IthasdevelopeditsownproductionfacilityfortheWaveMachine,generatedapipelineofnewproductsandestablishedasolidsalesorganisation.Itrequiresnewmoneyfortheexpansionofitsmarketingactivitiestwoothercontinents,theacquisitionofcompetitorsandexpansionoftheasset-heavyproductionfacility.Thecompanyhasapproachedaninvestmentbankforadviceonitspotentialtogopublic.TheinvestmentbankagreesthatthecompanycansuccessfullyfileforalistingandishiredtoassistNewWaveEnergyinthiscomplicatedprocess.NewWaveEnergy’sseniormanagement,alongwithrepresentativesfromtheinvestmentbank,visitpotential(institutional)investorstodeterminetheoptimalvaluationofthecompanyforthepurposeofraisingtheapproximately€75millionrequiredtoachievethecompany’sfuturegoals.Basedonthefeedbackduringthisso-called‘roadshow’,NewWaveEnergywillbeintroducedatavaluationof€200million.However,beforetheIPOcantakeplace,allregulatoryrequirementsmustbefulfilledandallpreferredsharesmustbeconvertedintocommonsharesona1:1basissincenodilutiveroundoreventleadingtoanadjustmentoftheconversionratiohasoccurred(seesection13–AutomaticConversion,ofchapter4).ThepricepersharehasincreasedsincetheSeedroundfrom€2.50to€33.23immediatelypriortotheIPO.Inordertocreateshareswithbettertradability,thesharesaresplit.

AttheIPO,newshareswillbeissuedandsoldtothepublic.Theexistingshareholderswillnotbeallowedtosellortransfertheirsharesduringalock-upperiod.Suchaperiodistypicallysixtotwelvemonthsfortheinvestorsandmaybelongerforthemanagementboard(theunderwritingbank(s)and/orthestockexchangeor(other)regulatoryauthoritiesusuallyrequire(s)alock-upperiod).

Ingeneral,theinvolvementoftheventurecapitalinvestorendsatthispoint.Thecontrollingrightsandfinancialpreferencesattachedtohispreferredshareshaveterminateduponconversionandhisnomineeatthecompany’ssupervisoryboardwillstepdownfromtheboard,orwilldosointhefollowingmonths,inordertoenabletheinvestortosellhissharesonthestockexchangewithoutrestrictionofanyinsidertradingrules.

FIGURE12:CAPTABLEATIPO

FIGURE13:IPO

3 NEWWAVEENERGYTERMSHEET

SetoutbelowisthetermsheetsubmittedbyVC2toNewWaveEnergyasmentionedinsection3,ofchapter2.Thistermsheetwillconstitutethebasisforthisbook.Eachclauseofthetermsheetwillbeexplainedinmoredetailinthefollowingchapters.

NEWWAVEENERGY

SUMMARYOFPROPOSEDTERMSANDCONDITIONSSERIESACONVERTIBLEPREFERREDSHARES

Thistermsheet(the“TermSheet”)summarisestheprincipaltermsandconditionswithrespecttotheproposedinvestmentbyVC2andVC1inexchangeforSeriesAconvertiblepreferredsharestobeissuedbyNewWaveEnergy.

OFFERINGTERMS

Issuer NewWaveEnergy(the“Company”)

AmountofFinancing €8,000,000

Milestones Theamountoffinancingispayableintwoequaltranches.ThefirsttrancheispayableattheClosing,thesecondtranchewillbepayableupontheclosingofalicensedealfortheWaveMachinewhichgeneratesalicensefeeofatleast€10,000permonth.

Investors VC2(leadinvestor)willinvest€6,000,000.Theexistinginvestor,VC1,willinvesttheremaining€2,000,000.VC1andVC2arejointlyreferredtoasthe“Investors”.

jointlyreferredtoasthe“Investors”.

TypeofSecurity SeriesAconvertiblepreferredshares(the“SeriesAShares”).TheSeriesASharesareseniortotheoutstandingcommonshares(the“CommonShares”).

SharePriceandValuation €9.38persharerepresentingafullydilutedpre-moneyvaluationof€15,000,000.

CapitalStructure Theattachedcapitalisationtable(Appendix[__])detailsallofthesecuritiesthatwillbeoutstandingimmediatelypriortoandaftertheClosing.

AnticipatedClosingDate 60daysaftertheexecutionofthisTermSheet(the“Closing”).

Dividends TheSeriesAShareswillcarryadividendinpreferencetotheCommonSharesof5%oftheoriginalpurchasepriceperannum,whichwillaccrueandcumulateannuallyandwillbepayableonlyifdeclared.

Redemption Attheelectionoftheholdersofatleast75%oftheSeriesAShares,subjecttoanyrestrictionsunderapplicablelaw,theCompanywillredeemalloutstandingSeriesASharesinfull,atanytimeafterthefifthanniversaryoftheClosing.

Suchredemptionwillbeatapriceequaltotheoriginalpurchaseprice(asadjustedforstocksplits,stockdividendsandthelike)plusanyaccruedandunpaiddividends.

VoluntaryConversion AholderofSeriesAShareswillhavetherighttoconvertSeriesAShares,oranypartofsuchsharesincludingdeclareddividends,attheoptionoftheholder,atanytime,intoCommonShares.ThetotalnumberofCommonShares

Shares.ThetotalnumberofCommonSharesintowhicheachSeriesASharemaybeconvertedwillbedeterminedbydividingtheoriginalpurchasepricebytheconversionprice.Theconversionpricewillinitiallybeequaltotheoriginalpurchaseprice.Theconversionpricewillhoweverbesubjecttoaproportionaladjustmentforsharedividends,splits,combinationsandsimilareventsandinaccordancewiththe‘Anti-Dilution’clause.

AutomaticConversion TheSeriesAShareswillautomaticallybeconvertedintoCommonSharesatthethenapplicableconversionpriceupon:(i)theclosingofafirmlyunderwrittenpublicofferingwithapricepershareofatleast8timestheoriginalpurchasepriceandproceedstotheCompanyofnotlessthan€100million(a“QualifiedOffering”),or(ii)thewrittenconsentoftheholdersof75%oftheSeriesAShares.

Anti-Dilution IntheeventthattheCompanyissuesnewsharesorsecuritiesconvertibleintoorexchangeableforsharesatapurchasepricelowerthantheapplicableconversionpriceoftheSeriesAShares,thentheconversionpriceoftheSeriesAShareswillbesubjecttoafullratchetadjustment,reducingtheapplicableconversionpriceoftheSeriesASharestothepriceatwhichthenewsharesare(tobe)issued.

Theanti-dilutionadjustmentwillnotapplyintheeventofissuanceofCommonSharesissuedorissuabletoemployees,consultantsordirectorsoftheCompanydirectlyorpursuanttotheESOP(assetoutinthe‘EmployeePool’clause)thathavebeenapprovedbytheSupervisoryBoard.

HoldersofPreferredSharesarerequiredto

Pay-to-Play HoldersofPreferredSharesarerequiredtoparticipateinanydilutiveissuanceincludingtheSeriesAFinancingtotheextentoftheirprorataequityinterestinthePreferredShares,unlesstheparticipationrequirementiswaivedforallPreferredShareholdersbytheSupervisoryBoard.

IntheeventthataholderofPreferredSharesfailstoparticipateinaccordancewiththepreviousparagraph,thePreferredSharesheldbysuchshareholderwillautomaticallylosetheiranti-dilutionandliquidationrights.

LiquidationPreference IntheeventofaliquidationorwindingupoftheCompany,theholdersofSeriesAShareswillbeentitledtoreceive,inpreferencetotheholdersoftheCommonShares,paymentofanamountequaltotheoriginalpurchasepriceperSeriesAShare,plusanyaccumulatedandunpaiddividends.

IfthereareinsufficientassetsorproceedstopaysuchamounttotheholdersofSeriesASharesinfull,theamountavailablewillbepaidonaproratabasisbetweentheholdersofSeriesAShares.

ThereafteranyremainingassetsorproceedswillbedistributedprorataamongtheholdersofCommonSharesandtheholdersofSeriesAShares(thelatteronan‘as-if’convertedbasis).

Areorganisation,consolidation,mergeroftheCompany,saleorissueofsharesoranyothereventpursuanttowhichtheshareholdersoftheCompanywillhavelessthan51%ofthevotingpowerofthesurvivingoracquiringcorporation,orthesale,lease,transferorotherdispositionofallorsubstantiallyallofthe

dispositionofallorsubstantiallyalloftheCompany’sassetswillbedeemedtobealiquidationorwindingupforthepurposesoftheliquidationpreference(a“DeemedLiquidationEvent”),therebytriggeringtheliquidationpreferencesdescribedabove.

FavourableTerms Thetermsherein,otherthanvaluation,aresubjecttoareviewoftherights,preferencesandrestrictionspertainingtotheexistingsharesintheCompany.AnychangesnecessarytoconformsuchexistingsharestothisTermSheetwillbemadeattheClosingasnecessaryinordertoensurethatholdersofexistingCommonShareswillnothaverightsmorefavourablethanthoseoftheholdersofSeriesAShares.

BoardRepresentation ThesupervisionofthepoliciesbytheManagementBoardandallothertasksanddutiesasassignedtoitwillbeentrustedtothesupervisoryboard(“SupervisoryBoard”),whichatClosingwillconsistofthreememberscomprisedof(i)onememberelecteduponthenominationoftheholdersoftheSeriesAShares;(ii)onememberuponthenominationofBillPearandPeterSingh(the“Founders”);and(iii)onememberwhohasspecificexpertiseintheCompany’sfieldofbusinessnominatedbyamajorityofallshareholdersandwhoismutuallyacceptabletotheFoundersandInvestors.

TheCompanywilltakeoutD&Oinsuranceintheamountofatleast€5millionperoccurrence.

VotingRights TheholdersofSeriesAShareswillvotetogetherwiththeholdersofCommonSharesandnotasaseparateclass,exceptas

andnotasaseparateclass,exceptasspecificallyprovidedhereinorasotherwiserequiredbylaw.EachSeriesASharewillhaveanumberofvotesequaltothenumberofCommonSharesissuableuponconversionofsuchSeriesAShare.

ConsentRights TheCompany’sarticlesofassociationoranyotherconstitutivecorporatedocumentswillbeamendedtocontainrestrictionsmakingcertainresolutionsoftheManagementBoardwithamaterialeffectontheCompany’soperationsormanagementsubjecttothepriorapprovaloftheSupervisoryBoard.Inaddition,thesedocumentswillcontainrestrictionsmakingcertainresolutionsofthegeneralmeetingofshareholders(e.g.resolutionsregardingthestructureandcapitalisationoftheCompany)subjecttothepriorapprovaloftheholdersofSeriesAShares.

RegistrationRights TheholdersofSeriesAShareswillhavenormalregistrationrightsincludingdemandregistrationrights,unlimited‘piggyback’registrationrights,S-3registrationrights,transferofregistrationrights,proportionateunderwritercut-backs,andothertypicalregistrationrights,allattheexpenseoftheCompany.

Intheeventthatthepublicofferingasreferredtointhis‘RegistrationRights’clausewillorhastakenplaceonastockexchangeoutsidetheU.S,thentheholdersofRegistrableSecuritieswillbeentitledtoregistrationrightsequivalenttotherightsandobligationscontainedinthis‘RegistrationRights’clause(orasequivalentaspossiblegivendifferencesinapplicablelaw).

Theinvestmentagreementoraseparate

RepresentationsandWarranties

TheinvestmentagreementoraseparaterepresentationandwarrantiesagreementwillincludestandardrepresentationsandwarrantiesgrantedbytheCompanyandexistingshareholders,including,butnotexpresslylimitedto:(i)organisationandgoodstanding;(ii)capitalisationstructure;(iii)dueauthorisation;(iv)validshareissuance;(v)governmentalconsents;(vi)nocompanylitigation;(vii)ownershiporexclusivelicenseofintellectualpropertyrights;(viii)employees;(ix)pensionplans;(x)assurancesoffulldisclosureandaccuracyofinformationprovided;(xi)goodtitletoallassets;(xii)tax;(xiii)accuracyoffinancialstatements;(xiv)absenceofadversedevelopments;and(xv)materialcontracts.

InformationRights AnyholderofSeriesAShareswillbegrantedaccesstoCompanyfacilitiesandpersonnelduringnormalbusinesshoursandwithreasonableadvancenotification.TheCompanywilldelivertosuchInvestor(i)un-auditedfinancialstatementswithin120daysaftertheendofthecalendaryear;(ii)andmonthlyfinancialstatementswithin20daysaftersuchperiod,andotherinformationasdeterminedbytheSupervisoryBoard;(iii)thirtydayspriortotheendofeachfiscalyear,acomprehensiveoperatingbudgetforecastingtheCompany’srevenues,expenses,andcashpositiononamonth-to-monthbasisfortheupcomingfiscalyear;and(iv)promptlyfollowingtheendofeachquarter,anup-to-datecapitalisationtable,certifiedbytheCFO.TheforegoingprovisionswillterminateuponaQualifiedOffering.

UseofProceeds TheCompanywillapplythenetproceedsofthesaleoftheSeriesASharesexclusivelytothedevelopmentandoperationoftheCompany

thedevelopmentandoperationoftheCompanyinaccordancewithabusinessplanandbudgettobeapprovedbytheInvestorspriortotheClosing.

Pre-emptiveRights Withoutprejudicetothe‘Anti-Dilution’clause,iftheCompanyproposestoofferequitysecurities,orsecuritiesconvertibleintoorexchangeableforshares,theholdersofSeriesAShareswillbeentitledtopurchasesuchsecuritiesinanamountsufficienttoallowtheholdersthemtoretaintheirfullydilutedownershipoftheCompany.

Thepre-emptiverightwillnotapplyintheeventofissuancesof(i)CommonSharesissuedorissuabletoemployees,consultantsordirectorsoftheCompanydirectlyorpursuanttotheESOP(assetoutinthe‘EmployeePool’clause)thathavebeenapprovedbytheSupervisoryBoard;(ii)CommonSharesissuedorissuableuponconversionofthePreferredShares;(iii)CommonSharesissuedorissuableinconnectionwithamerger,acquisition,combination,consolidationorotherreorganisationinvolvingtheCompanyapprovedbytheSupervisoryBoardoftheCompany;(iv)CommonSharesissuedorissuableinconnectionwith(a)anyborrowingsfromacommerciallendinginstitution,(b)theleaseofequipmentorpropertybytheCompany,or(c)strategicpartnershipsand/orlicensingrelationships,solongassuchtransactionsareapprovedbytheSupervisoryBoard;and(v)CommonSharesissuedorissuable(a)inaQualifiedOfferingbeforeorinconnectionwithwhichalloutstandingPreferredShareswillbeconvertedtoCommonSharesor(b)uponexerciseofwarrantsorrightsgrantedtounderwritersinconnection

rightsgrantedtounderwritersinconnectionwithsuchaQualifiedOffering.

RightsofFirstRefusal HoldersofSeriesAShareshavearightoffirstrefusalwithrespecttoanysharesproposedtobesoldbyashareholder,atthesamepriceandonthesametermsasoffered,witharightofoversubscriptionforholdersofSeriesASharesofsharesun-subscribedbytheotherholdersofSeriesAShares.Suchrightoffirstrefusalwillterminateupontheearlierof(i)aQualifiedOffering;or(ii)asaleormergeroftheCompany.

Co-SaleRight BeforeanyshareholdermaysellsharesintheCompany,afterhavingobservedthetermsandproceduresofthe‘RightoffirstRefusal’clause,hewillgivetheotherShareholdersanopportunitytoparticipateinsuchsaleonaproratabasis.

Drag-AlongRight Theholdersofa75%majorityofSeriesASharesmayrequireasaleoftheentireissuedsharecapitaloftheCompany.

ManagementBoard ThemanagementoftheCompanywillbeentrustedtothemanagementboard(the“ManagementBoard”)consistingatClosingofBillPearaschiefexecutiveofficerandPeterSinghaschieffinancialofficer.AnynewmanagementboardmemberorseniorcompanyofficerswillnotreceiveanofferofemploymentwithouttheapprovaloftheSupervisoryBoard.TheCompanywill,ona‘besteffort’basis,hireachiefbusinessdevelopmentofficerwithinthesix-monthperiodfollowingtheClosing.

EmployeePool UpontheClosing,theCompanywillreserveupto5%ofthepost-moneyoutstandingsharesfor

to5%ofthepost-moneyoutstandingsharesforissuancetoemployees,directorsandconsultants(the“ReservedEmployeeShares”).TheReservedEmployeeShareswillbeissuedfromtimetotimeunderanemployeeshareoptionplan(the“ESOP”)asapprovedbytheSupervisoryBoard.

VestingScheme AllReservedEmployeeShareswillbesubjecttovestingasfollows:25%tovestattheendofthefirstyearfollowingtheirissuance,withtheremaining75%tovestmonthlyoverthenextthreeyears.

Founder’sShares UponClosing,1,000,000oftheCompany’sissuedandoutstandingCommonShareswillbeheldbytheFounders(the“Founders’Shares”).TheFounders’Shareswillbemadesubjecttoasimilarvestingschemeassetforthinthe‘VestingScheme’clause,providedthatthevestingperiodwillbeginasoftheClosing.

EmploymentRelationships TheCompanyhasorwillhavepriortotheClosing:employmentagreements,proprietaryinformationandinventionsagreements,oneyearnon-competitionandnon-solicitationagreements,andnon-disclosureagreementswiththeFoundersandkeyemployeesinaformreasonablyacceptabletotheInvestors.

Lock-Up AtnotimepriortothefifthanniversaryoftheClosingwillanyFounderdisposeofanysharesintheCompanyinanymanner,exceptwiththewrittenconsentoftwo-thirdsoftheholdersofSeriesAShares.Thislock-upwillinanycaselapseattheconsummationofaQualifiedIPO,tradesaleorotherliquidityevent.

EmploymentRelationships TheCompanyhasorwillhavepriortotheClosingemploymentagreementsinaform

ClosingemploymentagreementsinaformreasonablyacceptabletotheInvestorswitheachFounderandkeyemployee.

Non-Competition/Non-Solicitation

PriortoClosing,eachFounderandkeyemployeewillenterintoaone-yearnon-competitionandnon-solicitationagreementinaformreasonablyacceptabletotheInvestors.

Non-DisclosureAgreement PriortoClosing,eachFounder,andeachofficer,employeeandconsultantwithaccesstotheCompany’sconfidentialinformation/tradesecretswillenterintoanon-disclosureagreementinaformreasonablyacceptabletotheInvestors.

AssignmentInventions PriortoClosing,eachFounderandkeyemployeewillenterintoaproprietaryrightsassignmentagreementinaformreasonablyacceptabletotheInvestors.Suchagreementwillcontain,interalia,appropriatetermsandconditionsunderwhicheachFounderandkeyemployeewillassigntotheCompanytheirrelevantexistingpatentsandpatentapplicationsandotherintellectualpropertyrightsasdefinedbytheCompany’sbusinessplan.

KeyManInsurance WithinthreemonthsoftheClosing,theCompanywillprocurealifeinsurancepolicyfortheFoundersintheamountof€1millionperperson(orsuchlesseramountasapprovedbytheInvestors).TheCompanywillbenamedasthebeneficiaryofthepolicies.

AgreementsatClosing ThepurchaseoftheSeriesAShareswillbemadepursuanttoanInvestmentandShareholders’AgreementacceptabletotheInvestorsandcontaining,interalia,appropriaterepresentations,warrantiesasreferencedinthe‘RepresentationandWarranties’clauseandcovenantsoftheCompany,ManagementBoard

covenantsoftheCompany,ManagementBoardandexistingshareholders,whereappropriatereflectingtheprovisionssetforthhereinandappropriateconditionsoftheClosing.

FeesandExpenses TheCompanywillpayreasonablefeesandexpensesincurredbytheInvestorsinconnectionwith(thepreparationof)thetransactioncontemplatedbythisTermSheet,including(butnotlimitedto)expensesinconnectionwiththepreparationoflegaldocumentationandtheconductofduediligenceinvestigation(s)payableattheClosingorpayableassoonastheCompanyelectsnottoproceedwiththetransactioncontemplatedbythisTermSheet.

Confidentiality ThepartieswillkeepstrictlyconfidentialthefactthattheyhaveenteredintonegotiationsconcerningthetransactionscontemplatedbythisTermSheetandthecontentsofsuchnegotiationsandofthisTermSheet.

Exclusivity/No-Shop TheCompanyagreestoworkingoodfaithexpeditiouslytowardstheClosing.TheCompanyandtheFoundersagree(a)todiscontinueanydiscussionswithotherpartiesconcerninganyinvestmentintheCompany,(b)nottotakeanyactiontosolicit,initiate,encourageorassistthesubmissionofanyproposal,negotiationorofferfromanypersonorentityotherthantheInvestorsrelatingtothesaleorissuance,ofanyofthecapitalsharesoftheCompany,and(c)tonotifytheInvestorspromptlyofanyinquiriesbyanythirdpartiesinregardstotheforegoing.

Thisprovision‘Exclusivity/No-Shop’willbeinforceuntilsixweeksaftertheexecutionofthisTermSheet.Thereafterthisexclusivityperiod

TermSheet.Thereafterthisexclusivityperiodwillautomaticallycontinueforaperiodoftwoweeks(revolving)unlesseithertheCompanyortheInvestorsdecidetoendthediscussionsbywayofawrittennoticetotheotherpartyatleastfivedayspriortotheendingofsuchexclusivityperiod.

GoverningLaw ThisTermSheetandallotheragreementsresultingfromthisTermSheetwillbeexclusivelygovernedbythelawofthecountryinwhichtheCompany’sseatislocated.

Insofaraspermissiblebylaw,exclusivejurisdictionforalldisputesarisingfromandinconnectionwiththepresentTermSheetwillbetheseatoftheCompany.

Non-bindingCharacter Exceptasotherwisespecificallyprovidedherein,thepartiestothisTermSheetexpresslyagreethatnobindingobligationswillbecreateduntiladefinitiveagreementisexecutedwiththerequisiteformalityanddeliveredbybothparties.

Notwithstandingtheforegoing,theclausesentitled‘FeesandExpenses’,‘Confidentiality’,‘Exclusivity/No-Shop’,and‘GoverningLaw’willbebindinguponexecutionofthisTermSheet.

Indemnities TheCompanyandtheInvestorswilleachindemnifytheotherforanyfinder’sfeesforwhicheitherisresponsible.

ConditionsPrecedent TheClosingissubjecttothefollowingconditionsprecedent:

(1)satisfactorycompletionoffinancial,taxandlegalduediligence;(2)nomaterialadverse

legalduediligence;(2)nomaterialadversechangeinthefinancialconditionortheprospectsoftheCompanyasmentionedinthebusinessplan[andanydocumentssenttotheInvestors];(3)negotiationandexecutionoflegaldocumentationsatisfactorytotheInvestors;(4)consentofthenecessarylegalmajorityoftheCompany’sshareholders,and(5)finalformalapprovaloftheInvestors’investmentandpartnercommittees.

Expiration ThisTermSheetexpireson[__]ifnotacceptedbytheCompanybythatdate.

Signatures:

NewWaveEnergy Name:...................................... Title:......................................

BillPear PeterSinghName:...................................... Name:......................................Title:...................................... Title:......................................

VC1 VC2Name:...................................... Name:......................................Title:...................................... Title:......................................

APPENDIX1:CAPITALISATIONTABLENEWWAVEENERGY

4 TERMSEXPLAINED

4.1 ISSUERInmostventurecapitaltransactions,thetypeoflegalentityinwhichtheinvestorswillinvest,isnotanissue.Normallyitwouldbeacompanywithlimitedliabilityandacapitaldividedinshares.Thistypeofcompanyexistsineveryjurisdiction,albeitunderdifferentnamesandsubjecttodifferentspecificlawsandregulations.

ExamplesoflimitedliabilitycompaniesincludeS.A.(SociétéAnonyme)inFrance,A.G.(Aktiengesellschaft)andGmbH(GesellschaftmitbeschränkterHaftung)inGermanyandSwitzerland,S.p.A.(SocietàperAzioni)inItaly,B.V.(BeslotenVennootschap)andN.V.(NaamlozeVennootschap)intheNetherlands,S.A.(SociedadAnónima)andS.R.L.(SociedaddeResponsabildadLimitada)inSpain,Ltd.(LimitedLiabilityCompany)intheUKandInc.(Corporation)andLLC(LimitedLiabilityCompany)intheUS.

Inthepasttenyears,manyEuropeanjurisdictionshavemadetheirlimitedliabilitycompanylawmoreflexible.Whereinthepastitcouldtakeacoupleofweekstoincorporatealimitedliabilitycompany,nowadaysinmostEuropeancountriesitwilltakeonlyoneortwodays.Furthermore,manyjurisdictionshaveabolishedtheirminimumcapitalrulesormadethemfarlessburdensomethantheyusedtobe.

Byinvestinginacompany’sequitycapital,theinvestorbecomesanownerofthecompany.Consequently,anincreaseordecreaseinthevalueofthecompanywillbereflectedinaprorataincreaseordecreaseinthevalueofhisinvestment(shares).Fromaninvestors’riskperspective,oneofthemostimportantbenefitsofinvestinginacompanywithlimitedliabilityisthatheisnotliableforthecompany’sdebtsandobligationsbeyondtheamounthepaidforhisshares.Furthermore,theconceptofthelegalpersonalityoflegalentitiesprovidespersonalprotectiontoindividualmanagersfromclaimsagainstthecompany(alegalliabilityofthelegalentityisnotnecessarilyalegalliabilityofanyofitsmanagers).

Obviously,thelegislationapplyingtolimitedliabilitycompaniesvariesfromonejurisdictiontoanother.Itisthereforeimportanttodeterminewhichmattersarecoveredbytheapplicablelawandwhichmattersneedtobedealtwithseparately(e.g.inatermsheetorshareholders’agreement).

Forthepurposeofthisbook,wewillassumethatthecompanyinwhichtheinvestorswillinvestisacompanywithlimitedliability.

Issuer: [namecompany],(the“Company”).

4.2 AMOUNTOFFINANCINGIntheintroduction,wetouchedonthetypicalfundingstagesthatastartupcompanypassesthroughinthecourseofitslife.Eachofthesestagesnormallystartsandendswithanewfinancingroundthatisintendedtoenablethecompanytoreachitsnextstage.Duringeachstage,thecompanyanditsmanagementshouldworktoachievesignificantbusinessdevelopmentsinorderbeabletosuccessfullyraiseandcloseanextroundoffinancing.

Theamountoffinancingismainlydrivenbymarketcircumstances.Ideally,theamountoffinancingineachroundisbarelysufficientforthecompanytorealiseadequateprogress.Iftheamountoffinancingistoosmall,thecompanywillrunoutoffundsbeforethefruitsofthepreviousroundcanbepresentedconvincingly.Thusraisingfundsinthenextroundatahighervaluationwillbelikelytofail,especiallysincetheaimistoraisefundsatahighervaluepershareissued.Furthermore,withinsufficientcashavailability,thecompanyhastogooutfundraisingmoreoften.Thisisatime-consumingbusinessthatdistractsfromthecoreactivityofcreatingrealvalue.Ifontheotherhandtheamountoffinancingismorethanstrictlyneededtoachievevalue-increasingmilestones,thecompanyanditsmanagementmaylosefocusandcontroloftheirexpenditure.Fromthefounders’perspectivemorefinancingisnotalwaysbetter.Ifpossibletheywouldratherhavethecompanyraisealimitedamountoffinancingnow,andmorelateronatahighervaluation.Thiswillavoidunnecessarydilutionofthefounders’stakeinthecompany.Butofcoursenooneknowswhatthefuturewillbring.Financingmaybeavailableasecondtime,oritmaynot.Not‘takingthecookieswhentheyarepassed’couldbeabitofagamble.

Thecashrequirementofacompanydependslargelyonitsstageofdevelopment.Companiesthataremoremature,requirelargeramountsoffinancing.Inotherwords,largeramountsoffinancingaregenerallycommittedinlaterrounds.

AmountofFinancing: €[___]million(the“Series[ ]Financing”).

4.3 MILESTONESIncertaintypesoftransactions,theinvestormaywishtoworkwithmilestones.Itimproveshisinternalrateofreturn(thelateryouinvest,thebetteryourIRRwillbe)anddiminishestheriskoflosingallhismoneyifthecompanygoesbankruptbeforethemilestonedate.Milestonesarepre-agreedtargetsthatarecrucialtothevaluationofthecompanyfromtheperspectiveoftheinvestor,suchasthecompletionofaprototype,theachievementofaproofofprinciple,acertainlevelofearnings,sales,orusers,ortheoutcomeofclinicaltrials.Often,amilestonewillbeavalueinflectionpoint.Inotherwords:ifamilestoneisachieved,thiswillresultinasignificantlyhighervaluationofthecompany.

Milestonesneednotonlybeusefultoinvestors.Theycanalsohelpentrepreneurs.Entrepreneurstendtofocusonvisionandmaypaylessattentiontopracticalitiesrequiredtorealisetheirvision.Milestonescanbeveryusefulinhelpingentrepreneursfocusonmattersthathavetobedealtwithintheshortterminordertoenablethemtorealisetheirvisioninthelongterm.

Therearetwotypesofmilestones:(a)investmentmilestonesand(b)valuationmilestones.Investmentmilestonesallowtheinvestortopostponepaymentofpartoftheamountcommitteduntilthepre-agreedmilestoneshavebeenachieved.Valuationmilestonesdonotaffecttheinvestmentofthetotalcommittedamount,butresultinareallocationofownershipofthecompany.Theextentoftheadjustmentofthevaluationistypicallylinkedtotheamountoftheperceivedincreaseordecreaseinvaluationofthecompanyifsuchamilestoneismetornotmet,respectively.Thetwotypesofmilestoneswillbediscussedindetailbelow.

A INVESTMENTMILESTONESIftheamountoffinancing,orpartthereof,issubjecttotheachievementofmilestones,theinvestorswillmakeaninitialpayment(afirsttranche)attheclosingofthedeal,whereastheremaininginvestmentamountwillbepaidinone

ormoretranchesuponthecompanyachievingpre-definedmilestones.Bystructuringtheirinvestmentinthismanner,theinvestorsareabletoreducetheirfinancialrisk(ifthemilestoneisnotachieved,theinvestors’fundingcommitmentends)andincreasetheinternalrateofreturn(IRR)(sincetheydonotinvestthetotalamountoffinancingatonce,butspreadtheinvestmentoutovertime).

Forobviousreasons,thecompanywillbeinserioustroubleifitdoesnotachieveamilestone.Theinvestorsmayrefrainfromfurtherinvestmentiftheyconsidertheachievementofamilestoneessentialtothefutureofthecompany.However,inmostcases,inordertoprotecttheirinitialinvestment,theinvestorsarewillingtorenegotiatethedealandtocommitfurtherfundingonmoreinvestor-friendlyterms.

B VALUATIONMILESTONESIncontrasttothemilestonesdiscussedinthepreviousparagraph,milestonesusedasatriggerforadjustmentofthevaluationdonotaffectthetotalcommittedamounttobeinvestedinthecompany,butwillresultinareallocationofownershipofthecompany.Theextentoftheadjustmentofthevaluationistypicallylinkedtotheamountoftheperceivedincreaseordecreaseinvaluationofthecompanyifsuchmilestoneiseithermetornotmet.

Valuationmilestonescaneitherbenegative–decreasingthevaluationatwhichtheaggregateinvestmentwillbemadeifamilestoneisnotachieved,orpositive–increasingthepre-moneyvaluationifamilestoneisachieved.

Byusingnegativevaluationmilestones,investorsareabletoofferarelativelyhighinitialvaluationandthustomakeanattractiveofferwhenmoreinvestorsarecompetingforthedeal,ortogivethefoundersthebenefitofthedoubtbylettingthemprovetheirambitiousplansandvaluation.Ifthemilestonesarenotachieved,thevaluationwillretroactivelybeadjusteddownwardsandtheinvestorswillbeentitledtoadditionalshares.However,ifthemilestonesareachieved,thehighvaluationwillbemaintainedandthenumberofsharesheldbytheinvestorswillnotchange.Alternatively,positivemilestones,whenachieved,willcausearetroactiveupwardadjustmentofthevaluationatwhichtheinvestorshaveinvested,entitlingthemtofewersharesthantheyhadreceivedatclosing.

Typically,valuationmilestonesareusedwhenthetotalamountoffinancingis

madeinoneormoreinstalmentsortranches.Theduedateofavaluationmilestonecanthencoincidewiththeduedateofaninvestmenttranche.Thenumberofsharestobeissueduponpaymentofeachtranchewilldependontheachievementofamilestone.Thetotalnumberofsharestobeissuedinexchangeforalltrancheswilldeterminetheoverallpre-moneyvaluationatwhichtheinvestmentismade.

Ifthetotalamountoffinancingisnotpayableintranchesbutistobepaidinfullattheclosing,aretroactiveadjustmentofthevaluationcanbeestablishedbyadjustingtheconversionratioofthepreferredsharestocommonshares.Theadjustmentcanbestructuredtoincreasethenumberofcommonsharestobeissuedtotheinvestorsuponconversionifthevaluationgoesdownandviceversa,ifthevaluationgoesup.Othermechanismsaretheissueofnewpreferredsharestotheinvestorsifthevaluationgoesdown,ortheredemptionofsomeoftheirpreferredsharesifthevaluationisadjustedupwards.Insmallercompanies,sharescanbereallocatedbytransferofsharesbetweentheinvestorsandcommonshareholders.

Analternativestructurethatcanbeusedintranchedinvestmentsistheagreedpostponementofpartofthepaymentofthesubscriptionpriceforthepreferredshares.Attheclosing,thepreferredshareswillbeissuedtotheinvestorsinexchangeforonlypartofthesubscriptionprice.Theremainderofthesubscriptionpricewillbepayableinfullonlyiftheagreedmilestonesaremet.Iftheyarenotmet,thepre-moneyvaluationwillbeautomaticallyadjusteddownward.Incertainjurisdictionsorinrespecttocertaintypesofentitiesthefullsubscriptionprice(beingthenominalvalueplusallsharepremiums)mustbepaidatissuanceandcannotbepostponed.

C FINALREMARKSConsideringthepossibleconsequencesoftheuseofmilestonesandthedisparateinterestsoftheinvestorsandthefounders,itisgenerallyveryimportantthatthemilestonesarewelldefined.

Furthermore,itshouldbeclearwhodecideswhetheramilestonehasbeenachieved.Thiscouldbeacorporatebody(e.g.themeetingofpreferredshareholders(i.e.theinvestors),thegeneralmeetingofshareholdersorthesupervisoryboard),orthedecisioncouldbeleftuptotheparties(e.g.thecompanyandtheinvestors).Inthelattercase,ifthepartiescan’tagreewhetheramilestonehasbeenachieved,thiswillhavetobedecidedoninultimateresortby

thecompetentcourt.Sincetheinvestorsareconsideredtobebiasedandthesupervisoryboardisrequiredtoactintheinterestofthecompany(andnotnecessarilyintheinterestoftheinvestors),theelectionofathirdpartyexpert(s)maybeasolutionifthereisdisagreementonthisissue.

Negotiationtips:• Keepthedefinitionofmilestonessimpleandconcrete.Avoid

vagueness;forexample“thesuccessfulcommencementofproduction”canbeinterpretedtomeanmanydifferentthings.Itwon’tworkinpractice.

• Don’tagreeonmilestonesiftheirachievementdoesnotseemrealistic;theyshouldberealisticallyachievablewithinthesettimeframe.

• Youcouldconsiderincludingamechanismthatwillmakeareasonableadjustmentofthemilestonespossible,if,atsomepointinthefuture(andwiththeapprovaloftheinvestors)thecompany’sstrategyischanged.

Milestones: [Alternative1:(investmentmilestone):TheSeries[ ]Financingispayablein[___]tranchesof€[___]subjecttotheachievementofthemilestonessetforthinAppendix[___].]

[Alternative2:(valuationmilestone):Thepre-moneyvaluationof€[___]asreferencedinthe‘SharePriceandValuation’clausewillbeadjustedto€[___]subjecttotheachievementofthemilestonessetforthinAppendix[___].]

4.4 INVESTORSTheclauseInvestorssetsoutthenamesofthepartiesprovidingthetotalamountoffinancing.Ifanumberofinvestorsjointogethertoprovidethecapitalunderthesameterms(asyndicate),thenthissectionofthetermsheetwillalsoindicatewhichinvestorwillactastheleadinvestorinthisfinancingroundandwhichinvestorswillco-investwiththeleadinvestor(theco-investors).Ifthesyndicateisnotfilledoutatthetimeoftheexecutionofthetermsheet,thetermsheetwilltypicallyallowtheleadinvestortoinviteotherinvestorstoco-invest.

Themainrolesoftheleadinvestoraretobuildasyndicate,tostructurethedealandtomanagetheduediligenceprocessandthecontractdrafting.Inmostcases,theleadinvestoristhefirstinvestorinvolvedintheroundandoftenmakesthelargestinvestmentinthefinancinground.Theleadinvestor’sactiveinvolvementinthefinancing,duediligenceandcontractdraftingprocesstypicallyrequireshimtohaveeasyaccesstothecompany.

Venturecapitalistssyndicateforseveralreasons.Thefirstreasonistospreadtherisksinvolvedinaventurefinancing.Byinvestinginasyndicate,theriskexposureofeachinvestorislimitedandmorecapitalisavailableforthecompany’spresentandfuturecashneeds.Sharingtheinvestmentalsoallowstheinvestorstobuildalargerandmorediverseinvestmentportfolio.Syndicationalsogivesinvestorstheopportunitytoshareknow-how.Sharingexpertise,marketintelligenceandduediligenceenablestheinvestorstomakeabetterassessmentofthecompany’sbusinessplanandtechnology,whichshouldleadtoasuperiorinvestmentdecision.Itfurtherallowstheinvestorstovalidatetheirinvestmentdecision.Eachinvestor’sinvestmentdecisionwillbeconfirmedifmoreinvestorsarewillingtoinvestinthecompany.Anotherbenefitofinvestinginsyndicationistogettoknowotherventurecapitalistsandtobuildupanetworkwithintheventurecapitalcommunity,whichshouldleadtoanincreasedandbetterdealflow.

Seedfinancing,generallybetween€100,000and€2,000,000,usedtobethedomainofbusinessangelsratherthanventurecapitalfunds.Overthepasttenyearsmoreandmoreventurecapitalfundshaveenteredthemarket.Thishasledtomoreventurecapitalfundsfocussingontheveryearlystage.ThesefundsareusuallyreferredtoasSeedFunds.However,angelsstillplayanimportantroleinseedfinancing,inparticularincountrieswithmanysuccessfulserialentrepreneurswhowanttore-investpartofthefortunestheyhavemade.Sometimestheseangelsbundletheircapitalandformaseedventurecapitalfundthatinvestsinmultiplestartupcompanies.SeedFundsandangelsusuallyrequirelessprotectivetermsthangeneral(SeriesA+)venturecapital.

Overthepastfewyearscrowdfundinghasbecomeincreasinglypopularasanalternativeformofseedfinancing.Therearefourmainformsofcrowdfunding:donation,rewards,lendingandequity.Duringtheearlydaysofcrowdfunding,therewardsmodelwasmostoftenused.Underthatmodelinvestorswerepaidbackwithproductsorservicesdevelopedbythecompany.Startupswouldalsosometimesutilizeapre-ordermodelinwhichproductsweresoldbeforetheywereactuallyproduced.Donationmodelswerealsopopular,especiallyfor

wereactuallyproduced.Donationmodelswerealsopopular,especiallyforcreativeprojectsandcharities.Asinterestincrowdfundingbegantogrow,manybegantoexperimentwithothermodelsforsecuringnecessaryfunds.Today,investorsareoftenabletoobtainanequityordebtstakeinthestartupinexchangefortheirinvestments.Whenraisingmoneywithcrowdfunding,keepinmindthatyouwillendupwithmanyequity-ornoteholders,whomaynothavevotingrightsbutwillrequireattentioninsomeform.Crowdfundingcanbeagreatwaytopromoteyourproduct,inparticularifitisaconsumerproduct.

Fortheentrepreneuritisimportanttochooseaninvestorwhoseinterestsrun(asmuchaspossible)inparallelwiththoseofthecompanyandwhocanhelpthecompanyachieveitsgoals,notonlyfinancially,butalsobysharingnetworkandknowledge.

Beforestartingalong-termrelationshipwithaninvestor,anentrepreneurshouldhavegivencarefulthoughttomanyimportantmatters.Afewofthosearelistedbelow:• Whatistheremaininglifeoftheinvestor’sfund?Venturecapitalfunds

typicallyhavealimitedlifespan(e.g.tenyears).Olderfundsmaynothavesufficienttimetositoutthewholerideandmaywanttorushanexit,ormayrunoutofmoneyforfollow-oninvestments.

• Whatistheinvestor’spreferreddealsize?Largeinvestmentfundsmaywanttoinvestaminimumamountperportfoliocompany.Thiscanjeopardizeasuccessfulshort-termexitofthecompany.Smallerinvestors,ontheotherhand,maynotbeabletoprovidesufficientfundinginthefuture.

• Whoaretheinvestor’sfunders(limitedpartners)andwhatistheinvestor’sinvestmentmandate?Fundsbackedbypublicmoneyoftenhavealocalornationalfocus.Thismaycreateaproblemifthecompanywishestoexpandabroadorcanbesoldtoaforeigncompany.Beawarethatventurecapitalfundsmayalsobebackedbystrategicinvestors,whomayhaveastrategicinterestinyourcompany.

• Ifyoucanchoose,haveoneortwoinvestorsprovideallrequiredfunding,ratherthanahandfulofinvestorseachprovidingasmallportion.Everyinvestorrequiresattention.Consequently,themoreinvestorsyouhave,themoretimeyouwillhavetospendoninvestorrelations.Ifyouaredealingwithasyndicate,pro-activelyco-ordinatetheinvestmentprocess(trytobetheoneinthe“driver’sseat”)inordernottolosemomentum.Makesurethatintheduediligenceprocess,duplicationofeffortisavoided.

Investors: [nameinvestor]asleadinvestorwillinvest€[__].OtherinvestorsparticipatingintheSeries[ ]Financing(togetherwiththeleadinvestor,the“Investors”),theamountsoftheirinvestmenttobeapprovedbytheleadinvestor.

4.5 TYPEOFSECURITYTheTypeofSecurityclauseintheNewWaveEnergytermsheet(seechapter3)indicatesthattheinvestmentwillbemadeinexchangeforequity,seriesAconvertiblepreferredsharestobeprecise.Equityisnotthesolesourceoffinancingthatcanbeprovidedbyinvestorsinventurecapitaltransactions.Incertaintransactions,investorsmayprovide(convertible)debtfinancingtocompanies.Attimes,thismaybeinadditiontoequityfinancing.Thereareessentiallytwotypesofsecurities:equitysecuritiesanddebtsecurities,eachwithitsownspecificcharacteristics.

A EQUITYSECURITIESEquityrepresentsownershipinacompany.Suchownershipcanbeevidencedbyanddividedintoequitysecurities,or,inmorecommonterms–shares.Inventurecapital,generallytherearetwodistincttypesofshares:(i)common(orordinary)sharesand(ii)preferredshares.

I. COMMONSHARESBasically,commonsharesaresharesthatcarryfullvotingrightsandareentitledtodividendpaymentsanddistributionsinthecaseofbankruptcyofthecompanyafterallothercostsandclaimstothecapitalhavebeenmet.Commonsharescarrynospecialrights(e.g.specialvoting,liquidation,dividendrights)andaretypicallyheldbythefoundersandkeyemployeesofventure-backedcompanies.

II. PREFERREDSHARESApreferredshareisatypeofsharethatcarriescertainrightsthatgoaboveandbeyondthoseconferredbycommonshares.Infinancialtermspreferredsharesprovidetheirholderstherighttoreceivepaymentofdividendsaheadoftheholdersofcommonshares,andtotakeprecedenceoverthemwhenitcomestothedistributionoftheliquidationproceedsofacompany.Thesefinancialpreferredrights(explainedinfurtherdetailinsection10–Dividendsandin

section16–Liquidationpreference,ofthischapter)formtheessentialrightsofthepreferredshareclass.

Preferredsharestypicallycarryadditionalrightstoprovidethemwithacertainlevelofcontroloverthebusinessandcapitalofthecompany–particularlysoinventurecapitaltransactions.Theserightsofteninclude:• Redemptionrights(seesection11–Redemption)• Anti-Dilution(seesection14–Anti-Dilution)• Votingrights(seesection19–VotingRights)• Drag-alongprovisions(seesection28–Drag-AlongRight)• Co-saleprovisions(seesection27–Co-SaleRight)• Rightsoffirstrefusal(seesection26–RightsofFirstRefusal)

Preferredsharescanbeeitherconvertibleornon-convertible.Convertiblepreferredsharesmaybesimpleconvertiblepreferredsharesorparticipatingconvertiblepreferredshares.Non-convertiblepreferredsharesgivetheinvestortherighttoapreferreddividendorliquidationproceeds,makingthemmoreorlesssimilartosubordinateddebtsecurities.Theseshareshavealimitedupsidepotentialforinvestorsandarethereforerarelyusedinventurefinancings.

Simpleconvertiblepreferredsharesprovidetheinvestorwithanoptiontochoosebetweenanormalequityclaimandamoredebt-likeclaim,atthetimeofdistributionofdividends(orliquidationproceeds).Theinvestorhasanormalequityclaimifheconvertshispreferredsharesintocommonshares.Thisenablestheinvestortoshareinthedividendsonaproratabasiswiththeothercommonshares.If,ontheotherhand,theinvestordoesnotconverthispreferredshares,heretainshisrighttoapreferreddividendandhasamoredebt-likeclaim.Simpleconvertiblepreferredsharesprovideboththeupsidepotentialofacommonshare,andthe(limited)downsideprotectionofa(non-convertible)preferredshare.

Participatingconvertiblepreferredsharesarethesharesmostusedinventurecapitalfinancing.Thesesharescombinethe(limited)downsideprotectionandtheupsidepotentialasdiscussedbefore,providingtheholdersthereofwithbothadebt-likeclaimandanequityclaim.Intheeventofdistributionofdividends,theholdersofparticipatingconvertiblepreferredsharesreceivetheirpreferreddividendsfirstandthereafterparticipateonaproratabasiswiththecommonsharesintheremainingdividends.

Thefeaturesandrightsthatcanbeattachedtopreferredsharesmakethistypeof

Thefeaturesandrightsthatcanbeattachedtopreferredsharesmakethistypeofequitytheidealinstrumentforventurecapitalinvestors.Theinvestorsgainacertainlevelofcontrolevenwhileholdingminoritystakesinthecompany.Furthermore,itprovidesthemwithseniorityovertheholdersofcommonshareswhenitcomestodividendpaymentsandexitproceeds.

Aventure-backedcompanyusuallyissuesseveralclasses(orseries)ofpreferredsharesinitslifetime–oneclassforeachinvestmentround.Thepreferredsharesissuedinthemostrecentroundhaveseniorrightscomparedtothepreferredsharesissuedinpreviousrounds(juniorpreferredshares).Distinguishingtherightsenjoyedbydifferentclassesofpreferredsharesiscommonpracticesincetheinvestmentsmadeatthetimeofthecreationofeachseriesareusuallybasedondifferentvaluationsofthecompanyanddifferentcircumstances,andconsequentlyhavedifferentriskprofiles.

Dependingonthejurisdictionitmaynotbenecessarytocreatesharesthatactuallyconvertintosharesofanotherclass.Insomejurisdictionsthelawprovidesthepossibilitytoissuepreferredsharesthatgivepreferentialdividendrightsinadditiontotherighttoregulardividendsonaproratabasiswithcommonshares.

B DEBTSECURITIES

I. GENERALREMARKSAsopposedtoequity,debtisasourceoffinancingthatdoesnotentailownershipinacompany.Inthecaseofbankruptcy,unpaiddebtisaliabilityofthecompanyandthereforehaspriorityoverequity(whichisnotaliabilityofthecompany,butrepresentsownership).Usingdebtasaninvestmentinstrumenttherefore(intheory)reducestheinvestors’risks.Inventurecapitalpracticethough,abankruptcompanywillseldombeabletopaybackanydebt(letaloneequity).

Sincedebtisnotanownershipinterestinthecompany,itdoesnothaveanyupsidepotentialotherthanthepaymentofinterest.Consequently,debtlimitsinvestors’upsidepotential.Underordinarycircumstances,venturecapitalinvestorsthereforeprefertotargetthe(unlimited)potentialofcapitalgainsprovidedbytheappreciationoftheirequity,ratherthanthe(limited)interestpaymentsandrepaymentoftheirinvestment.

II. BRIDGELOANSEvenintheventurecapitalsector,incertaincircumstancesdebtisamorelogicalfinancinginstrumentthanequity.Forexample,ifacompanyisinacuteneedoffinancingtherewillnotbesufficienttimetoobtainsuchfinancingthroughaprivateplacementorpublicoffering.Sometimesalackoftimemaynotbetheissue,butinvestorsinacompanymayfeelthetimeisnotyetrighttoobtainfinancingthroughanewinvestmentround.Thiscouldforexamplebethecaseifacompanyhasnottimelyachievedcertainmilestonesthatarecrucialtoagoodvaluation,whiletheinvestorsexpectsuchmilestoneswillbeachievedifthecompanyisgivenmoretime.Insuchacasesaninterimsolutionisneededtopayforthecompany’soperatingexpensesuntilnewfinancingbecomesavailablefromasubsequentprivateplacementorpublicoffering.Asaninstrumentofbridgefinancing,debt(abridgeloan)canprovidesuchinterimsolution.

Ifthepurposeofthebridgeloanistofinancethecompanyinthecourseofapublicoffering,theloanistypicallyrepaidtotheinvestorsfromtheproceedsofthepublicoffering.However,ifabridgeloanisintendedtobridgethegapbetweentwoprivateequityrounds,theloanwilltypicallyconvertintoequityissuableatthenewfinancingroundandonthesametermsandvaluationofsuchafinancinground.

Bridgeloansmayhavemanydifferentfeatures,dependingonthegoalstheyserve.Typically,bridgeloansareshort-termloans(theycomeintermsofthreetotwelvemonthmaturities)providedbyexistingshareholdersseekingtosafeguardtheirexistinginterest.Theyarenormallyrepayableorconvertibleatmaturityand,ingeneral,arenotcallablepriortomaturity.Ifonthedateofmaturity,theloanisnotconvertedintosharesandisnotrepaid,thecompanyisindefault,providingtheinvestorswithleverageintheirnegotiationstorestructurethecompany’sboardand/orcapitalstructure.Inmostcases,theinvestorwillretaintherighttoconverttoequityatadefinedpriceifadeemedliquidationevent(e.g.saleormergerofthecompany)occurspriortothematuritydateoftheloan.Thisprovidestheinvestorswiththebenefitsofanequityreturn,insteadofrepaymentoftheloanoutoftheproceedsofthedeemedliquidationevent.Itisalsonotunusualthatanexittriggersrepaymentofxtimestheprincipalamount(usuallytwotimes).Furthermore,acommonlyusedinstrumenttomakeitattractiveforinvestorstoprovidealoaniswarrantcoverage(seesection6–WarrantCoverage,ofthischapter).

Bridgeloansarenormallyprovidedintheformofaconvertibleloanagreement,whichmayinclude,amongstotherthings,covenants,representationsand

whichmayinclude,amongstotherthings,covenants,representationsandwarrantiesfromthecompanyanditsmanagement.

Asmentionedabove,bridgeloanstypicallyconvertintoequityissuableatthenewfinancingroundandonthesametermsandvaluationofsuchafinancinground.Usingthetermsandconditionsofthenewfinancingroundhastwoadvantages.Firstly,theexistinginvestorscanprovidethebridgeloanimmediatelywithoutcomplicatednegotiationsregardingthesharepriceandotherterms.Secondly,thevaluationofthecompanywillbedeterminedbythemarket(i.e.thenewinvestors)andnotbytheexistinginvestors,whowouldbenefitfromalowvaluation.Anewfinancingroundisusuallydefinedas(i)afinancingroundataminimumvaluationofthecompanyofx;and/or(ii)afinancingroundwithaminimuminvestedamountofy.

Thefinancialrisksinvolvedwithbridgeloanscanbeconsiderable.Theinvestorsprovidemoneytoacompanythathasnomoremoney,anddoesnot(yet)havethecapabilitytocloseanewfinancinground.Furthermore,theprovidersofabridgeloanruntheriskthatthenewinvestorsdonotacceptthebridgeloanasapartialpre-paymentofthenewfinancinground.Insucheventthebridgeloancan’tconvertintoequityissuableatthenewfinancinground,butwillhavetoconvertintoamorejunior(existing)typeofequity.Thenewinvestorswon’tmaketheirinvestmentunlessthebridgeloanhasbeenconvertedintosuchjuniorequity(apre-moneyconversion).Thepricepersharethatthenewinvestorswillpaywillbecalculatedonafullydilutedbasis,includingthesharesissueduponconversionofthebridgeloan.Obviously,thelongerabridgeloanisoutstandingbeforeclosinganequityround,thehighertheriskthatthebridgeloanwillbeconvertedpre-money.

Fortakingontheriskofprovidingthebridgeloan,theinvestors,orrather:thelenders,mayfeelthattheyareentitledtoa“bonus”.Usuallythisbonuswillconsistofadiscount(wherethebridgeloanconvertsatdiscountof,say,15-20%comparedtothenewmoneycomingin)orwarrantcoverage(seesection6–WarrantCoverage,ofthischapter).Obviously,newinvestorswillonlybewillingtoinvestinanewroundiftheyfeelthebonusisfairandreasonableandonlydilutestheexistingshareholders.Arewardcanalsobestructuredbyclaimingahigherthanusualinterestrate.Theunpaidinterestcanthenbeconvertedintosharesinthesamemannerastheprincipalamountoftheloan.Ifabridgeloanisprovidedbyonlyalimitednumberofshareholders,thentheothershareholdersmayviewthetermsofthebridgeloanastoofavourableforthelenders.Therefore,itisrecommendedtoofferallshareholderstherightto

participate(onaproratabasisandunderthesametermsandconditions)inthebridgefinancing.Ifashareholderchoosesnottoparticipate,hewilllosehisrighttoobjecttotheseterms.

Originally,bridgeloanswereusedtobridgeagaptothenextfinancinground.Theyhavehoweveralsobecomequitecommonintheseedphaseofacompany,beforeconcreteplansforafinancingroundhavebeenmade.Ifusedinseedfinancing,bridgeloansareusuallyreferredtoasconvertiblenotesorjustconvertibles.Whenusedasseedfundingitiscommontoagreeonavaluationcap(maximumvaluation).Ifthecompany’svaluationatthenewfinancingroundisabovetheamountofthevaluationcap,theloanwillbeconvertedataconversionpricebasedonthevaluationcap.Thus,itdeterminestheminimumnumberofsharesthattheinvestorwillobtainatconversion.Beawarethatavaluationcapcan–unintendedly–serveasamaximumbenchmarkforinvestorsinanewfinancinground.

Optingforabridgeloaninseedfinancingistypicallyconsideredafastandcheapwaytogetastartupfunded.Thereislessneedforlengthydiscussionsaboutlegalterms,sincebridgeloansinseedfinancingareusuallyprovidedbasedonstandardconvertibleloanagreements.Moreover,thediscussiononthevaluationofthecompany–whichcanbeextremelydifficultwithveryearlystagestartups–willbepostponeduntilthenextfinancinground.

AvariationonconvertiblesnotesistheSAFE–SimpleAgreementforFutureEquity–whichisaconvertiblenotewithoutamaturitydate.TheSAFEwasdevelopedbytheUSseedacceleratorY-combinatorandiscommonlyusedintheUSforseedfinancinginsteadoftraditionalconvertiblenotes.SincetheSAFElacksamaturitydate,itisarguablynotaloanandcouldbeconsideredapre-paymentonacapitalinvestment.

Providingaconvertibleloaninsteadofequitymayseemattractivefromboththecompany’sandinvestors’pointofview.Investorsshouldhoweverkeepinmindthatthecompanywillmostlikelynotbeabletopaybacktheirmoneyifnonewfinancingroundorexittakesplace.Theinvestmentisatfullriskfromthemomentitisprovided,whileconversiontakesplaceatafuturevaluation.Ifthecompanyisdoingverywellthankstotheconvertiblenoteinvestment,thenoteholderwillbe“punished”byseeingtheconversionpricegoup.

Negotiationtips:

• Iftherearevariousconvertiblenoteholders,tryto“bundle”themandtoprovidethemostessentialrights,suchastherighttodemandrepaymentoftheloan,nottoeachindividualnoteholder,buttothemeetingofnoteholders,usuallycalled“thelenders’majority”instead.

• Toexecuteaconversion,evenincaseofan‘automaticconversion’,thecompanywillneedtotakecertainlegalactions;e.g.toissuetheshares.Thesestepsshouldbecarefullydescribedintheloandocumentationandagreeduponinadvancebyallshareholdersinthecompany,sothattheissueofshareswillbecomeanautomatedprocess.

TypeofSecurity: Series[ ]convertiblepreferredshares(the“Series[ ]Shares”)areinitiallyconvertibleona1:1basisintotheCompany’scommonshares(the“CommonShares”).TheSeries[ ]Sharesandallotheroutstandingpreferredshares(the“JuniorPreferredShares”)arejointlyreferredtoasthe“PreferredShares”.

4.6 WARRANTCOVERAGEIncompensationformakingadebtorequityinvestmentthattheinvestorsbelieveinvolvesanunusualrisk,investorsmayrequirethecompanytosweetenthedealbygrantingthemwarrants.Awarrantisbasicallyacalloption–arighttobuyaspecifiednumberofsharesatafixedexercisepricebyexercisingsaidrightpriortoaspecifiedexpirationdate.Theperiodinwhichthewarrantscanbeexercised(theexerciseperiod)istypicallythreetofiveyears.Thenumberofsharesthattheinvestorsareentitledtopurchase,typicallyequalsacertainpercentageoftheamountinvestedbysuchinvestor(thewarrantcoverage),dividedbytheexercisepriceofthewarrant.

Example:IftheinvestorsintheSeriesAroundmakeanaggregateinvestmentof€8millionatapricepershareof€9.38,andNewWaveEnergygrantsa25%warrantcoverage,thentheinvestorsareentitledtopurchaseadditionalsharesduringtheexerciseperiodforanamountof€2million.Thenumberofsharesthatcanbepurchasediftheexercisepriceis€9.38amountsto213,333shares.

Theexercisepriceofawarrantisnormallyequaltothepricethatispaidfortheunderlyingshareatthetimeofthewarrantgrant.Theinvestorswillthereforeonlybenefitfromthewarrantifthecompanyisabletoincreaseitsvalueduring

onlybenefitfromthewarrantifthecompanyisabletoincreaseitsvalueduringtheexerciseperiod.Ifthevalueoftheunderlyingsharesfallsbelowtheexercisepriceofthewarrants,theinvestorswillnotexercisethewarrant.

Warrantsareexercisablebypaymentoftheexercisepricebythewarrantholder.Sometimeshowever,warrantsalsohavea‘cashless’exercisefeature,whichallowsthewarrantholderstoexercisetheirwarrantswithoutpayinganycash.

Thenumberofsharestowhichaninvestorisentitledifheoptsforthecashlessexerciseofhiswarrantscanbecalculatedusingthefollowingformula:

whereX= thenumberofsharestobeissuedtothewarrantholderifheoptsforthecashlessexerciseofthewarrants;

Y =thenumberofsharespurchasableunderthewarrant;A =thefairmarketvalueoftheshareatthedateofsuchcalculation;andB =theexercisepriceofthewarrant.

Example:IfinthepreviousexampletheSeriesAinvestorsinNewWaveEnergydecidetoexercisetheirwarrantsonacashlessbasis,andassumingthatthefairmarketvalueoftheunderlyingsharesequals€12.50pershare,thewarrantholderwillbeentitledto:

Sincethefairmarketvalueforprivatecompaniesisdifficulttodetermine,thecashlessexercisefeaturetypicallyappliestosharesthathavebeenlistedonastockexchange.Thecashlessexercisecanthenbesettledbyatransferagentorabroker.Nevertheless,investorsmayrequirethatthewarrantstheyholdinaprivatecompanycanbeexercisedonacashlessbasis.Thefairmarketvalueisthenusuallydeterminedingoodfaithbythesupervisoryboardorbyanindependentthirdparty(e.g.anaccountant).

Beawarethatunexercisedwarrantsmayraisequestionsfrompotentialinvestorswhenyouwanttoraiseanewinvestmentround,distractingdiscussionsfromthemoreimportanttopics.Therefore,trytoavoidhavingunexercisedwarrantswhenraisinganewinvestmentroundifatallpossible.Alsotakeintoaccounttheamountoflegalpaperworkinvolvedinsettingupawarrantscheme.Awarrant

amountoflegalpaperworkinvolvedinsettingupawarrantscheme.Awarrantschemeoftencomesinadditiontoabridgeloanagreement(ortheissueofpromissorynotes).Whatisintendedasaquickwaytohelpthecompanythroughafewmonthsandtorewardtheinvestorsfortheirsupport,canbecomea‘lawyers’paradise’.

WarrantCoverage: InadditiontotheSeries[ ]Shares,theInvestorswillalsoreceive[___]%warrantcoverage.ForeachSeries[ ]Sharepurchased,anInvestorwillreceiveawarranttopurchase[__]CommonShares/Series[ ]Shares.Thewarrantswillhaveatermexpiringontheearlierof(i)[___]yearsfromissuanceor(ii)thedateofcompletionofaQualifiedOffering.Thewarrantswillhavestandardanti-dilutionprotections.Thewarrantswillbeexercisableincashoronacashlessbasis,attheoptionoftheholder,atanexercisepriceof[OriginalPurchasePrice]pershare.

4.7 SHAREPRICEANDVALUATIONValuationofnon-listedcompaniescanbeacomplexissue.Itisoftenoneofthemostimportantissuesinaventurecapitaltransaction.Thevaluationprocessisusuallyassociatedwithcomplexcalculationsandthereforethoughtofasanexactscience.Inrealitythough,themaindriversofthevaluationprocessinventurecapitaltransactions(especiallyinthecaseoflessmaturecompanies)haveverylittletodowithexactscience.Oftenthevaluationistoalargeextentbasedonsubjective,ratherthanobjective,variables.Issuessuchasthequalityofthemanagementteam,thesizeandmaturityofthemarket,theuniquenessofthetechnology,thestageofproductdevelopment,thecompetitivelandscape,thepreviouspost-moneyvaluation,thereputationoftheinvestorsinthecompany,etc.areextremelyimportantfactorsfordeterminingthevalueofacompany.

Inventurecapitaltransactions,thevalueofthecompany,immediatelypriortotheinvestmentisreferredtoasthepre-moneyvaluation;whilethevalueofthecompany,immediatelyaftersuchinvestmentisreferredtoasthepost-moneyvaluation.Thepre-moneyvaluationneedstobedeterminedinordertosetthesharepriceforaproposedinvestment.

Althoughitmayappearattractiveforexistingshareholderstosetthepre-moneyvaluationashighaspossible,itisimportanttorealisethatdoingsocouldgiverisetoproblemsatalaterstage.Ifinthefuturethecompanyneedstoraisenewcapital,itwillbedifficultormaybeevenimpossibletodosoifthevalueofthecompanyhasnotincreasedsincethelastround,orworse:ifithasdecreased(inotherwords:inthecaseofadownround).

InsuchcasesVCswillbereluctanttoinvest.Furthermore,foundersand(key)employeeswithanequitystakeinthecompanymaybecomedemotivatedifanti-dilutionprovisionsoftheexistinginvestorscomeintoforce(seesection14–Anti-Dilution,ofthischapter).Consequently,whatappearstobeattractiveintheshortrunisnotalwaysattractiveinthelongerrun.

Thesharepriceiscalculatedbydividingthepre-moneyvaluationbythetotalof(i)theoutstandingsharesand(ii)anyadditionalshareswhichmaybeissuedduetotheexerciseofoptions,warrants,convertibledebtorotherrightstopurchasesharesinthecompany.Theaforementionedsumisreferredtoasthefullydilutednumberofsharesofthecompany.

ToillustratethiswehaveaddedthecaptableofNewWaveEnergybelow(seesection3,ofchapter2):

AfterclosingoftheSeriesAfinancingthesharepriceofNewWaveEnergyis€8.92onafullydilutedbasis(€23,000,000post-moneyvaluationdividedby2,578,333fullydilutedoutstandingshares),and€9.38onanon-dilutedbasis(€23,000,000post-moneyvaluationdividedby2,453,333actuallyoutstandingshares(i.e.totalsharesless125,000optionstopurchasesharesunderthe

shares(i.e.totalsharesless125,000optionstopurchasesharesundertheESOP)).

Sometimesinvestorstrytonegotiatethattheoptionpoolcomesoutofthepre-moneyvaluation,sotheburdenoftheoptionpoolisontheexistinginvestorsandfoundersonly.Pleaserefertosection30-OptionPoolofthischapter.

Valuationmethods(suchasdiscountedcashflow(DCF)analysis,andearningsorrevenuemultiples)thatmaybeusefulformaturecompaniesareoflittleuseforthevaluationofanearlystagecompany.TheaccuracyofaDCFvaluationdependsontheaccuracyoftheforecastsusedforsuchavaluation.Iftheforecastsarenotaccurate,thevaluationisworthless.Ratherthanapplyingthesetraditionalmethods,aventurecapitalistwilllookatthepost-moneyvaluationasamatterofpercentages.Let’sassumeonlyoneinvestorwillprovidetherequiredamountoffinancing.Theinvestorhasdeterminedheiswillingtoinvestthatamountinthecompany,providedheobtainsatleastacertainpercentageofthesharesinthecompany.Usuallythispercentagevariesfrom25%to40%,regardlessoftheamountoffinancing.Thefinalpercentagewill,ofcourse,betheresultofnegotiationsbetweentheinvestorandtheexistingshareholders.Thisfinalpercentagecombinedwiththeamountoffinancingdeterminesthepost-moneyvalueofthecompany.

Example:TherequiredamountoffinancingofCompanyXis€3,000,000.VC1iswillingtoinvestthisamountinexchangefor40%ofthesharesinCompanyX.IfVC1andCompanyXagreeonthispercentage,thepost-moneyvalueofCompanyXwillbe€7,500,000(€3,000,000dividedby40%).

Timingiscrucialinnegotiatingagoodvaluation.Ifacompanyisrunningoutofmoneyatveryshortnotice,thefoundersarestandingwiththeirbacksagainstthewallandhavenochoicebuttoacceptanyvaluationtheinvestorcomesupwith.Thereforefoundersshouldtakeintoaccountthatraisingmoney,fromthefirsttalkswithpotentialinvestorsuntilclosing,generallytakesatleastfourtosixmonths.

Sometimesthefounders’expectationsregardingthecompany’svaluationaretoohighandtheinvestorandfounderscan’tagreeonavaluation.Insuchcasesfounderssometimessweetenthehighvaluationbyofferingtheinvestorliquidationpreferencesandotherfinancialrights(suchasanti-dilutionprotection).Inpracticehowever,thisdoesnotalwayswork.Pleaserefertosection14-Anti-Dilutionandsection16-LiquidationPreferenceofthischapter

foramoreextensivediscussionofthesematters.Tobridgeagapbetweentheinvestor’svaluationandthevaluationofthefounders,valuationmilestonescanbeausefultool(seesection3–Milestones,ofthischapter).Reachingthestatedmilestonesintheagreedtimeframesthenservesasaconfirmationthatthefounders’valuationofthecompanywasnottoooptimistic.

SharePriceandValuation: [Alternative1:€[___]pershare(the“OriginalPurchasePrice”)representingafullydilutedpre-moneyvaluationof€[___].]

[Alternative2:€[___]pershare(the“OriginalPurchasePrice”).TheOriginalPurchasePricerepresentsafullydilutedpre-moneyvaluationof€[___]basedonalloutstandingCommonShareequivalents,includingoptionsandwarrants,atthetimeoftheClosingandincluding(a)[___]newoptionsasanincreasetotheoptionpool,asreflectedinthecapitalisationtableattachedasAppendix[___]and(b)theadditionalsharesissuabletotheholdersofJuniorPreferredSharesasaresultoftheanti-dilutionprotectioninconnectionwiththetransactioncontemplatedintheTermSheet.]

4.8 CAPITALSTRUCTUREThetermcapitalstructureasusedinthetermsheetreferstoanoverviewofthecompany’sequitysecuritiesand,ifanysuchsecuritieshavebeenissued,non-equitysecuritiesthatcanbeconvertedintoequitysecurities.Suchanoverviewistypicallyprovidedinacapitalisationtableorcaptable,whichisnormallyattachedasanappendixtothetermsheetbutmayalsobeincludedintheclauseCapitalStructureitselfinanabbreviatedversion.

Acompletecaptablegivesanoverviewofallsecuritiesissuedandissuable(forexampleinconnectionwiththeexerciseofoptions)bythecompany,theirallocation(theidentityoftheholdersofthesecurities),andtheinvestmentsmadeinexchangeforsuchsecurities.Togetherwiththepost-moneyvaluation,thecaptablewillbethebasisforthedeterminationofthepricepershare,

thecaptablewillbethebasisforthedeterminationofthepricepershare,payablebytheinvestorscontemplatinganinvestmentandshouldgivethefullydilutedpicture,includingalloptions,warrantsandsecuritiesconvertibleintoshares.

CapitalStructure: Theattachedcapitalisationtable(Appendix[___])detailsallofthesecuritiesthatwillbeoutstandingimmediatelypriortoandaftertheClosing.

4.9 ANTICIPATEDCLOSINGDATETheclosingdateisthedateonwhichtheinvestorswillconsummatethetransaction,orinlegaljargon,whenthelegaltitlestothesharesandtothefundsareexchanged.Afterexecutingthetermsheet,theinvestorwilldoduediligenceandpartieswillnegotiatea“subscriptionandshareholdersagreement”.Thedateofsigningofthesubscriptionandshareholdersagreementisusuallyreferredtoasthesigningdate.Theclosingdatedoesnotnecessarilyneedtocoincidewiththesigningdate,althoughfromapracticalpointofviewthisisthepreferredoption.Sometimestheinvestorneedstimebetweensigningandclosingtofinaliselegalformalitiesconcerningtheapprovaloftheinvestmentbythecompany’scorporatebodiesand/orbytheregulatoryauthorities.

Beforeclosing,theinvestorstransfertheinvestmentamounttoanescrowaccountofthelawyerornotarypublicinvolvedinthetransaction,whichwillbereleasedtothecompanyattheclosingdateonfulfilmentofallclosingconditions.Theseconditionsincludethereceiptbythecompanyoftheabove-mentionedapprovalsbutmayalsoconsistofotherconditionstoclosing,liketheabsenceofamaterialadversechangeinthefinancialconditionofthecompany.Ifthepartieshaveagreedtoastagedinvestment,aclosingdatewillbeagreedforeachtranche.

Theinvestor(ortheleadinvestor)setstheanticipatedclosingdatebasedonthecompany’sinformationasavailabletotheinvestorsatthetimeofsigningofthetermsheet.Thisdateischosentoallowsufficienttimetosatisfyallconditionsprecedentsuchastheduediligenceinvestigationandnegotiationofthesubscriptionandshareholdersagreement(seesection46–ConditionsPrecedent,ofthischapter).Theperiodrequiredtocloseaventuredealusuallyvariesfrom

onetothreemonths.Itisintheinterestsofallpartiestoclosethetransactionassoonaspracticallypossible.Ifaclosingtakeslongerthannecessary,thedealwilllosemomentum,thepartieswilltendtofocusonlessimportantmattersandthedealmayfallapartaltogether.Bylinkingtheclosingdatetotheexclusivityandno-shopclause(seesection42–Exclusivity/No-Shop,ofthischapter)andbyagreeingtoashortexclusivityperiod,thecompanycanexertinfluenceonthetimeframeoftheclosingprocess.

AnticipatedClosingDate: [date](the“Closing”).[provideformultipleclosingsifapplicable].

4.10 DIVIDENDSAdividendisaportionoftheearningsofacompanythatisdistributedtotheshareholdersofthecompany.Usuallythedividendamountdependsontheprofitmadeintheyeartowhichthedividendpertains.Typically,dividendsaredeclaredbytheannualmeetingofshareholders,uponaproposalofthemanagementboard.Dividendscanbepaidintheformofastockdividendorincash.

Oneofthepreferentialrightsthatattachestopreferredsharesinpracticallyallcasesisadividendpreference.Thisentitlestheholderofpreferredsharestoreceivedividendsbeforethepaymentofdividendsonthecommonshares.Inmostcases,preferredsharesyieldafixeddividendbasedonthesubscriptionpriceofthepreferredshare,justasdebtyieldsaninterestbasedontheprincipalloanamount.ThedividendtobepaidonpreferredsharesgenerallyreflectsaminimalIRRrequiredbytheinvestors.Ratesofpreferreddividendtypicallyvaryfrom5%to15%.

Dividendscanbeparticipatingornon-participating.Non-participatingdividendsaremostcommonandlimitdividenddistributionstothepreferredshareholderstoafixeddividendamountorpercentage.Inthecaseofpreferredshareswithnon-participatingdividends,itisthereforepossiblethatthedividendspaidoncommonsharesarehigherthanthosepaidonthepreferredshares.Participatingdividendsallowthepreferredshareholderstoalsohaveashare(onashare-for-sharebasiswiththecommonshareholders)inthedividendsavailablefordistributionafterthepreferreddividendhasbeenpaid.

Theinvestors’positioncanbefurtherenhancedbydeterminingthatthepreferreddividendwillbecumulative.Insuchacase,ifthecompanydoesnotpaydividend,theamountofthepreferreddividendwillaccumulateandhastobepaidinfullbeforedividendscanbepaidonthecommonshares.If,forexample,acompanymissestwoyearsofdividendpayment,theholdersofcumulativepreferredshareswillbeentitledtorepaymentofallthemissedpreferreddividendamountspertainingtothosetwoyears,beforeanydividendscanbepaidtothecommonshareholders.Ifdividendsarenon-cumulative,nosuchentitlementtorepaymentofmissedamountsexists.

Adividendpreferencemayseempointlessinmanytypicalventurecapitaltransactions.Whyprovideforadividendpreferenceincaseswhereitisclearthecompanywillneedallthecashitcangettofuelitsgrowth?Inthecaseofsuchhigh-growth,non-dividend-payingcompanies,adividendpreferencemayneverthelessbeattractivetotheinvestor,especiallywhensuchdividendsarecumulative.Bylinkingcumulativedividendstoso-calledliquidityevents,thedividendsonpreferredsharesfunctionasabuilt-inreturn,accruingeveryyear,resultinginanincreaseoftheinvestors’claimtotheproceedsofanysaleofthecompanyorredemptionoftheirshares(seesection16–LiquidationPreferenceandsection11–Redemption,ofthischapter).

Example:IfVC1invests€5,000,000intheSeriesAroundwithacumulativedividendof10%andthecompanyissoldtwoyearslaterwhilenodividendshavebeenpaidbythecompany,VC1willbeentitledto€6,000,000inliquidationpreference(insteadofthe€5,000,000VC1wouldbeentitledtoifthedividendonthepreferredshareswerenotcumulative).Ifthetermsheetindicatesthatthecumulativedividendcompoundsannually(meaningthatdividendswillalsobepayableoverunpaiddividends),VC1willevenbeentitledto€6,050,000.

Negotiationtips:• Alldistributionstotheinvestorsbywayofdividendpaymentsshould

beregardedasapre-paymentontheliquidationpreference.Inotherwords:ifthedividenddistributionsresultinthefullrepaymentoftheinvestorsinaccordancewiththeliquidationpreferenceclause,theliquidationpreferencerightsoftheinvestorsshouldautomaticallyterminate.Makesurethisisallclearlystatedinthelegaldocuments(thisisnotalwaysthecase).

• Ahighdividendratemaydilutethemanagement’sprofitsharesignificantlyandcanthereforebebadfortheirmorale.Newinvestors

willbelookingforthesameorbetterterms,makingtheproblemevenbigger.Keepthisinmindwhendeterminingthedividendrate.

Dividends: TheSeries[ ]ShareswillcarryadividendinpreferencetotheCommonSharesof[___]%oftheOriginalPurchasePriceperannum,whichwillaccrueandcumulateannuallyandwillbepayableonlyifdeclared.

[ThedividendwillbepayableinSeries[ ]SharesattheOriginalPurchasePriceorincashattheoptionoftheInvestorsintheeventofaliquidationoraDeemedLiquidationEventandwithoutanycompounding.]

[Withouttheapprovaloftheholdersofa[qualified]majorityoftheSeries[ ]Shares,nodividendswillbepaidontheCommonSharesorJuniorPreferredSharessolongasSeries[ ]Sharesareoutstanding.]

4.11 REDEMPTIONThetermredemptionreferstoarepurchaseofsharesbythecompany.Aredemptionprovisionmakesitpossiblefortheinvestortoforcethecompanytorepurchasetheinvestors’preferredshares.Theredemptionpriceisoftenequaltotheliquidationpreference,includingaccruedandunpaiddividends.However,otherredemptionpricesarealsoused(e.g.amultipleoftheliquidationpreference,afairmarketvaluenotion,ortheoriginalpurchasepriceplusafixedannualpercentage).

Obviously,thegoalofeveryinvestoristoinvestincompaniesthatwillbecomeagreatsuccess,preferablysoonerratherthanlater.Unfortunately,noteveryventure-backedcompanyisassuredofsuccess.Somecompaniesmaygobankrupt.Othersmayonlybeamoderatesuccess.Inthelattercase,themanagementofthecompanymaybecontenttokeepthingsgoingthewaytheywereandmaynotactivelypursuethecreationofanexitfortheinvestors.

Thelackofactivepursuitbythecompany’smanagementofanexitconstitutesamajorproblemfortheinvestors.Manyinvestorsoperateinvestmentfundswithalimitedlifespan.Thesefundsmustbefullydivestedpriortotheirtermination.Onewayortheother,theymustbeabletoselltheirinvestments.Inmanyventure-backedcompanies,investorsholdaminorityshareholders’position,makingitimpossibletoproperlyaddresstheproblembydismissingorreplacingthemanagementwithouttheconsentofothershareholders.Insuchcases,theredemptionclausemaybetheonlyinstrumenttheinvestorshavetosolvetheirproblem.Itmayofferthemawaytogettheirinvestmentbackandreceivesomereturnintheformofaccrueddividends.

Agrowingcompanyisunlikelytohavethecashrequiredtomeettheredemption.Amorerealisticscenariothereforeisthatthecompanywillbeunabletorepaytheinvestorswhentheycallfortheredemptionoftheirshares.Insuchascenario,theredemptionclausewillprimarilyfunctionasaninstrumenttoforcethemanagementtopursueanexitonashortnotice.Thismayresultinaforcedsaleofthecompanyor(partof)itsassets.Theultimatepunishmentwillbethattheinvestorswillfileforthebankruptcyofthecompanyincasethecompanydoesnotgivefulleffecttotheredemption.Inthatcase,theinvestorsmaybeabletorecoversomeoftheirinvestmentfromtheliquidationproceedspursuanttotheirpreferredliquidationrights.Fromthepointofviewofthecompany,mandatoryredemptionclausesarehighlyunattractive.Obviously,theexerciseofaredemptionclausemaybethecauseofafierceclashbetweentheentrepreneurandtheinvestors.

Whiledealingwithredemptionclauses,carefulattentionshouldbepaidtothelimitationsimposedbytheapplicablelaw.Undervariousjurisdictionsproceduralrequirementsandrestrictionsapplytotheredemptionofshares.Theserequirementswerecreatedtoprotectcreditor’srightsinthecaseofarepurchaseofsharesbythecompanyAnalternativeforaredemptionclause–e.g.ifredemptionisnotallowedduetorestrictionsundertheapplicablejurisdiction–istohavethefoundersgranttheinvestoraputoptionunderwhichtheinvestorcansellhissharestothefoundersatacertainpredeterminedpriceafterfivetosevenyears.Thus,whilenottechnicallyrepurchasingtheshares,averysimilareffectcanbeachieved.

Aredemptionrightnormallydoesnotapplyuntilfivetosevenyearsaftertheinitialinvestmentdate.However,allsortsofvariationscanbenegotiatedinredemptionclauses.Theredemptionclausesetoutbelowincludestwoalternatives.Oneallowsallsharestoberedeemedatonce,whiletheother

alternatives.Oneallowsallsharestoberedeemedatonce,whiletheotherprovidesforaphasedredemption.

Redemption: Attheelectionoftheholdersofatleast[___]%oftheSeries[ ]Shares,subjecttoanyrestrictionsunderapplicablelaw,theCompanywillredeem(…)

[Alternative1:(…)alloutstandingSeries[ ]Sharesinfull,atanytimeafterthefifthanniversaryoftheClosing.]

[Alternative2:(…)onethirdoftheoutstandingSeries[ ]Sharesonthefourthanniversary,onehalfoftheoutstandingSeries[ ]SharesonthefifthanniversaryoftheClosingandalloftheremainingoutstandingSeries[ ]SharesonthesixthanniversaryoftheClosing.

SuchredemptionwillbeatapurchasepriceequaltotheOriginalPurchasePrice(asadjustedforstocksplits,stockdividendsandthelike)plusanyaccruedandunpaiddividends.

IntheeventthattheCompanydoesnothavefundslegallyavailableforsuchredemption,theSeries[ ]ShareholderswillhavetherighttorequiretheCompanytotakeanyfurtherstepsnecessarytoeffectasaleoftheCompany,includingretentionofaninvestmentbankerappointedbytheSeries[ ]ShareholderstoactivelymarkettheCompanyforsaletoathirdparty.]

4.12 VOLUNTARYCONVERSIONThevoluntaryconversionrightpermitsashareholdertoconverthispreferred

sharesintocommonsharesandindicateshowmanycommonshareseachpreferredsharewillconvertinto(theconversionratio).Thisisbasedontheassumptionthatpartieshaveoptedforamechanismofconversionratesthatwillbeadjustedifcertaineventsoccur.Thismaynotalwaysbethecase.Ifitisnot,othercompensationmechanismswillbeincluded,suchastheissueofadditionalsharesincaseananti-dilutionprovisionistriggered.

Ifpartiesdoopt(aswedointhisbook)foramechanismofadjustableconversionrates,theconversionratiocanbedeterminedbydividingtheoriginalpurchasepriceofeachpreferredsharebya‘conversionprice’.Initially,thisconversionpricewillbeequaltotheoriginalpurchasepriceandconsequentlytheconversionratiowillbe1:1.Therefore,immediatelyaftertheissueofpreferredshareseachpreferredshareisconvertibleintoonecommonshare.However,undercertaincircumstances,theconversionprice(andconsequentlytheconversionratio)maybeadjusted.

Oneofthecircumstancesunderwhichtheconversionpricemaybeadjustediswhentheanti-dilutionprotectionistriggered,providedthat,insuchacase,themechanismforcompensationundertheanti-dilutionclauseforeseesinanadjustmentoftheconversionrateinsteadoftheimmediateissueofshares.

Example:Letusassumetheoriginalpurchasepriceofthepreferredsharesheldbyaninvestoris€5.Initially,theconversionpricewillbe€5aswell.Atacertainpointintime,thecompanydecidestodoublethenumberofitsoutstandingsharesbyissuingnewshares.Thevalueofthecompanyhasgonedown.Newshareswillbeissuedatanissuepriceof€2.50.Consequently,the‘old’sharesinthecompanywillhavelost50%oftheirvalue.Asaresult,assumingfullratchetanti-dilutionprotectionapplies(seesection14–Anti-dilution,ofthischapter)theconversionpricewillbereducedfrom€5to€2.50.Thisinturnwillresultinaconversionratioof2(5dividedby2.50).Inotherwords,iftheinvestordecidestovoluntarilyconverthispreferredsharesintocommonsharesafterthenewshareshavebeenissued;hewillbeentitledtotwiceasmanycommonsharesasbefore.

Sinceinvestorswillloseallpreferredrightsattachedtothepreferredshareswhentheyareconverted,voluntaryconversionwouldnotbeconsideredundernormalcircumstances.However,itcanbeaninvaluablerightiftheinvestorsholdnon-participatingpreferredshares(preferredsharesthatdonotshareintheproceedsofaliquidationorsaleofthecompanyaftertheinvestorshave

receivedthesubscriptionpriceoftheirshares).Insuchacase,investorsmaybeabletogeneratehigherreturnsontheirinvestmentbyconvertingtheirpreferredsharesintocommonshares(seesection5–TypeofSecurityandsection16–LiquidationPreference,ofthischapter).

Intheeventthatthecompanyincreasesthenumberofsharesoutstanding(andatthesametimereducesthevalueofeachshare)byissuingstockdividendsoreffectingstocksplits,theconversionpricewillbeadjustedproportionally.Furthermore,whentheinvestmentismadesubjecttotheachievementofmilestones,adjustmentoftheconversionrateisoftenusedasamechanismtoadjustthevaluationwhensuchmilestoneisnotmet(seesection3–Milestones,ofthischapter).

Inthesamemanner,dividendthathasaccruedandhasnotyetbeenpaidtothepreferredshareholdersmaybeconvertibleintocommonsharesbasedontheapplicableconversionprice.

VoluntaryConversion: AholderofSeries[ ]ShareswillhavetherighttoconvertSeries[ ]Shares,oranypartofsuchsharesincludingdeclareddividends,attheoptionoftheholder,atanytime,intoCommonShares.ThetotalnumberofCommonSharesintowhicheachSeries[ ]SharemaybeconvertedwillbedeterminedbydividingtheOriginalPurchasePricebytheconversionprice.TheconversionpricewillinitiallybeequaltotheOriginalPurchasePrice.Theconversionpricewillhoweverbesubjecttoaproportionaladjustmentforsharedividends,splits,combinationsandsimilareventsandinaccordancewiththe‘Anti-Dilution’clause.

[Milestone:theconversionpriceoftheSeries[ ]Shareswillbeadjustedto€[___]pershareiftheCompanyfailstomeetanyofthemilestonessetforthinAppendix[___]tothisTermSheet.]

4.13 AUTOMATICCONVERSIONTheautomaticconversionclauseisaimedmainlyatdealingwithapossibleinitialpublicoffering(IPO)ofthecompany’sshares.AnIPOisanimportanteventforinvestorsaswellasthecompany.AnIPOcanofferinvestorsagoodexitopportunityandcanmarkthebeginningofanimportantnewphaseforthecompany.However,ifthecircumstancesunderwhichtheIPOtakesplacearenotcarefullyconsidered,theinterestsoftheinvestorsaswellasthoseofthecompanycouldbejeopardised.

Thepurposeoftheautomaticconversionclauseistopre-establishthecircumstancesunderwhichboththeinvestorsandthecompanyagreeanIPOshouldtakeplaceandtoensurethatthecompany’scapitalisationstructurefacilitatesanIPO.Inthelatterissue,acompanywithdifferentclassesofsharesanddifferentrightsattachedtoeachclassisnotaveryattractiveIPOcandidate.Themarketpreferssimplecapitalisationstructurestocomplexones.Marketinvestorsgenerallydonotwishtoinvestincompaniesthathavedifferentclassesofshares,especiallyiftheclassesthatarenotavailabletothepublichavemuchstrongerrightsthanthoseavailabletothepublic.Consequently,thecomplexcapitalisationstructureofthecompanyrequirestobecleanedupimmediatelypriortoanIPO.Thisclean-upisachievedbyautomaticallyconvertingallpreferredsharesintocommonsharesinthecaseofanIPOthatmeetsthepredeterminedcriteria.

Sincethepreferredshareholderswillbecomecommonshareholdersasaconsequenceoftheconversionandlosealltheirpreferredrights(e.g.rightsfacilitatingalternativeexitscenariossuchasdrag-alongrights,co-salerights,andredemptionrights),theautomaticconversionclausesusuallycontaintwocriteriathatmustbemetinorderfortheIPOtobeacceptabletotheinvestors.ThefirstcriterionisthattheIPOshouldensureacertainreturnontheinvestors’investment.ThesecondcriterionisthattheIPOshouldgenerateacertainamountofproceedsforthecompany.AnIPOisarelativelyexpensivewaytoraisemoney.Afterdeductionofthecostsinvolved,thecompanyshouldstillhavesufficientfinancestoachieveprofitability,orvalue-creatingmilestones.

Animportantfactorforconsiderationinthiscontextisthattheamounttoberaisedfromthepublic,andthesharesofferedinexchangeshouldbeofsufficientsubstancetoensureahealthyliquidityinthecompany’spubliclytradedshares.

Consequently,automaticconversionclausesnormallystatethatautomatic

conversionwilloccuriftheIPOpricepershareisatleastacertainmultipleofthepricepershareoriginallypaidbytheinvestor,andtheproceedstothecompanyequalsaminimumpredeterminedamount.Themultipleandtheamountofrequiredproceedswillobviouslydifferforeachtransactionandwillbedeterminedinnegotiationsbetweentheinvestorsandthecompany.ThelongeritisexpectedtotakeacompanytobereadyforanIPO,thehigherthemultiplerequiredbytheinvestorswillbe.

InadditiontoensuringautomaticconversionuponaqualifyingIPO,automaticconversionclausesusuallycontainarightfortheholdersofpreferredsharestoautomaticallyconvertallpreferredsharestocommonsharesifaqualifiedmajorityof(aclassof)thepreferredsharesvotesinfavourofsuchaconversion.IfanIPOdoesnotqualify,theinvestorshaveroomtonegotiatewiththecompanyandtheothershareholdersbeforetheyagreetoaconversion.Furthermore,thisrightenables(amajorityofthe)investorstopushforanIPOpursuanttotheirdemandright(seesection21–RegistrationRights,ofthischapter)incaseswheretherequirementsofaqualifyingIPOarenotmet.Insuchcases,ifalargeenoughmajorityoftheshareholdersisinfavourofanIPO,theycanforcethecompanytogopublic(viathegeneralshareholders’meeting).Byutilisingtheaforementionedright,thequalifiedmajorityofthepreferredshareholderscanforceaminorityofthepreferredshareholdersthatisnotinfavourofsuchanIPO,toconvertitspreferredsharesintocommonsharesandthusfacilitatetheIPO.

AutomaticConversion: TheSeries[ ]Shares,includingdeclareddividends,andallotherPreferredShareswillautomaticallybeconvertedintoCommonSharesatthethenapplicableconversionpriceupon(i)theclosingofafirmlyunderwrittenpublicofferingwithapriceperCommonShareofatleast[___]timestheOriginalPurchasePrice(subjecttoadjustmentsforsharedividends,splits,combinationsandsimilarevents)and[net/gross]proceedstotheCompanyofnotlessthan€[___](a”QualifiedOffering”),or(ii)uponthewrittenconsentoftheholdersof(a)[___]%oftheSeries[ ]Shares,votingseparately[and(b)[___]%of

thePreferredSharesoftheCompany,votingtogetherasasingleclass.

4.14 ANTI-DILUTIONDeterminingthevaluationofacompanyisacomplexissue.Inearlystageinvestmentsinparticular,thevaluationis,largely,theproductofnegotiations(seesection7–SharePriceandValuation,ofthischapter)andissometimesprovenwronginafollowinginvestmentround.Ideally,asacompanydevelops,itincreasesitsvalue,andtherebyitsshareprice.Inadownround,however,thesharepricedecreases,tolessthanthepricepaidbytheinvestorsinthepreviousround.Tobeprotectedagainstsucheconomic(orprice-based)dilution,investorsrequireanti-dilutionprotection.

Theprice-basedanti-dilutionclauseprovidesaprotectionmechanismthatwillbetriggeredwheneverthecompanyissuesadditionalequitysecurities(sharesorinstrumentsconvertibleintoshares)atapricethatislowerthanthepricepaidforthesharesbytheinvestors.Sincetheanti-dilutionprotectionisanagreedrightattachedtothepreferredshares,itservesasanadvantageforthepreferredshareholders(investors)overthecommonshareholders,whowillpaythepriceforthedilution.

Whenanti-dilutionprotectionistriggered,theprotectedinvestorsobtaintherighttoreceiveadditionalshares.Thisrightmaybeexercisedeitherbyadjustingtheconversionratioofthepreferredsharesintocommonshares,orbydirectlyissuingadditionalsharestotheinvestors.Oneoftheadvantagesofthefirstmechanism(adjustingtheconversionratio)isthattheinvestorsdonothavetopayfortheiradditionalshares.However,theywillhavetoensurethattheycanvoteintheshareholders’meetingasiftheyhadconvertedtheirpreferredsharesintocommonshares.InmanyEuropeanjurisdictions,votingrightsareattachedtothenominalvalueoftheshares,oftenmakingvotingonan‘asifconverted’basisdifficult(seesection19–VotingRights,ofthischapter).Underthesecondmechanism(directissueofshares),theinvestorsmaybeobligedundertheapplicablelawtopayacertainpricefortheshares(e.g.thenominalvalue)–potentiallyaconsiderableamountifalargenumberofnewsharesareissued.Undersuchamechanism,theinvestorswillnaturallybeentitledtothevotingrightsattachedtotheadditionalshares.InvestorsintheUSwill,withoutexception,usethefirstmechanism.

Ifthesystemofadjustableconversionratesisthepreferredcompensation

Ifthesystemofadjustableconversionratesisthepreferredcompensationmechanism,theanti-dilutionprovisioncouldbedraftedasfollows:

“IntheeventthattheCompanyissuesnewshares,orsecuritiesconvertibleintoorexchangeableforshares,atapurchasepricelowerthantheapplicableconversionpriceoftheSeries[ ]Shares,thentheconversionpriceoftheSeries[ ]Shareswillbesubjecttoa[full-ratchet/weightedaverage]adjustment(…)”

Ifadditionalsharesaretobeissuedtotheinvestorsasthepreferredcompensationmechanism,theanti-dilutionprovisioncouldreadasfollows:

“IntheeventthattheCompanyissuesnewshares,orsecuritiesconvertibleintoorexchangeableforshares,atapurchasepricelowerthantheapplicablepurchasepriceoftheSeries[ ]Shares,theholdersofSeries[ ]SharesmayelectthattheCompanyshallprocure(totheextentthatitislawfullyabletodoso)theissuetotheholdersofSeries[ ]Shares,ofadditionalSeries[ ]Sharesagainstpaymentofsuchanamountthattheaveragepurchasepricetheyhavepaidisequaltothepurchasepriceatwhichthenewsharesareissued.”

Therearetwobasictypesofprice-basedanti-dilutionprotection:(a)fullratchetanti-dilutionprotectionand(b)weightedaverageanti-dilutionprotection.Thedifferenceliesinthelevelofcompensationavailabletotheinvestors.Wewilldiscussthesetypesofprotectionbelow,basedontheassumptionthatpartieshaveagreedontheconversionadjustmentascompensationmechanism.

A FULLRATCHETPROTECTIONThefullratchetanti-dilutionprotectionisthemostinvestor-friendlytypeofprotection.Underthefullratchetprotection,theinvestorswillbeputinthepositionasiftheyhadinvestedatthenew,lowerissueprice.Thiscompletelypreservesthevalueoftheirinitialinvestmentinadownround.InthetermsheetsubmittedtoNewWaveEnergy,theanti-dilutionclauseindicatesthatafullratchetadjustmentwillapplyifNewWaveEnergyissuesnewsharesatapricelessthantheapplicableconversionpriceoftheSeriesAShares.Amoreextensivefullratchetclause,explainingtheextentoftheprotection,couldbedraftedasfollows:

“IntheeventthattheCompanyissuesequitysecuritiesatapurchasepricelessthantheapplicableconversionpriceoftheSeriesAShares,thentheconversionpriceoftheSeriesAShareswillbesubjecttoafullratchetadjustment,reducing

theapplicableconversionpriceoftheSeriesASharestothepriceatwhichthenewequitysecuritiesareissued.”

Theprincipleofthefullratchetprotectioncanbeillustratedbythefollowingexample.

Example:ACompanyhasraisedaSeriesAroundat€2pershareandraisesasubsequentSeriesBroundat€1pershare.Underthefullratchetprotection,theholdersofSeriesAshareswillbeputinthepositionasiftheyhadpurchasedtheSeriesAsharesat€1pershareinsteadof€2pershare,thusentitlingthemtotwicethenumberofsharestheyheldbeforetheSeriesBround.

Thefullratchetprotectionfocusesonthenewpricepershareandcompensatestheinvestorsforthefulldifferenceinshareprice,regardlessoftherealimpactofthedilutiveevent.Consequently,aspertheexample,thecompensationfortheholdersofSeriesAshareswillbethesameregardlessofwhetherthecompanyissuesonly1newSeriesBshareor1millionnewSeriesBshares.Thiscancausesignificantdilutionofthevalueofthesharesheldbytheshareholdersthatarenotprotectedagainstprice-baseddilution(typicallythecommonshareholders,i.e.foundersandemployees).Theeffectsofa(fullratchet)anti-dilutionprotectionmaybeperceivedbythoseshareholdersasasevereinjusticeandmayhaveademoralisingeffectonthem.Companiesthatareinapositiontonegotiatebettertermswilltrytohavetheinvestorssettleforalessonerousformofanti-dilutionprotection,suchastheweightedaverageanti-dilutionprotection.

B WEIGHTEDAVERAGEPROTECTIONIncontrasttothefullratchetprotection,theweightedaverageanti-dilutionprotectiontakesintoaccounttheproportionalrelevanceofthesubscriptionpricepaidinthedownroundandthesubscriptionpricepaidinthepreviousround.Asinthefullratchetmechanism,ittakesanewsharepricebasedonwhichtheinvestorswillbecompensated.However,itwillnotbringtheoldpricedowntothenewpriceofthedownround,butwill‘ratchetitdown’toanewprice(weightedaverageprice)determinedbytheaverageofbothprices,aftertheyareweighted.Forthenewprice,theweightingfactoristhenumberofsharesissuedinthedilutivefinancinground.Fortheoldprice,thefactoriseither(i)thetotalnumberofcommonsharesoutstandingpriortothedilutivefinancingroundonan‘as-ifconvertedandfullydiluted’basis–(broadbasedweightedaverage)or(ii)partofthesharesoutstandingpriortothedilutivefinancingroundasspecifiedinthetermsheet(narrowbasedweightedaverage).

Itisimportanttonotethatthenarrowbasedweightedaveragebasicallystandsforallweightedaveragecalculationsusinglessthanthesharesmentionedunder(i)(broadbasedweightedaverage)asaweightingfactorfortheoldprice.Thus,inpractice,thenumberofsharesmentionedunder(ii)canvaryfromallpre-moneyoutstandingshares(onanon-convertedandnon-dilutedbasis)toonlythepreferredsharesissuedinthepreviousround.Thenarrowerthebase,thelargertheeffectofthenewpriceandthemorefavourabletheclauseistotheprotectedinvestors.

Tocalculatetheweightedaverageprice,partiesincludeamathematicalformulaintheirshareholders’agreement.Thougheachformulamaylookalike,thedefinitionofQ1maystronglyvary.Asexplainedabove,protectionbasedoneitherofthetwoaveragesdependsonthedefinitionofthissymbol.

whereP1= thesubscriptionpriceinthepreviousround1;P2= thesubscriptionpriceinthenewround;Q1= broadbased:thetotalnumberofsharesoutstandingpriortothe

dilutivefinancinground,onan‘as-ifconvertedandfullydiluted’basis;‘narrowbased’:partofthesharesoutstandingpriortothedilutivefinancingroundasspecifiedinthetermsheet;

Q2= thenumberofsharesissuedinthenewround.

Atermsheetnormallysimplystatesthataweightedaverageprotectionisapplicable,withoutincludingaformulaorindicatingwhetherabroadbasedornarrowbasedweightedaverageistobeapplied.Inviewofthedifferentlevelsofanti-dilutionprotectionprovidedbyeachparticularweightedaverageformula,theformulaanditscontentsshouldideallybeapartofthediscussionduringthetermsheetnegotiations.

C COMBINATIONSANDOTHERFEATURESThoughnotseenveryoften,thefollowingmodificationsmaybemadetothefullratchetandtheweightedaverageanti-dilutionprotections,toaddressspecificneedsorconcernsoftheinvestorsortofindasolutiontoadeadlocksituation.Forinstance,theconcernedpartiesmayagreetocalculatethecompensationbasedontheaverageofthefullratchetandweightedaverageprice.Theformula

basedontheaverageofthefullratchetandweightedaverageprice.Theformulaisfairlysimple:

whereX= theactualnumberofadditional(anti-dilution)sharestobeissuedto

theinvestors;FR= (fullratchet)numberofadditionalsharestobeissuedunderthefull

ratchetcalculation;WA= (weightedaverage)numberofadditionalsharestobeissuedunder

theweightedaveragecalculation

Anotheralternativeistoplaceatimelimitonthefullratchetanti-dilutionright,i.e.afteracertainperiod,thefullratchetanti-dilutionprotectionswitchestoaweightedaverageformulaorisforfeitedaltogether.Thefollowingclausecontainssuchalimitation:

“IntheeventthattheCompanyissuesequitysecuritiespriorto[date]atapurchasepricelessthantheapplicableconversion/subscriptionpriceoftheSeries[ ]Shares,thentheconversionpriceoftheSeries[ ]Shareswillbesubjecttoa[fullratchet][weightedaverage]adjustment.”

Asharepricefloormayalsobeincluded.Ifthenewsharepriceinthedownroundfallsbelowaspecificprice,thefullratchetprotectionswitchestoaweightedaverageanti-dilutionprotection.Anexampleofsuchaclauseinatermsheetisthefollowing:

“IntheeventthattheCompanyissuesequitysecuritiesatapurchaseprice(the”PurchasePrice”)lessthantheapplicableconversionpriceoftheSeries[ ]Shares,thentheconversion/subscriptionpriceoftheSeries[ ]Shareswillbesubjectto:(i)afullratchetadjustment,ifthePurchasePriceisgreaterthan€[___]pershare;and(ii)aweightedaverageadjustmentifthePurchasePriceislessthan€[___]pershare.”

Insteadofusingthedownroundaloneasreferencefortheanti-dilutioncompensation,partiesmayincludefutureroundsinthecalculationofthedilution.Thefullratchetorweightedaverageprotectionisthenbasedonanewpricecalculatedastheweightedaveragepriceofallfuturerounds.Thiswilllimitthedilutionwhenonedownroundisfollowedbyuprounds.Anexample

clause:

“IntheeventthattheCompanyissuesequitysecuritiesinoneormoreissuancesandiftheweightedaverageofthepurchasepricesofsuchissuanceorissuances(the“WeightedAveragePrice”)islessthantheapplicableconversion/subscriptionpriceoftheSeries[ ]Shares,thentheconversionpriceoftheSeries[ ]ShareswillbeadjustedtotheWeightedAveragePrice.”

Inexchangeforallowingtheinvestorsprotectionagainstfuturedownrounds,thefoundersmaynegotiateapay-to-playclauserequiringtheinvestorstoinvesttheirproratashareinsuchroundsinordertoretaintheiranti-dilutionprotection.Also,refertosection15–Pay-to-Playofthischapter.

D CARVE-OUTSANDADJUSTMENTSNoteveryissuanceofsharesundertheoriginalpurchasepricehowever,shouldtriggertheanti-dilutionprotection.Themostobviousexceptionistheissueofcommonsharesuponconversionofthepreferredshares.Anothertypicalexceptionsetoutintermsheetsistheissueofsharesoroptionsatadiscounttoemployeesunderanemployeestockoptionplan(ESOP).

Other,lessobviouscarve-outsshouldbejudgedbytheinvestorsortheSupervisoryBoardonthebasisofindividualcases.Examplesare:commonsharesissuedorissuableinconnectionwith:i. amergeroracquisitionoftheCompany;ii. anyborrowingsfromacommerciallendinginstitution;iii. apublicofferingbeforeorinconnectionwithwhichalloutstandingpreferredshareswillbeconvertedtocommonsharesoruponexerciseofwarrantsorrightsgrantedtounderwritersinconnectionwithsuchapublicoffering.

E CALCULATIONPROBLEMSCalculationofthenewconversionpriceorthenumberofsharestobeissuedpursuanttotheanti-dilutionprotectionappearssimple.Inpracticehowever,itcanbequitecomplex.Thisismainlybecausetheanti-dilutionprotectionisbasedonthesharepriceinthenew(down)round.Thenewsharepriceisdeterminedonafullydilutedbasis,includingallsharestobeissuedtotheexistingpreferredshareholderspursuanttotheanti-dilutionprotection.Thisresultsinacircularlogic,whichcanbeillustratedinthefollowingexample.

Example:NewWaveEnergy’spost-moneyvaluationafteritsSeriesAroundis€23million,basedon2,578,333post-moneysharesoutstanding(andapriceperSeriesAshareof€9.38).LetusassumethattheSeriesBroundisadownroundandthattheSeriesBinvestorsvalueNewWaveEnergyat€15millionpre-money(note:preSeriesBround).Basedonthe2,578,333sharesoutstanding(pre-moneyfullydiluted),thesharepriceofaSeriesBsharewouldbe€5.82.However,theanti-dilutionprotectionoftheholdersofSeriesAshareswillincreasethefullydilutedoutstandingsharespreSeriesB,andwillconsequentlydecreasetheshareprice.Thedecreasedsharepricewilltriggertheanti-dilutionpriceagain,andsoon.

F DILUTIONOFOWNERSHIPAdistinctionmustbemadebetweentheconceptofeconomicorprice-baseddilutionasexplainedaboveandthedilutionofownership.

Dilutionofownershipoftheexistingshareholders’percentageofthecompany’ssharecapitaloccursforexampleifthecompanyissuesadditionalsharestonewshareholders.Insuchasituation,thepiehasbeendividedintomore–andthereforesmaller–pieces.Dilutionofownershipcanbepreventedbypurchasingaproportionalnumberofsharesofanyfutureissueofshares.Arighttopurchasesuchproportionalnumberofsharesiscalledapre-emptiveright(seesection25–Pre-EmptiveRight,ofthischapter).

Negotiationtips:• Ananti-dilutionclauseshouldprotecttheoldinvestorsagainstprice

dilutionincaseswherenewinvestorsvaluethecompanyatlessthanthelastpost-moneyvaluation.Inpractice,however,newinvestorstypicallydon’tstartpricenegotiationsiftheythinkthelastpost-moneyvaluationwastoohigh.Inthissituation,anti-dilutionprotectionisineffectiveandofferspoorcompensationforpayinga(too)highprice(duetoatoohighvaluation).

• Itcouldbearguedthatanti-dilutionprotectionincaseofadownroundshouldonlybeprovidedwhenoutsideinvestorsjoinasshareholdersandsettheprice.Onlytheirvaluationcanbeconsideredasthenewcompanyvalueinthe‘market’.

Anti-Dilution: IntheeventthattheCompanyissuesnewshares,orsecuritiesconvertibleintoor

exchangeableforshares,atapurchasepricelowerthantheapplicableconversionpriceoftheSeries[ ]Shares,thentheconversionpriceoftheSeries[ ]Shareswillbesubjecttoa(n)(…)

[Alternative1:(…)fullratchetadjustment,reducingtheapplicableconversionpriceoftheSeries[ ]Sharestothepriceatwhichthenewsharesare(tobe)issued.]

[Alternative2:(…)[broadbased][narrowbased]weightedaverageadjustment,reducingtheapplicableconversionpriceoftheSeries[ ]Sharestoanewconversionpricecalculatedinaccordancewithaweightedaverageanti-dilutionformula.]

[Alternative3:(…)fullratchetadjustmentwithin[___]yearsoftheClosing.Thereafter,theconversionpricewillbesubjecttoadjustmentona[broadbased][narrowbased]weighted-averagebasis.

[Alternative4:(…)(a)[broadbased][narrowbased]weighted-averageadjustmentifthepurchasepricepershareisequaltoorgreaterthan€[___]pershareand(b)fullratchetadjustmentifthepurchasepricepershareislowerthan€[___]pershare.]

[Alternative5:(…)adjustment,reducingtheapplicableconversionpriceoftheSeries[ ]Sharestoanewconversionpricecalculatedastheaverageoftheconversionpricesresultingfromtheweightedaverageadjustmentandthefullratchetadjustment(newconversionprice=(WA+FR)/2).]

IntheeventthattheCompanyissuesnewshares,orsecuritiesconvertibleintoorexchangeableforshares,atapurchasepricelowerthantheapplicablepurchasepriceoftheSeries[ ]Shares,theholdersofSeries[ ]SharesmayelectthattheCompanyshallprocure(totheextentthatitislawfullyabletodoso)theissuetotheholdersofSeries[ ]Shares,additionalSeries[ ]Sharesagainstpaymentofsuchanamountthattheaveragepurchasepricetheyhavepaidisequaltothepurchasepriceatwhichthenewsharesareissued.

Theanti-dilutionadjustmentwillnotapplyintheeventofissuanceof(…)

[Alternative1:(…)CommonSharesissuedorissuabletoemployees,consultantsordirectorsoftheCompanydirectlyorpursuanttotheESOP(assetoutinthe‘EmployeePool’clause)thathavebeenapprovedbytheSupervisoryBoard.].

[Alternative2:(…)(i)CommonSharesissuedorissuabletoemployees,consultantsordirectorsoftheCompanydirectlyorpursuanttotheESOP(assetoutinthe‘EmployeePool’clause)thathavebeenapprovedbytheSupervisoryBoard;(ii)CommonSharesissuedorissuableuponconversionofthePreferredShares;(iii)CommonSharesissuedorissuableinconnectionwithamerger,acquisition,combination,consolidationorotherreorganisationinvolvingtheCompanyandapprovedbytheSupervisoryBoardoftheCompany;(iv)CommonSharesissuedorissuableinconnectionwith(a)anyborrowingsfromacommerciallendinginstitution,(b)the

leaseofequipmentorpropertybytheCompany,or(c)strategicpartnershipsand/orlicensingrelationships,solongassuchtransactionsareapprovedbytheSupervisoryBoard;and(v)CommonSharesissuedorissuable(a)inapublicofferingbeforeorinconnectionwithwhichalloutstandingPreferredShareswillbeconvertedtoCommonSharesor(b)uponexerciseofwarrantsorrightsgrantedtounderwritersinconnectionwithsuchapublicoffering.]

4.15 PAY-TO-PLAYApay-to-playclauseisaimedatpenalisinginvestorswhodonotparticipateonaproratabasisinafinancinground,bycancellingsomeoralloftheirpreferentialrights.

Theideabehindapay-to-playclauseisthatthethreatoflosingthesepreferentialrightswillencourageinvestorstomakeadditionalinvestmentsinthecompanyincaseswherethevaluationhasbeenadjusteddownward.Furthermore,thisclausewillpreventthoseinvestorswhodonotmakeadditionalinvestmentsfromfreeriding.Suchfreeridingwouldoccurifinvestors,whodonotmakeadditionalinvestments,weretoretainalltheirpreferentialrightsand,asaconsequenceofthedilutiveeffectofthedownround,beentitledtoadditionalsharesundertheiranti-dilutionprotection.

Thepay-to-playclausetypicallyonlyappliestofuture(down)rounds.Itispossible,however,thatnewinvestorsinadownroundareonlypreparedtoinvestinthecompanyifthepay-to-playclausealsoappliestothedownroundinwhichtheyplantomaketheirfirstinvestment.Insuchcases,thepay-to-playclausecanbedraftedinsuchamannerthatitalsoappliestoinvestorswhomadetheirinvestmentinapreviousround.Thiswillforcetheseoldinvestorstoparticipateinthenew(down)roundandwillpreventthefoundersfrombeingdilutedduetotheinvestors’anti-dilutionprotection.

Themostonerousversionofpay-to-playistheautomaticconversionintocommonshares,whichessentiallyendsanypreferentialrightofaninvestor,suchashisliquidationpreference,anti-dilutionrightsandcontrolrights.Aless

onerousversionistheautomaticconversionintoanewseriesofpreferredshares,whichisidenticaltotheexistingseriesbutwhichmaynothave:(i)anti-dilutionprotection(ormayhavelessfavourableanti-dilutionprotection),(ii)liquidationpreference,(iii)specialvotingrights,or(iv)acombinationoftheabove.Theforfeitureofrightsunderthepay-to-playclauseisgenerallyproportionatetotheextentthattheinvestorfailstoparticipateinthenewround.

Thoughitseemsappropriatetomakethenon-participatinginvestorspayfortheirunwillingnesstoplay,notallinvestorsarekeenonimplementingthisclauseatthetimeoftheirinvestment.Afterall,noinvestorcanbeentirelysurethathewill(beableto)participateinafutureinvestmentround(onaproratabasis).Sincethepay-to-playclausepreventsthemfrombeingdilutedunderinvestors’anti-dilutionclauses,thefoundersandallothercommonshareholdersarethemainbeneficiariesofthisclause.Forthem,thepay-to-playclausecanbeavaluabletoolinthetermsheetnegotiations.

Pay-to-Play: HoldersofPreferredSharesarerequiredtoparticipateinanydilutiveissuance[includingtheSeries[ ]Financing]totheextentoftheirprorataequityinterestinthePreferredShares,[unlesstheparticipationrequirementiswaivedforallPreferredShareholdersbytheSupervisoryBoard[(includingtheSeries[ ]Director)]][unlesstheholdersof[ ]%oftheSeries[ ]Shareselectotherwise].

IntheeventthataholderofPreferredSharesfailstoparticipateinaccordancewiththepreviousparagraph,thePreferredSharesheldbysuchshareholderwillautomatically[andproportionally],[losetheiranti-dilutionrights][losetheirliquidationrights][converttoCommonShares].

4.16 LIQUIDATIONPREFERENCETheliquidationpreferenceclausespecifieshowmuchoftheproceedsofaliquidationthepreferredshareholderscancollectbeforeanyoftheseproceeds

aredistributedtotheholdersofcommonshares.Ifmoreseries(classes)ofpreferredsharesareoutstanding,itwillalsodescribeinwhichordertheholdersofdifferentseriesofpreferredshareswillbepaid.Usually,theholdersofpreferredsharesissuedinthelastroundoffinancingrankseniororaheadoftheholdersofpreferredsharesissuedinearlierroundsandtheholdersofcommonshares.

A LIQUIDATIONEVENTSAsthetermindicates,aliquidationpreferenceisprimarilyapplicableintheeventofaliquidation,bankruptcy,dissolution,orwindingupofacompany.Theliquidationpreferenceallowstheinvestorstorecovercertainamountsfromtheliquidationproceeds(ifany)beforeallothers.Incertaincircumstances,itmayresultintheinvestorsrecoveringamounts,whiletheothershareholdersdonotreceiveanyproceedsatall.Aliquidationpreferencecanthusprovideinvestorswithacertaindegreeofprotectionagainsttheirdownsiderisk,atthecostoftheothershareholders.However,duetothenatureofequity,thisprotectionislimited.Inbankruptcysituationsthereareusuallynoproceedsatalltodistributeamongequityholders,sincealldebtmustberepaidfirst.

Typically,theapplicabilityoftheliquidationpreferenceisalsoextendedtocertaineventsotherthanliquidationorbankruptcy,suchasthesaleormergerofthecompany.Theseeventsarethendeemedtobealiquidationeventforpurposesofallocatingthedistributionoftheproceeds.Byincludingthesedeemedliquidationeventsintheliquidationpreferenceclause,preferredshareswillprovidetheinvestorswithadditionalcoverageincasethecompanyisnotliquidatedbutsoldto(ormergedwith)anothercompanyataverylowvaluation(a‘firesale’).Moreover,providedthattheinvestorshaveaparticipatingliquidationpreference(i.e.theyholdparticipatingpreferredsharesthatentitlethemtoapredeterminedportionoftheliquidationproceedsandtoaproratapartoftheremainderoftheproceedssharedwiththecommonshareholders),theywill,inadditiontotheaforementioneddownsideprotection,obtainupsidepotentialintheeventofa(successful)saleormergerofthecompany.

Theeventsthataretobeconsideredadeemedliquidationunderaliquidationpreferenceclauseoftenalsoincludeeventslikeareorganisationoraconsolidationofthecompany,orthesale,lease,transferorotherdispositionofallorsubstantiallyallofthecompany’sassets.Toqualifyasadeemedliquidationevent,theseeventsmusttypicallyresultinalossofvotingrightsbythecurrentshareholders(changeofcontrol).

SometimesinvestorsarguethatanIPOshouldalsotriggeraliquidationevent.Thisisundesirable,fortworeasons.Firstly,anIPOshouldberegardedasaninvestmentroundratherthanasadeemedliquidationevent(e.g.thesaleofthecompany).TherearenodistributableproceedsresultingfromanIPO;thecompanymerelyissuesnewshareswhicharesoldto‘thepublic’inordertoraisenewmoney.Likeanyinvestmentround,anIPOshouldthereforenotbesubjecttoaliquidationpreferencearrangement.Secondly,immediatelypriortotheIPOallpreferredshareswillbeconvertedintocommonshares(onlycommonsharescanbetradedatastockexchange).Thisconversionresultsinthelossoftheliquidationpreferencethatisattachedtothepreferredshares.ThepreferredshareswillautomaticallyconvertintheeventofaQualifiedOffering(seesection13–AutomaticConversion,ofthischapter).AnIPOcanthereforenottriggertheliquidationpreferencebecausenopreferredshareswillbeoutstandingatthetimethecompanyisactuallylistedatastockexchange.

Itshouldbenotedthatadistributiontotheshareholdersasaresultofawindinguporbankruptcyofthecompanyisanentirelydifferentlegalconceptfromthereallocationofthesalepriceofthesharesamongsttheshareholdersincaseofasaleormergerofthecompany.Thespecificlegalbasisofeachliquidationevent,thespecificdocumentinwhichitistobesetforth(articlesofassociationorshareholders’agreement),andthepartiesthatneedtoagreetotheliquidationpreferenceareelementsthatshouldbecarefullyconsideredwhiledraftingthisclauseinthetermsheetandinthefinaldocumentation.

B TYPESOFLIQUIDATIONPREFERENCEIntheprevioussectionwehaveelaboratedontheeventsthatcantriggertheliquidationpreference.Nowwewilllookintothedifferenttypesofliquidationpreferenceandtheirconsequencesfortheholdersofcommonandpreferredshares.Liquidationpreferenceclausescanbefoundintwobasicforms:(i)anon-participatingliquidationpreferenceand(ii)aparticipatingliquidationpreference,eachformdependingonthetypeofconvertiblepreferredsharesused,andprovidingtheinvestorswithadifferentlevelofreturn.Athirdtypeofliquidationpreferencecanbecreatedbycappingtheparticipatingliquidationpreference.

I. NON-PARTICIPATINGLIQUIDATIONPREFERENCEThemostbasicformofliquidationpreferenceisthenon-participatingliquidationpreference(alsocalled:simpleliquidationpreference).This

liquidationpreferenceentitlesonlytheholdersofthe(non-participating)preferredsharestoapredeterminedportionoftheliquidationproceeds,usuallyequivalenttotheamountpaidbythemforthepreferredshares.Underanon-participatingliquidationpreference,thepreferredshareholdersstopsharingintheproceedsafterrepaymentofsuchamount.Incircumstanceswheretheproceedsexceedthepreferredreturnoftheinvestors,thismayhavetheundesirableeffectfortheinvestorsthattheyarenotabletoshareintheupside.Therefore,thistypeofliquidationpreferenceshouldalwaysbereadinconjunctionwiththeabilityoftheholdersofthepreferredsharestoconverttheirsharesintocommonshares,asexplainedinmoredetailinsection12–VoluntaryConversion,ofthischapter.Ifhowever,undertheapplicablejurisdiction,aliquidationpreferencecanbestipulatedinsuchawaythatitallowsthepreferredshareholderstochoosebetweenreceivingeither(i)theirsubscriptionpriceor(ii)theamounttheywouldhavereceivediftheyhadconvertedthepreferredsharestocommonshares,theneedforconversionwillnotarise.

Thenon-participatingliquidationpreferencecanbeincreasedbyamultiple(e.g.2x,3xormore)oradividendasexplainedinparagraph(iv)below.

Thequestionofwhetherornottoconvertinthecaseofanon-participatingliquidationpreferenceisillustratedinthefollowingexample.

Example:Letusassumethataventure-backedcompanyhasasharecapitalconsistingof50%commonsharesand50%preferredshares.Allpreferredsharesareheldbyoneinvestor,whohasinvested€10millioninthecompany.Theholderofpreferredshares(theinvestor)isentitledtoa1xnon-participatingliquidationpreference.Dependingontheamountofproceedsavailablefordistributionorreallocation,theinvestorwilldecidetoclaimhisliquidationpreference(€10million)orhisproratashareoftheliquidationproceeds(50%).Hisprorataentitlementtotheproceedsequalstheinvestmentamount(€10million)whentheproceedsoftheliquidationare€20million(€10/50%).

Iftheproceedsarelessthan€20million,theinvestorwillnotconvertsincehewillbebetteroffwiththeliquidationpreference.Iftheproceedsaremore,hewilldefinitelyconverthispreferredsharesintocommonsharespriortodistribution.

FIGURE14:LIQUIDATIONPREFERENCES1XNON-PARTICIPATING

Itshouldbenotedthatunderthis1xsimpleliquidationpreferencethereisamisalignmentofinterestbetweentheholdersofcommonsharesandpreferredsharesforexitvaluesbetween€0and€20million;thecommonshareholderswillreceivenothingiftheproceedsarelessthan€10million,whiletheholderofpreferredshareswon’tbenefitfromanyexitproceedsbetween€10millionand€20million.Wecalltherangeofexitvaluesbetween€0and€20millionthe‘zoneofmisalignment’.Investorstendtofocusonthezonewheretheyareindifferentormisalignedwiththefoundersandcalltherangeofexitvaluesbetween€10and€20million(insteadofthefullrangebetween€0and€20million)the‘zoneofindifference’or‘deadzone’.Aswillbeshowninthenextparagraphs,thesignificanceofsuchazonewillincreaseiftermsbecomeharsher.

II. PARTICIPATINGLIQUIDATIONPREFERENCETheotherbasictypeofliquidationpreferenceistheparticipatingliquidationpreference.Thistypeofliquidationpreferenceentitlestheholdersofpreferredsharestofirstreceivetheoriginalpurchasepriceoftheirpreferredshares(theliquidationpreference)andsubsequentlytoshareintheremainingproceedsasiftheirpreferredshareshadbeenconvertedintocommonsharesimmediatelypriortothe(deemed)liquidationevent.Thisdistributionprincipleoffersaprotectionwhichissimilartothesimpleliquidationpreference,buthasanincreasedupsidepotentialsincethepreferredshareswillalsoshareintheremainingproceeds,aftertherepaymentoftheirinvestment.Thisdoublerepaymentfeatureattachedtotheparticipatingpreferredsharesisoftenreferredtoasadoubledip.

Example:Followinguponthepreviousexample,let’sassumethattheventure-

backedcompanyissoldfor€25million.Iftheinvestor(holderofpreferredshares)hasnegotiateda1xparticipatingliquidationpreference,hewillreceivefirst€10millionbackbasedonhisliquidationpreferenceandwillsubsequentlyreceive€7.5million(50%oftheremaining€15million),bringinghistotalto€17.5million.Inthecaseofanon-participatingliquidationpreference,theinvestorwouldonlyhavereceived€12.5million.

FIGURE15:LIQUIDATIONPREFERENCES1XPARTICIPATING

Asillustratedintheabovechart,onlyafterthefirst€10millionhasbeendistributed(totheholderofpreferredshares)willtheholderofcommonsharesstartsharingintheremainingproceeds.Thezoneofmisalignmentliesbetweentheexitvaluesof€0and€10million.However,itshouldbenotedthatmisalignmentcontinuestoexistbetweentheholdersofpreferredandcommonsharesbecausetheinitialdistributiontotheholderofpreferredsharesisnever‘caughtup’bytheholderofcommonshares.

III. CAPPEDPARTICIPATINGLIQUIDATIONPREFERENCEAcommonwaytolimitthedilutiveeffectsofaparticipatingliquidationpreferenceistoimposeacapontheparticipationoftheinvestor(holderofpreferredshares)intheremainingproceeds.Theholderofcappedparticipatingpreferredshareswillreceiveallthebenefitsoftheparticipatingpreferredsharesasmentionedabove,butthetotalreturniscapped.Suchacapistypicallyfixedasamultipleoftheoriginalinvestment,suchas2xor3x2.Oncetheinvestorhasreachedthatcap,itwillnolongershareintheremainingproceeds.Asaresult,incircumstanceswheretheinvestor’sproratashareinthetotalproceedswould

yieldahigherreturnthanhispreferenceandparticipationcapallows,theinvestorisforcedtoforegohispreferenceandsimplyparticipateonanas-convertedbasisproratapartewiththeholderofcommonshares.

Example:Iftheinvestor(holderofpreferredshares)hasnegotiateda1xparticipatingliquidationpreferencewhichiscappedat2x,hewillbeentitledtoreceiveanamountequalto1xliquidationpreferenceplusaproratadistributionwiththecommonsharesuntilthetotalamountequals2xhisinvestment(€20million).Sincetheinvestorintheaboveexampleowns50%ofthesharesonaproratabasis,hewillonlyconverthispreferredsharesintocommonshares(inordertoshareintheproceedsonaproratabasis)iftheexitvalueexceeds€40million.

FIGURE16:LIQUIDATIONPREFERENCES1XPARTICIPATING,2XCAP

Asshownintheabovechart,thezoneofmisalignmentisbetween€0and€10millionandbetween€30and€40million.

IV. DIVIDENDSANDMULTIPLESIrrespectiveofthefactthataparticipatingliquidationpreferenceismoreinvestorfriendlythananon-participatingliquidationpreference,marketconditionssometimesimpelinvestorstoseekevenbetterrights.Theliquidationpreference,whethersimpleorparticipating,canbeimprovedfortheinvestorsbyincreasingthepreferredrepaymentamountwithaccruedandunpaiddividendsorbyapplyingmultiplepay-outinstruments.

Byincreasingtheliquidationpreferencewiththeamountofaccruedandunpaidcumulativedividends,investorscanincreasetheirreturnoninvestmentinthecaseofaliquidationevent(seesection10–Dividends,ofthischapter).Thesameresultmaybeachievedbyusingnon-cumulativedividends,butobviouslytoalesserextent.

Investorswithsufficientleveragemaynegotiatemultiplepay-outinstruments.Underthosecircumstances,theywillbepaidoutacertainmultipleoftheoriginalpurchasepricebeforetheremainingproceedsaredistributed.Themultiplesvaryfromtwotothreetimestheinvestmentamountinacertainround.Intheeventofamultipleof2(alsoreferredtoasa‘2x’liquidationpreference)incombinationwithanincreasebyaccruedandunpaiddividends,thefollowingwordingmaybeused:

“(…)theholdersofpreferredshareswillbeentitledtoreceive,inpreferencetotheholdersofcommonshares,2(two)timestheaggregateoftheoriginalpurchasepriceplusanyaccruedandunpaiddividends.”

Evidently,bycombiningcumulativedividendswithamultiplepay-outinstrumentandtheuseofparticipatingpreferredshares,theinvestorswillhavethemostfavourabletypeofliquidationpreference.

Earlystageinvestorsmayshootthemselvesinthefootbynegotiatinginvestorfriendlyliquidationpreferences.Investorswhoinvestinlaterroundsusuallywillrequireatleastthesameliquidationrights.Theywillalsowanttheirpreferredsharestorankseniororaheadoftheearlyinvestors.Thiscanresultinasituationwheretheholdersofpreferredsharesissuedinthelastroundoffinancinggeteverythingandtheearlyinvestorsgetnothing,despitetheirsevereliquidationrights.

LiquidationPreference: IntheeventofaliquidationorwindingupoftheCompany,theholdersofSeries[ ]ShareswillbeentitledtoreceiveinpreferencetotheholdersofJuniorPreferredSharesandtheholdersofCommonSharespaymentofanamountequalto[___times]theOriginalPurchasePriceperSeries[ ]Share[plusanyaccumulatedandunpaiddividends].

IfthereareinsufficientassetsorproceedstopaysuchamounttotheholdersofSeries[ ]Sharesinfull,theamountavailablewillbepaidonaproratabasisbetweentheholdersofSeries[ ]Shares.

Thereafter,theholdersofJuniorPreferredShareswillreceivepaymentinfulloftheoriginalpurchasepricepaidperJuniorPreferredShare[plusanyaccumulatedandunpaiddividends].

[Alternative1:(non-participatingliquidationpreference):Thereafter,anyremainingassetsorproceedswillbepaidexclusivelytotheholdersofCommonSharesonaproratabasis.]

[Alternative2:(participatingliquidationpreference):Thereafter,anyremainingassetsorproceedswillbedistributedprorataamongtheholdersofCommonSharesandtheholdersofPreferredShares(thelatteronanas-ifconvertedbasis).]

[Alternative3:(non-participatingwithconversionattheoptionofinvestor):Intheeventofaliquidation(…),theholdersofSeries[ ]Shareswillbeentitledtoreceive,inpreferencetotheholdersofcommonshares,anamountequaltothegreaterof(i)theOriginalSubscriptionPriceoftheSeries[ ]Sharesheldplusanyaccruedandunpaiddividendsand(ii)theamounttheywouldhavereceivedhadtheyconvertedtheSeries[ ]Sharestocommonsharesimmediatelypriortosuchliquidationorwindingup.]

[Alternative4:(cappedparticipatingliquidationpreference):Thereafter,anyremainingassetsor

proceedswillbedistributedprorataamongtheholdersofCommonSharesandtheholdersofPreferredShares(thelatteronanas-ifconvertedbasis)untilsuchtimethattheholdersofSeries[ ]PreferredShareshavereceivedanaggregateof[___times]theOriginalPurchasePricepershare(includinganyamountspaidpursuanttotheparagraphsabove).ThebalancethereafterwillbedistributedamongsttheholdersofCommonSharesonaproratabasis.]

Areorganisation,consolidation,mergeroftheCompany,saleorissueofSharesoranyothereventpursuanttowhichtheshareholdersoftheCompanywillhavelessthan51%ofthevotingpowerofthesurvivingoracquiringcorporation,orthesale,lease,transferorotherdispositionofallorsubstantiallyalloftheCompany’sassetswillbedeemedtobealiquidationorwindingupforthepurposesoftheliquidationpreference(a“DeemedLiquidationEvent”),therebytriggeringtheliquidationpreferencesdescribedabove[unlesstheholdersof[___]%oftheSeries[ ]Shareselectotherwise].

4.17 FAVOURABLETERMSNotonlydoventurecapitaltermsheetssummarisethebasictermsandconditionsunderwhichapotentialinvestmentwillbemade,theyalsosetoutthebasicstructureofthetransaction,thetimelinesforduediligenceandthedeadlinefortheclosing.Thepurposeofatermsheetistoensurethatthisexerciseisdoneatanearlystageoftheinvestmentprocess.Atthattime,theinvestorsnormallywouldnothavehadtheopportunitytoconductaduediligenceinvestigationortootherwisereviewtheexistingrights,preferencesandrestrictionsoftheoutstandingsharesofthecompany.

Asageneralrule,investorsineachroundoffinancingwillnegotiateinvestment

termsreflectingtheinvestmentrisktheyperceive,buttheywillinnoeventaccepttermsthatarelessfavourablethanthetermsnegotiatedinearlierrounds.A‘FavourableTerms’clauseensuresthattherightsattachedtothesharestobeissuedtotheinvestorsinthenewroundwillbeequivalenttoorbetterthanthoseattachedtotheexisting(preferredandcommon)shares.

FavourableTerms: Thetermsherein,otherthanvaluation,aresubjecttoareviewoftherights,preferencesandrestrictionspertainingtotheexistingsharesintheCompany.AnychangesnecessarytoconformsuchexistingsharestothisTermSheetwillbemadeattheClosingasnecessaryinordertoensurethatholdersofexistingCommonSharesandJuniorPreferredShareswillnothaverightsmorefavourablethanthoseoftheholdersofSeries[ ]Shares.

4.18 BOARDREPRESENTATION

A ONE-TIERSYSTEMVERSUSTWO-TIERSYSTEMThetermboarddoesnotholduniformmeaning.Incertainjurisdictions(suchastheUS),aone-tierboardsystemisthestandard.Inthesejurisdictions,thetermboardreferstoonecomprisedofexecutiveaswellasnon-executivedirectors.Inotherjurisdictions,theconceptofnon-executivedirectorsdoesnotexist.Inthesejurisdictions,atwo-tierboardsystemappliesandadistinctionismadebetweenamanagementboardandasupervisoryboard,eachconstitutingaseparatecorporatebodywithinthecompany.Finally,therearejurisdictionswherecompaniescanoptforeitheraone-tierboardsystemoratwo-tierboardsystem.

Regardlessofthesystemfollowedwithregardtotheboard,thereis,ingeneral,acleardistinctionbetweenthedutiesandresponsibilitiesoftheexecutiveboardmembersandthoseofthenon-executiveorsupervisoryboardmembers.Sincetheseparationofdutiesandresponsibilitiesinatwo-tiersystemismoreevidentthanintheone-tiersystem,wewillonlydiscussthetwo-tierboard.Consequently,henceforthreferencewillbemadeonlytotheconceptsmanagementboardandsupervisoryboard.

B SUPERVISORYBOARDTheprimaryfunctionofthesupervisoryboardistooverseethepolicypursuedbymanagementandassessthegeneralstateofaffairsinthecompany.Thesupervisoryboardadvisesthemanagementboardonspecificissues,eitheronrequestoronitsowninitiativeasrequired.Thesupervisoryboardnormallyhasapprovalrightswithrespecttoallimportantactionsbythemanagementboard(seesection20–ConsentRights,ofthischapter).Thesefunctionsofthesupervisoryboardmakeittheperfectforumforventurecapitalinvestorstomonitorthecompanyanditsmanagementandtobeinvolvedinalldecisionsthatareoffundamentalimportancetothecompany.Therefore,theinvestorwillwanttohavetherighttoappointornominateoneormoremembersofthesupervisoryboardinalmostallventurecapitaltransactions.

Havingarepresentativeonthesupervisoryboardwillgivetheinvestorintimateknowledgeofcompanyaffairs.Itwillinadditiongivetheinvestoratooltoguidethecompanyinthedirectionhedeemsbestforthecompany.Fortheboardtofunctionwell,notonlytherepresentative(s)oftheinvestor,butalsoalltheothermembersofthesupervisoryboardshouldbeknowledgeableinthecompany’sfieldofoperation.Thecompositionandsizeofthesupervisoryboardareveryimportanttothesuccessofacompanyandareoftenpreconditionstofinancing.Whiletheformershouldbetherightmixoffinancialandcommercialexperts,aswellasexpertsinthespecificfield(s)inwhichthecompanyoperates,thelattershouldbesuchastoenableittofunctioninaneffective,flexibleandtransparentmanner.

Thedutiesandresponsibilitiesofthesupervisoryboardwilldifferineachjurisdiction,andinvestorsshouldbeawareofthelegalpositionofthemembersofthesupervisoryboardbeforenominatingtheirrepresentativetotheboard.FollowingaresomeofthebasicrulesthatapplyinmostEuropeanjurisdictions.

Themembersofthesupervisoryboardhavecollectivepowersandresponsibilities.Consequently,inmostEuropeanjurisdictions,theyshareresponsibilityforalldecisionsandactsundertakenbythesupervisoryboardaswellasthoseofeachindividualmemberofthesupervisoryboard.Thefunctionsofthesupervisoryboarddonotincludetheexerciseofexecutivefunctions,dispensingofspecificinstructionstothemanagementboard,determiningthebusinesspolicyofthecorporation,orappointingorremovingmembersofthemanagementboard.Thesupervisoryboardmembersmay,however,adoptanindependentstancevis-à-visthemanagementboardandtakemeasuresto

managethecompanyifthemanagementboardisunabletoperformitsduties(e.g.suspendingmembersofthemanagementboard).

Asarule,themembersofthesupervisoryboardmaybeappointedanddismissedbytheshareholders.Veryoften,directappointmentrightsorspecialnominationrightsaregrantedtoholdersofpreferredshares.Theshareholders’agreementshouldclearlystatethattheywouldundertaketovoteinfavourofpersonssonominatedinashareholders’meeting.

Thesupervisoryboardisindependentandnotsubordinatetotheshareholders’meeting.Inperformingtheirduties,themembersofthesupervisoryboardaretobeguidedsolelybytheinterestsofthecompanyanditsbusiness.Itisimportanttonotethatirrespectiveofthecourseofappointmentornomination,eachboardmemberhasfiduciaryobligationstowardsthecompany.Theseobligationsmustalwaysprevailoveranyobligationsaboardmembermayhavetoanyotherparty.Thesefiduciaryobligationsmayplaceboardmembersappointedbyaninvestorinanawkwardpositionsincetheymustalwaysactinthebestinterestofthecompany,whichmaynotalwayscoincidewiththebestinterestoftheinvestor.Theconsequencesofbreachingfiduciaryobligationscanbeseriousandmayresultinpersonalliabilityforthedebtsofthecompany.

Thesupervisoryboardmayformcommitteesforspecificareasofexpertisedependingonthespecificsofthecompanyandthenumberofmembersonthesupervisoryboard.Thesecommitteesservetoincreasetheefficiencyofthesupervisoryboardandthehandlingofcomplexissues.Theyarecomprisedofsupervisorydirectorsdeterminedbythesupervisoryboard,butmayalsobedeterminedbytheinvestorsatthetimeoftheirinvestment.Thecommitteesarecomprisedofmemberswho,asawhole,havetherequiredknowledge,abilities,expertiseandindependencetoproperlyperformtheirtaskswithinthesecommittees.Commonlyconstitutedcommitteesaretheauditcommitteeandthecompensationcommittee.Theroleoftheauditcommitteeisbasicallytoassistthesupervisoryboardinmonitoringtheintegrityofthefinancialstatementsofthecompany,theindependentauditor’squalifications,theperformanceofthecompany’sinternalauditfunctionandthecompliancebythecompanywithlegalandregulatoryrequirements.Theprimaryobjectiveofthecompensationcommitteeistodischargetheresponsibilitiesofthesupervisoryboardrelatingtocompensationofthecompany’sexecutiveofficers,suchassalaries,stockoptionorotherequityparticipationplans,thetermsofemploymentagreements,severancearrangements,andanyspecialorsupplementalbenefits.Thepurpose,

roleandresponsibilitiesofthecommitteesareoftenlaiddowninspecialcommitteecharters.

Achairmanmaybeelectedonasupervisoryboardtoco-ordinatetheworkwithinthesupervisoryboardanditscommittees,andtochairthemeetings.Thechairmanmaintainsregularcontactwiththemanagementboardandactsasthespokespersonofthesupervisoryboard.Consideringtheamountofinfluencethechairmancanexert,investorsaregenerallykeenondeterminingthechairmanbeforetheyclosetheirinvestment.

Supervisoryboardmembersandthemembersofitscommitteesusuallyreceivecompensationfortheirefforts.Thelevelofcompensationislargelydeterminedbytheresponsibilitiesandscopeoftasksofthespecificmembersofthesupervisoryboardaswellastheeconomicsituationandperformanceofthecompany.Typically,themembersofthesupervisoryboardnominated(andemployed)bytheinvestorsonlyreceivereimbursementofexpensesincurredbytheminconnectionwiththeattendanceofmeetingsofthesupervisoryboard.

C BOARDOBSERVATIONRIGHTSItissometimesimpossibleorinappropriateforaninvestortohavetherighttonominateamemberofthesupervisoryboard,e.g.forreasonsofsizeandcompositionoftheboard,orbecauseoftheamountinvestedbysuchaninvestor.Increasedliabilityrisk(andinsurancepremiums)andcorporategovernancecodes(e.g.theSarbanes-OxleyAct)canofferadditionalreasonsforinvestorsnottorequestorexercisenominationrights.

Investorsthatarenotgivenaseatonthesupervisoryboardmaytrytogetaboardobservationright.Aboardobservationrightentitlestheinvestortohavearepresentative(anobserver)presentattheboardmeetingsandthustocloselymonitorthecompany.Ineffect,thisenablesaninvestortoexertsomeinfluenceatsupervisoryboardmeetings,withoutactuallyhavinganomineeonthesupervisoryboard.

Aboardobserverisnotentitledtovoteatthemeetingsofthesupervisoryboard.Nevertheless,hewillbeentitledtoattendthemeetingsofthecompany’ssupervisoryboardandwillreceivecopiesofallnotices,writtenmaterialsandotherdocumentationprovidedtomembersofthesupervisoryboard,providedthatthecompanymaywithholdinformationorexcludetheobserverfrommeetingswhererequired;forexampletoprotecttheattorney-clientprivilegeor

toprotecthighlyconfidentialinformation.Sinceobserversareusuallynotboundbythesamefiduciarydutiesasthemembersofthesupervisoryboard,theyarerequiredtoenterintoconfidentialityagreementspriortoexercisinganyobserverrights.

D D&OINSURANCEANDINDEMNIFICATIONIncaseswhereaninvestorhasnominatedamembertothesupervisoryboard,heparticularlywantstomakesurethathisnomineeonthesupervisoryboardisproperlyprotectedforliabilityassertedagainsthim.Basically,therearetwowaystoprotectthemembersofthesupervisoryboardandmembersofthemanagementboardagainstsuchliability:firstlybyexecutinganindemnificationagreementandsecondlybytakingoutdirectors’andofficers’insurance(aD&Oinsurance).

Anindemnificationagreementisacontractbetweenthecompanyandamemberofthesupervisoryormanagementboard(adirector)orothersenioremployeesofthecompany(anofficer)specifyingthatthecompanywillcompensatethedirectororofficerforanycostsincurredindefendingthememberagainstalawsuitorsimilarcomplaint,orinsettlingsuchanactionbroughtagainsthim,providedthedirectororofficerhasnotbreachedhisfiduciarydutiesorcommittedfraudorbeenfoundgrosslynegligent.

AtypicalD&Oinsurancepolicyprovidescoverforthecompanyanditsdirectorsandofficersforclaimsarisingfromawrongfulact.However,D&Oinsurancepoliciesgenerallycontainanumberofqualificationsandlimitationsthatnarrowthescopeofcoverage.D&Oinsurancepolicieseitherindemnifythedirectorsandofficers,orreimbursethecompanyforanymoniesithaspaidoutonbehalfofthedirectorsandofficers.

AnindemnificationagreementcanbeadesirableadditiontoaD&Oinsurancepolicy,butshouldnotbeconsideredasaproperreplacementforsuchinsuranceforseveralreasons.First,D&Oinsurancemayinsureagainstliabilitieswhereindemnificationisnotallowedundertheapplicablecorporateandinsurancelaw.Second,duetovariouscircumstances(e.g.changeofmanagers,conductofthedirector),thecompanymaybepermittedbutunwillingtoindemnifytheindividual.Andthird,thecompanymaybeunabletoprovideindemnificationbecauseitisinsolvent.D&Oinsurancepassestheriskandresponsibilityforindemnificationontoathirdparty,theinsurancecompany.

BoardRepresentation: ThesupervisionofthepoliciesbytheManagementBoardandallothertasksanddutiesasassignedtoitwillbeentrustedtothesupervisoryboard(the“SupervisoryBoard”),whichatClosingwillconsistof[___]memberscomprisedof(i)[___]member(s)electeduponthenominationoftheholdersofa[qualified]majorityoftheSeries[ ]Shares(the“Series[ ]Director”),(ii)[___]member(s)electeduponthenominationoftheholdersofthePreferredShares,(iii)[___]electeduponthenominationof[[](the“Founders”)],and(iv)[___]person(s)whohavespecificexpertiseintheCompany’sfieldofbusinesselectedbya[qualified]majorityofallshareholdersandwhoaremutuallyacceptable[totheFoundersandInvestors][totheotherdirectors].

[Inaddition,[name(s)Investor(s)][solongasit[they]hold(s)atleast[___]%ofthe[Series[ ]Shares][outstandingshares]willhavetherighttodesignateoneobservertotheSupervisoryBoard,whowillhavetherighttoparticipateindiscussionsandtoreceiveinformation,butwillnotbeentitledtovote.]

TheSupervisoryBoardwillmeetatleast[quarterly]withintermittentteleconferencingforatleastthefirst[twelve(12)]monthsafterClosing.

TheCompanywillpaythereasonableexpensesincurredbymembersoftheSupervisoryBoardinattendingSupervisoryBoardmeetings,includingcommitteemeetings,orotherwiserepresentingtheCompany.Furthermore,[___]willreceiveanannualretainerof€[___]andaper-meetingfeeof€[___].

[FollowingtheClosing,theSupervisoryBoardwillestablishanauditcommitteeandacompensationcommitteetobecomposedoftheSeries[ ]Directorand[___].Thecompensationcommitteewillberesponsibleforreviewingandapprovingalloptiongrants,aswellascompensationofofficersoftheCompanyandallnon-officeremployeeswhoseannualsalaryexceeds€[___]

TheCompanywill[maintain][takeout]D&Oinsuranceintheamountofatleast€[five(5)]millionperoccurrence.

4.19 VOTINGRIGHTSApartfromsharingintheprofits,itisashareholder’sbasicrighttovoteingeneralshareholdermeetings.Thisvotingrightenableseachshareholdertoparticipateindecisionsconcerningfundamentalcorporateissues.

Inprinciple,eachshareentitlesitsholdertoonevote.Theassumptionofequalityofsharesfurtherentailsthattheholdersofshareshaveequalvotingrightsinproportiontothenominal(par)valueofthesharestheyhold.Nevertheless,inmanyEuropeanjurisdictionsitispossibletohavenon-votingsharesandeventohavedifferentialvotingrights(e.g.doublevotingrights).

Termsheetsmaystatethattheholdersofpreferredshareswillvoteonanas-ifconvertedbasis;thepreferredshareswillthenhaveanumberofvotesequaltothenumberofcommonsharesissuableuponconversionofsuchpreferredshares.Votingonanas-ifconvertedbasisisespeciallyimportantiftheconversionratiohasbeen,ormaybe,adjustedundertheanti-dilutionclause(seesection14–Anti-Dilution,ofthischapter).Asmentionedabove,incertainjurisdictionsvotingrightsareconnectedtotheactualnominalvalueofthesharesinvolved.Suchjurisdictionstypicallydonotallowprovisionsinthearticlesofassociationstatingthatthevotingrightsattachingtocertaintypesofsharesshallbedeterminedasiftheywereconvertedintocommonshares.Inthosecases,itwillhoweverbepossibletoagreecontractually(typicallyintheshareholders’agreement)thatthistypeofas-ifconvertedsystemwillapply.Ifthetermsheetdoesnotprovideforanyadjustmentoftheconversionratio,thereisnoneedtoapplythisas-ifsystem,andpreferredsharesusuallyhavethesamevotingrightsascommonshares.

VotingRights: TheholdersofSeries[ ]ShareswillvotetogetherwiththeholdersofCommonSharesandnotasaseparateclassexceptasspecificallyprovidedhereinorasotherwiserequiredbylaw.[EachSeries[ ]SharewillhaveanumberofvotesequaltothenumberofCommonSharesissuableuponconversionofsuchSeries[ ]Share.][EachSeries[ ]ShareandCommonSharewillhaveonevote.]

4.20 CONSENTRIGHTSTheconsentrightsconstituteoneofthemostimportantcontrolinstrumentsinventurecapitaltransactions.Consentrights(alsoreferredtoas‘protectiveprovisions’)areeffectivelyvetorightsthatinvestorshavewithrespecttocertainactionsbythecompany,whichtheydeemimportant.

Fromalegalperspective,actionstakenbythecompanyarebasedonresolutionsmadebyitsmaincorporatebodies–thegeneralmeetingofshareholders,themanagementboardandthesupervisoryboard.Thepowertomakedecisionsconcerningtheoperationsofthecompanyisvestedinthemanagementboard,whileallpowersbeyondthepurviewofthemanagementorsupervisoryboard,arevestedinthegeneralmeetingofshareholders.Theultimatecontrolinaregularprivatecompanyisexercisedbytheshareholders’meeting,sinceitisentitledtodismissandreplacethemanagement.Intypicalventurecapitaltransactions,theinvestorsholdminoritypositionsandarethusunabletocontrolthevotingprocessinthegeneralmeetingofshareholders.Consentrightsenabletheinvestorstofillthatgap.

Throughtheirconsentrights,investorsareabletoexerttheirinfluencebothatshareholderlevelandatsupervisoryboardlevel.Bysubjectingcertaindecisionsofthegeneralmeetingofshareholderstotheapprovalofthepreferredshares(orofaspecificclassofpreferredshares),theinvestorscreateablockingrightintheirfavour.Blockingrightscanalsobecreatedbysettingtherequiredmajorityofvotesforcertaindecisionsofthegeneralmeetingofshareholdersatsuchahighlevel,thatdefactothesedecisionscannotbeadoptedwithouttheinvestor’sapproval.Decisionssubjecttotheapprovalofpreferredshareholderstypicallyincludetheissuanceofsecurities,paymentofdividends,enteringintoamergerandmakingofanyamendmentstothearticlesofassociation.

Investorsexerttheirinfluenceonmanagementboarddecisionsbysubjectingthemtopriorapprovalofthesupervisoryboard.Thesupervisoryboardnormallyhasapprovalrightswithrespecttothefollowingactionsbythemanagementboard:changingofthenatureofthecompany’sbusiness,approvaloftheannualbudgetandanynon-budgetedexpensesinexcessofapredeterminedamount,conductingofanylitigationonbehalfofthecompany,disposingofcertainassets,andenteringintoanytransactionswithrelatedparties.

Consentrightsarealsooftenreferredtoasnegativecovenants.Anegativecovenantisalegalpromisenottotakeacertainactionwithouttherequiredprior

consent.Asopposedtonegativecovenants,everyventurecapitaltransactionalsoincludes‘affirmativecovenants’.Affirmativecovenantsarepromisesorobligationsusuallymadebythecompanytotakecertainactions(insteadofrefrainingfromtakingcertainactions).Forexample,inthetermsheetprovidedtoNewWaveEnergyaffirmativecovenantsareincludedinthefollowingclauses:InformationRights,UseofProceeds,EmploymentRelationships,KeyManInsurance,FeesandExpenses,andIndemnities.

Sinceconsentrightslimittheauthorityofthemanagementboardandthegeneralmeetingofshareholders,theyareusuallythesubjectofextensivenegotiationbyallconcernedparties.

ConsentRights: [Alternative1:TheCompany’sarticlesofassociationoranyotherconstitutivecorporatedocumentswillbeamendedtocontainrestrictionsmakingcertainresolutionsoftheManagementBoardwithamaterialeffectontheCompany’soperationsormanagementsubjecttothepriorapprovaloftheSupervisoryBoardand/ortheholdersof[PreferredShares][Series[ ]Shares],asthecasemaybe.Inaddition,thesedocumentswillcontainrestrictionsmakingcertainresolutionsofthegeneralmeetingofshareholders(e.g.resolutionsregardingthestructureandcapitalisationoftheCompany)[subjecttothepriorapprovaloftheholdersof[PreferredShares][Series[ ]Shares][subjecttoaqualifiedmajorityofvotes].]

[Alternative2:Theapprovalofa[qualified]majorityoftheSupervisoryBoard[includingtheSeries[ ]Director]and/ortheholdersof[PreferredShares][Series[ ]Shares]and/oraqualifiedmajorityof[twothirds/threefourths]ofthevotesinthegeneralmeetingwillberequiredforthefollowingactions[unlessprovidedforintheannualbudget]:

(i)engagementinanynewlineofbusinessorjurisdictionwheretheCompanyismanagedandcontrolledoranymaterialmodificationofthebusinessplan;(ii)approvaloftheannualbudgetandanynon-budgetedexpensesinexcessof€[___];(iii)implementationofanEmployeeStockOptionPlanandgrantinganyrightsthereunder;(iv)appointmentofemployeeswithayearlysalaryinexcessof€[___];(v)disposaloracquisitionofanysecuritiesinthecapitalofanyothercompanyorestablishmentofanynewbranchorsubsidiaryoftheCompany;(vi)exerciseofvotingrightsintheshareholders’meetingofanysubsidiaryoraffiliate,ifany;(vii)conductofanylitigationonbehalfoftheCompany;(viii)enteringintoaguaranteeorindemnityorotherwisecommittingtheCompany(otherthanintheordinarycourseofbusiness);(ix)provisionofanyloanoradvanceoranycredit(otherthanintheordinarycourseofbusiness)toanyperson;(x)enteringintoanytransactionswithrelatedparties;(xi)changingtheaccountingpolicies;(xii)enteringintoanyagreements,contractsorarrangementsthatarenotofanatarm’slengthnature;and(xiii)undertakinganysuchlegalactsaswillbedeterminedandclearlydefinedbytheSupervisoryBoardandnotifiedtotheManagementBoardinwriting.

Theapprovalofa[qualified]majorityofthe[PreferredSharesvotingtogetherasaclass][Series[ ]Shares]and/oraqualifiedmajorityof[twothirds/threefourths]ofthevotesinthegeneralmeetingwillberequiredforthefollowingactions:(i)issuanceofanysecurities(includinginstrumentsconvertibleintosecuritiesandtheissuanceofsubordinated

debt);(ii)declarationand/orpaymentofanyandalldividendsbytheCompany;(iii)enteringintoanymerger,consolidation,recapitalisation,changeofcontrol,orsaleofallorsubstantiallyalloftheassetsoftheCompany;(iv)undertakingofanyfilingforbankruptcy,insolvencybyoragainsttheCompany;(v)engagementinanytransactionthatconstitutesadeemeddividendaccordingtotherelevanttaxlaws;and(vi)makingofanyamendmentstothearticlesofassociation/charter/bylawsoftheCompanythatadverselyimpactthe[PreferredShares][Series[ ]Shares],includingbywayofmerger,consolidationorotherwise.]

4.21 REGISTRATIONRIGHTS

A INTRODUCTIONTheregistrationrightsclausedealswithregistrationofthecompany’sshareswiththeU.S.SecuritiesandExchangeCommission(theSEC)sothattheycanbelistedandtradedonaU.S.stockexchange.IntheU.S,sharesmaynotbesoldtothepublicunlesstheyareregistered(oranexemptionfromregistrationisavailable).Sharesareregisteredbypreparingaregistrationstatement(whichincludesaprospectus)thatmustbefiledwiththeU.S.SecuritiesandExchangeCommission(theSEC).Thecompanymustpreparetheregistrationstatementandvouchfortheinformationcontainedwithinit.Consequently,itisimpossibleforinvestorstoregistershareswithouttheco-operationofthecompany.

Sinceasaleofthecompany’ssharestothepublicisanimportantexitopportunityforinvestors,theywillatsomepointintimewanttohavetherighttoensurethatallnecessaryactionsareundertakentoenablesuchasale.Aregistrationrightsclausedealswiththismatter.Itdetermineswhetherandunderwhatcircumstancesinvestorshavetherighttodemandregistration.Italsodealswiththemostimportantissuerelatingtoregistration.AregistrationrightsclauseisstandardpracticeinU.S.termsheets.OutsidetheU.S.itislesscommon.

B DEMANDREGISTRATIONVERSUSPIGGYBACKREGISTRATION

Basically,therearetwotypesofregistrationrights:demandregistrationrightsandpiggybackregistrationrights.Ademandregistrationrightistherightofaninvestortodemandthathissharesberegistered.Thisgivesaninvestorcontroloverthetimingofaregistrationandineffectmeansthattheinvestorcanforcethecompanytogopublic.Apiggybackregistrationrightgrantsinvestorstherighttoincludetheirsharesinaregistrationinitiatedbyanothershareholderorthecompany.

Piggybackregistrationrightsarelesspowerfulthandemandregistrationrights.Theydonotgiveinvestorstherighttoinitiatearegistration.Investorsonlyhavetherighttofollowintheprocessinitiatedandcontrolledbyothersanditisnotintheirpowertoforcethecompanytogopublic.However,whereasthenumberoftimesthatademandregistrationrightcanbeexercisedisusuallylimited,piggybackregistrationrightsclausesnormallydonotcontainalimitationonthenumberoftimestheclausemaybeinvoked.

C DEMANDREGISTRATIONThedemandregistrationclauseattheendofthischaptermentionstwopointsatwhichregistrationmaybedemanded:(i)acertainperiodoftimeaftertheclosingoftheinvestmentinthecompany,and(ii)acertainperiodoftimeafteranIPOofthecompany’sshares.Ifitissoagreed,investorscandemandregistrationacertainperiodoftimeafterclosing(forexamplefiveyears).Ineffect,thismeanstheinvestorscanforcethecompanytogopubliconcethatperiodhaselapsed.Asstatedabove,anIPOisanimportantexitopportunityforinvestorsandconsequentlyinvestorsprefertohavetherighttoforcethecompanytogopublicafteracertainpassageoftime.Fromthecompany’sperspective,however,anIPOmaynotnecessarilybeveryattractive.If,forexample,thecompanybelievesithasnotattainedsufficientmaturitytogopublic,aprematureIPOmaylimititspossibilitiestoobtainfundsinthefuture.Furthermore,publiclylistedcompaniesaresubjecttofarmoreburdensomeregulationsthannon-publiccompanies.Thecompanywilltherefore,normally,seektogopubliconlyifitbelievesthecircumstancesareright.BecausethesupportofthecompanyandtheboardisimportantforasuccessfulIPO,registrationrightsarerarelyexercised.Theycanhoweverprovidetheinvestorsleverageindiscussionsonexitopportunities.Duringthenegotiationsbetweenthecompanyandtheinvestors,abalancewillhavetobefoundbetweentheinterestsoftheinvestorsandtheinterestsofthecompany.

interestsoftheinvestorsandtheinterestsofthecompany.

ThesecondpointatwhichregistrationmayusuallybedemandedisseveralmonthsafteranIPOofthecompany’sshares.Sincethisdoesnotentailtherightoftheinvestorstoenforcesuchamove,thisissuedoesnotusuallygiverisetoanydiscussionbetweeninvestorsandthecompany.MosttermsheetssettheperiodafterwhichregistrationmaybedemandedatsixmonthsaftertheIPO.

Registrationisacostlyandtime-consumingaffair.Consequently,itisusuallyagreedthatthecompanywillundertakeallactionsnecessaryforregistrationonlyifacertainspecifiedpercentageoftheregistrablesharesareinvolvedandthevalueofsuchsharesexceedsapredeterminedamount.Thenumberoftimesthatregistrationmaybedemandedisalsousuallylimited.Thefrequencydependsonseveralfactors,suchasthenumberofregistrablesharesandtheliquidityofthemarket.Iftherearealargenumberofregistrableshares,itmaybewisetoavoidfloodingthemarketbyregisteringallsharesatthesametime.Insuchcases,itmaybeappropriatetodecidethatregistrationmaybedemandedmoretimesthaninothercases.Thesamemayapplyincaseswhereasmallernumberofsharesareofferedbutthemarketisdeemedrelativelyilliquid.

Thefinalsentenceinthedemandregistrationclausebelowdealswithsituationswhere,forexample,thenumberofsharesofferedpursuanttotheexerciseofademandregistrationrightistoolargeintheopinionoftheunderwriters.Insuchsituations,thenumberofsharesonoffermaybelimited(acutback).Theaforementionedsentencedeterminesthattheinvestorsinvokingthedemandregistrationrightwillhavepriorityinofferingtheirsharesoverothershareholderswhowishtoregistershares(suchasinvestorsinvokingapiggybackregistrationright–seebelow).

D REGISTRATIONONFORMS-3ForacompanythathasalreadyfiledaregistrationstatementwiththeSECinthepastandcomplieswithallrequirementsrelatingtotheregistrationofitssecurities,itseemsonlylogicalthatanewregistrationofsecuritiesshouldbelessburdensomeandrelativelylessexpensivethantheinitialregistration.AregistrationonFormS-3isintendedforsuchcases.

AregistrationonFormS-3isconsideredashortformregistrationandismuchlessburdensomeandmuchcheaperthanonFormS-1,whichisusedforanIPOorwhenacompanyisnoteligibletouseFormS-3.ThereareanumberofrequirementsthatacompanymustmeettouseFormS-1.Oneofthemandatoryqualificationcriteriaforthistypeofregistrationisthatthecompanyinquestion

qualificationcriteriaforthistypeofregistrationisthatthecompanyinquestionmusthaveoffereditssharesinanIPOthattookplaceatleastoneyearbeforethepresentS-3registration.

E PIGGYBACKREGISTRATIONMosttermsheetscontainapiggybackregistrationclause.Asstatedearlier,suchclausesgrantinvestorstherighttoincludetheirsharesinaregistrationinitiatedbyanothershareholderorthecompany.Inviewofthefactthatthereisnolimittothenumberofsharesthatmayberegisteredandthemarginalcostsofregisteringadditionalsharesarerelativelylow,companiesseldomobjecttograntingpiggybackregistrationrights.

Demandregistrationrightsusuallyhavepriorityoverpiggybackregistrationrights.Piggybackregistrationclausesthereforegenerallycontainlimitationsontherighttosellsharesincertainofferings.Forexample,iftheunderwriterdeterminesthatthemarketcanonlyabsorbalimitednumberofshares,thepiggybackregistrationrightsclausewillusuallyprovideforalimitationorevenexclusionofthesharesofferedunderthisclauseinfavourofsharesofferedpursuanttotheexerciseofdemandregistrationrights.Unlikedemandregistrationrightsclauses,piggybackregistrationrightsclausesnormallydonotcontainalimitationonthenumberoftimestheclausemaybeinvoked.

F TRANSFEROFREGISTRATIONRIGHTSThefactorsgoverningtransferofregistrationrightsvaryfromtransactiontotransaction.Incertaintransactions,itmaybeimportantforinvestorstohavetheoptiontofreelytransfertheirrightstoanothercompany,forexampleagroupcompany.Inothertransactions,transferrightsmaybelessimportanttoinvestorsandmaybeobjectionablefromthecompany’spointofview.Thecompanymayalsoonlyaccepttransferrightsifthetransfereeobtainsacertainminimumamountofshares.

G EXPENSESUndernormalcircumstances,thecompanywillpaytheregularfeesandexpensesrelatingtotheregistration(filingfee,printingcosts,accountant’sfees,etc.)Whetherornotthecompanywillalsopay(apartof)thefeesandexpensesoftheinvestors’legalcounsel,varies.Often,thecompanyandtheinvestorsagreethatthecompanywillbearthereasonablefeesandexpensesofonelegalcounselrepresentingallregisteringshareholders.Oftensuchfeesandexpenses

arecapped.Underwritingdiscountsandcommissionsandtransfertaxesareusuallybornebytheinvestors.

H LOCK-UPInmostIPOs,underwritersrequirethelargestshareholdersanddirectorsofthecompanytoagreetoalock-upperiodofsixmonthsfollowingtheIPO.Duringthatperiodtheymaynotsellortransfertheirshares.Registrationrightsclausesusuallycontainaprovisionstatingthatinvestorsandmembersofthemanagementboardandsupervisoryboardwillagreetosuchalock-upperiod.Veryoftenthesixmonthslock-upperiodisfollowedbyanadditionalperiodofsixmonthsduringwhichtheinvestorsareonlyallowedtoselltheirsharesinblocktradesorganizedbythesupportinginvestmentbanks.Thispreventsinvestorsfromdumpingtheirsharesandnegativelyinfluencingtheshareprice.

I OTHERREGISTRATIONPROVISIONSThetermsheettypicallycontainsonlythemostimportantissuesrelatingtoregistrationrights.Afterthetermsheethasbeensigned,theseissuesareusuallydealtwithmoreextensivelyinaseparateagreement(usuallyreferredtoastheRegistrationRightsAgreement)tobeenteredintobythecompanyormajorityshareholdersontheonehand,andtheinvestorsontheother.

J EQUIVALENTRIGHTSTheprovisionsofaregistrationrightsclausedealwiththeU.S.conceptofregistration.Bydeterminingthataninvestorhastherighttodemandsuchregistration,heisgrantedtheopportunitytocreateanexitbyofferinghissharestothepublic.In(themany)caseswhereapublicofferingintheU.S.would,forwhateverreasons,notbeappropriate,investorswillstillwishtohavetheopportunitytocreateanexitbyofferingtheirsharestothepublicinanothercountry.Sometimesanequivalentrightsclauseisincluded,toprovidetheinvestorssuchapossibility.

RegistrationRights: [Alternative1:Theholdersof[PreferredShares][Series[ ]Shares]willhavenormalregistrationrightsincludingdemandregistrationrights,[unlimited]‘piggyback’registrationrights,S-3registrationrights,transferofregistrationrights,proportionate

underwritercutbacks,andothertypicalregistrationrights,allattheexpenseoftheCompany.Theregistrationrightsofall[PreferredShares][Series[ ]Shares]willbethesame.]

[Alternative2:AllCommonShares[issuedor]tobeissueduponconversionofthe[PreferredShares][Series[ ]Shares]willbedeemed“RegistrableSecurities”.

DemandRegistration:Upontheearliestof(i)[three-five]yearsaftertheClosing;or(ii)[six]monthsfollowinganinitialpublicoffering(“IPO”),personsholding[30-50]%oftheRegistrableSecuritiesmayrequest[one][two](consummated)registrationsoftheirsharesbytheCompany.Theaggregateofferingpriceforsuchregistrationmaynotbelessthan€[___]million.IntheeventofanycutbacksbytheCompanyand/oritsunderwriters,sharestoberegisteredbyholdersofRegistrableSecuritieswillhavefirstpriorityforregistration.

RegistrationonFormS-3:Theholdersof[10-30]%oftheRegistrableSecuritieswillhavetherighttorequiretheCompanytoregisteronFormS-3(ifavailableforusebytheCompany)RegistrableSecuritiesforanaggregateofferingpriceofatleast€[___]million.TherewillbenolimitontheaggregatenumberofsuchFormS-3registrations,providedthattherearenomorethan[two]peryear.

PiggybackRegistration:TheholdersofRegistrableSecuritieswillbeentitledto‘piggyback’registrationrightsonallregistrationstatementsoftheCompany,subjecttotheright,however,oftheCompanyanditsunderwriterstoreducethenumberofshares

underwriterstoreducethenumberofsharesproposedtoberegisteredtoaminimumof[30]%onaproratabasisandtocompletereductiononanIPOattheunderwriter’sdiscretion.Inallevents,thesharestoberegisteredbyholdersofRegistrableSecuritieswillbereducedonlyafterallothershareholders’sharesarereduced.

Transferofregistrationrights:Theregistrationrightsmaybetransferredtoatransferee(otherthantoacompetitoroftheCompany)whoacquiresatleast€[___]ofthesharesheldbyaholderof[PreferredShares][Series[ ]Shares].[TransferofregistrationrightstoagroupcompanyofanyInvestorwillbewithoutrestrictionwithregardstominimumshareholding.]

Expenses:Theregistrationexpenses(exclusiveofsharetransfertaxes,underwritingdiscountsandcommissions)willbebornebytheCompany.TheCompanywillalsopaythereasonablefeesandexpenses[nottoexceed€___,]ofonespecialcounseltorepresentalltheparticipatingshareholders.

Otherregistrationprovisions:Otherprovisionswillbecontainedintheregistrationrightsagreementwithrespecttoregistrationrightsasarereasonable,includingcross-indemnification,theCompany’sabilitytodelaythefilingofthedemandregistrationforaperiodofnotmorethan120days,theagreementbyholdersof[PreferredShares][Series[ ]Shares]ifrequestedbytheunderwriterinapublicofferingnottosellanyunregisteredsharestheyholdforaperiodofupto120daysfollowingtheeffectivedateofthe

RegistrationStatementofsuchoffering,theperiodoftimeduringwhichtheRegistrationStatementwillbekepteffective,underwritingarrangementsandthelike.[TheregistrationrightswillapplyexclusivelytoCommonSharesissueduponconversionof[PreferredShares][Series[ ]Shares]andtheCompanywillhavenoobligationtoregisteranofferingofanyothershares.]

Ifsorequestedbythemanagingunderwriter,theholdersofPreferredShareswillreachanagreementwithregardtotheIPOnottosellortransferanyCommonSharesoftheCompany[(excludingsharesacquiredinorfollowingtheIPO)]foraperiodofupto180daysfollowingtheIPO(providedalldirectorsandofficersoftheCompanyand[1–5]%shareholdersagreetothesamelock-up).]

[Intheeventthatthepublicofferingasreferredtointhis‘RegistrationRights’clausewillorhastakenplaceonastockexchangeoutsidetheU.S,thentheholdersofRegistrableSecuritieswillbeentitledtoregistrationrightsequivalenttotherightsandobligationscontainedinthis‘RegistrationRights’clause(orasequivalentaspossiblegivendifferencesinapplicablelaw).]

4.22 REPRESENTATIONSANDWARRANTIESRepresentationsandwarrantiesarecontractualguaranteesaffordedtoabuyerbythesellerregardingthenatureandqualityofthegoodssold.Inthecontextofventurecapitalfinancing,therepresentationsandwarrantiesareclausesusuallycontainedintheinvestmentagreementinwhichthecompanyand/ortheexistingshareholdersprovideassurancestotheinvestorsregardingthestatusofthebusinessandothermatters,suchasthecompany’scapitalisation,keypersonnel,financialsituation,liabilities,ownership,intellectualproperty,andcompliancewithallrelevantlaws.

withallrelevantlaws.

Representationsandwarrantiesserveavarietyofpurposes.Oneimportantuseforrepresentationsandwarrantiesisthatofadiscoverytool;itisamethodbywhichtheinvestorforcesthecompanytocarefullyconsiderthenatureofitsbusiness,togaugewhatitknowsaboutitsbusinessandtechnology,andtorevealthosefactsondisclosureschedulesthatsupporttherepresentationsandwarranties.

Warrantiescanbegivenjointlyorjointlyandseverally.Onlyinthelattercaseiseachguarantorliableforthewholeamount.

Ifthetermsheetisabindingdocument(whichisusuallynotthecase,seesection44–Non-BindingCharacter,ofthischapter),representationsandwarrantiesalsoprovidetheinvestorwiththeoptiontowalkawayiftheduediligenceprocessbetweenthesigningofthetermsheetandtheclosingoftheinvestmentdoesnotbearoutthepromisessetoutinthebusinessplan.Insucheventthetermsheetwillcontainaconditionprecedentinfavouroftheinvestorthatallowstheinvestortoterminatetheinvestmentprocessifitisdeterminedthattheresultsoftheduediligencehavenotconfirmedtheassumptionsoftheinvestorsregardingthestatusofthecompany(seesection46–ConditionsPrecedent,ofthischapter).Ifthetermsheetisanon-bindingdocument,itisgenerallynotnecessarytocreatealegalframeworkforbreakingoffnegotiations.

Perhapsthemostimportantaspectofrepresentationsandwarranties,however,istheiruseasariskallocationdeviceforunknownfactors.Theydeterminewhowillbeartheriskofliability(whowillgivetheguarantees?)andtowhatextent(whataretheguaranteesandwhataretheconsequencesofabreach?).Warrantiesareprovidedforunknownliabilities.Ifatthetimeofsigning,thereareindicationsthatawarrantyhasalreadybeenbreached,thenaspecificindemnificationclauseshouldbeincludedinthesubscriptionagreementforthebenefitoftheinvestor.Thisisfortworeasons:(i)thresholdsandcapsusuallydonotapplywithrespecttospecificindemnities(whichmakessenseiftheclaimisknownbeforehand);and(ii)undersomejurisdictionsyoulosetherighttoclaimunderawarrantyifyouknewbeforehandtherewasabreach.

Thetermsheetwillmakeclearwhichpartiesarerequiredtoprovidethewarranties.Insomecases,thecompanyistheonlypartyprovidingthewarranties.Thisisnotalwaysthepreferredsituationforinvestors.Insomejurisdictionsthereisariskthatwarrantiesgrantedbythecompany,inrelationto

jurisdictionsthereisariskthatwarrantiesgrantedbythecompany,inrelationtoaninvestmentinthecompany,willbeconsideredbeyondthescopeofthecompany’sobjectsclauseandwillthereforebenullandvoid.Furthermore,indemnificationincaseofbreachofwarrantiesgrantedbythecompanywillbepaid(atleastpartly)outoftheinvestor’sownpockets,sincehewillbeoneoftheshareholders.Finally,ifthebreachof(oneormore)warrantiesissomaterialthatthesharesofthecompanyhavebecomepracticallyworthless(e.g.duetofraudulentactsorsevereintellectualpropertyissues)thecompanywillnotbeabletopayanyindemnificationandtheinvestorwillhavenorecourseatall.

Inothercases,allorsomeoftheexistingshareholdersarerequiredtoprovidewarranties.Financialshareholders,suchasthepreferredshareholdersfromearlierroundsusuallyobjecttograntingafullsetofwarranties.Theywillarguethat(i)theyarenotinvolvedonanoperationallevelandthereforecannotbereasonablyexpectedtograntwarrantiesrelatingtotheoperation;and(ii)theirinvestmentfundsaresetupforalimitedperiodoftimeandmaywellbeliquidatedbeforetheexpirationofthewarranties.Sometimestheyendupgrantingonlyalimitedsetofwarranties,orawarrantyinsuranceisused.Inearly-stagecompanies,wherethefoundershavebeencloselyinvolvedinthebusinessofthecompany,oreveninalater-stagecompanywheretheyholdalargepercentageoftheoutstandingcapital,investorsmayinsistthatthefoundersalsomaketherepresentationsandwarrantiespersonally.Suchapersonalwarrantyofferstheinvestorsomeextraprotectioniftheguarantor(i.e.thelegalentityofthefoundergrantingthewarranties)appearstobeanemptyshell.Otherformsofsecurityforbreachofwarrantiestoaskfromtheguarantorsareverylimited.Inaregularsharepurchasetransaction,partofthepurchasepriceisusuallypaidintoanescrowaccounttogivethepurchasersomeprotectionagainstbreachofwarranty;inventurecapitaltransactionshowever,thefullpurchasepriceistransferreddirectlytothecompany(leavingasideanymilestonepayments).Theoretically,arightofpledgeonthesharesheldbytheguarantorscouldserveassecurityfortheinvestor,butthisisrarelyseeninpractice.Firstly,itisquiteahassletoeffectandsecondly,itdoesnotprovideanyprotectionagainstbreachesthataresomaterialthattheyrenderthepledgedsharesworthless.

Furtherallocationoftheriskofliabilityunderthewarrantieswillingeneralnotbesetforthinatermsheet,butintheinvestmentagreement.Thiswillbecomeasubjectofnegotiationwhenthefirstdraftofsuchagreementisdistributedtotheparties.Nevertheless,notalltermsheetsarealike,andsomemayincluderatherextensiverepresentationsandwarrantiesclauses.Insuchcases,itisimportantto

extensiverepresentationsandwarrantiesclauses.Insuchcases,itisimportanttounderstandthemostimportantaspectsofrepresentationsandwarrantiesatthetermsheetstage.

Asarule,whilenegotiatingtheriskallocatingfactorsintherepresentationsandwarranties,theinvestorwillseektoimplementanabsolutewarranty.Thecompanyontheotherhand,willtrytolimitthewarrantytoknownfacts,orbyaddingqualifyingphrasessuchas“tothebestknowledge,informationandbelief”or“afterdueinquiry”.Furthermore,theinvestorswilltrytouseexpandeddefinitionsofthewarrantiesinordertobroadentheirscope,whilethecompanywilltrytonarrowthedefinitionsdownasmuchaspossible.Claimsbasedoninformationthatwasfairlydisclosedduringtheduediligenceinvestigationaresometimesexcludedfromthescopeofthewarranties.

Usingindemnificationclauses,theinvestorsseektoobtaintheultimateprotectionagainstacompany’sbreachofarepresentationornon-fulfilmentofacovenant,oragainstliabilitiesthatarosepriortoclosing.Thecompany,ontheotherhand,attemptstolimittheinvestors’indemnificationrightsinseveralways,e.g.byimplementingthresholdsorbasketsrequiringthatonesingleclaimand/ortheaggregateclaimsmustexceedacertainlevelbeforerecoverywillbecomeavailable,andaceilingorcap,amaximumaggregateamountforallclaimsfordamages(usuallytheamountinvestedbyeachinvestororapercentagethereof).Finally,thecompanywilltrytorestricttheperiodduringwhichtheinvestorshavetherighttoclaimsuchdamagesasmuchaspossible.

RepresentationsandWarranties:

Theinvestmentagreementoraseparaterepresentationandwarrantiesagreementwillincludestandardrepresentationsandwarrantiesgrantedbythe[Company][Founder][ManagementBoard][andexistingshareholders],[including,butnotexpresslylimitedto:(i)organisationandgoodstanding;(ii)capitalisationstructure;(iii)dueauthorisation;(iv)validshareissuance;(v)governmentalconsents;(vi)nocompanylitigation;(vii)ownershiporexclusivelicenseofintellectualpropertyrights;(viii)employees;(ix)pensionplans;(x)assurancesoffulldisclosureandaccuracyofinformationprovided;(xi)goodtitletoallassets;(xii)tax;

provided;(xi)goodtitletoallassets;(xii)tax;(xiii)accuracyoffinancialstatements;(xiv)absenceofadversedevelopments;and(xv)materialcontracts].

4.23 INFORMATIONRIGHTSInordertobeabletomonitorthecompanyduringtheperiodofitsinvestment,aninvestorwillrequirecertainspecificfinancialandoperationalinformationofthecompany.Ifaninvestorisaminorityshareholderandisneitherrepresentedonthesupervisoryboardnorhasaboardobservationright,hewillonlyhavelimitedaccesstothecompany’sinformation,oftentoolittletoadequatelymonitorthecompany’sbusinessprocessesandprogress.

Theinformationrightsrequiredbyinvestorsmayincludetherightto(i)consultwithandadvisethemanagementofthecompanyonsignificantbusinessissues,and/or(ii)examinethebooksandrecordsofthecompanyandinspectitsfacilitiesand/or(iii)requestspecificinformation.Furthermore,theinvestorsmaywanttoreceivecertainpre-agreedmonthly,quarterlyand/orannualfinancialandoperationalinformationand,ifaninvestorisnotrepresentedonthesupervisoryboard,copiesofallnotices,minutes,consentsandothermaterialconnectedwithsuchboardmeetings.

Theobligationtoprovideaccesstoanyinformationofthecompanymaybelimitedinordertopreservehighlyconfidentialproprietaryinformationortoprotecttheattorney-clientprivilege.Inordertoavoidimpracticalandburdensomedisclosurerequirementsonthepartofthecompany,thegroupofshareholderswhomayhavesuchinformationrightsmayalsobelimited.Thiscanbedone,forexample,bylimitingsuchaccesstoshareholdersholdingacertainminimumnumberof(preferred)shares.Forobviousreasons,shareholdersthatarecompetitorsofthecompanywillusuallybeexcludedfromthegroupofshareholderswithextensiveinformationrights.

Accesstothecompany’sinformationisnormallyterminatedwhenacompanyispreparingforlistingatastockexchange(e.g.sixtydayspriortotheestimatedfilingdateforanIPO)inordertocomplywiththeapplicablesecuritieslaws.

InformationRights: [AnyholderofSeries[ ]Shares][Aslongastheholdersof[PreferredShares][Series[ ]

Shares][(providedthattheyarenotacompetitoroftheCompany)]continuetoholdatleast[___][PreferredShares][Series[ ]Shares],they]willbegrantedaccesstoCompanyfacilitiesandpersonnelduringnormalbusinesshoursandwithreasonableadvancenotification.TheCompanywilldelivertosuchshareholder(s)(i)un-auditedfinancialstatementswithin120daysaftertheendofthecalendaryear;(ii)quarterly[andmonthly]financialstatementswithin20daysaftersuchperiod,andotherinformationasdeterminedbytheSupervisoryBoard;(iii)thirtydayspriortotheendofeachfiscalyear,acomprehensiveoperatingbudgetforecastingtheCompany’srevenues,expenses,andcashpositiononamonth-to-monthbasisfortheupcomingfiscalyear;and(iv)promptlyfollowingtheendofeachquarter,anup-to-datecapitalisationtable,certifiedbytheCFO.TheforegoingprovisionswillterminateuponaQualifiedOffering.

4.24 USEOFPROCEEDSMostfinancingroundsresultinthecompanyreceivingsubstantialamountsofmoney.Itisofgreatimportancetotheinvestorsthatthecompanyusetheseamountsinlinewiththeagreedbusinessplansandbudget,andnotforpurposessuchastheservicingofexistingdebtobligations(e.g.immediatelyaftertheclosing).Investorsgenerallyhavetheabilitytoinfluencethecompany’sspendingusingtheirconsentrightinthesupervisoryboardandpreferredshareholders’meeting.Nevertheless,veryofteninvestorswanttohaveaspecificguarantee(orcovenant)fromthecompanythatitwillusetheproceedsfromtheinvestmentroundinaccordancewiththeagreedplansandbudget.SuchacovenantissetoutinaUseofProceedsclause.Theseclausestypicallydefineingeneralwordingthattheproceedsoftheroundaretobeusedas‘workingcapital’,ormorespecifically,“fortheexpansionofthecompany’sbusiness,developmentofnewproducts,marketingofitsproducts,orachievementofinitialrevenue”.Iftheuseofproceedsislinkedtomilestones,theinvestorsare

abletomonitorthecompany’sspendingafterclosingevenbetter.

UseofProceeds: TheCompanywillapplythenetproceedsofthesaleoftheSeries[ ]SharestotheInvestorsexclusivelytothedevelopmentandoperationoftheCompanyinaccordancewithabusinessplan(includingkeymilestones)anda12-monthbudgettobe[agreeduponbytheCompanyandtheInvestors][approvedbytheInvestors]priortoClosing.

4.25 PREEMPTIVERIGHTSApreemptiverightclausedescribesashareholder’srighttopurchasehisprorataportionofanyissuanceofsharesorothersecuritiesatthesamepriceandonthesametermsandconditionsasapplicabletootherbuyersofsuchsecurities.Thepreemptiverightenablestheexistingshareholderstomaintaintheirfractionalownershipofthecompany.

InmostEuropeancountries,apreemptiverightisautomaticallyprovidedtotheshareholdersbylaw.Itmaybeexcludedinthearticlesofassociationorlimitedtoholdersofthesameclassofsharestobeissued(ageneralexclusion)orbyresolutionofthegeneralmeetingofshareholdersifthearticlessopermit(aspecificexclusion).Insteadofexcludingthepreemptiveright,shareholdersmayalsoagreeinadvance(e.g.intheshareholders’agreement)thattheywillwaivetheirpreemptiverightundercertaincircumstances.IntheUSontheotherhand,apreemptiverightisnotautomaticallyprovidedtotheshareholdersbylaw.Instead,thepreemptiverightsareonlyconsideredvalidifexplicitlyagreedbetweenthecompanyanditsshareholders(i.e.inashareholders’agreementoraninvestors’rightsagreement).Itisahighlynegotiatedrightandisusuallyprovidedonlytoafewselect(major)investors,toavoidunduecomplicationofsubsequentfinancingroundsasalsotoensurethatacertainnumberofsecuritiesofferedinsubsequentroundswillbeavailableforpurchasebynewinvestors.

Usually,thecompanyanditsshareholdersagreetoexcludecertainissuancesofsecuritiesfromthepreemptiveright.Theseexclusions,orcarve-outs,areinteraliatoallowthecompanytocomplywiththeemployeestockoptionplanortofacilitateproperexecutionofamergerorIPO.Theseandothersuchcarve-outs

aresetoutinmoredetailinthelastparagraphofthePreEmptiveRightclausebelowandaresimilarlyapplicabletotheanti-dilutionprotection(seesection14–Anti-Dilution,ofthischapter).

Apreemptiverightisalsoreferredtoasarightoffirstoffer,preemptionright,subscriptionprivilege,rightoffirstrefusalatissuanceorsubscriptionright.

Keepinmindthat,evenifaspecificexclusionofpreemptiverightsisallowedaccordingtothearticlesofassociation,somejurisdictionsapplyprinciplesofgeneralcorporatelaw–suchasequalrightsforallshareholders–whichcallforadditionaljustificationforthisdifferentialtreatment.Ifflexibilityisrequiredinrespectofpreemptiverights,makesuretheshareholdersagreementandarticlesprovideanadequatebasisforsuchflexibility.

PreemptiveRights: Withoutprejudicetothe‘Anti-Dilution’clause,iftheCompanyproposestoofferequitysecurities,orsecuritiesconvertibleintoorexchangeableforshares,theholdersof[PreferredShares][Series[ ]Shares]willbeentitledtopurchase(…)[Alternative1:(…)onaproratabasisalloranyportionofsuchsecurities.Anysecuritiesnotsubscribedforbyaholderof[PreferredShares][Series[ ]Shares]maybereallocatedamongtheotherholdersof[PreferredShares][Series[ ]Shares].Ifholdersof[PreferredShares][Series[ ]Shares]donotpurchaseallofsuchsecurities,theportionthatisnotpurchasedmaybeofferedtotheothershareholdersontermsnotlessfavourabletotheCompanyforaperiodof[60]days.]

[Alternative2:(…)suchsecuritiesinanamountsufficienttoallowtheholdersof[PreferredShares][Series[ ]Shares]toretaintheirfullydilutedownershipoftheCompany.]

[Thepreemptiverightwillnotapplyintheeventofissuancesof(i)CommonSharesissued

eventofissuancesof(i)CommonSharesissuedorissuabletoemployees,consultantsordirectorsoftheCompanydirectlyorpursuanttotheESOP(assetoutinthe‘EmployeePool’clause)thathavebeenapprovedbytheSupervisoryBoard;(ii)CommonSharesissuedorissuableuponconversionofthePreferredShares;(iii)CommonSharesissuedorissuableinconnectionwithamerger,acquisition,combination,consolidationorotherreorganisationinvolvingtheCompanyapprovedbytheSupervisoryBoardoftheCompany;(iv)CommonSharesissuedorissuableinconnectionwith(a)anyborrowingsfromacommerciallendinginstitution,(b)theleaseofequipmentorpropertybytheCompany,or(c)strategicpartnershipsand/orlicensingrelationships,solongassuchtransactionsareapprovedbytheSupervisoryBoard;and(v)CommonSharesissuedorissuable(a)inapublicofferingbeforeorinconnectionwithwhichalloutstandingPreferredShareswillbeconvertedtoCommonSharesor(b)uponexerciseofwarrantsorrightsgrantedtounderwritersinconnectionwithsuchapublicoffering.]

4.26 RIGHTSOFFIRSTREFUSALArightoffirstrefusalisarightofashareholdertomeetthetermsofathirdparty’sofferifanothershareholderintendstosellhissharestosuchthirdparty.Thepurposeoftherightoffirstrefusalistokeepthecompany’ssharesinfriendlyhands,andtoallowtheexistingshareholderstobenefitfromasaleofcompanysharesiftheyareofferedatanattractiveprice.

Negotiationsregardingtherightoffirstrefusalclauseusuallyfocusontwoimportantelementsoftheclause:theshareholdersholdingtherightoffirstrefusal,andtheshareholdersgrantingit.The(common)sharesheldbythefoundersandkeyemployeesareusuallyfullysubjecttoarightoffirstrefusalor

evenalock-upperiod,duringwhichtheyarenotallowedtobesoldatallwithouttheinvestors’approval(seesection32–Founders’Shares,ofthischapter).Investorsintheircapacityasholdersofpreferredsharestypicallyinsistonhavingarightoffirstrefusal,butmayresistgrantingitbecauseofitsnegativeeffectonthemarketabilityoftheshares.Futurebuyersmaybereluctanttomakeanofferforsharesthataresubjecttoarightoffirstrefusalunlesstheyreceiveadiscountuponeventualpurchaseorarepromisedsomekindofcompensationifandwhentherightisexercised.

Therightoffirstrefusalshouldbereadinconjunctionwiththeco-saleright(seesection27–Co-SaleRight,ofthischapter)anddrag-alongright(seesection28–Drag-AlongRight,ofthischapter),sinceinmostcasesathirdpartywillonlybeinterestedinbuyingallofthecompany’ssharesandnotonlyaportionthereof.

Sometimesarightoffirstrefusalclausealsoprovidesforaforfeitureofsuchrightifnotallsharessoofferedaresubscribedfor.Thesellingshareholderisthenfreetosellall,butusuallynotlessthanall,ofthesesharestotheproposedbuyer.

Thepricepayableforthesharesofferedundertherightoffirstrefusalisgenerallythepriceatwhichthepotentialbuyerispreparedtopurchasetheshares.Sometimeshowever,thispriceisdeterminedbytakingthelowerof(i)thepriceofferedbythepotentialbuyerand(ii)themarketvalue,asdeterminedbyanindependentexpert.

Exceptionstotherightoffirstrefusalgenerallyapplytotransfersapprovedbya(qualified)majorityofthegeneralmeetingofshareholdersortransfersbyaninvestortoamemberofhisgroup.Rightsoffirstrefusalnormallyterminateuponapublicofferingorsaleofthecompany.

Arightoffirstrefusalisusuallysetoutinashareholders’agreementorinaseparaterightoffirstrefusalandco-saleagreement,butitmayalsobeincludedinthearticlesofassociationofthecompany.IncertainEuropeanjurisdictionsspecificlegalrequirementsmayapply.Arightoffirstrefusalisalsoreferredtoasapreemptiveright.Inthisbookhowever,thetermpreemptiverightwillsolelybeusedinthecontextofarighttopreemptincaseofnewshareissuesbythecompany.

RightsofFirstRefusal: [Holdersof[PreferredShares][Series[ ]Shares]][TheCompanyfirstandholdersof[PreferredShares][Series[ ]Shares]second(orviceversa)]havearightoffirstrefusalwithrespecttoany[share(s)intheCompany][CommonShare(s)][andsecuritiesconvertibleintoorexchangeableforshares]proposedtobesoldby[ashareholder][Founder][andemployeesholdingmorethan[1]%oftheoutstandingCommonShares(assumingconversionofthePreferredShares)],atthesamepriceandonthesametermsasoffered,witharightofover-subscriptionforholdersof[PreferredShares][Series[ ]Shares]of[share(s)intheCompany][CommonShare(s)][andsecuritiesconvertibleintoorexchangeableforshares]un-subscribedbytheotherholdersof[PreferredShares][Series[ ]Shares].

Therightoffirstrefusalwillnotapplyintheeventof(i)atransferofsharesapprovedbyamajorityof[75]%ofthevotingrights;or(ii)atransferbyaholderofPreferredSharestoanaffiliate.

Suchrightoffirstrefusalwillterminateupontheearlierof(i)tenyearsfromtheClosingDate;(ii)aQualifiedOffering;(iii)asaleormergeroftheCompany;[(iv)withrespecttoanyemployee,whensuchemployeenolongerownsanyCommonShares];[(v)withrespecttoanyholderof[PreferredShares][Series[ ]Shares],whensuchholderof[PreferredShares][Series[ ]Shares]nolongerownsatleast[___][PreferredShares][Series[ ]Shares]].

4.27 CO-SALERIGHT

Aco-salerightortag-alongrightisashareholder’scontractualrighttoincludehissharesinanysaleofsharesbyanothershareholderunderthesametermsandconditions.

Iftheshareholdershaveagreedtoarightoffirstrefusal(whichistypicallythecase)theco-salerightshouldbereadinconjunctionwiththerightoffirstrefusal,sinceitisonlyexercisabletotheextentthattherightoffirstrefusalisnot(orpartly)exercised.Shareholders,whomaybefreetotransfertheirsharesundertherightoffirstrefusalclause,maythereforeneverthelessberequiredtoallowtheinvestorstoinclude(aportionof)theirsharesinthesale.

Theco-salerightprovideseachshareholderwiththerighttobenefitfromathird-partysale.Sometimesonlytheinvestorsareentitledtoaco-saleright.

Ifshareholdersexercisetheirco-saleright,theywillparticipateinasalearrangedbyanothershareholderatthesamepriceandunderthesametermsandconditions.Thelevelofsuchparticipationwillbesetforthinthefinallegaldocumentation,butisusuallycalculatedonaproratabasis.

Example:Ifasellingfounderwhoowns100sharesinthecompanyhasagreedtosell50sharestoathirdparty,aninvestorholding400shareswillbeallowedtoco-sell40shares(being400/500*50)ofthetotalnumberof50sharestobesold(assumingnootherinvestorsexercisetheirco-saleright),whereasthesellingfounderwillonlybeallowedtoselltenshares.Investorsmayrequiretherighttoco-sellmorethantheirproratashare(upto100%)inexceptionalcircumstances,forexampleintheeventthatthepurchaserisacompetitororacustomerofthecompanyorifsuchpurchaserwouldacquireacontrollingstakeinthecompany.

Theco-salerightsclauseisacontractualrightgrantedto(certain)shareholdersandisusuallysetoutintheshareholders’agreementorinaseparaterightoffirstrefusalandco-saleagreement.Inordertoallowfreetradeinthecompany’slistedshares,theco-salerightshouldterminateuponthecompany’sinitialpublicoffering(IPO).

Co-SaleRight: BeforeanyshareholdermaysellsharesintheCompany,afterhavingobservedthetermsandproceduresofthe‘RightoffirstRefusal’clause,hewillgive[theotherShareholder][the

holderof[PreferredShares][Series[ ]Shares]anopportunitytoparticipateinsuchsaleonaproratabasis.

4.28 DRAG-ALONGRIGHTAdrag-alongrightisarightthatenablestheinvestorstoforceasaleofthecompany.Effectively,itisanagreementbetweenallshareholders(thereforegenerallyfoundintheshareholders’agreement)toselltheirshares,ifa(qualified)majorityofthepreferredshareholders(and/orothershareholders)areinfavourofsuchasale,andtotakeallotheractionsnecessaryanddesirableinconnectionwithsuchasaleinthefuture.Amergerofthecompany(resultinginachangeofcontrol)orasaleofthecompany’sassetsisusuallyincludedinthescopeofadrag-alongright.

Thedrag-alongrightenablestheinvestorstosellthecompanyregardlessofthefactthattheymayonlyholdaminoritystakeinthecompanyandnotwithstandingthattheothershareholders(e.g.foundingshareholders,orshareholdershavingnodeemedliquidationrights)andmanagementboardandsupervisoryboardmaynotbesupportiveofthedeal.Thisabilityprovidestheinvestorswithcontrolovertheexecutionandtimingofthesaleofthecompany,whichhasapositiveeffectonthesalespriceandeasestheprocessofpre-salemarketingandnegotiations.

Thedrag-alongclausecomesinmanyflavours.Oneelementinthedrag-alongclausethatneedsspecificattentionisthedefinitionofsaleofthecompany.Thedefinitionofsaleofthecompanyintheclausemaybedraftedbroadly,includingalltransactionslistedinthe‘liquidationpreference’clause(so-called(deemed)liquidationevents),orrestrictedly,reflectingonlythesaleofsharesinthecompanyor,morerestrictedly,thesaleofallsharesofthecompany.Inallcases,thedrag-alongclauseinthefinaldocumentationshouldmakeclearthattheproceedsfromsuchatransactionaretobedistributedinaccordancewiththeliquidationpreferenceclause.Topreventaninvestorfrommisusinghisdrag-alongrighttosqueezeoutoneormoreshareholders,itisusuallyrequiredthatthedrag-alongrightcanonlybetriggeredincaseofathirdpartyoffer.

Inthetermsheetorfinaldocumentation,itisusuallysetouttowhatextenttheshareholderswhoareforcedtoselltheirshares,arerequiredtoproviderepresentationsandwarrantiestothebuyer.Thisrangesfromthemostbasicandessentialrepresentationsandwarrantiesonly(typicallythoseregardingthelegal

essentialrepresentationsandwarrantiesonly(typicallythoseregardingthelegaltitleoftheirsharesandtheir(unrestricted)transferability)tothesamewarrantiesthattheinvestortriggeringthedrag-alongrightprovideshimself.

Anotherimportantelementistheclass(orclasses)ofshareholdersandthemajoritiesrequiredtotriggerthedrag-alongright.Investorswillunderstandablywanttokeepthisgroupassmallaspossible,whiletheotherpartiesinvolvedmaywanttoincludeanapprovalrightofthegeneralmeetingofshareholders.Otherissuesofnegotiationmayconcerntheinclusionoflimitationsintime(thedrag-alongrightbecomesvalidonlyafteracertainperiodoftime)andofaminimumamountofrequiredproceeds(thedragalongcanbetriggeredonlyifacertainminimumamountofanticipatedproceedswillresultfromthesale).Theserestrictionsareaimedatpreventingtheinvestorsfromsellingthecompanysoonafterclosingatagoodreturn(forthem),whereastheothershareholdersmaynotnecessarilyreceiveasimilarlygoodreturn(sincetheliquidationpreferenceapplies).Sometimesamatchingrightisnegotiatedtopreventtheinvestorfromeffectuatingasaleofthecompanybelowmarketprice.Investorsaregenerallyreluctanttoacceptamatchingrightfortheothershareholders,oronlyforveryshortperiodsoftime,sincetheyareafraidthatathird-partybiddermaywalkawayifthematchingprocesstakestoomuchtime.

Thedrag-alongrighttypicallyterminatesifthecompanyundertakesapublicoffering.

Drag-AlongRight: [Alternative1:Theholdersofa[qualified]majorityofthe[PreferredShares][Series[ ]Shares]mayrequireasaleoftheentireissuedsharecapitaloftheCompany.]

[Alternative2:Intheevent,[thatathirdpartymakesanoffertoacquirealloftheoutstandingsharesoftheCompany][ofaDeemedLiquidationEvent],thatisacceptedbytheholdersofa[qualified]majorityofthe[PreferredShares][Series[ ]Shares],theothershareholderswillbeobligedto[voteinfavourofsuchDeemedLiquidationEventandtotakeallactionsnecessaryinconnectiontherewith][offertheirsharestosaidthirdpartyunderthe

sametermsandconditionsspecifiedinsuchoffer]andaccordingly(totheextentnecessary)waivetheirrightsoffirstrefusaletc.]

[Iftheholdersofthe[PreferredShares][Series[ ]Shares]wishtoexercisethedrag-alongrightassetoutinthepreviousparagraphwithin[___]yearsaftertheClosing,theadditionalapprovaloftheholdersofa[qualified]majorityoftheoutstandingCommonShares(assumingconversionofthePreferredShares),willberequired.]

4.29 MANAGEMENTBOARDThemanagementboardisresponsiblefortheday-to-daymanagementofthecompanyandforitsrepresentationvis-à-visthirdparties.

Themanagementboardmayconsistofoneormoremembers(managingdirector(s)).Ifthemanagementboardhasmorethanonemember,eachmemberwillhavedifferentresponsibilities.AsinUScorporations,manyEuropeanventure-backedcompaniesusetitlesreflectingtheresponsibilitiesofeachmanagementboardmember,suchasChiefExecutiveOfficer(CEO)andChiefFinancialOfficer(CFO)and,inthecaseoftechnologycompanies,ChiefTechnologyOfficer(CTO).Severalvariationsarepossibleinthecompositionandsizeofthemanagementboards,dependingonthedevelopmentstageofthecompany.Astart-upcompanymaystartoutwithonlyonemember(thefounder),whilemorematurecompanieswillhavetheresourcesandtheworkloadtosetafullteamtowork.

Despitethefactthatadivisionoftasksamongstthemembersofthemanagementboardispossible,itisimportanttonotethatincertainjurisdictionsthemanagementboardiscollectivelyresponsibleforallmembersofsuchboard.

Themembersofthemanagementboardareappointedandmayalsobedismissedbytheshareholders.InmostEuropeanjurisdictions,amemberofthemanagementboardmayalsobesuspendedbytheshareholders,and/orifthecompanyhasasupervisoryboardinplace,bythesupervisoryboard.

Fromastrictlylegalpointofview,themanagementboardisnotsubordinatetotheshareholders’meetingorthesupervisoryboardandisindependentintheperformanceofitsduties.Inventurecapitaltransactions,theboundariesofthisindependencearenarroweddownconsiderablybyprotectiveprovisionssuchasconsentrights.Undersuchprovisions,theapprovalofthemajorityofthepreferredshareholdersisrequiredforimportantmanagement(andshareholders)decisions,andtheconsentofthesupervisoryboardisrequiredforotherimportantdecisions.Theconsentmattersaresetoutinmoredetailinsection20–ConsentRights,ofthischapter.

ManagementBoard: ThemanagementoftheCompanywillbeentrustedtothemanagementboard(the“ManagementBoard”)consistingatClosingof[___]aschiefexecutiveofficerand[___]aschief[]officer.AnynewManagementBoardmembersorseniorcompanyofficerswillnotreceiveanofferofemploymentwithouttheapprovaloftheSupervisoryBoard[includingtheSeries[ ]Director].[TheCompanywill,onabest-effortsbasis,hireachief[___]officerwithinthe[six(6)]monthperiodfollowingtheClosing.]

4.30 EMPLOYEEPOOL

A EMPLOYEESTOCKOPTIONSAnemployeestockoptionisarightgrantedtoanemployeeofacompanytobuyacommonshareinthecompany’scapitalatapre-setprice(exerciseprice)withinaspecifiedperiodoftime(exerciseperiod).Ifthevalueofthecompanyincreasesduringtheexerciseperiodofanoption,theholderofsuchanoptioncanbenefitfromsuchoptionbybuyingtheunderlyingshareattheexerciseprice,whichislessthantheactualvalueofsaidshare.Intheory,theholderoftheoptionhasmadeaprofit.Hewill,however,notbeabletocashthisprofituntilthemomentheactuallysellssuchashare.Thiswillgenerallyonlybepossibleuponasaleofthecompany,oruponalistingofthecompanyonastockexchange.Asthebasicprinciplesofaventure-backedcompanyincludetheaim

toincreasevalueandtopursueliquidityforitsinvestorsthroughasaleorIPOofthecompany,thegrantingofemployeeoptionsisconsideredoneofthemosteffectiveincentivetoolsavailabletothecompany.

Thesharesreservedforthepurposeofissuanceupontheexerciseofoutstandingoptionsarecollectedinanemployeepooloroptionpool.Thetermsandconditionsunderwhichtheemployeeoptionscanbegranted,exercisedandtransferredareusuallysetoutinanarrangementcalledemployeestockoptionplanorESOP.Thenumberofsharesreservedintheoptionpoolistypicallytentofifteenpercentofthefullydilutedsharecapitalofthecompany.Asdetailedinsection7–SharePriceandValuation,ofthischapter,investorswillconsiderthefulloptionpool,includingthenon-grantedoptions,asoutstandingstockforthepurposeofcalculatingthepricepershare.

Ifatanewfinancingrounditisdecidedtoincreasetheoptionpool,newinvestorsmaytrytonegotiatetohavetheincreasepre-moneysothedilutionfromtheoptionpoolallocationcomesfromthesharesoftheexistinginvestorsandfoundersonly.

Thesupervisoryboard,sometimesrepresentedbyitsspecialcompensationcommittee,isthecorporatebodytowhichthepowertodecideonthetermsoftheESOPandtograntoptionsundertheESOPisnormallydelegated.

Unfortunatelyforemployeesandinvestors,thetaxauthoritiesinmanyEuropeancountrieshavecurbedtheadvantagesofstockoptionsbyimplementingstringentrules.Typicaltaxableeventsarethegranting,thevestingandtheexercisingoftheoptions.TheseinturncanreducetheESOP’seffectivenessasanincentivetool.

B EMPLOYEESTOCKOWNERSHIPInsteadofgrantingemployeesoptionstobuysharesinthefuture,theycanalsobeofferedtheopportunitytobuysharesatonce.Insomejurisdictions,thesubsequentincreaseinvalueofthesesharesisnottaxedatall,providedthatthesharesareacquiredbytheemployeeatanarm’slengthprice.Tofinancethesharepurchase,thecompanymaygrantaloantotheemployee.

Insomecases,companiesdonotoffercommonsharestoemployees,butnon-votingshares,depositoryreceiptsofsharesorsharescarryingotherrestrictionsinstead.Theemployeeswhobuysharesorequivalentsofsharesusuallyare

boundbyanincentiveplancalledEmployeeStockOwnershipPlan,RestrictedStockOwnershipPlanorSharePurchasePlan.

Suchanincentiveplanistypicallysubjecttoarepurchaseclauseandavestingclause(seesection31–VestingScheme,ofthischapter).Thepurposeofthiscombinationofarepurchaseclauseandavestingclauseistoensurethatthecompanycanrepurchasethenon-vestedstockfromtheemployeeuponterminationoftheemploymentagreementatthepriceoriginallypaidbytheemployee(orthelowermarketvalue).

C OTHERINCENTIVESCHEMESInadditiontostockoptionandstockownershipplans,otheremployeeincentiveschemesexist.Examplesofsuchschemesarestockappreciationrightsanddynamicequitysplits.

StockappreciationrightsorSARsareawardsthatenableemployeestoprofitfromanincreaseinvalueofthecompany.SARsprovidetheemployeewithabonuspaymentbasedontheincreaseinthevalueofastatednumberofsharesoveraspecificperiodoftime.Theseproceedswillusuallybepaidincash,butcanalsobepaidinshares,orinacombinationofcashandshares,dependingontherulesoftheincentiveplan.PayoutsunderSARsareusuallytaxedasordinaryincome.Stockappreciationrightsarealsoknownasphantomstock.

Recently,otherincentiveschemeshavebeendevelopedtomotivateandretainemployees,inparticularforearly-stagestart-ups.Oneofthemisthedynamicequitysplit.Withadynamicequitysplittheideaisthateveryoneinvolvedintheearlystageofastart-up(whichincludesfounders,employees,advisors,etc.)isrewardedforhiscontributionduringthisstageofthestart-up.Contributioncanbeinhoursofwork,butalsobyprovidingequityorintroducingafirstcustomer.Basedonanagreedcalculationmethod,rewardsareconvertedintorealequityatalatertime,forexamplewhenaSeriesAinvestmentroundtakesplace.

EmployeePool: UpontheClosing,theCompanywillreserveupto[[numberofshares]CommonShares][[___]%ofthepost-moneyoutstandingshares]forissuancetoemployees,directorsandconsultants(the“ReservedEmployeeShares”)[includingtheCommonSharespresentlyreservedforissuanceupontheexerciseof

reservedforissuanceupontheexerciseofoutstandingoptions].TheReservedEmployeeShareswillbeissuedfromtimetotimeunder[sucharrangements,contractsorplans][anemployeeshareoptionplan(the“ESOP”)]as[recommendedbytheManagementBoardand]approvedbytheSupervisoryBoard.

4.31 VESTINGSCHEME

A INTRODUCTIONMostESOPsandstockownershipplansaresubjecttovesting.Theconceptofvestingreferstoapre-conditionontherighttodisposeoverthestock(options).Thepurposeofavestingschemeistocreatealonger-termincentivefortheemployees.Ifanemployeeleavesthecompanyshortlyafterhavingbeengrantedstock(options),heshouldbeabletobenefitfromsuchstock(options)onlytoalimitedextentornotatall.Inaddition,avestingmechanismisavaluableinstrumenttocontroldilutionandtoallowthecompanytoconserveitsequity.

Underavestingscheme,thebeneficiaryofanESOPorstockownershipplancandisposeovermorestock(options)astimepasses.Vestingperiodsareoftenfixedatthreetofiveyears.Vestingusuallyoccursonamonthlyorquarterlybasis.SharesandoptionsunderanESOPmaybesubjecttocliffvesting.Thismeansthatanemployeehastoremainwiththecompanyforacertainperiod,usuallysixtotwelvemonths,beforeanystock(option)istobeconsideredvested.Thevestingscheduleobviouslydependsonthespecificsofeachtransaction.Incertaincases,ashorterperiodwillbeappropriate;inothersalongeronewillbelogical.Sometimesalinearvestingsystemmaybeputinforce(i.e.thenumberofsharesvestingpertimeperiodisfixed),while,inothercases,anon-linearsystem(i.e.thenumberofsharesvestingpertimeperiodvaries)wouldbemoreappropriate.Incaseofaliquidityevent(anexit)itisusuallydeterminedthatallnon-vestedshareswillvestatonce,whichisreferredtoasacceleratedvesting.

Example:Letusassumethatanemployeeisgranted1,000stockoptions.Assumealsothattheoptionsaresubjecttoa4-yearvestingschemeattherateof1/48thofthetotalnumberofoptionseachmonth.Consequently,afteroneyeartheemployeecanfreelydisposeover250options.

Theremaining750optionshavenotyetvestedandconsequentlycannotbefreelydisposedoverbytheemployee.After2.5years,theemployeecanfreelydisposeover625options(etc.).Iftheemployeeleavesthecompanybeforeallhisoptionshavevested,heforfeitstheoptionsthathavenotyetvestedatthattime.Ifatwelvemonthcliffvestingschemeapplied,thentheemployeewouldforfeitallofhis1,000optionsifheleftthecompanywithinoneyearafterhehasreceivedtheoptions,despitethemonthlyvesting.Ifthecompanyisbeingsoldwhileanemployeeisemployedbythecompany,suchemployeecanexerciseallofhisoptions,whethertheyhavebeenvestedornot.

Underavestingschemerelatingtoastockownershipplan,anemployeewholeavesthecompanyisallowedtokeeponlythosesharesthatvestedduringhistenure.Thesharesthathavenotvestedwillberepurchasedbythecompany–assumingtheapplicablelawallowsthis.Ifsuchisnotthecase,thesharesmayberepurchasedbytheothershareholdersonaproratabasis.Suchretroactivevestingisalsoreferredtoasareversevestingscheme.Byagreeingtoavestingperiodthatreflectstheexpectedgrowthspeedofthecompany,afairsystemcanbecreatedthatwillallowemployeeswholeaveearliertobenefitonlyfromthegrowththatcan(inpart)beattributedtotheirefforts.

Apartfromaddressingthefreerideissue,avestingsystemcanservetocomfortaninvestorwithregardtothecommitmentoftheemployees.Itactsasagoldenhandcuffsystem;theemployeeshaveaclearincentivetostaywiththecompanyforalongerperiod.

B GOODLEAVER/BADLEAVERThevestingsystemcanbefurtherrefinedbydistinguishingbetweenagoodleaverandabadleaver.Iftheemployeeleavingthecompanyisagoodleaver,hecouldforexamplebeentitledtokeephisvestedshares,whilehisnon-vestedshareswillberepurchasedatthepriceoriginallypaid.Ifheisabadleaver,itcouldbedeterminedthevestedandnon-vestedshareswillberepurchasedatthenominalvalueofthesharesorthepriceoriginallypaid(assumingthatthepriceoriginallypaidislowerthanthefairmarketvalue).Badleaversituationswillbedefinedintheshareholders’agreementandusuallyincludegrossmisconductandleavingthecompanytojoinacompetitor.Allothercircumstancesarethenconsideredgoodleaversituations.Sometimesthereisalsoathirdcategory,theneutralleaver,whichwillincludedeathandretirementandrestrictthegoodleavertodismissalwithoutcause.

VestingScheme: AllReservedEmployeeShareswillbesubjecttovestingasfollows:[25]%tovestattheendofthefirstyearfollowingtheirissuance,withtheremaining[75]%tovestmonthlyoverthenext[three]years.Goodleaver/badleaverprovisionswillapply.

4.32 FOUNDERS’SHARESAsubstantialpercentageofthesharesinthecompanyisusuallyownedbyoneormorefounders.Ifallgoesasplanned,allfounderswillstaywiththecompanyandcontributetoitssuccess.However,alldoesnotalwaysgoasplanned.Itisthereforesensibletothinkaboutcontingenciessuchasthatofoneormorefoundersholdingsharesinthecompanyleavingthecompanyearlierthanplanned.Cantheykeeptheirshares?Isitfairtoletthemfreerideontheeffortsofthosewhocontinuetobuildthecompany?Dotheyhavetooffertheirsharesandifsoforwhatprice?ForthereasonssetoutintheVestingSchemeclause(seesection31–VestingScheme,ofthischapter),investorsmaywishtosubjectalloutstandingcommonsharesheldbythefounderstoareversevestingschemetoensurecontinuedcommitmentofthefounderstowardstheprogressofthecompany.Manyofthetermsthatapplytothevestingoffounders’sharesareidenticaltothosethatapplytothevestingofemployeeshares(seesection31–VestingScheme,ofthischapter).

Forfounders,goodleaverandbadleaverprovisionscanhaveahugeimpact.Theyshouldcarefullyconsiderwhohasthepowertodismissthemasmanagingdirectorsofthecompany.Ifitistheinvestor,theyshouldbeawarethatadismissalcouldtriggertheobligationtooffertheirsharesundertheapplicableleaverprovisions.Moreover,theyshouldcarefullyconsiderthedefinitionofabadleaver,asthisregularlyleadstoheateddiscussions..

Ifafounderhastoofferhissharesunderanapplicablegoodleaverprovision,twocomplicationsoftenarise:(i)itcanbeveryhardtodeterminewhatthemarketvalueis,inparticularincaseofanearly-stagestart-up,and(ii)thecompanywillnotalwayshavethecashtobuyoutafounder.Forthosetworeasons,theinvestorsandotherremainingshareholderssometimesnegotiatetherighttoforcealeavingfoundertoconverthissharesintonon-votingshares.Bydoingso,theleavingfounderwillloseallofhisvotingpowers,whilekeepinghiseconomicinterest.

hiseconomicinterest.

Founders’Shares: UpontheClosing,[numberofshares]oftheCompany’sissuedandoutstandingCommonShareswillbeheldbytheFounders(the“Founders’Shares”).TheFounders’Shareswillbesubjecttoasimilarvestingschemeassetforthinthe‘VestingScheme’clause,providedthatthevestingperiodwillbeginasoftheClosing.[Inaddition,intheeventthattheCompanymilestonesarenotsatisfied,theCompanywillhavetherightuponterminationofemploymentofaFounderwithorwithoutcause,torepurchasehisvestedFounders’SharesintheCompanyatfairmarketvalue(asdeterminedbytheSupervisoryBoard).]

4.33 LOCK-UPFoundersandkeyemployeesofventure-backedcompaniesoftenownasignificantquantityofcommonsharesofthecompany,whichtheyhavereceivedinexchangefortheircontributionofuniqueskillsorintellectualpropertytothecompany.Beforemakinganinvestmentinacompany,investorswanttoensurethatthekeyemployees(includingthefounders)willcontinuetheiremploymentwiththecompanyandarecommittedtoitsfuturesuccess.Inordertoachievethatgoal,investorsmayinsistonmakingthesharesheldbythefoundersandkeyemployeessubjecttoreversevestingassetoutintheFoundersSharesclause.Inaddition,investorsmayinsistthatthefounders’(andkeyemployees’)sharesaresubjectedtoalock-upagreement,preventingthemfromsellingtheirvestedshareswithouttheapprovaloftheinvestors.

Alock-upoffounders’sharesasmentionedinthisclausehowever,shouldnotbeconfusedwithalock-upagreementinconnectionwithananticipatedlistingatastockexchange.Thelatteristypicallyexecutedasarequirementfromtheunderwritersandisaimedatpreventingthecompany’sshareholdersfromsellingtheirsharesduringacertainperiodfollowingthelistingatthestockexchange.

Lock-Up: Atnotimepriorto[date]willanyFounderor

keyemployee,ifany,disposeofanysharesintheCompanyinanymanner,exceptwiththewrittenconsentof[two-thirds]oftheholdersofSeries[ ]Shares.Thislock-upwillinanycaselapseattheconsummationofaQualifiedIPO,tradesaleorotherliquidityevent.

4.34 EMPLOYMENTRELATIONSHIPSThetermsandconditionsoftheemploymentrelationshipbetweenanemployerandanemployeeareusuallysetoutinanemploymentagreement.Theexistenceofproperemploymentagreementsbetweenthecompanyandkeyemployeesisofgreatimportancetomostinvestors.Itprovidessecuritywithregardtotheirconcernsregardingthecompany’scontinuedaccesstotheservices,skills,andknowledgeofitskeyemployees.

Investorsusuallywanttohaveaclearunderstandingofthetermsoftheemploymentagreementsofthekeyemployees,suchastheirdutiesandresponsibilities,theircompensationandotherbenefits(e.g.optionsandbonuses)duringtheemploymenttermandupontermination,andthecovenantsprovidedbythem,suchasanon-compete,non-disclosureandassignmentofinventionscovenant,priortoaclosing.

EmploymentRelationships: TheCompanyhasorwillhavepriortotheClosingemploymentClosingemploymentagreementsinaformreasonablyacceptabletotheInvestorswith[thefollowingpersons:[names]][eachFounderandkeyemployee].

4.35 NON-COMPETITION/NON-SOLICITATIONInparticularinearly-stageventurecapitaltransactions,investorsbasetheirinvestmentdecisiononthecontinuinginvolvementofthefounders,whohavespecificknowledgeofthecompany’sbusinessandtechnology.Thepurposeofanon-competition(ornon-compete)agreementistodeterthefoundersfromleavingthecompanytoworkfor,oras,acompetitor,asthiswouldprobablyjeopardisethecompany’sfuturesuccess.Astandardclauseinnon-compete

agreementsisthenon-solicitationclause,whichprohibitsafounderwholeavesthecompanyfromapproachingitscustomersandemployeeswiththeintentionofrecruitingthemforhisnewventure.

Non-competeagreementslimitaperson’sabilitytoengageinadesignatedprofession,tradeorbusiness.Therefore,theywillbeenforcedbylawonlyiftheprovisionsarecarefullylimitedandaredraftedincompliancewiththeparticularrequirementsofnon-competelawsoftheapplicablejurisdiction.Thethreemostimportantelementsofnon-competeagreementsarethebusinessinwhichthefounderisprecludedfromcompeting,thegeographicscopeofthenon-compete,andthedurationthereof(non-competesgenerallyhaveaoneortwoyearduration).Eachoftheseelementsshouldbeproportionatetothelegitimatebusinessinterestofthecompany.Anon-compete/non-solicitationcovenantisusuallypartoftheshareholders’agreement.

Asmentionedinthepreviousparagraph,itiscrucialfortheinvestorthatkeyemployeesareboundbyrobustnon-competition/non-solicitationprovisions.Incertainjurisdictions,non-competerestrictionsinemploymentagreementsarevalidonlyiftheemployeeisallowedanadditionalconsiderationinexchangeforsigningorexecutingsuchagreement.Thecompanyshouldthereforeenterintonon-competeagreementsonlyifthisisstrictlynecessarytoprotectitsinterests.Inadditiontothenegativeincentivecreatedbyanon-compete/non-solicitationclause,positiveincentivessuchassharevestingagreementsandESOPsshouldbeconsideredasaninstrumenttokeepkeyemployeeswiththecompany.

Negotiationtips:• Ifthefounderholdshissharesthroughoneormoreothercompanies

(i.e.thefounderindirectlyholdshisfounder’sshares),itmakessenseforthefoundertoalsobeboundbythenon-competitionagreementinhiscapacityasaprivateperson.Otherwise,thefounder-shareholdercouldeasilyevadethenon-competerestrictionbyincorporatinganewlegalentity.

• Alongerdurationthanisallowedundertheapplicablelawwillusuallymakethenon-competecovenantnullandvoidinitsentirety.Somakesuretheclauseisenforceableunderapplicablelaw.

• Makesuretheshareholdersagreementprovidesthe(preferred)shareholders,andnotjustthecompany,withtherighttoinitiatelegalactionagainstthekeyindividualsincaseofabreachofanynon-competitioncovenant.

Non-Competition/Non-Solicitation:

PriortoClosing,eachFounderandkeyemployeewillenterNon-Solicitation:intoa[one]yearnon-competitionandnon-solicitationagreementinaformreasonablyacceptabletotheInvestors.

4.36 NON-DISCLOSUREAGREEMENTAnon-disclosureagreementaimstoprotectthecompanyagainstimproperdisclosureoruseofsensitivecompanyinformationandmaterialsthatarenotknowntothegeneralpublic.Incompaniesactiveinthelifesciencesareasforexample,non-disclosureagreementsareusedtopreserveun-filedpatentrights,tradesecrets,businessplans,andotherconfidentialandproprietaryinformation.

Non-disclosureagreementsbetweenemployersandtheiremployeesaretypicallyincludedasaspecificcovenantbytheemployeeintheemploymentagreements.Foremployeesorconsultantswithspecificknowledgeofthecompany’sproprietaryinformationoraccessthereto,moreextensiveagreementsmaybeappropriate.

Ingeneral,anon-disclosureagreementspecifiesthetypeofinformationdeemedconfidential.Suchinformationmayincludeunpublishedpatentapplications,knowhow,financialinformation,businessstrategies,etc.Anon-disclosureagreementtypicallysetsoutdetailsofinformationexcludedfromthenon-disclosureagreement.Commonexceptionsarewithregardtoinformationthat(i)therecipientcandemonstratehewasinpossessionofpriortohavingreceivedsuchinformationfromthediscloser;(ii)becomespublicthroughnoinitiationoftherecipient;(iii)becomesknowntotherecipientthroughathirdpartythathasalawfulrighttodisclosesuchinformation;(iv)waspublicknowledgebeforethedisclosureofsuchinformationtotherecipient;and(v)wasindependentlycreatedbytherecipient.Thenon-disclosureagreementalsotypicallyclarifiesthatalltangibleembodimentsoftheinformation(e.g,models,data,anddrawings)andallcopiesthereofshouldbereturnedimmediatelyuponrequestofthecompanyandinnoeventlaterthantheendofthe(employment)agreementterm.Thetermclauseofthenon-disclosureagreementstipulatestheterm(inyears)duringwhichtheinformationshouldbekeptconfidential,andtheterm(inyears)duringwhichtheagreementisbinding.

Toenforceanon-disclosureagreement,theenforcingpartyshouldbeabletodemonstratetheexistenceofconfidentialinformationwithinthedefinitionofproprietaryinformationandtheunauthorisedusethereof.Sometimesthenon-disclosureagreementincludesapenaltyclause,whichmakesiteasierfortheenforcingpartytoprovedamagesthatresultfromanyunauthoriseduseofconfidentialinformation.

Anon-disclosureagreementisoftenreferredtoasanNDAoraconfidentialityagreementoraCDA.

Non-DisclosureAgreement: PriortoClosing,eachcurrentandformerFounder,andeachofficer,employeeandconsultantwithaccesstotheCompany’sconfidentialinformation/tradesecretswillenterintoanon-disclosureagreementinaformreasonablyacceptabletotheInvestors.

4.37 ASSIGNMENTINVENTIONSIntellectualpropertyisthemostvaluableassetofmanyhightechandlifesciencescompanies.Itisalsoveryimportantforemergingcompaniesinotherindustries.Creatingnewintellectualpropertycanbeoneofthemostimportantvaluedriversofsuchcompanies.Toensurethatthecompanyistheowneroftheproprietaryrightstoinventionsthatarecreatedbythefoundersandemployeeswhiletheyareworkingforthecompany,thecompanyshouldenterintoaproprietaryrightsassignmentofinventionsagreementwitheachofsuchindividuals.

Aproprietaryrightsassignmentofinventionsagreementelucidateswhatconstitutesaninvention,whentheemployeeshoulddiscloseaninvention,howtheownershipisdetermined,andwhattheemployeeretainsownershipof.Theassignmentshouldincludeanyinventionsmadewhileemployedbythecompany(soincludinginventionsmadeathomeoroutsidebusinesshours).Veryoften,theassignmentagreementiscombinedwithaconfidentialityagreement,definingtheresponsibilitiesoftheemployeewithregardtoconfidentialinformation.

Iftheassignmentisincludedinanemploymentagreement,itshouldsurvive

Iftheassignmentisincludedinanemploymentagreement,itshouldsurviveterminationoftheemploymentwiththeCompany.Furthermore,attentionshouldbepaidtopossibleconflictswithearlieragreementsthatmaystillbeinforce.If,forexample,afounderisalsoemployed(onapart-timebasis)byauniversity,enteringintoaproprietaryrightsassignmentofinventionsagreementwiththecompanymayconflictwithhisexistingassignmentarrangementswiththeuniversity.

AssignmentInventions: PriortoClosing,eachFounderandkeyemployeewillenterintoaproprietaryrightsassignmentagreementinaformreasonablyacceptabletotheInvestors.Suchagreementwillcontain,interalia,appropriatetermsandconditionsunderwhicheachFounderandkeyemployeewillassigntotheCompanytheirrelevantexistingpatentsandpatentapplicationsandotherintellectualpropertyrightsasdefinedbytheCompany’sbusinessplan.[IntheeventthataFounderisnotallowedtoassignhisIPunderanyoutstandingarrangement,asevidencedbysuchanarrangement,saidFounders’requirementtoassignhisIPwillbeamendedinawayacceptabletotheInvestors.

4.38 KEYMANINSURANCEAsstatedinsection34–EmploymentRelationships,ofthischapter,certainemployeescanbeextremelyimportanttothecompany.Incaseofanysuchemployeebeingpermanentlyunavailable,thecompanycouldbefacedwithaserioussetback,whichmightleadtosubstantialnegativefinancialconsequences.ByprovidingkeyemployeeswithstrongincentivesbywayofanESOP,(seesection30–EmployeePool,ofthischapter);byseeingtoitthatadequateagreementsareinplace(containing,forexample,non-competeclauses);andbylockinginfoundersthroughavestingschemewithgoodleaverandbadleaverprovisions(seesection31–VestingScheme,ofthischapter)andalock-upclause(seesection33–Lock-Up,ofthischapter),investorsmayminimisetheriskofkeyemployeesorfoundersleaving(andtherebycausingdamageto)thecompany.Thesemeasures,however,cannotprotectinvestorsandthecompany

againstthepossibilityofsuchpersonsbecomingincapacitatedorpassingaway.Bystipulatingthatthecompanypurchasealifeinsurancepolicyforthosemembersofthecompany’smanagementwhohavebeenidentifiedbytheinvestorsandthecompanyaskeymembers,thepotentialnegativefinancialconsequencesupontheincapacitationordeathofsuchakeymembermaybe(partially)offset.

Mostkeymanclausesdeterminethatthecompanyshouldbethebeneficiaryofthekeymaninsurance.Suchclauseshoweveralsousuallystatethattheproceedsfromsuchkeymaninsurancecanbeusedtoredeemthesharesofinvestors.Inotherwords,intheeventoftheincapacitationordeathofakeyman,thekeymaninsurancebecomesasourceoffundsforredemption.

KeyManInsurance: [Within[number]monthsoftheClosing,]theCompanywillprocurealifeinsurancepolicyforthoseindividualsdeemedtobekeymembersoftheCompany’smanagementteamintheamountof€[__]millionperperson(orsuchlesseramountasapprovedbytheInvestors).[TheCompanywillpurchasesuchpolicieswithin[60]daysaftertheSupervisoryBoarddeterminesthesekeymembersoftheteam.]TheCompanywillbenamedasthebeneficiaryofthepolicies[providedhoweverthatattheelectionoftheholdersofa[qualified]majorityoftheSeries[ ]Shares,suchproceedswillbeusedtoredeemSeries[ ]Shares].

4.39 AGREEMENTSATCLOSINGInaventurecapitalfinancing,twoessentialagreementsareusedtodocumentandgoverninvestmenttermsandtherelationshipbetweentheinvestors,thecompanyandtheothershareholders:theinvestment(orsubscription)agreementandtheshareholders’agreement.Sometimesthesetwoagreementsarecombinedinasingledocument.

Theinvestmentagreementcontainsthebasictermsandconditionsgoverningtheinvestment.Itincludesadescriptionofthesecuritiesissuedandthepurchasepricethereof.Itoftenalsocontainsrepresentations,warrantiesandcovenantsofthecompanyand/oritsfounders.Iftheinvestmentispayableintranches,theinvestmentagreementwillalsodefinetheapplicabletimelinesandmilestones.Theagreementwillbeenteredintobythenewinvestors,thecompanyandtheexistingshareholders.Investmentagreementsareoftenreferredtoassubscriptionagreements,orshare(orstock)purchaseagreements.

Ashareholders’agreementgovernstherightsandobligationsofshareholdersvis-à-viseachotherandthecompany.Itspecifiestheframeworksetoutinthetermsheetwithrespecttotheserightsandobligations.Ashareholders’agreementusuallycontainsmanyclausesthatregulatetheissuanceand/ortransferofsharesinthecompanyandincludesprovisionsthatdealwiththecompositionanddutiesofthemanagementboardandthesupervisoryboard.Itfurtherstipulatestherights,preferencesandrestrictionsassociatedwiththeholdingofthepreferredshares.Theshareholders’agreementwillbeenteredintobyallshareholdersandthecompany.Therightsgrantedtotheinvestorsaresometimessetforthinaseparateinvestors’rightsagreement.Rightspertainingtoafuturepublicofferingareoftensetforth(particularlyintheU.S.)inaregistrationrightsagreement.Thecompany’sarticlesofassociationorbylawsshouldbeamendedwherenecessarytobeinconformitywiththeshareholdersagreement.Insofarasthatisnotpossible,theshareholdersagreementshouldincludeadequateprovisionsensuringthatthetermsandconditionsoftheshareholdersagreementhavepriorityoveranydeviatingprovisionsofthecompany’sarticlesorbylaws.

Inadditiontotheinvestmentagreementandshareholders’agreement,investorsmayalsorequirethatfoundersandkeyemployeesenterintonewemploymentagreements,non-competitionandnon-solicitationagreements,non-disclosureagreements,andproprietaryrightsassignmentagreements,allinaformreasonablyacceptabletotheinvestors(seesection34–EmploymentRelationships,ofthischapter).

AgreementsatClosing: ThepurchaseoftheSeries[ ]Shareswillbemadepursuanttoa(n)[InvestmentAgreement][SubscriptionAgreement][SharePurchaseAgreement][andShareholders’Agreement]

acceptabletotheInvestorsandcontaining,interalia,appropriaterepresentations,warrantiesasreferencedinthe‘RepresentationandWarranties’clauseandcovenantsoftheCompany,[Founder][ManagementBoard][andexistingshareholders],whereappropriate,reflectingtheprovisionssetforthhereinandappropriateconditionsoftheClosing.

4.40 FEESANDEXPENSESVenturecapitalinvestmentsareusuallysubjecttoathoroughinternalandexternalduediligenceinvestigationtoassesstheproposedvaluationofthecompanyandtoensureappropriatecontractualcoverageforriskitems.Thecostsinvolvedinconductingaduediligencearebasedonthescopeanddurationoftheeffort,whichinturnaredependentonthecomplexityofthetargetbusinessandotherfactorssuchasthetypeandnumberofexternalconsultantsinvolved.Investorsviewduediligencecostsasanecessaryexpensethatisjustifiedbytheclearerinsightitgivestheminallessentialaspectsofthecompany.Ontheonehand,thisinsightcanenableinvestorstoassistthecompanytobenefitfromopportunitieswithgreatereffectiveness,whileontheother,itenablesthemtoprotectthemselvescontractuallyagainstperceivedrisksaswellastohelpthecompanymitigateitsrisks.

Beforetheincurringofcostsorinitiatingoftheduediligenceandcontractdraftingprocess,theinvestorsneedtohaveclarityonwhowillbeartherelatedexpenses.Obviously,theywillwantthemtobetheresponsibilityofthecompany.Foundersusuallydon’thaveaproblemwiththecompanybearingallthecosts(sometimescappedtoacertainamount)iftheinvestorsactuallymaketheinvestment.Thedebategenerallyfocusesonwhoshouldbearthecostsifthetermsheetdoesnotresultinanactualinvestment.

FeesandExpenses: TheCompanywillpayreasonablefeesandexpensesincurredby[nameleadinvestor]inconnectionwith(thepreparationof)thetransactioncontemplatedbythisTermSheet,including(butnotlimitedto)expensesinconnectionwiththepreparationoflegaldocumentationandtheconductofduediligence

documentationandtheconductofduediligenceinvestigation(s)[subjecttoacapof€[___]][payableattheClosingorpayableassoonastheCompanyelectsnottoproceedwiththetransactioncontemplatedbythisTermSheet][payableattheClosingorpayableattheendoftheexclusivityperiodifnotransactionhasoccurredforwhateverreason].

4.41 CONFIDENTIALITYTheconfidentialityclauseisgenerallyquitestraightforward.Ifinvestorsandacompanyareseriouslycontemplatingatransaction,itisusuallyinboththeirintereststoagreetokeeptheirnegotiationsandtheinformationrelatingtheretoconfidential.

Theconfidentialityclauseisoneofthebindingprovisionsofatermsheet.Thismeansthatpartiesmaybeheldliablefordamagesincurredasaresultofbreachofthisclause.Partiesshouldthereforeexercisegreatcautionwhileagreeingtosuchaclause.Strangelyenough,inpracticetheseprovisionsareusuallysetoutinverygeneralterms,withoutindicatinganexpirationdateorspecifyingeventsthatdonotfallwithinthescopeoftheconfidentiality.

Theconfidentialityclauseinatermsheetdoesnotusuallyincludeaconfidentialityundertakingbythepartieswithrespecttoinformationrelatedtothecompany’stechnology,intellectualpropertyandstrategydisclosedtotheinvestorsinthecourseoftheirduediligence.Suchinformationwillnormallybecoveredbyaseparateconfidentialityarrangementexecutedbetweenthecompanyandthepotentialinvestorbeforethecompanysendsoutitsbusinessplanorotherdocumentscontainingproprietaryinformation.

Confidentiality: ThepartieswillkeepstrictlyconfidentialthefactthattheyhaveenteredintonegotiationsconcerningthetransactionscontemplatedbythisTermSheetandthecontentsofsuchnegotiationsandofthisTermSheet.[Aftertheexpiryof[___]monthsafterthedateonwhichthisTermSheetisexecuted,thepartieswillnolongerbeboundbythisconfidentialityclause.]

longerbeboundbythisconfidentialityclause.]

4.42 EXCLUSIVITY/NO-SHOPOncethetermsheethasbeensigned,theinvestorswillcommencetheirduediligenceprocess.Duringthisduediligencephaseinvestorsinvestigatethebusinesscaseofthecompanyingreatdetail.Indoingso,theytypicallyinvolveexternalexpertsandthereforestartincurringseriouscosts.Obviously,theinvestorswouldwishtoavoidasituationwhereinthecompanycaninformthemduringtheduediligenceprocessthatithasagreedtohaveotherinvestorsfinancethecompany,therebymakingtheoriginalinvestorsredundant.Investorsregardthesigningofatermsheetasaseriousindicationoftheirintentiontoinvestinacompany.Theyarecommittedtopursuingthatintentionandexpectasimilarcommitmentfromthecompany.Byagreeingtoanexclusivity/no-shopclause,thecompanycandemonstratetotheinvestorsthatitiscommittedtoenteringintoatransactionwiththeinvestorsandwillnot(withinareasonabletimeframe)explorethepossibilityoffindingalternativeinvestorstoreplacetheoriginalinvestors.

Exclusivity/No-Shop: TheCompanyagreestoworkingoodfaithexpeditiouslytowardstheClosing.TheCompanyagreesandshallensurethattheFounders,itskeyemployees,itsshareholdersandthemembersofitscorporatebodiesagree(a)todiscontinueanydiscussionswithotherpartiesconcerninganyinvestmentintheCompany,(b)nottotakeanyactiontosolicit,initiate,encourageorassistthesubmissionofanyproposal,negotiationorofferfromanypersonorentityotherthantheInvestorsrelatingtothesaleorissuance,ofanyofthecapitalsharesoftheCompany[ortheacquisition,sale,lease,licenseorotherdispositionoftheCompanyoranymaterialpartofthesharesorassetsoftheCompany](c)tonotifytheInvestorspromptlyofanyinquiriesbyanythirdpartiesinregardstotheforegoing.Thisprovision‘Exclusivity/No-Shop’willbeinforceuntil[ ].

[Thereafterthisexclusivityperiodwillautomaticallycontinueforaperiodoftwoweeks(revolving)unlesseithertheCompanyortheInvestorsdecidetoendthediscussionsbywayofawrittennoticetotheotherpartyatleastfivedayspriortotheendingofsuchexclusivityperiod.]

4.43 GOVERNINGLAWThegoverninglawclauseisastandardclauseinvirtuallyeverylegaldocument.Byincludingaclausestatingthelawthatgovernstheagreementandapplicablejurisdiction,futuredisagreementsaboutthesemattersmaybeavoided.Thisisobviouslyintheinterestofallpartiestotheagreement.

GoverningLaw: ThisTermSheetandallotheragreementsresultingfromthisTermSheetwillbeexclusivelygovernedby[applicablelaw].

Insofaraspermissiblebylaw,exclusivejurisdictionforalldisputesarisingfromandinconnectionwiththepresentTermSheetwillbetheseatoftheCompany.

4.44 NON-BINDINGCHARACTERThenon-bindingcharacterclausesetsoutthenon-bindingcharacterofthetermsheet.Itisasummaryoftermsandconsequentlylacksmanyconditionsanddetailsonewouldnormallywantinthefinalagreements.Atermsheetinfactfunctionsasagentleman’sagreementbindingthepartiesonlypsychologicallyandmorallytothedeal.Itshouldmovepartiestowardsfinal(binding)documentationbyreducingmisunderstandingsbetweenthepartiesandbysettingforthatimelinefornegotiations,includingadeadlineforclosing.

Fromthefounders’perspective,anon-bindingtermsheetprovidesaninstrumenttoassesstheseriousnessoftheinvestors’intentionsinanon-bindingfashion,andtodetermineatanearlystageinthetransaction,theeconomicandstrategicadvantagesoftheproposeddeal.Fromtheinvestor’sperspective,itenablesthe

advantagesoftheproposeddeal.Fromtheinvestor’sperspective,itenablestheinvestortoestablishwhetherornottheproposedtermsareacceptabletothecompanywithoutimmediatelycommittinghimselftotheinvestment.

Nevertheless,despitethepositiveeffectsofanon-bindingdocument,theinvestorswillnormallyonlypursueatransaction,enterintoduediligence,involveexternalexpertsandmakerelatedcosts,ifcertainconditionsinthetermsheetarelegallybindingandenforceable.Therefore,termsheetsusuallycontaintermsexplicitlystatedtobebinding.Thesebindingtermstendtodealnotsomuchwiththeinvestment-relatedclausesbutmorewiththeregulationofthenegotiationprocess,andincludeitemssuchasexclusivity/no-shop,confidentiality,paymentoffeesandexpenses,governinglaw,andindemnities.

Enteringintoabindingagreementregardingtheexclusivity/no-shopandconfidentialityclauses,givestheinvestortheconfidenceofknowingthatthecompanyisfullyengagedandcommittedtothecontemplatedtransactionandtotheinvestorandisnotshoppingaroundforalternatives(seesection42–Exclusivity/No-Shop,ofthischapter)ordisclosingdealspecificinformationtotheinvestor’scompetitors(seesection41–Confidentiality,ofthischapter).Theallocationofexpensesisanotherimportantissuethattheinvestorsnormallywanttoincludeasabindingcommitment.Itassurestheinvestorthathewillgetalloratleastsomeofhisexpensesback,evenifthedealdoesnotmaterialise(seesection40–FeesandExpenses,ofthischapter).Theclausessettingouttheapplicablelawandindemnitiesareaninstrumenttoassurethatbreachofanyofthesebindingprovisionsisactuallysubjecttolegalenforcement.

Insomejurisdictions,thecourtmayholdthatthepartiesareboundtothetermsheetifitperceivesthatthepartiesclearlyintendedittohavesomecontractualeffect,evenifthetermsheetitselfclearlystatesthatitis,apartfromcertainclauses,anon-bindingdocument.Intheirevaluations,courtsgenerallytakeintoaccountthelanguageofthetermsheet,thesubstanceandformofthecommunicationduringthetermsheetnegotiationsandthe(partial)performanceofobligationsunderthetermsheet.Whiledraftingatermsheet,partiescantakeprecautionsthatshoulddecreasethechancesofthetermsheetbeingmisconstrued.Tworulesofthumbare:(i)clearlystatethatthetermsheetissubjecttotheexecutionofaformalcontract,aswellasthefulfilmentofotherconditionsprecedent(seesection46–ConditionsPrecedent,ofthischapter);and(ii)avoidmakingthetermsheetoverlycomplex,legalisticorbindingforalargeproportionofitscontent.Ifatermsheetistoodetailed,insome

jurisdictionsthecourtmayholdthatthepartieshavereachedanagreementonallessentialtermsofthetransaction,withonlythemechanicsanddetailslefttobesuppliedbytheparties.

Non-BindingCharacter: Exceptasotherwisehereinspecificallyprovided,thepartiestothisTermSheetexpresslyagreethatnobindingobligationswillbecreateduntiladefinitiveagreementisexecutedwiththerequisiteformalityanddeliveredbybothparties.Notwithstandingtheforegoing,the‘FeesandExpenses’,‘Confidentiality’,‘Exclusivity/No-Shop’,‘GoverningLaw’and‘Indemnities’clauseswillbebindinguponexecutionofthisTermSheet.

4.45 INDEMNITIESAsstatedintheprevioussection(Non-BindingCharacter),thetermsheetmainlyhasanon-bindingcharacter.Nevertheless,certainclausesofthetermsheetarebinding.Itisthereforelogicaltodeterminethatifonepartytothetermsheetbreachesoneofthesebindingclauses,itmustindemnifytheotherpartyagainstalllossesanddamagesresultingfromsuchabreach.

Inadditiontoindemnificationintheaforementionedsituations,theindemnificationclauseusuallycontainsaprovisiondealingwithfinder’sfees.Theeffectofsuchaprovisionisgenerallytoensurethatanyfinder’sfeesthatmaybedueinconnectionwiththe(proposed)investmentinthecompanyarebornebythepartyresponsibleforagreeingtosuchafinder’sfee.

Forexample,letusassumeacompanyweretoengageaninvestmentbanktofindaninvestorwhoiswillingtoinvestacertainamountinthecompany.Let’sfurtherassumethecompanyweretoagreetopaytheinvestmentbankafinder’sfeeinthecasethatitfoundsuchaninvestorandthisinvestorsubsequentlyweretoinvesttherequiredamountinthecompany.Byincludingafinder’sfeeclauseinthetermsheet,theinvestorwouldbeentitledtosubtractthevalueofthefinder’sfee(duebythecompanytotheinvestmentbank)fromthevalueofthecompanywhendeterminingthevalueofthecompany(andthusthepercentageofthesharesthattheinvestorwillgetinexchangeforhisinvestmentinthe

ofthesharesthattheinvestorwillgetinexchangeforhisinvestmentinthecompany).Bysodoing,theinvestorwouldavoidineffectpayingforafinder’sfeetowhichnottheinvestor,butthecompanyhadagreed.

Indemnities: TheCompanyandtheInvestorswilleachindemnifytheotherforanyfinder’sfeesforwhicheitherisresponsible.TheCompanyandtheInvestorswilleachindemnifytheotheragainstalllossesanddamagesarisingoutoforrelatingtobreachofthebindingobligations:the‘FeesandExpenses’‘Confidentiality’,‘Exclusivity/No-Shop’,‘GoverningLaw’and‘Indemnities’clausesofthisTermSheet.

4.46 CONDITIONSPRECEDENTTheconditionsprecedentclausesetsouttheeventsthathavetooccurbeforetheinvestorsarewillingtoconsummatethetransaction.Theperiodinwhichtheconditionsprecedentneedtobesatisfiedstartsatexecutionofthetermsheetandendsattheclosingoftheinvestment(seesection9–AnticipatedClosingDate,ofthischapter).Mosttermsheetswillcontainconditionsprecedentdealingwiththemattersdiscussedbelow.Nevertheless,otherconditionsprecedentmaybeincludedinthetermsheettomeetspecificrequirementsofthedeal.

Investorsexecuteatermsheetwhentheyhavemadeapreliminarydecisiontoinvestinthecompany.Undernormalcircumstances,suchadecisionisbasedongeneralinformationprovidedbythecompany(e.g.businessplanandbudget)andontheinvestors’specificexpertiseintheareainwhichthecompanyoperates.Beforeclosing,theinvestorswilltrytoverifywhetherthepromisesmadeandfactsprovidedbythecompanyaretrueandcomplete.Thisfact-findingprocessiscalledduediligenceinvestigation(orsimplyduediligence).Aduediligenceisperformedbyoronbehalfoftheinvestors,withthepurposeofidentifyingandminimisingunnecessaryriskspriortomakingtheirinvestment.Duediligenceproceduresusuallyconcentratearoundlegal,financial,technologicalandbusiness-relatedareas,butmay–dependingonthecharacteristicsofeachinvestment–alsoincludemorespecificareasliketheintellectualproperty,regulatoryissues,marketpotentialandstrategy.Thecompanyanditsfoundersareexpectedtoco-operatewiththeinvestorsortheir

consultantsbydisclosingtothemallimportantinformation,requestedorotherwise.Co-operationanddisclosuremaybeincludedintheconditionsprecedentclauseasaseparateconditionprecedent.

Anotherconditionthatgenerallyshouldbesatisfiedpriortoclosingisthenegotiationandexecutionoflegaldocumentationthatissatisfactorytotheinvestorsandtheirlegalcounsel.Theinvestorswanttobesurethatthefinaldocumentationreflectsallclausesofthetermsheetaswellastheresultsofthepre-closingnegotiations.Thesenegotiationsgenerallyfocusoninterpretationofclausesinthetermsheetand/ortheduediligenceresults.

Mostinvestorsneedtheapprovalorrecommendationoftheirinvestmentcommitteeorsupervisoryboardbeforetheyareentitledtoexecuteinvestmentdocumentation.Oneofthemostcommonlyseenconditionsprecedenttherefore,istheinvestors’requirementtohavefinalformalapprovalfromtheirinvestmentcommittee(oranyotherapprovingbody).

Anobviousconditionprecedentistheabsenceofamaterialadversechange(MAC)priortoclosing.Thefinancialconditionandprospectsofthecompanyassetoutinthebusinessplanarethebasisfortheinitialinvestmentdecisionoftheinvestors.Theyshouldthereforeremainunchangedintheperiodaftersigningofthetermsheetandintheforeseeablefuture(evenaftertheclosingdate).TheMACclauseisespeciallyimportantwhentheactualsigningofthelegallybindingdocumentsandclosingofthedeal(seesection9–AnticipatedClosingDate,ofthischapter)areondifferentdates.

Therequirementtohavethetotalamountoffinancinginplacebeforethecompanyisabletoclosethetransactionisaprerequisitetothedealandissetoutinaseparateclause(seesection2–AmountofFinancing,ofthischapter).Sometimesthisconditionisrepeatedasaconditionprecedentsinceitsachievementisoftenthehardesttopredictandfulfilintheperioduptotheanticipatedclosingdate.

Undercontractlaw,aconditionprecedentisafactoreventthatmusttakeplacebeforethereisarighttoperformance.Ifatermsheetisdraftedasabindingdocument,thefulfilmentoftheconditionsprecedentwillresultinanobligationoftheinvestortofulfilhisfiduciarydutiesbymakingtheinvestment,andanobligationofthecompanytoissueequitysecuritiesinexchange.However,sincemosttermsheetsareexplicitlynon-bindingdocuments,thefulfilmentoftheconditionsprecedentwillnotautomaticallyleadtoaninvestmentnortothe

conditionsprecedentwillnotautomaticallyleadtoaninvestmentnortotheobligationtoinvest.Theconditionsprecedentclausemerelysetsouttheproceduresthattheinvestorswillhavetofollowbeforetheycanexecutelegallybindinginvestmentdocumentation.Italsofunctionsasabenchmarktoallowtheinvestorstowalkawayelegantlyfromthedeal,if,forexample,theduediligenceprocessdoesnotbearoutthetruthfulnessofthestatementofaffairspresentedbythecompany.

Ifaconditionprecedentisnotfulfilled,itprovidestheinvestorswithgroundsforterminationoftheproposedtransactionorabasisforre-negotiationofthedealterms.Ifinsuchacasetheinvestorsneverthelesswishtopursuetheinvestmentcontemplatedinthetermsheet,theymaywaivetheconditionprecedentinquestion.

ConditionsPrecedent: TheClosingissubjecttothefollowingconditionsprecedent:(1)satisfactorycompletionoffinancial,[IPcommercial,regulatory,tax]andlegalduediligence;(2)nomaterialadversechangeinthefinancialconditionortheprospectsoftheCompanyasmentionedinthebusinessplan[andanydocumentssenttotheInvestors];(3)negotiationandexecutionoflegaldocumentationsatisfactorytotheInvestors;(4)consentofthenecessarylegalmajorityoftheCompany’sshareholders,and(5)finalformalapprovaloftheInvestors’investmentandpartnercommittees.

4.47 EXPIRATIONTheexpirationdateisthedateonwhichtheinvestor’sofferascontainedinthetermsheetexpires.Bylimitingthevalidityperiodofthetermsheet,severalpurposesareserved.First,theexpirationfeaturelimitsthetimeduringwhichtheinvestoris(morally)boundbyhisoffer.Hecanmoveonandconcentrateonanotherinvestmentopportunityincaseofthepresentonenotmaterialising.Itfurtherpreventsthecompanyfromusingthetermsheettonegotiatedealswithotherinvestors.Sometimestheexpirationexertspressureuponthecompanytoexecutethetermsheetandagreeontheproposedtermswithinareasonabletimeframe.Itmayalsogivetheinvestoranearlyindicationofthecompany’sview

frame.Itmayalsogivetheinvestoranearlyindicationofthecompany’sviewonthetransactioncontemplatedinthetermsheet.

Theperiodduringwhichthetermsheetshouldbevalid,willbedeterminedbytheinvestor,bytakingintoconsiderationtheabovegoalsinrelationtothepeculiaritiesofeachspecificdeal(e.g.competitionbyotherinvestors,andcomplexityofthedealoffered).

Expiration: ThisTermSheetexpireson[date]ifnotacceptedbytheCompanybythatdate.

1 P1canalsobedefinedasthe“oldconversionprice”iftheanti-dilutionmechanismforeseesanadjustmentoftheconversionratio(seesection14–Anti-Dilution,ofthischapter).Insuchanevent,“WeightedAveragePrice”shouldbereadas“NewConversionPrice”.

2 Don’tmistakethismultipleforthemultipleonliquidationpreferenceexplainedunderparagraph(iv),whichhastheoppositeeffect.

ANNEXES

ANNEX1:TERMSHEETTEMPLATE

Termsheettemplatealsofreelydownloadableatwww.venturecapitaldealterms.com

[NAMECOMPANY]

SUMMARYOFPROPOSEDTERMSANDCONDITIONSSERIES[ ]CONVERTIBLEPREFERREDSHARES

Thistermsheet(the“TermSheet”)summarisestheprincipaltermsandconditionswithrespecttotheproposedinvestmentby[nameinvestor]inexchangeforSeries[ ]ConvertiblePreferredSharestobeissuedby[namecompany]

OFFERINGTERMS

Issuer: [namecompany],(the“Company”).

AmountofFinancing:Milestones:

€[___]million(the“Series[ ]Financing”).

[Alternative1:(investmentmilestone):TheSeries[ ]Financingispayablein[___]tranchesof€[___]subjecttotheachievementofthemilestonessetforthinAppendix[___].]

[Alternative2:(valuationmilestone):Thepre-moneyvaluationof€[___]asreferencedinthe‘SharePriceandValuation’clausewillbeadjustedto€[___]subjecttotheachievement

ofthemilestonessetforthinAppendix[___].]

Investors: [nameinvestor]asleadinvestorwillinvest€[___].OtherinvestorsparticipatingintheSeries[ ]Financing(togetherwiththeleadinvestor,the“Investors”),theamountsoftheirinvestmenttobeapprovedbytheleadinvestor.

TypeofSecurity: Series[ ]convertiblepreferredshares(the“Series[ ]Shares”)areinitiallyconvertibleona1:1basisintotheCompany’scommonshares(the“CommonShares”).TheSeries[ ]Sharesandallotheroutstandingpreferredshares(the“JuniorPreferredShares”)arejointlyreferredtoasthe“PreferredShares”.

WarrantCoverage: InadditiontotheSeries[ ]Shares,theInvestorswillalsoreceive[___]%warrantcoverage.ForeachSeries[ ]Sharepurchased,anInvestorwillreceiveawarranttopurchase[__]CommonShares/Series[ ]Shares.Thewarrantswillhaveatermexpiringontheearlierof(i)[___]yearsfromissuanceor(ii)thedateofcompletionofaQualifiedOffering.Thewarrantswillhavestandardanti-dilutionprotections.Thewarrantswillbeexercisableincashoronacash-lessbasis,attheoptionoftheholder,atanexercisepriceof[OriginalPurchasePrice]pershare.

SharePriceandValuation: [Alternative1:€[___]pershare(the“OriginalPurchasePrice”)representingafullydilutedpre-moneyvaluationof€[___].]

[Alternative2:€[___]pershare(the“OriginalPurchasePrice”).TheOriginalPurchasePricerepresentsafullydilutedpre-moneyvaluationof€[___]basedonalloutstandingCommonShareequivalents,includingoptionsand

warrants,atthetimeoftheClosingandincluding(a)[___]newoptionsasanincreasetotheoptionpool,asreflectedinthecapitalisationtableattachedasAppendix[___]and(b)theadditionalsharesissuabletotheholdersofJuniorPreferredSharesasaresultoftheanti-dilutionprotectioninconnectionwiththetransactioncontemplatedintheTermSheet.]

CapitalStructure: Theattachedcapitalisationtable(Appendix[___])detailsallofthesecuritiesthatwillbeoutstandingimmediatelypriortoandaftertheClosing.

AnticipatedClosingDate: [date](the“Closing”).[provideformultipleclosingsifapplicable].

Dividends: TheSeries[ ]ShareswillcarryadividendinpreferencetotheCommonSharesof[___]%oftheOriginalPurchasePriceperannum,whichwillaccrueandcumulateannuallyandwillbepayableonlyifdeclared.

[ThedividendwillbepayableinSeries[ ]SharesattheOriginalPurchasePriceorincashattheoptionoftheInvestorsintheeventofaliquidationoraDeemedLiquidationEventandwithoutanycompounding.]

[Withouttheapprovaloftheholdersofa[qualified]majorityoftheSeries[ ]Shares,nodividendswillbepaidontheCommonSharesorJuniorPreferredSharessolongasSeries[ ]Sharesareoutstanding.]

Redemption: Attheelectionoftheholdersofatleast[___]%oftheSeries[ ]Shares,subjecttoanyrestrictionsunderapplicablelaw,theCompany

willredeem(…)

[Alternative1:(…)alloutstandingSeries[ ]Sharesinfull,atanytimeafterthefifthanniversaryoftheClosing.]

[Alternative2:(…)onethirdoftheoutstandingSeries[ ]Sharesonthefourthanniversary,onehalfoftheoutstandingSeries[ ]SharesonthefifthanniversaryoftheClosingandalloftheremainingoutstandingSeries[ ]SharesonthesixthanniversaryoftheClosing.]

SuchredemptionwillbeatapurchasepriceequaltotheOriginalPurchasePrice(asadjustedforstocksplits,stockdividendsandthelike)plusanyaccruedandunpaiddividends.

[IntheeventthattheCompanydoesnothavefundslegallyavailableforsuchredemption,theSeries[ ]ShareholderswillhavetherighttorequiretheCompanytotakeanyfurtherstepsnecessarytoeffectasaleoftheCompany,includingretentionofaninvestmentbankerappointedbytheSeries[ ]ShareholderstoactivelymarkettheCompanyforsaletoathirdparty.]

VoluntaryConversion: AholderofSeries[ ]ShareswillhavetherighttoconvertSeries[ ]Shares,oranypartofsuchsharesincludingdeclareddividends,attheoptionoftheholder,atanytime,intoCommonShares.ThetotalnumberofCommonSharesintowhicheachSeries[ ]SharemaybeconvertedwillbedeterminedbydividingtheOriginalPurchasePricebytheconversionprice.Theconversionpricewillinitiallybe

equaltotheOriginalPurchasePrice.Theconversionpricewillhoweverbesubjecttoaproportionaladjustmentforsharedividends,splits,combinationsandsimilareventsandinaccordancewiththe‘Anti-Dilution’clause.

[Milestone:theconversionpriceoftheSeries[ ]Shareswillbeadjustedto€[___]pershareiftheCompanyfailstomeetanyofthemilestonessetforthinAppendix[___]tothisTermSheet.]

AutomaticConversion: TheSeries[ ]Shares,includingdeclareddividends,andallotherPreferredShareswillautomaticallybeconvertedintoCommonSharesatthethenapplicableconversionpriceupon(i)theclosingofafirmlyunderwrittenpublicofferingwithapriceperCommonShareofatleast[___]timestheOriginalPurchasePrice(subjecttoadjustmentsforsharedividends,splits,combinationsandsimilarevents)and[net/gross]proceedstotheCompanyofnotlessthan€[___](a“QualifiedOffering”),or(ii)uponthewrittenconsentoftheholdersof(a)[___]%oftheSeries[ ]Shares,votingseparately[and(b)[___]%ofthePreferredSharesoftheCompany,votingtogetherasasingleclass.

Anti-Dilution: IntheeventthattheCompanyissuesnewshares,orsecuritiesconvertibleintoorexchangeableforshares,atapurchasepricelowerthantheapplicableconversionpriceoftheSeries[ ]Shares,thentheconversionpriceoftheSeries[ ]Shareswillbesubjecttoa(n)(…)

[Alternative1:(…)fullratchetadjustment,reducingtheapplicableconversionpriceofthe

Series[ ]Sharestothepriceatwhichthenewsharesare(tobe)issued.]

[Alternative2:(…)[broadbased][narrowbased]weightedaverageadjustment,reducingtheapplicableconversionpriceoftheSeries[ ]Sharestoanewconversionpricecalculatedinaccordancewithaweightedaverageanti-dilutionformula.]

[Alternative3:(…)fullratchetadjustmentwithin[___]yearsoftheClosing.Thereafter,theconversionpricewillbesubjecttoadjustmentona[broadbased][narrowbased]weighted-averagebasis.]

[Alternative4:(…)(a)[broadbased][narrowbased]weighted-averageadjustmentifthepurchasepricepershareisequaltoorgreaterthan€[___]pershareand(b)fullratchetadjustmentifthepurchasepricepershareislowerthan€[___]pershare.]

[Alternative5:(…)adjustment,reducingtheapplicableconversionpriceoftheSeries[ ]Sharestoanewconversionpricecalculatedastheaverageoftheconversionpricesresultingfromtheweightedaverageadjustmentandthefullratchetadjustment(newconversionprice=(WA+FR)/2).]

[IntheeventthattheCompanyissuesnewshares,orsecuritiesconvertibleintoorexchangeableforshares,atapurchasepricelowerthantheapplicablepurchasepriceoftheSeries[ ]Shares,theholdersofSeries[ ]SharesmayelectthattheCompanyshallprocure(totheextentthatitislawfullyableto

doso)theissuetotheholdersofSeries[ ]Shares,additionalSeries[ ]Sharesagainstpaymentofsuchanamountthattheaveragepurchasepricetheyhavepaidisequaltothepurchasepriceatwhichthenewsharesareissued.]

Theanti-dilutionadjustmentwillnotapplyintheeventofissuanceof(…)

[Alternative1:(…)CommonSharesissuedorissuabletoemployees,consultantsordirectorsoftheCompanydirectlyorpursuanttotheESOP(assetoutinthe‘EmployeePool’clause)thathavebeenapprovedbytheSupervisoryBoard.].

[Alternative2:(…)(i)CommonSharesissuedorissuabletoemployees,consultantsordirectorsoftheCompanydirectlyorpursuanttotheESOP(assetoutinthe‘EmployeePool’clause)thathavebeenapprovedbytheSupervisoryBoard;(ii)CommonSharesissuedorissuableuponconversionofthePreferredShares;(iii)CommonSharesissuedorissuableinconnectionwithamerger,acquisition,combination,consolidationorotherreorganisationinvolvingtheCompanyandapprovedbytheSupervisoryBoardoftheCompany;(iv)CommonSharesissuedorissuableinconnectionwith(a)anyborrowingsfromacommerciallendinginstitution,(b)theleaseofequipmentorpropertybytheCompany,or(c)strategicpartnershipsand/orlicensingrelationships,solongassuchtransactionsareapprovedbytheSupervisoryBoard;and(v)CommonSharesissuedorissuable(a)inapublicofferingbeforeorinconnectionwithwhichalloutstanding

PreferredShareswillbeconvertedtoCommonSharesor(b)uponexerciseofwarrantsorrightsgrantedtounderwritersinconnectionwithsuchapublicoffering.]

Pay-to-Play: HoldersofPreferredSharesarerequiredtoparticipateinanydilutiveissuance[includingtheSeries[ ]Financing]totheextentoftheirprorataequityinterestinthePreferredShares,[unlesstheparticipationrequirementiswaivedforallPreferredShareholdersbytheSupervisoryBoard[(includingtheSeries[ ]Director)]][unlesstheholdersof[ ]%oftheSeries[ ]Shareselectotherwise].

IntheeventthataholderofPreferredSharesfailstoparticipateinaccordancewiththepreviousparagraph,thePreferredSharesheldbysuchshareholderwillautomatically[andproportionally],[losetheiranti-dilutionrights][losetheirliquidationrights][converttoCommonShares].

LiquidationPreference: IntheeventofaliquidationorwindingupoftheCompany,theholdersofSeries[ ]ShareswillbeentitledtoreceiveinpreferencetotheholdersofJuniorPreferredSharesandtheholdersofCommonSharespaymentofanamountequalto[___times]theOriginalPurchasePriceperSeries[ ]Share[plusanyaccumulatedandunpaiddividends].

IfthereareinsufficientassetsorproceedstopaysuchamounttotheholdersofSeries[ ]Sharesinfull,theamountavailablewillbepaidonaproratabasisbetweentheholdersofSeries[ ]Shares.

Thereafter,theholdersofJuniorPreferredShareswillreceivepaymentinfullofthe

ShareswillreceivepaymentinfulloftheoriginalpurchasepricepaidperJuniorPreferredShare[plusanyaccumulatedandunpaiddividends].

[Alternative1:(non-participatingliquidationpreference):Thereafter,anyremainingassetsorproceedswillbepaidexclusivelytotheholdersofCommonSharesonaproratabasis.]

[Alternative2:(participatingliquidationpreference):Thereafter,anyremainingassetsorproceedswillbedistributedprorataamongtheholdersofCommonSharesandtheholdersofPreferredShares(thelatteronanas-ifconvertedbasis).]

[Alternative3(non-participatingwithconversionattheoptionofinvestor):Intheeventofaliquidation(…),theholdersofSeries[ ]Shareswillbeentitledtoreceive,inpreferencetotheholdersofcommonshares,anamountequaltothegreaterof(i)theOriginalSubscriptionPriceoftheSeries[ ]Sharesheldplusanyaccruedandunpaiddividendsand(ii)theamounttheywouldhavereceivedhadtheyconvertedtheSeries[ ]Sharestocommonsharesimmediatelypriortosuchliquidationorwindingup.]

[Alternative4:(cappedparticipatingliquidationpreference):Thereafter,anyremainingassetsorproceedswillbedistributedprorataamongtheholdersofCommonSharesandtheholdersofPreferredShares(thelatteronanas-ifconvertedbasis)untilsuchtimethattheholdersofSeries[ ]PreferredShareshavereceivedanaggregateof[___times]theOriginalPurchasePricepershare(including

anyamountspaidpursuanttotheparagraphsabove).ThebalancethereafterwillbedistributedamongsttheholdersofCommonSharesonaproratabasis.]

Areorganisation,consolidation,mergeroftheCompany,saleorissueofSharesoranyothereventpursuanttowhichtheshareholdersoftheCompanywillhavelessthan51%ofthevotingpowerofthesurvivingoracquiringcorporation,orthesale,lease,transferorotherdispositionofallorsubstantiallyalloftheCompany’sassetswillbedeemedtobealiquidationorwindingupforthepurposesoftheliquidationpreference(a“DeemedLiquidationEvent”),therebytriggeringtheliquidationpreferencesdescribedabove[unlesstheholdersof[___]%oftheSeries[ ]Shareselectotherwise].

FavourableTerms: Thetermsherein,otherthanvaluation,aresubjecttoareviewoftherights,preferencesandrestrictionspertainingtotheexistingsharesintheCompany.AnychangesnecessarytoconformsuchexistingsharestothisTermSheetwillbemadeattheClosingasnecessaryinordertoensurethatholdersofexistingCommonSharesandJuniorPreferredShareswillnothaverightsmorefavourablethanthoseoftheholdersofSeries[ ]Shares.

BoardRepresentation: ThesupervisionofthepoliciesbytheManagementBoardandallothertasksanddutiesasassignedtoitwillbeentrustedtothesupervisoryboard(the“SupervisoryBoard”),whichatClosingwillconsistof[___]memberscomprisedof(i)[___]member(s)electeduponthenominationoftheholdersofa[qualified]majorityoftheSeries[ ]Shares(the“Series

[ ]Director”),(ii)[___]member(s)electeduponthenominationoftheholdersofthePreferredShares,(iii)[___]electeduponthenominationof[[](the“Founders”)],and(iv)[___]person(s)whohavespecificexpertiseintheCompany’sfieldofbusinesselectedbya[qualified]majorityofallshareholdersandwhoaremutuallyacceptable[totheFoundersandInvestors][totheotherdirectors].

[Inaddition,[name(s)Investor(s)][solongasit[they]hold(s)atleast[___]%ofthe[Series[ ]Shares][outstandingshares]willhavetherighttodesignateoneobservertotheSupervisoryBoard,whowillhavetherighttoparticipateindiscussionsandtoreceiveinformation,butwillnotbeentitledtovote.]

TheSupervisoryBoardwillmeetatleast[quarterly]withintermittentteleconferencingforatleastthefirst[twelve(12)]monthsafterClosing.

TheCompanywillpaythereasonableexpensesincurredbymembersoftheSupervisoryBoardinattendingSupervisoryBoardmeetings,includingcommitteemeetings,orotherwiserepresentingtheCompany.Furthermore,[___]willreceiveanannualretainerof€[___]andaper-meetingfeeof€[___].

[FollowingtheClosing,theSupervisoryBoardwillestablishanauditcommitteeandacompensationcommitteetobecomposedoftheSeries[ ]Directorand[___].Thecompensationcommitteewillberesponsibleforreviewingandapprovingalloptiongrants,aswellascompensationofofficersofthe

Companyandallnon-officeremployeeswhoseannualsalaryexceeds€[___].]

TheCompanywill[maintain][takeout]D&Oinsuranceintheamountofatleast€[five(5)]millionperoccurrence.

VotingRights: TheholdersofSeries[ ]ShareswillvotetogetherwiththeholdersofCommonSharesandnotasaseparateclassexceptasspecificallyprovidedhereinorasotherwiserequiredbylaw.[EachSeries[ ]SharewillhaveanumberofvotesequaltothenumberofCommonSharesissuableuponconversionofsuchSeries[ ]Share.][EachSeries[ ]ShareandCommonSharewillhaveonevote.]

ConsentRights: [Alternative1:TheCompany’sarticlesofassociationoranyotherconstitutivecorporatedocumentswillbeamendedtocontainrestrictionsmakingcertainresolutionsoftheManagementBoardwithamaterialeffectontheCompany’soperationsormanagementsubjecttothepriorapprovaloftheSupervisoryBoardand/ortheholdersof[PreferredShares][Series[ ]Shares],asthecasemaybe.Inaddition,thesedocumentswillcontainrestrictionsmakingcertainresolutionsofthegeneralmeetingofshareholders(e.g.resolutionsregardingthestructureandcapitalisationoftheCompany)[subjecttothepriorapprovaloftheholdersof[PreferredShares][Series[ ]Shares][subjecttoaqualifiedmajorityofvotes].]

[Alternative2:Theapprovalofa[qualified]majorityoftheSupervisoryBoard[includingtheSeries[ ]Director]and/ortheholdersof[PreferredShares][Series[ ]Shares]and/ora

qualifiedmajorityof[twothirds/threefourths]ofthevotesinthegeneralmeetingwillberequiredforthefollowingactions[unlessprovidedforintheannualbudget]:(i)engagementinanynewlineofbusinessorjurisdictionwheretheCompanyismanagedandcontrolledoranymaterialmodificationofthebusinessplan;(ii)approvaloftheannualbudgetandanynon-budgetedexpensesinexcessof€[___];(iii)implementationofanEmployeeStockOptionPlanandgrantinganyrightsthereunder;(iv)appointmentofemployeeswithayearlysalaryinexcessof€[___];(v)disposaloracquisitionofanysecuritiesinthecapitalofanyothercompanyorestablishmentofanynewbranchorsubsidiaryoftheCompany;(vi)exerciseofvotingrightsintheshareholders’meetingofanysubsidiaryoraffiliate,ifany;(vii)conductofanylitigationonbehalfoftheCompany;(viii)enteringintoaguaranteeorindemnityorotherwisecommittingtheCompany(otherthanintheordinarycourseofbusiness);(ix)provisionofanyloanoradvanceoranycredit(otherthanintheordinarycourseofbusiness)toanyperson;

(x)enteringintoanytransactionswithrelatedparties;(xi)changingtheaccountingpolicies;(xii)enteringintoanyagreements,contractsorarrangementsthatarenotofanatarm’slengthnature;and(xiii)undertakinganysuchlegalactsaswillbedeterminedandclearlydefinedbytheSupervisoryBoardandnotifiedtotheManagementBoardinwriting.

Theapprovalofa[qualified]majorityofthe[PreferredSharesvotingtogetherasaclass]

[Series[ ]Shares]and/oraqualifiedmajorityof[twothirds/threefourths]ofthevotesinthegeneralmeetingwillberequiredforthefollowingactions:

(i)issuanceofanysecurities(includinginstrumentsconvertibleintosecuritiesandtheissuanceofsubordinateddebt);(ii)declarationand/orpaymentofanyandalldividendsbytheCompany;(iii)enteringintoanymerger,consolidation,recapitalisation,changeofcontrol,orsaleofallorsubstantiallyalloftheassetsoftheCompany;(iv)undertakingofanyfilingforbankruptcy,insolvencybyoragainsttheCompany;(v)engagementinanytransactionthatconstitutesadeemeddividendaccordingtotherelevanttaxlaws;and(vi)makingofanyamendmentstothearticlesofassociation/charter/bylawsoftheCompanythatadverselyimpactthe[PreferredShares][Series[ ]Shares],includingbywayofmerger,consolidationorotherwise.

RegistrationRights: [Alternative1:Theholdersof[PreferredShares][Series[ ]Shares]willhavenormalregistrationrightsincludingdemandregistrationrights,[unlimited]‘piggyback’registrationrights,S-3registrationrights,transferofregistrationrights,proportionateunderwritercutbacks,andothertypicalregistrationrights,allattheexpenseoftheCompany.Theregistrationrightsofall[PreferredShares][Series[ ]Shares]willbethesame.]

[Alternative2:AllCommonShares[issuedor]tobeissueduponconversionofthe[PreferredShares][Series[ ]Shares]willbedeemed“RegistrableSecurities”.

DemandRegistration:Upontheearliestof(i)[three-five]yearsaftertheClosing;or(ii)[six]monthsfollowinganinitialpublicoffering(“IPO”),personsholding[30-50]%oftheRegistrableSecuritiesmayrequest[one][two](consummated)registrationsoftheirsharesbytheCompany.Theaggregateofferingpriceforsuchregistrationmaynotbelessthan€[___]million.IntheeventofanycutbacksbytheCompanyand/oritsunderwriters,sharestoberegisteredbyholdersofRegistrableSecuritieswillhavefirstpriorityforregistration.

RegistrationonFormS-3:Theholdersof[10-30]%oftheRegistrableSecuritieswillhavetherighttorequiretheCompanytoregisteronFormS-3(ifavailableforusebytheCompany)RegistrableSecuritiesforanaggregateofferingpriceofatleast€[___]million.TherewillbenolimitontheaggregatenumberofsuchFormS-3registrations,providedthattherearenomorethan[two]peryear.

PiggybackRegistration:TheholdersofRegistrableSecuritieswillbeentitledto‘piggyback’registrationrightsonallregistrationstatementsoftheCompany,subjecttotheright,however,oftheCompanyanditsunderwriterstoreducethenumberofsharesproposedtoberegisteredtoaminimumof[30]%onaproratabasisandtocompletereductiononanIPOattheunderwriter’sdiscretion.Inallevents,thesharestoberegisteredbyholdersofRegistrableSecuritieswillbereducedonlyafterallothershareholders’sharesarereduced.

Transferofregistrationrights:Theregistration

rightsmaybetransferredtoatransferee(otherthantoacompetitoroftheCompany)whoacquiresatleast€[___]ofthesharesheldbyaholderof[PreferredShares][Series[ ]Shares].[TransferofregistrationrightstoagroupcompanyofanyInvestorwillbewithoutrestrictionwithregardstominimumshareholding.]Expenses:Theregistrationexpenses(exclusiveofsharetransfertaxes,underwritingdiscountsandcommissions)willbebornebytheCompany.TheCompanywillalsopaythereasonablefeesandexpenses[nottoexceed€___,]ofonespecialcounseltorepresentalltheparticipatingshareholders.

Otherregistrationprovisions:Otherprovisionswillbecontainedintheregistrationrightsagreementwithrespecttoregistrationrightsasarereasonable,includingcross-indemnification,theCompany’sabilitytodelaythefilingofthedemandregistrationforaperiodofnotmorethan120days,theagreementbyholdersof[PreferredShares][Series[ ]Shares]ifrequestedbytheunderwriterinapublicofferingnottosellanyunregisteredsharestheyholdforaperiodofupto120daysfollowingtheeffectivedateoftheRegistrationStatementofsuchoffering,theperiodoftimeduringwhichtheRegistrationStatementwillbekepteffective,underwritingarrangementsandthelike.[TheregistrationrightswillapplyexclusivelytoCommonSharesissueduponconversionof[PreferredShares][Series[ ]Shares]andtheCompanywillhavenoobligationtoregisteranofferingofanyothershares.]

Ifsorequestedbythemanagingunderwriter,theholdersofPreferredShareswillreachanagreementwithregardtotheIPOnottosellor

agreementwithregardtotheIPOnottosellortransferanyCommonSharesoftheCompany[(excludingsharesacquiredinorfollowingtheIPO)]foraperiodofupto180daysfollowingtheIPO(providedalldirectorsandofficersoftheCompanyand[1–5]%shareholdersagreetothesamelock-up).]

[Intheeventthatthepublicofferingasreferredtointhis‘RegistrationRights’clausewillorhastakenplaceonastockexchangeoutsidetheU.S.,thentheholdersofRegistrableSecuritieswillbeentitledtoregistrationrightsequivalenttotherightsandobligationscontainedinthis‘RegistrationRights’clause(orasequivalentaspossiblegivendifferencesinapplicablelaw).]

RepresentationsandWarranties:

Theinvestmentagreementoraseparaterepresentationandwarrantiesagreementwillincludestandardrepresentationsandwarrantiesgrantedbythe[Company][Founder][ManagementBoard][andexistingshareholders],[including,butnotexpresslylimitedto:(i)organisationandgoodstanding;(ii)capitalisationstructure;(iii)dueauthorisation;(iv)validshareissuance;(v)governmentalconsents;(vi)nocompanylitigation;(vii)ownershiporexclusivelicenseofintellectualpropertyrights;(viii)employees;(ix)pensionplans;(x)assurancesoffulldisclosureandaccuracyofinformationprovided;(xi)goodtitletoallassets;(xii)tax;(xiii)accuracyoffinancialstatements;(xiv)absenceofadversedevelopments;and(xv)materialcontracts].

InformationRights: [AnyholderofSeries[ ]Shares][Aslongas

theholdersof[PreferredShares][Series[ ]Shares][(providedthattheyarenotacompetitoroftheCompany)]continuetoholdatleast[___][PreferredShares][Series[ ]Shares],they]willbegrantedaccesstotheCompanyfacilitiesandpersonnelduringnormalbusinesshoursandwithreasonableadvancenotification.TheCompanywilldelivertosuchshareholder(s)(i)un-auditedfinancialstatementswithin120daysaftertheendofthecalendaryear;(ii)quarterly[andmonthly]financialstatementswithin20daysaftersuchperiod,andotherinformationasdeterminedbytheSupervisoryBoard;(iii)thirtydayspriortotheendofeachfiscalyear,acomprehensiveoperatingbudgetforecastingtheCompany’srevenues,expenses,andcashpositiononamonth-to-monthbasisfortheupcomingfiscalyear;and(iv)promptlyfollowingtheendofeachquarter,anup-to-datecapitalisationtable,certifiedbytheCFO.TheforegoingprovisionswillterminateuponaQualifiedOffering.

UseofProceeds: TheCompanywillapplythenetproceedsofthesaleoftheSeries[ ]SharestotheInvestorsexclusivelytothedevelopmentandoperationoftheCompanyinaccordancewithabusinessplan(includingkeymilestones)andatwelvemonthbudgettobe[agreeduponbytheCompanyandtheInvestors][approvedbytheInvestors]priortoClosing.

Pre-EmptiveRights: Withoutprejudicetothe‘Anti-Dilution’clause,iftheCompanyproposestoofferequitysecurities,orsecuritiesconvertibleintoorexchangeableforshares,theholdersof[PreferredShares][Series[ ]Shares]willbeentitledtopurchase(…)

[Alternative1:(…)onaproratabasisalloranyportionofsuchsecurities.Anysecuritiesnotsubscribedforbyaholderof[PreferredShares][Series[ ]Shares]maybereallocatedamongtheotherholdersof[PreferredShares][Series[ ]Shares].Ifholdersof[PreferredShares][Series[ ]Shares]donotpurchaseallofsuchsecurities,theportionthatisnotpurchasedmaybeofferedtotheothershareholdersontermsnotlessfavourabletotheCompanyforaperiodof[60]days.]

[Alternative2:(…)suchsecuritiesinanamountsufficienttoallowtheholdersof[PreferredShares][Series[ ]Shares]toretaintheirfullydilutedownershipoftheCompany.]

[Thepre-emptiverightwillnotapplyintheeventofissuancesof(i)CommonSharesissuedorissuabletoemployees,consultantsordirectorsoftheCompanydirectlyorpursuanttotheESOP(assetoutinthe‘EmployeePool’clause)thathavebeenapprovedbytheSupervisoryBoard;(ii)CommonSharesissuedorissuableuponconversionofthePreferredShares;(iii)CommonSharesissuedorissuableinconnectionwithamerger,acquisition,combination,consolidationorotherreorganisationinvolvingtheCompanyapprovedbytheSupervisoryBoardoftheCompany;(iv)CommonSharesissuedorissuableinconnectionwith(a)anyborrowingsfromacommerciallendinginstitution,(b)theleaseofequipmentorpropertybytheCompany,or(c)strategicpartnershipsand/orlicensingrelationships,solongassuchtransactionsareapprovedbytheSupervisoryBoard;and(v)CommonSharesissuedorissuable(a)inapublicofferingbeforeorin

issuable(a)inapublicofferingbeforeorinconnectionwithwhichalloutstandingPreferredShareswillbeconvertedtoCommonSharesor(b)uponexerciseofwarrantsorrightsgrantedtounderwritersinconnectionwithsuchapublicoffering.]

RightsofFirstRefusal: [Holdersof[PreferredShares][Series[ ]Shares]][TheCompanyfirstandholdersof[PreferredShares][Series[ ]Shares]second(orviceversa)]havearightoffirstrefusalwithrespecttoany[share(s)intheCompany][CommonShare(s)][andsecuritiesconvertibleintoorexchangeableforshares]proposedtobesoldby[ashareholder][Founder][andemployeesholdingmorethan[1]%oftheoutstandingCommonShares(assumingconversionofthePreferredShares)],atthesamepriceandonthesametermsasoffered,witharightofoversubscriptionforholdersof[PreferredShares][Series[ ]Shares]of[share(s)intheCompany][CommonShare(s)][andsecuritiesconvertibleintoorexchangeableforshares]un-subscribedbytheotherholdersof[PreferredShares][Series[ ]Shares].

Therightoffirstrefusalwillnotapplyintheeventof(i)atransferofsharesapprovedbyamajorityof[75]%ofthevotingrights;or(ii)atransferbyaholderofPreferredSharestoanaffiliate.

Suchrightoffirstrefusalwillterminateupontheearlierof[(i)tenyearsfromtheClosingDate;](ii)aQualifiedOffering;(iii)asaleormergeroftheCompany;[(iv)withrespecttoanyemployee,whensuchemployeenolongerownsanyCommonShares];[(v)withrespecttoanyholderof[PreferredShares][Series[ ]

Shares],whensuchholderof[PreferredShares][Series[ ]Shares]nolongerownsatleast[___][PreferredShares][Series[ ]Shares]].

Co-SaleRight: BeforeanyshareholdermaysellitssharesintheCompany,afterhavingobservedthetermsandproceduresofthe‘RightoffirstRefusal’clause,hewillgive[theotherShareholder][theholderof[PreferredShares][Series[ ]Shares]anopportunitytoparticipateinsuchsaleonaproratabasis.

Drag-AlongRight: [Alternative1:Theholdersofa[qualified]majorityofthe[PreferredShares][Series[ ]Shares]mayrequireasaleoftheentireissuedsharecapitaloftheCompany.]

[Alternative2:Intheevent,[thatathirdpartymakesanoffertoacquirealloftheoutstandingsharesoftheCompany][ofaDeemedLiquidationEvent],thatisacceptedbytheholdersofa[qualified]majorityofthe[PreferredShares][Series[ ]Shares],theothershareholderswillbeobligedto[voteinfavourofsuchDeemedLiquidationEventandtotakeallactionsnecessaryinconnectiontherewith][offertheirsharestosaidthirdpartyunderthesametermsandconditionsspecifiedinsuchoffer]andaccordingly(totheextentnecessary)waivetheirrightsoffirstrefusaletc.]

[Iftheholdersofthe[PreferredShares][Series[ ]Shares]wishtoexercisethedrag-alongrightassetoutinthepreviousparagraphwithin[___]yearsaftertheClosing,theadditionalapprovaloftheholdersofa[qualified]majorityoftheoutstandingCommonShares(assumingconversionofthePreferredShares),willberequired.]

ManagementBoard: ThemanagementoftheCompanywillbeentrustedtothemanagementboard(the“ManagementBoard”)consistingatClosingof[___]aschiefexecutiveofficerand[___]aschief[]officer.AnynewManagementBoardmembersorseniorcompanyofficerswillnotreceiveanofferofemploymentwithouttheapprovaloftheSupervisoryBoard[includingtheSeries[ ]Director].[TheCompanywill,onabest-effortsbasis,hireachief[___]officerwithinthe[six(6)]monthperiodfollowingtheClosing.]

EmployeePool: UpontheClosing,theCompanywillreserveupto[[numberofshares]CommonShares][[___]%ofthepost-moneyoutstandingshares]forissuancetoemployees,directorsandconsultants(the“ReservedEmployeeShares”)[includingtheCommonSharespresentlyreservedforissuanceupontheexerciseofoutstandingoptions].TheReservedEmployeeShareswillbeissuedfromtimetotimeunder[sucharrangements,contractsorplans][anemployeeshareoptionplan(the“ESOP”)]as[recommendedbytheManagementBoardand]approvedbytheSupervisoryBoard.

VestingScheme: AllReservedEmployeeShareswillbesubjecttovestingasfollows:[25]%tovestattheendofthefirstyearfollowingtheirissuance,withtheremaining[75]%tovestmonthlyoverthenext[three]years.Goodleaver/badleaverprovisionswillapply.

Founders’Shares: UpontheClosing,[numberofshares]oftheCompany’sissuedandoutstandingCommonShareswillbeheldbytheFounders(the

“Founders’Shares”).TheFounders’Shareswillbesubjecttoasimilarvestingschemeassetforthinthe‘VestingScheme’clause,providedthatthevestingperiodwillbeginasoftheClosing.[Inaddition,intheeventthattheCompanymilestonesarenotsatisfied,theCompanywillhavetherightuponterminationofemploymentofaFounderwithorwithoutcause,torepurchasehisvestedFounders’SharesintheCompanyatfairmarketvalue(asdeterminedbytheSupervisoryBoard).]

Lock-Up: Atnotimepriorto[date]willanyFounderorkeyemployee,ifany,disposeofanysharesintheCompanyinanymanner,exceptwiththewrittenconsentof[two-thirds]oftheholdersofSeries[ ]Shares.Thislock-upwillinanycaselapseattheconsummationofaQualifiedIPO,tradesaleorotherliquidityevent.

EmploymentRelationships: TheCompanyhasorwillhavepriortotheClosingemploymentagreementsinaformreasonablyacceptabletotheInvestorswith[thefollowingpersons:[names]][eachFounderandkeyemployee].

Non-Competition/Non-Solicitation:

PriortoClosing,eachFounderandkeyemployeewillenterintoa[one]yearnon-competitionandnon-solicitationagreementinaformreasonablyacceptabletotheInvestors.

Non-DisclosureAgreement: PriortoClosing,eachcurrentandformerFounder,andeachofficer,employeeandconsultantwithaccesstotheCompany’sconfidentialinformation/tradesecretswillenterintoanon-disclosureagreementinaformreasonablyacceptabletotheInvestors.

AssignmentInventions: PriortoClosing,eachFounderandkeyemployeewillenterintoaproprietaryrightsassignmentagreementinaformreasonablyacceptabletotheInvestors.Suchagreementwillcontain,interalia,appropriatetermsandconditionsunderwhicheachFounderandkeyemployeewillassigntotheCompanytheirrelevantexistingpatentsandpatentapplicationsandotherintellectualpropertyrightsasdefinedbytheCompany’sbusinessplan.[IntheeventthataFounderisnotallowedtoassignhisIPunderanyoutstandingarrangement,asevidencedbysuchanarrangement,saidFounders’requirementtoassignhisIPwillbeamendedinawayacceptabletotheInvestors.]

KeyManInsurance: [Within[number]monthsoftheClosing,]theCompanywillprocurealifeinsurancepolicyforthoseindividualsdeemedtobekeymembersoftheCompany’smanagementteamintheamountof€[]millionperperson(orsuchlesseramountasapprovedbytheInvestors).[TheCompanywillpurchasesuchpolicieswithin[60]daysaftertheSupervisoryBoarddeterminesthesekeymembersoftheteam.]TheCompanywillbenamedasthebeneficiaryofthepolicies[providedhoweverthatattheelectionoftheholdersofa[qualified]majorityoftheSeries[ ]Shares,suchproceedswillbeusedtoredeemSeries[ ]Shares].

AgreementsatClosing: ThepurchaseoftheSeries[ ]Shareswillbemadepursuanttoa(n)[InvestmentAgreement][SubscriptionAgreement][SharePurchaseAgreement][andShareholders’Agreement]acceptabletotheInvestorsandcontaining,interalia,appropriaterepresentations,warrantiesasreferencedinthe‘Representationand

Warranties’clauseandcovenantsoftheCompany,[Founder][ManagementBoard][andexistingshareholders],whereappropriatereflectingtheprovisionssetforthhereinandappropriateconditionsoftheClosing.

FeesandExpenses: TheCompanywillpayreasonablefeesandexpensesincurredby[nameleadinvestor]inconnectionwith(thepreparationof)thetransactioncontemplatedbythisTermSheet,including(butnotlimitedto)expensesinconnectionwiththepreparationoflegaldocumentationandtheconductofduediligenceinvestigation(s)[subjecttoacapof€[___]][payableattheClosingorpayableassoonastheCompanyelectsnottoproceedwiththetransactioncontemplatedbythisTermSheet][payableattheClosingorpayableattheendoftheexclusivityperiodifnotransactionhasoccurredforwhateverreason].

Confidentiality: ThepartieswillkeepstrictlyconfidentialthefactthattheyhaveenteredintonegotiationsconcerningthetransactionscontemplatedbythisTermSheetandthecontentsofsuchnegotiationsandofthisTermSheet.[Aftertheexpiryof[___]monthsafterthedateonwhichthisTermSheetisexecuted,thepartieswillnolongerbeboundbythisconfidentialityclause.]

Exclusivity/No-Shop: TheCompanyagreestoworkingoodfaithexpeditiouslytowardstheClosing.TheCompanyagreesandshallensurethattheFounders,itskeyemployees,itsshareholdersandthemembersofitscorporatebodiesagree(a)todiscontinueanydiscussionswithotherpartiesconcerninganyinvestmentintheCompany,(b)nottotakeanyactiontosolicit,

initiate,encourageorassistthesubmissionofanyproposal,negotiationorofferfromanypersonorentityotherthantheInvestorsrelatingtothesaleorissuance,ofanyofthecapitalsharesoftheCompany[ortheacquisition,sale,lease,licenseorotherdispositionoftheCompanyoranymaterialpartofthesharesorassetsoftheCompany](c)tonotifytheInvestorspromptlyofanyinquiriesbyanythirdpartiesinregardstotheforegoing.Thisprovision‘Exclusivity/No-Shop’willbeinforceuntil[ ].

[Thereafterthisexclusivityperiodwillautomaticallycontinueforaperiodoftwoweeks(revolving)unlesseithertheCompanyortheInvestorsdecidetoendthediscussionsbywayofawrittennoticetotheotherpartyatleastfivedayspriortotheendingofsuchexclusivityperiod.]

GoverningLaw: ThisTermSheetandallotheragreementsresultingfromthisTermSheetwillbeexclusivelygovernedby[applicablelaw].

Insofaraspermissiblebylaw,exclusivejurisdictionforalldisputesarisingfromandinconnectionwiththepresentTermSheetwillbetheseatoftheCompany.

Non-BindingCharacter: Exceptasotherwisehereinspecificallyprovided,thepartiestothisTermSheetexpresslyagreethatnobindingobligationswillbecreateduntiladefinitiveagreementisexecutedwiththerequisiteformalityanddeliveredbybothparties.

Notwithstandingtheforegoing,the‘FeesandExpenses’,‘Confidentiality’,‘Exclusivity/No-

Expenses’,‘Confidentiality’,‘Exclusivity/No-Shop’,‘GoverningLaw’and‘Indemnities’clauseswillbebindinguponexecutionofthisTermSheet.

Indemnities: TheCompanyandtheInvestorswilleachindemnifytheotherforanyfinder’sfeesforwhicheitherisresponsible.[TheCompanyandtheInvestorswilleachindemnifytheotheragainstalllossesanddamagesarisingoutoforrelatingtobreachofthebindingobligations:the‘FeesandExpenses’‘Confidentiality’,‘Exclusivity/No-Shop’,‘GoverningLaw’and‘Indemnities’clausesofthisTermSheet.]

ConditionsPrecedent: TheClosingissubjecttothefollowingconditionsprecedent:

(1)satisfactorycompletionoffinancial,[IPcommercial,regulatory,tax]andlegalduediligence;(2)nomaterialadversechangeinthefinancialconditionortheprospectsoftheCompanyasmentionedinthebusinessplan[andanydocumentssenttotheInvestors];(3)negotiationandexecutionoflegaldocumentationsatisfactorytotheInvestors;(4)consentofthenecessarylegalmajorityoftheCompany’sshareholders,and(5)finalformalapprovaloftheInvestors’investmentandpartnercommittees.

Expiration: ThisTermSheetexpireson[date]ifnotacceptedbytheCompanybythatdate.

Signatures:

[NameCompany] Name:………………………………..

………………………………..Title:………………………………..

Date:………………………………..

[NameFounder(s)] [NameInvestor(s)]Name:………………………………..

Name:………………………………..

Title:………………………………..

Title:………………………………..

Date:………………………………..

Date:………………………………..

ANNEX2:PROFITANDLOSSACCOUNTANDCASHFLOWSTATEMENTCASESTUDY

ANNEX3:GLOSSARYOFTERMS

Acceleratedvesting—aspeedingupofthevestingschedule,forexampleincaseofanexit.

Angel—awealthyindividualwhoinvestsincompaniesinrelativelyearlystagesofdevelopment.

Anti-dilutionprotection—aclausethatprotectsaninvestorfromareductioninthevalueofhissharesduetotheissuancebythecompanyofadditionalsharestootherentitiesatapersharepricethatislowerthanthepersharepricepaidbytheinvestor.TheprotectionconsistsofanadjustmentmechanismcalledaRatchet.

Bridgeloan—ashort-termloanthatwilleventuallybereplacedbypermanentcapitalfromequityinvestorsordebtlenders.Inventurecapital,abridgeloanisusuallyashort-termnote(sixtotwelvemonths)thatconvertstopreferredstock.Seechapter4,section5–TypeofSecurity.

Broad-basedweightedaverage—asystemusedinconnectionwithanti-dilutionprotection.Abroad-basedweightedaverageprotectionadjustsdownwardthepricepershareofthepreferredstockofinvestorAduetotheissuanceofnewpreferredsharestoanewinvestorBatapricelowerthanthepriceinvestorAoriginallypaid.InvestorA’spreferredstockisre-pricedtoaweightedaverageofinvestorA’spriceandinvestorB’sprice.Ifabroad-basedweightedaveragesystemisused,thedenominatoroftheformulafordeterminingthenewweightedaveragepricecontainsthetotalnumberofoutstandingcommonshares(onanas-ifconvertedbasis)onafullydilutedbasis(includingallconvertiblesecurities,warrantsandoptions).Seechapter4,section14–Anti-Dilution.

Burnrate—therateatwhichacompanyusesupitsavailablefunds(normallyinordertomeetitsgrowthtargetsandcoveritsexpenses).Theburnrateisusuallyexpressedonamonthlyorweeklybasis.

Businessplan—adocumentthatdescribesabusinessopportunityandthemannerinwhichsuchanopportunitycanbetransformedintoasuccessfulbusiness.Abusinessplantypicallyincludesthefollowingchapters:executivesummary,product,managementteam,marketingplan,businesssystemandorganisation,realisationschedule,risksandfinancing.

Capitalisationtable—atableprovidinganoverviewofthecompany’sequitysecuritiesand,ifanysuchsecuritieshavebeenissued,non-equitysecurities

thatcanbeconvertedintoequitysecurities.Thecapitalisation(orcap)tableusuallyalsoprovidesanoverviewoftheownersoftheaforementionedsecurities.

Capitalgains—investmentearningsresultingfromthepurchaseandsaleofsharesorotherassets.

Conversion—theconvertingofaninvestor’spreferredsharesintocommonsharesatapre-setconversionratio,seechapter4,section12–VoluntaryConversion;ortheconversionofconvertiblenotesintopreferredsharesataconversionratiobasedontheissuepriceofafuturefinancinground,seechapter4,section5–TypeofSecurity.

Convertiblenote—aloanthatallowsthelendertoexchangethedebtforpreferredsharesinacompanyataconversionratiobasedontheissuepriceofafuturefinancinground.

Convertiblepreferredshares—atypeofsharesthatgivetheownertherighttoconvertsuchpreferredsharestocommonshares.Convertiblepreferredsharesarethemostcommontypeofequityusedbyventurecapitalinvestorstoinvestincompanies.Seechapter4,section5–TypeofSecurity.

Co-saleright—arightthatenablesaninvestortoincludehissharesinanysalebyanothershareholderatthesamepriceandunderthesametermsandconditionsthatapplytotheothershareholder.AlsoreferredtoasaTag-alongright.

Covenant—alegalpromisetodoornotdoacertainthing.Crowdfunding—thepracticeoffundingacompanybyraisingmanysmallamountsofmoneyfromalargenumberofindividuals,usuallyviatheinternet,basedonadonation,rewards,lendingorequitymodel.

Cumulativedividends—dividendsthataccrue.Ifacompanycannotpayacumulativedividendwhenitisdue,itisstillresponsibleforpayingitinthefuture.Thecompanymustfulfilthisobligationbeforeitcanpayoutdividendstoholdersofanyotherclassesofstock.Seechapter4,section10–Dividends.

Default—acompany’sfailuretocomplywiththetermsandconditionsofafinancingarrangement.

Demandregistration—atypeofregistrationright.DemandregistrationrightsgiveaninvestortherighttoforceacompanytoregisteritsshareswiththeSEC.Ademandregistrationrightgivesaninvestorcontroloverthetimingofaregistrationandineffectmeansthattheinvestorcanforcethecompanytogopublic.Seechapter4,section21–RegistrationRights.

Dilution—seeEconomicdilution,Price-baseddilutionandDilutionofownership.

Dilutionofownership—thereductionintheownershippercentageofcurrent

investors,foundersandemployeescausedbytheissuanceofnewsharestonewinvestors.

Dividends—ashareofprofitspaidbyacompanytoitsshareholders.Dividendscanbepaidincashorinshares.

Downround—afinancingroundinwhichthevaluationofthecompanyislowerthanthevaluedeterminedbyinvestorsinanearlierround.

Drag-alongrights—arightthatenablesashareholdertoforcetheothershareholderstoselltheirsharesofthecompany.Seechapter4,section28–Drag-AlongRight.

Duediligence—aninvestigationofacompanyaimedatassessingtheviabilityofapotentialinvestmentandtheaccuracyoftheinformationprovidedbythecompany.Thisinvestigationusuallyfocusesonthelegal,financial,taxandcommercialpositionofthecompany.

Dynamicequitysplit—theconceptthateveryoneinvolvedintheearly-stagephaseofastart-upreceivesrewards(thatcanbeconvertedintoequity)fortheircontribution,basedonanagreedcalculationmethod.

Earlystage—theearlyphaseofacompany’slife.Thistermisusedtoindicatethephaseaftertheseed(formation)stagebutbeforethephaseinwhichthecompanystartsgeneratingrevenues.

EmployeeStockOptionPlan(ESOP)or(Restricted)StockOwnershipPlan—aplanestablishedbyacompanytoletcertainemployeesbenefitstronglyfromtheincreaseinvalueofthecompany.UnderanESOP,certainemployeeshavearighttobuysharesinthecompanyatapredeterminedprice(exerciseprice)withinaspecifiedperiodoftime(exerciseperiod).Undera(Restricted)StockOwnershipPlan,employeesarenotgrantedoptions,butbuysharesatonce.ESOPsand(Restricted)StockOwnershipPlansoffercompaniesawaytoemploy(andretain)high-qualitypeopleatrelativelylowsalaries.Seechapter4,section30–EmployeePool.

Equity—Equityrepresentsownershipinacompanyandisusuallyrepresentedbycommonsharesandpreferredshares.Equityisequaltoassetslessliabilities.

ESOP—seeEmployeeStockOptionPlan.Founder—apersonwhoparticipatesinthecreationofacompany.Fullratchetprotection—atypeofanti-dilutionprotection.IfnewpreferredsharesareissuedtoinvestorBata(pershare)pricethatislowerthanthepriceinvestorApaidinanearlierround,theeffectofthefullratchetisthatthepersharepriceofinvestorAisadjusteddownwardtothepricepaidbyinvestorB.Usually,asaresultoftheimplementationofafullratchet,thecompanymanagementandemployeeswhoowncommonsharessuffersignificant

dilution.Seechapter4,section14–Anti-Dilution.Fullydilutedbasis—amethodologyforcalculatingpershareratios.Underthismethodology,thedenominatorisequaltothetotalnumberofsharesissuedbythecompany,wherebyitisassumedthatallcommonshareequivalents(suchasconvertiblenotes,convertiblepreferredshares,options,warrants,etc.)havebeenconvertedintocommonshares.

Initialpublicoffering(IPO)—acompany’sfirstsaleofsharestothepublicalsoreferredtoasgoingpublic.AnIPOisoneofthewaysinwhichacompanycanraiseadditionalcapitalforfurthergrowth.

Internalrateofreturn(IRR)—theinterestrateatwhichacertainamountofcapitaltodaywouldhavetobeinvestedinordertogrowtoaspecificvalueataspecifictimeinthefuture.

IPO—seeInitialpublicoffering.IRR—seeInternalRateofReturn.Issuer—thecompanyissuingsecurities.Laterstage—thelaterphaseofacompany’slife.Inthisphase,thecompanyhasprovenitsconcept,achievedsignificantrevenues,andisapproachingcashflowbreak-evenorpositivenetincome.AlaterstagecompanyistypicallyaboutsixtotwelvemonthsawayfromaliquidityeventsuchasanIPOorstrategictake-over.

Leadinvestor—Thefirmorindividualthatorganisesaroundoffinancingandusuallycontributesthelargestamountofcapitaltothedeal.

Liquidation—Thesellingofalltheassetsofacompanyandtheuseofthecashproceedsofthesaletopayoffcreditorspriortothecompletecessationofoperations.

Liquidationpreference—therightofaninvestortopriorityinreceivingtheproceedsfromthesaleorliquidationofacompany.Thisrightisusuallyattachedtothepreferredsharesandgivestheholdersofsuchsharesapositionthatisseniororaheadoftheholdersofcommonsharesorjuniorpreferredsharesifthecompanyissoldorliquidated.

Liquidityevent—aneventthatallowsaninvestortorealiseagainorlossonhisinvestment.ExamplesofliquidityeventsincludeInitialPublicOfferings(IPOs),tradesales,buy-outsandtake-overs.

Lock-upagreement—anagreementnottosellortransfersharesinacompanyforaspecificperiod.Underwriters,forexample,requirelock-upagreementsinmostIPOs.Insuchcases,theywillusuallyrequirethelargestshareholdersanddirectorsofthecompanytoagreetoalock-upperiodofsixmonthsfollowingtheIPO.

Narrow-basedweightedaverageanti-dilution—asystemusedinconnection

withanti-dilutionprotection.Anarrow-basedweightedaverageprotectionadjustsdownwardthepricepershareofthepreferredstockofinvestorAduetotheissuanceofnewpreferredsharestoanewinvestorBatapricelowerthanthepriceinvestorAoriginallypaid.InvestorA’spreferredsharesarere-pricedtoaweightedaverageofinvestorA’spriceandinvestorB’sprice.Ifanarrow-basedweightedaveragesystemisused,thedenominatoroftheformulafordeterminingthenewweightedaveragepricecontainsonlyatotalnumberofoutstandingshares(asopposedtothenumbersharesonafullydilutedbasis).Thisnumbercanvaryfromallpre-moneyoutstandingshares(onanon-convertedandnon-dilutedbasis)toonlythepreferredsharesissuedinthepreviousround.Thenarrowerthebase,thelargertheeffectofthenewpriceandthemorefavourabletheclauseistotheprotectedinvestors.Seechapter4,section14–Anti-Dilution.

Non-compete—anagreementoftensignedbykeyemployeesandotherpersons(suchasmanagement)whoarekeytothesuccessofacompanypursuanttowhichsuchpersonsagreenottoworkforcompetitorcompaniesorformanewcompetitorcompanywithinacertaintimeperiodafterterminationoftheiremploymentwiththecompany.

Non-cumulativedividends—dividendsthatdonotcumulate.Inotherwords,ifthecashflowofthecompanyisinsufficienttomakepaymentofdividendpossibleatacertainpointintime,theownersofthesharesentitledtonon-cumulativedividendswillnotreceivethedividendowedforthetimeperiodinquestion(alsonotatalaterstage)andwillhavetowaituntilanothersetofdividendsisdeclared.

Non-solicitation—anagreementoftensignedbyemployeesandmanagementthatprohibitssuchpersons,oncetheyhaveleftthecompany,fromsolicitingthecustomersandemployeesofthecompany.

Non-disclosureagreement—anagreementoftensignedbykeyemployeesandmanagementthatisaimedatprotectingthecompanyagainstimproperdisclosureoruseofthecompany-sensitiveinformationandmaterialsthatarenotknowntothegeneralpublic.

Pay-to-play—aclausethatisaimedatpunishinginvestorswhodonotparticipateonaproratabasisinafinancinground,bycancellingsomeoralloftheirpreferentialrights.Themostonerousversionofpay-to-playisautomaticconversiontocommonshares,whichinessenceendsanypreferentialrightsofaninvestor,suchastherighttoinfluenceimportantmanagementdecisions.

Paripassu—alegaltermthatmeansinequalproportion.Itusuallyreferstotheequaltreatmentoftwoormorepartiesinanagreement.

Participatingdividends—therightofholdersofcertainpreferredsharestoreceivetheirpreferreddividendsandshare(withthecommonshareholders)inthedividendsavailablefordistributionafterthepreferreddividendhasbeenpaid.Seechapter4,section10–Dividends.

Participatingpreferredshare—apreferredsharethatisentitledtoparticipatingdividends.Aparticipatingpreferredsharecanineffectbesplitintotwoparts:apreferredsharepartandcommonsharepart.Thepreferredsharepartentitlestheownertoreceiveapredeterminedcashdividend.Thecommonsharepartrepresentsadditionalcontinuedownershipinthecompany.

Piggybackright—therightofaninvestortofollowintheprocesstohavesharesregistered.Inthecaseofpiggybackrights,thisprocessisinitiatedandcontrolledbyothers.Consequently,theinvestorcannotforcethecompanytogopublic.Seechapter4,section21–RegistrationRights.

Post-moneyvaluation—thevaluationofacompanyimmediatelyafteraninvestmentinthecompany.If,forexample,aninvestorinvests€2millioninacompanyvaluedat€1millionpre-money(beforetheinvestmentwasmade),thepost-moneyvaluationwillbe€3million.

Preference—apreferredposition,orseniority.Inventurecapitaltransactionsinvestorsusuallyhavepreferencewithrespecttodividendsandproceedsfromaliquidityevent,forexample.

Preferredshare—atypeofsharetowhichcertainspecialrightsareattachedthatarenotattachedtocommonshares.Thesespecialrightsmayincludepreferreddividends,anti-dilutionprotection,votingrights,drag-alongrights,tag-alongrights,liquiditypreference,rightsoffirstrefusal,etc.Aventurecapitalinvestorwillnormallyonlysubscribetopreferredshares.

Pre-moneyvaluation—thevaluationofacompanyimmediatelybeforeaninvestmentinthecompany.

Privateequity—equityinvestmentsinnon-publiccompanies.Privateplacement—thesaleofsecuritiesdirectlytoalimitednumberofinvestors.

Prospectus—aformalwrittenoffertosellsecuritiesthatsetsforthaplanfora(proposed)businessopportunityandthatgivessufficientdetailaboutsuchopportunityforaprospectiveinvestortomakeadecision.

QualifiedIPO(orQualifiedOffering)—apublicofferingofsecuritiesthatmeetscertainpredeterminedcriteria,suchasaminimumpersharepriceandminimumproceedstothecompany.

Redemptionrights—therightofaninvestortoforcethecompanytorepurchasetheinvestors’preferredshares.

Registration—theprocesswherebysharesofacompanyareregisteredwith

therelevantauthoritiesinpreparationforasaleofthesharestothepublic.Registrationrights—therightsofaninvestorinacompanyregardingtheregistrationofthecompany’ssharesforsaletothepublic.Examplesofregistrationrightsarepiggybackrightsanddemandrights.Seechapter4,section21–RegistrationRights.

Rightoffirstrefusal—arighttomatchanyoffermadeforsharesheldbyashareholder,underthesametermsandconditions,andthustopre-emptanyotherbuyers.Seechapter4,section26–RightsofFirstRefusal.

Round—aneventwherebyfinancingisprovidedtoacompanybyoneormoreinvestors.

Security—adocumentthatindicatesthattheholderownsaportionofacompany’sequityordebt,orhastherighttopurchaseorsellsuchportion.Shares,notes,bondsandoptionsareexamplesofsecurities.

Seedround—thefirstfinancingroundafterincorporationoftheCompany.Fundsareprovidedbyseedventurecapitalists,angels(highnet-worthindividuals)orfriendsandfamilytothefoundersofastart-upcompany.Theamountraisedwithaseedroundusuallydoesnotexceed2millioneuros.

Seniority—higherpriority.SeriesApreferredshares—preferredsharesissuedbyacompanyinexchangeforcapitalfrominvestorsintheSeriesAroundoffinancing.

SeriesAround—thefirstsignificantfinancingroundinwhichoneormoreventurecapitalist(s)become(s)involvedinafast-growingcompanythatwaspreviouslyfinancedbyfounders,seedventurecapitalistsand/orangels.Usually,aSeriesAroundraisesfromtwototenmillioneuros.

SeriesBround—thefinancingroundfollowingtheSeriesAroundinwhichadditionalfundsareprovidedtothecompany.SubsequentroundsarecalledC,D,andsoon.

Stock—ashareofownershipinacompany.StockAppreciationRights(SARs)—rights,usuallygrantedtoemployees,toreceiveabonusequaltotheappreciationinthecompany’ssharesoveraspecifiedperiod.

Stockoption—arighttopurchaseorsellashareataspecificpricewithinaspecificperiod.

Subordinateddebt—aloanoverwhichaseniorloantakespriority.Intheeventofaliquidationofthecompany,subordinateddebt-holdersreceivepaymentonlyafterseniordebtispaidinfull.Alsoknownasjuniordebt.

Syndicate—agroupofinvestorsthatagreetoprovidecapitaltoacompanyunderthesameterms.Thetermsyndicatecanalsorefertoagroupof(investment)banksthatagreetoparticipatein,forexample,thesaleofstock

tothepublicaspartofanIPO.Tag-alongright—therightofaninvestortoincludehissharesinanysalebyanothershareholderatthesamepriceandunderthesametermsandconditionswhichapplytosuchothershareholder.AlsoreferredtoasCo-saleright.Seechapter4,section27–Co-SaleRight.

Termsheet—adocumentsummarisingthebasictermsandconditionsunderwhichinvestorsarepreparedtomakeapotentialinvestmentinacompany.

Underwriter—aninvestmentbankthatcommitstothesuccessfuldistributionofapublicissue,failingwhichthebankwouldtakethesecuritiesbeingofferedintoitsownbooks.

Valueinflectionpoint—aneventorseriesofeventsthatresultsinasignificantchangeinthevalueofacompany.Aninflectionpointcanbeconsideredaturningpointafterwhichadramaticchange,witheitherpositiveornegativeresults,isexpectedtoresult.

Venturecapital—asegmentoftheprivateequityindustry,whichfocusesoninvestinginnewcompanieswithahighgrowth-rate.

Voluntaryconversion—therightofaninvestortoconverthispreferredsharesintocommonshares.

Votingright—therightofashareholdertovoteoncertainmattersaffectingthecompany.

Warrant—arighttobuyaspecifiednumberofsharesatafixedexercisepricebyexercisingsuchrightpriortoaspecifiedexpirationdate.Awarrantisalong-termoption,usuallyvalidforseveralyearsorindefinitely.Seechapter4,section6–WarrantCoverage.

Weightedaverageprotection—atypeofanti-dilutionprotection.IfnewpreferredsharesareissuedtoinvestorBata(pershare)pricewhichislowerthanthepriceinvestorApaidinanearlierround,theeffectoftheweightedaverageprotectionisthatthepersharepriceofinvestorAisadjusteddownwardtoaweightedaverageofthepricepaidbyinvestorAandthepricepaidbyinvestorB.Forthenewpricetheweightingfactoristhenumberofsharesissuedinthedilutivefinancinground.Fortheoldprice,thefactoriseither(i)thetotalnumberofcommonsharesoutstandingpriortothedilutivefinancingroundonanas-ifconvertedandfullydilutedbasis(broadbasedweightedaverage)or(ii)anynumberofsharesoutstandingpriortothedilutivefinancingroundlessthanthenumberunder(i)(narrowbasedweightedaverage).Seechapter4,section14–Anti-Dilution.

Zoneofmisalignment—therangeofexitvaluesweretheinterestsoftheholdersofcommonsharesandpreferredsharesaremisalignedduetotheeffectsoftheliquidationpreference.

ANNEX4:IRRANALYSIS:YEARSINVESTEDVS.RETURNMULTIPLE

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