Term Sheet Convertible Preferred Stock

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This Term Sheet for Convertible Preferred Stock summarizes the terms under which stock can be purchased. This agreement is non-binding and will be followed by a formal stock purchase agreement.

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This Term Sheet for Convertible Preferred Stock sets out a summary of the proposed terms under which an investor will purchase convertible preferred stock. This is a non-binding document and will be followed with definitive stock purchase agreements. The Term Sheet includes information regarding: i) number of shares to be purchased and the total, and per, share purchase price; ii) regarding dividends; iii) investor rights including voting, liquidation, preemptive and registration rights; iv) employee stock options; v) and restrictive covenants.

This Term Sheet for Convertible Preferred Stock includes:
  • Stock: Amount of stock, purchase price and price per each share;
  • Takedowns: Stock shall be taken down in three increments which are set out in clear detail;
  • Voting Rights: Holders of preferred stock have the right to vote the number of shares owned;
  • Holder: Information regarding each holder of shares including number of shares and percentage of total shares.

Protect yourself and your rights by using our attorney-prepared forms.

This attorney-prepared packet contains:
  1. General Information
  2. Instructions and Checklist
  3. Term Sheet for Convertible Preferred Stock
State Law Compliance: This form complies with the laws of all states
This is the content of the form and is provided for your convenience. It is not necessarily what the actual form looks like and does not include the information, instructions and other materials that come with the form you would purchase. An actual sample can also be viewed by clicking on the "Sample Form" near the top left of this page.
 
 
Term Sheet for Convertible
Preferred Stock
Summary of Proposed Principal Terms

 

 

 
Amount:
________  shares of Series A Convertible Preferred Stock (Preferred Stock), at a purchase price of $________  or approximately $________  per share.
 
 
 
 
Takedowns:
The Preferred Stock shall be taken down in three increments, upon conditions precedent, as follows:
 
First Increment:
________  shares ($________ ) shall be purchased upon the closing of the Agreement.
 
Second Increment:
 
________  shares ($________ ) shall be purchased upon reasonable demonstration that: ______________________________________ [technical benchmarks] Demonstration of the above technical capability shall be evaluated for the Investors by ________ .
 
Final Increment:
________ shares shall be purchased on or before ___________ [date], provided that the first two increments have been purchased, and ____________________________________ [provide further technical or marketing benchmarks].
 
 
 
 
Dividends:
The holders of the Preferred Stock shall be entitled to quarterly dividends at the annual rate of __% [e.g., percentage of the original purchase price], only if declared by the Board, which shall not accumulate and shall be payable only out of assets legally available therefor [optional: only after the Company has earned $________ after taxes for a fiscal year].
 
 
 
 
Conversion:
The Preferred Stock shall be convertible into ________  shares of the Companys Common Stock at the election of the Investors, provided that the Preferred Stock shall be automatically converted upon a public offering of the Companys securities of at least $________  where the Common Stock is offered for not less than $________  per share.
 
 
 
 
No Redemption:
The Preferred Stock is not redeemable.
 
 
 
 
[or Optional Redemption by Company:
The Preferred Stock may be redeemed by the Company at its election, in whole or in part, at any time after the ________  year, at par value (approximately $________  per share) plus cumulative but unpaid dividends.]
 
 
 
 
[or Redemption Upon Vote of Investors
The Preferred Stock shall be redeemed in __ [number] equal annual installments commencing in the first fiscal year following a vote by the holders of a majority of the outstanding Preferred Stock.]
 
 
 
 
[or Mandatory Redemption:
The Preferred Stock shall be redeemed at par value (approximately $________  per share) plus cumulative but unpaid dividends, in three equal annual installments, beginning at the end of the ________  year through the end of the  
__________________________________________________________________ year.]
 
 
 
 
Voting Rights:
The holder of each share of Preferred Stock shall have the right to vote the number of votes equal to the number of common shares issuable upon conversion of the Preferred Stock. The Preferred Stock shall vote with the Common Stock all as a single class.
 
 
 
 
Liquidation Rights: [Non-Participating Preferred]
The holders of the Preferred Stock shall be entitled to a liquidation preference in an amount equal to 100% of the par value [or purchase price] per share plus cumulative but unpaid dividends, if any. The liquidation preference shall also be applicable, in the form of a cash payment to the holders of the Preferred Stock, in the event of a sale of all or substantially all of the stock or assets of, or merger or consolidation of, the Company.
 
 
 
 
[Participating Preferred]
After payment of the full liquidation preference, the Preferred stock will share with the Common Stock any remaining assets, as if the Preferred Stock were fully converted, until the holders of Preferred Stock have received ____% [percentage] of the original purchase price in the aggregate under this Section.
 
 
 
 
Preemptive Rights:
Holders of Preferred Stock shall have the right to participate in any future sales of securities by the Company (other than (a) options and shares granted or sold to employees, directors and consultants, (b) issuance of stock in connection with corporate acquisitions or joint ventures) on the basis of maintaining their pro rata share of all outstanding common and preferred shares of the company.
 
 
 
 
Registration Rights:
The holders of the Preferred Stock shall be entitled to two demand registrations (the first one at the expense of the Company and the second one at the expense of the Investors) and unlimited piggyback registration rights, provided that any request for a demand registration must be made by the holders of at least a majority of the then outstanding shares of Preferred Stock or common shares issued upon conversion. Registration rights are transferable only with a transfer of at least __% [percentage] of the registrable shares.
 
 
 
 
Information Rights:
Each holder of the Preferred Stock will be furnished with an annual budget and annual audited financial statements within 90 days following the end of each fiscal year, and a trial balance sheet and profit and loss statement from books and records within 30 days following the end of each month. Any holder of the Preferred Stock shall be entitled to inspection rights and a summary of the Companys financial plans.
 
 
 
 
Representation on Board:
The holders of Preferred Stock shall have the right to designate ________  [number] directors. The ________ remaining directors will be designated by holders of the Common Stock. One director shall be jointly elected by a majority of common stock and a majority of the Series A Preferred stock, voting as separate classes; and the holders of preferred stock and common stock voting together as a single class shall be entitled to elect any additional directors.
 
 
 
 
Right of First Refusal And Co-Sale Rights:
The Company shall have a right of first refusal, and the holders of Preferred Stock shall have a right of second refusal with respect to any proposed sale by any Founder to a third party. If neither the Company nor the holders of Preferred Stock exercise such right of refusal, the Selling Founder shall provide a co-sale right to the holders of Preferred Stock to participate in such sale, such pro-rata right to reduce the amount of stock sold by the Founder. These rights of refusal and co-sale rights shall terminate upon the Companys initial public offering or upon sale of the Company through merger, sale of stock or assets or otherwise.
 
 
 
 
Anti-Dilution Provisions:
The Preferred Stock shall be subject to customary weighted average anti-dilution provisions (i.e., if the Company issues additional Common Stock at less than the $________  conversion price, an appropriate weighted adjustment would be made in the conversion price).
 
 
 
 
Drag-Along Rights
These rights require the founders to vote their shares in favor of a merger, sale of assets or other reorganization where control of the company is being transferred to a buyer, in the event that the preferred shareholders elect to sell control of the company through such reorganization requiring a vote or consent of shareholders. In order to protect the founders from an unreasonable position such as personal liability on the companys representations and warranties, indemnification of the buyer and other provisions, these types of provisions are excluded from the founders obligation to approve the reorganization.
 
 
 
 
Employee Stock Options:
An employee stock option plan shall be established, and an amount of Common Stock equal to 10% of the issued and outstanding Common Stock shall be reserved for issuance under the plan.
 
 
 
 
Protective Rights:
The holders of the Preferred Stock shall, by a vote of majority thereof, have the right to consent to mergers, acquisitions, sales of assets or amendments to the Companys charter documents, creation of any new class of shares having rights or privileges senior to or on a parity with the Preferred Stock, declare any dividends, cancel, exchange, redeem or otherwise acquire any shares of the companys capital stock, authorize a liquidation or liquidation event, change the number of directors to a number other than ___ [number] or any other action which materially and adversely affects the rights, privileges and preferences of the Preferred Stock.
 
 
 
 
Restrictive Covenants:
As long as 25% or more of the original par value of the Preferred Stock (or the Common Stock into which the Preferred Stock is converted) is outstanding, the holders of the Preferred Stock shall have the following rights:
1. Upon certain specified events (e.g., failure to par accrued dividends, or fall below certain financial ratios), to elect a majority of the Companys Board of Directors, by holding an irrevocable proxy (or voting trust agreement) from the Companys founders sufficient to give the Investors Common Stock voting power equal to at least 51% of the total Common Stock voting power, to wit: the voting rights to approximately  
__________________________________________________________________ shares of Common Stock held by the founders.
2. To approve the sale of any additional common or preferred stock or the incurrence of any long-term debt.
3. To approve the issuance of stock options, other than up to ________  shares to key employees, consultants and directors.
4. To approve any sale or merger of the Company, or dissolution or sale of assets.
 
 
 
 
Repurchase of Founders Stock:
The stock held by the founders may be repurchased by the Company at the original purchase price in the event that the founders employment by the Company is terminated because of voluntary quit or discharge for cause, to wit: by reason of the fact that the founder has been convicted of a felony or has been discharged from employment for theft, dishonesty, misconduct, alcohol or drug addiction, for acts which cause embarrassment to or detrimental publicity of the Company, habitual neglect of his or her duty, or willful breach of duty or gross negligence in carrying out the activities for which the founder is employed. Voluntary quit shall not be deemed to include termination of employment by death, disability, or because of a substantial reduction in the salary, responsibilities or position of the founder.
Such repurchase rights by the Company shall lapse as follows:
________ % of the founders shares at the closing of the Agreement;
________ % of the founders shares at the end of each year after closing.
 
 
 
 
Nondisclosure Agreements:
The founders will execute appropriate noncompetition and nondisclosure agreements.
 
 
 
 
Capitalization:
After completion of the three incremental purchases of Preferred Stock, and assuming full conversion of the Preferred Stock into Common Stock, the Common Stock capitalization of the Company will be as follows:
 
 
 
Holder
No. of Common Shares to be  
Issued and Outstanding
Price Per Share
% of Total
 
 
 
 
Series A Preferred Stock Purchasers
________  shares
________
________ %
Founders
________  shares
________
________ %
Directors, Key Employees & Consultants
________  shares
________
________ %
Total
________
________
________
 
________  shares
 
100%
 
 
 
 
 
 
 
 
 
Number of Pages9
DimensionsDesigned for Letter Size (8.5" x 11")
EditableYes (.doc, .wpd and .rtf)
UsageUnlimited number of prints
Product number#43685
This is the content of the form and is provided for your convenience. It is not necessarily what the actual form looks like and does not include the information, instructions and other materials that come with the form you would purchase. An actual sample can also be viewed by clicking on the "Sample Form" near the top left of this page.
 
 
Term Sheet for Convertible
Preferred Stock
Summary of Proposed Principal Terms

 

 

 
Amount:
________  shares of Series A Convertible Preferred Stock (Preferred Stock), at a purchase price of $________  or approximately $________  per share.
 
 
 
 
Takedowns:
The Preferred Stock shall be taken down in three increments, upon conditions precedent, as follows:
 
First Increment:
________  shares ($________ ) shall be purchased upon the closing of the Agreement.
 
Second Increment:
 
________  shares ($________ ) shall be purchased upon reasonable demonstration that: ______________________________________ [technical benchmarks] Demonstration of the above technical capability shall be evaluated for the Investors by ________ .
 
Final Increment:
________ shares shall be purchased on or before ___________ [date], provided that the first two increments have been purchased, and ____________________________________ [provide further technical or marketing benchmarks].
 
 
 
 
Dividends:
The holders of the Preferred Stock shall be entitled to quarterly dividends at the annual rate of __% [e.g., percentage of the original purchase price], only if declared by the Board, which shall not accumulate and shall be payable only out of assets legally available therefor [optional: only after the Company has earned $________ after taxes for a fiscal year].
 
 
 
 
Conversion:
The Preferred Stock shall be convertible into ________  shares of the Companys Common Stock at the election of the Investors, provided that the Preferred Stock shall be automatically converted upon a public offering of the Companys securities of at least $________  where the Common Stock is offered for not less than $________  per share.
 
 
 
 
No Redemption:
The Preferred Stock is not redeemable.
 
 
 
 
[or Optional Redemption by Company:
The Preferred Stock may be redeemed by the Company at its election, in whole or in part, at any time after the ________  year, at par value (approximately $________  per share) plus cumulative but unpaid dividends.]
 
 
 
 
[or Redemption Upon Vote of Investors
The Preferred Stock shall be redeemed in __ [number] equal annual installments commencing in the first fiscal year following a vote by the holders of a majority of the outstanding Preferred Stock.]
 
 
 
 
[or Mandatory Redemption:
The Preferred Stock shall be redeemed at par value (approximately $________  per share) plus cumulative but unpaid dividends, in three equal annual installments, beginning at the end of the ________  year through the end of the  
__________________________________________________________________ year.]
 
 
 
 
Voting Rights:
The holder of each share of Preferred Stock shall have the right to vote the number of votes equal to the number of common shares issuable upon conversion of the Preferred Stock. The Preferred Stock shall vote with the Common Stock all as a single class.
 
 
 
 
Liquidation Rights: [Non-Participating Preferred]
The holders of the Preferred Stock shall be entitled to a liquidation preference in an amount equal to 100% of the par value [or purchase price] per share plus cumulative but unpaid dividends, if any. The liquidation preference shall also be applicable, in the form of a cash payment to the holders of the Preferred Stock, in the event of a sale of all or substantially all of the stock or assets of, or merger or consolidation of, the Company.
 
 
 
 
[Participating Preferred]
After payment of the full liquidation preference, the Preferred stock will share with the Common Stock any remaining assets, as if the Preferred Stock were fully converted, until the holders of Preferred Stock have received ____% [percentage] of the original purchase price in the aggregate under this Section.
 
 
 
 
Preemptive Rights:
Holders of Preferred Stock shall have the right to participate in any future sales of securities by the Company (other than (a) options and shares granted or sold to employees, directors and consultants, (b) issuance of stock in connection with corporate acquisitions or joint ventures) on the basis of maintaining their pro rata share of all outstanding common and preferred shares of the company.
 
 
 
 
Registration Rights:
The holders of the Preferred Stock shall be entitled to two demand registrations (the first one at the expense of the Company and the second one at the expense of the Investors) and unlimited piggyback registration rights, provided that any request for a demand registration must be made by the holders of at least a majority of the then outstanding shares of Preferred Stock or common shares issued upon conversion. Registration rights are transferable only with a transfer of at least __% [percentage] of the registrable shares.
 
 
 
 
Information Rights:
Each holder of the Preferred Stock will be furnished with an annual budget and annual audited financial statements within 90 days following the end of each fiscal year, and a trial balance sheet and profit and loss statement from books and records within 30 days following the end of each month. Any holder of the Preferred Stock shall be entitled to inspection rights and a summary of the Companys financial plans.
 
 
 
 
Representation on Board:
The holders of Preferred Stock shall have the right to designate ________  [number] directors. The ________ remaining directors will be designated by holders of the Common Stock. One director shall be jointly elected by a majority of common stock and a majority of the Series A Preferred stock, voting as separate classes; and the holders of preferred stock and common stock voting together as a single class shall be entitled to elect any additional directors.
 
 
 
 
Right of First Refusal And Co-Sale Rights:
The Company shall have a right of first refusal, and the holders of Preferred Stock shall have a right of second refusal with respect to any proposed sale by any Founder to a third party. If neither the Company nor the holders of Preferred Stock exercise such right of refusal, the Selling Founder shall provide a co-sale right to the holders of Preferred Stock to participate in such sale, such pro-rata right to reduce the amount of stock sold by the Founder. These rights of refusal and co-sale rights shall terminate upon the Companys initial public offering or upon sale of the Company through merger, sale of stock or assets or otherwise.
 
 
 
 
Anti-Dilution Provisions:
The Preferred Stock shall be subject to customary weighted average anti-dilution provisions (i.e., if the Company issues additional Common Stock at less than the $________  conversion price, an appropriate weighted adjustment would be made in the conversion price).
 
 
 
 
Drag-Along Rights
These rights require the founders to vote their shares in favor of a merger, sale of assets or other reorganization where control of the company is being transferred to a buyer, in the event that the preferred shareholders elect to sell control of the company through such reorganization requiring a vote or consent of shareholders. In order to protect the founders from an unreasonable position such as personal liability on the companys representations and warranties, indemnification of the buyer and other provisions, these types of provisions are excluded from the founders obligation to approve the reorganization.
 
 
 
 
Employee Stock Options:
An employee stock option plan shall be established, and an amount of Common Stock equal to 10% of the issued and outstanding Common Stock shall be reserved for issuance under the plan.
 
 
 
 
Protective Rights:
The holders of the Preferred Stock shall, by a vote of majority thereof, have the right to consent to mergers, acquisitions, sales of assets or amendments to the Companys charter documents, creation of any new class of shares having rights or privileges senior to or on a parity with the Preferred Stock, declare any dividends, cancel, exchange, redeem or otherwise acquire any shares of the companys capital stock, authorize a liquidation or liquidation event, change the number of directors to a number other than ___ [number] or any other action which materially and adversely affects the rights, privileges and preferences of the Preferred Stock.
 
 
 
 
Restrictive Covenants:
As long as 25% or more of the original par value of the Preferred Stock (or the Common Stock into which the Preferred Stock is converted) is outstanding, the holders of the Preferred Stock shall have the following rights:
1. Upon certain specified events (e.g., failure to par accrued dividends, or fall below certain financial ratios), to elect a majority of the Companys Board of Directors, by holding an irrevocable proxy (or voting trust agreement) from the Companys founders sufficient to give the Investors Common Stock voting power equal to at least 51% of the total Common Stock voting power, to wit: the voting rights to approximately  
__________________________________________________________________ shares of Common Stock held by the founders.
2. To approve the sale of any additional common or preferred stock or the incurrence of any long-term debt.
3. To approve the issuance of stock options, other than up to ________  shares to key employees, consultants and directors.
4. To approve any sale or merger of the Company, or dissolution or sale of assets.
 
 
 
 
Repurchase of Founders Stock:
The stock held by the founders may be repurchased by the Company at the original purchase price in the event that the founders employment by the Company is terminated because of voluntary quit or discharge for cause, to wit: by reason of the fact that the founder has been convicted of a felony or has been discharged from employment for theft, dishonesty, misconduct, alcohol or drug addiction, for acts which cause embarrassment to or detrimental publicity of the Company, habitual neglect of his or her duty, or willful breach of duty or gross negligence in carrying out the activities for which the founder is employed. Voluntary quit shall not be deemed to include termination of employment by death, disability, or because of a substantial reduction in the salary, responsibilities or position of the founder.
Such repurchase rights by the Company shall lapse as follows:
________ % of the founders shares at the closing of the Agreement;
________ % of the founders shares at the end of each year after closing.
 
 
 
 
Nondisclosure Agreements:
The founders will execute appropriate noncompetition and nondisclosure agreements.
 
 
 
 
Capitalization:
After completion of the three incremental purchases of Preferred Stock, and assuming full conversion of the Preferred Stock into Common Stock, the Common Stock capitalization of the Company will be as follows:
 
 
 
Holder
No. of Common Shares to be  
Issued and Outstanding
Price Per Share
% of Total
 
 
 
 
Series A Preferred Stock Purchasers
________  shares
________
________ %
Founders
________  shares
________
________ %
Directors, Key Employees & Consultants
________  shares
________
________ %
Total
________
________
________
 
________  shares
 
100%
 
 
 
 
 
 
 
 
 

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