NH Mill Works Fund Series II, LP
CONVERTIBLE PROMISSORY NOTE TERM SHEET
To [NAME OF ISSUER]
This Term Sheet summarizes the principal terms of the proposed 6% Convertible Promissory Note (the “Note”) to be issued by [Name of Issuer] (the “Company”) to NH Mill Works Fund Series II, LP and NH Mill Works Fund Series II – BFA, LP (together, the “Fund s”) and related transactions. The terms outlined herein are subject in all respects to due diligence by the Funds and the execution of the definitive Notes, Securities Purchase Agreement and related documents with each of the Funds. This Term Sheet is an expression of intent only, and does not constitute a legally binding document or create any legal obligations on the part of the Company, the Funds or any of their affiliated parties.
Title of Securities
6% Convertible Promissory Notes
The original principal amount of the Notes will be $_____ to NH Mill Works Fund Series II, LP and $_____ to NH Mill Works Fund Series II – BFA, LP (the “Notes”).
The Notes will accrue interest on the unpaid principal balance thereof at an annual rate of 6%, calculated on the basis of a 360-day year of twelve 30-day months. Interest will not be payable until the Maturity Date, as defined below.
The Notes will mature, and all principal, accrued interest and any other Company obligation under the Notes will become due and payable, on the second anniversary of the issuance thereof (the “Maturity Date”), unless earlier converted as set forth below in this Term Sheet.
The closing of the issuance of the Notes (the “Closing”) will occur upon the execution of a Securities Purchase Agreement in customary form. The Funds reserve the right to cease negotiating with the Company if negotiations are not, in the judgment of the Funds, proceeding expeditiously toward a Closing. The Company will provide to the Funds, promptly after a request therefor, any due diligence materials reasonably requested by the Funds.
Use of Proceeds
The proceeds of the Notes will be used by the Company for capital expenditures or working capital purposes to support the growth of the Company. The proceeds may not be used to repay existing loans of the Company or any deferred or accrued compensation to any employee.
Security; Ranking of Notes
The Notes will not be secured. Upon request of the Company, the Funds will enter into a subordination agreement on customary terms with any institutional lender to the Company.
Default Price; Target Price
Under certain circumstances, the Notes may become convertible into units of preferred equity of the Company of the class and series with the highest priority, or if no units of preferred equity are then issued or issuable, into units of common equity, at a price per unit equal to (1) $____ (the “Default Price”), which corresponds to a total valuation of the Company, on a fully-diluted premoney basis and less any outstanding indebtedness, of $1,000,000, or (2) $____ (the “Target Price”) which corresponds to a total valuation of the Company, on a fully-diluted pre-money basis and less any outstanding indebtedness, of $2,000,000.
Upon the closing by the Company of an equity financing prior to (and at the election of the Funds, after) the Maturity Date in which the Company receives gross cash proceeds of at least $250,000 (a “Qualified Financing”), all outstanding principal and interest on the Notes will automatically convert into the preferred units or other equity instrument issued in such financing at a price per unit equal to the price per unit paid in such Qualified Financing with a 20% discount, but in no event greater than the Target Price.
The Funds may, at their election, convert all outstanding principal and interest on the Notes at the Default Price upon the happening of any of the following events: (1) a sale of all of the outstanding [stock/membership interests] of the Company or a merger involving the Company; (2) a sale of all or substantially all of the assets of the Company; (3) the Maturity Date shall have occurred and the Company shall not have sufficient funds available to repay all outstanding principal and interest on the Notes; (4) the Maturity Date shall have occurred and the Company tenders payment of all of the outstanding obligations under the Notes and the Funds convert in lieu of accepting payment on the Notes (in which case the Target Price shall apply), and (5) a material default by the Company under the Notes or the Securities Purchase Agreement.
The Notes may not be prepaid by the Company without the written consent of the Funds.
For so long as the Notes remain outstanding, the Funds will have the right to approve or disapprove any transaction between the Company and any of its members, officers or employees that is not approved by a majority of the disinterested managers of the Company in accordance with applicable law.
Default Interest Rate
If either or both of the Notes are not paid and discharged in full by the third (3rd) anniversary of the Maturity Date, then any Note which remains outstanding shall bear and accrue interest at a default rate which shall increase from the normal rate of 6.0% by an additional one-half percent (0.5%) for each subsequent quarter. In no event shall such default interest rate exceed the maximum rate allowed by law.
Upon reasonable advance notice, the Funds will have the right to review and copy information regarding the Company’s business, prospects, finances, accounting records, material agreements, ownership and minutes of meetings of the managers and members. Upon reasonable advance notice to the Company, the Company will make available to the Funds’ representatives responsible officers to answer questions by the Funds regarding any of the foregoing matters. In addition, the Company will provide to the Funds unaudited financial statements on an annual basis. The Company will also provide to the Funds on a quarterly basis a narrative description of its business and prospects.
Each party will bear and pay its expenses incurred in issuing the Notes and carrying out the other transactions contemplated herein.
Conditions to Closing
The funding of the Notes is conditioned on the occurrence or the delivery of the following matters and documents:
The Company shall have entered into non-competition, non-solicitation, non-disclosure and assignment of invention agreements with each of its executive officers and key employees on terms reasonably satisfactory to the Funds;
The Company shall have responded to the Funds’ reasonable satisfaction any due diligence information request, and the Funds shall be reasonably satisfied with such information; and
The Company shall have made any necessary amendment to its [operating agreement or charter documents] to authorize a sufficient number of units of common and preferred equity to give effect to the conversion of the Notes in accordance with the terms set forth in this Term Sheet, and shall have reserved a number of units of common equity sufficient to permit the conversion of the Note into common units at the Default Price.
A default under the Notes will occur upon the occurrence of any one of the following:
Failure to pay any interest, principal or other obligation as an when specified in the Notes when due;
Bankruptcy, insolvency or other similar proceedings involving the Company; or
Any material breach by the Company of any representation, warranty, covenant or agreement under the terms of the Notes, the Securities Purchase Agreement or any other agreement entered into in connection with the issuance of the Notes.