What is a Term Sheet?

Draft

We are pleased to present our proposal for an investment in (the “Company”).

1. Investment

1.1 You have told us that the proposed business plan calls for an equity injection of £. Of this amount, funds managed by us (the "Funds") will provide
£ alongside investment by other venture capital funds or financial institutions (together the "Investors"). We will act as lead equity investor.

1.2 The investment will be at a fully diluted pre-money valuation of £, including employee share options (both granted or committed) equal to % of the fully diluted equity. This represents a % shareholding for the Investors on a fully diluted basis, following an expansion of the share option pool as detailed in paragraph 2.4. The current capitalisation of the Company is set out in Part I of Appendix 1 and the capitalisation of the Company after this proposed funding is set out in Part 2 of Appendix 1. (See paragraph 2, Section IV above.)

1.3 The investment will be made in the form of convertible participating [redeemable] preferred shares ("Preferred Shares") at a price of £ per Preferred Share (the "Original Issue Price") the terms of which are set out in Appendix 2.

1.4 [The investment will be made in full at completion.]/

[The investment will be staged with % being invested at completion (the "First Tranche") and % being invested subsequently ("Subsequent Tranches"). [The Investors will have the right, but not the obligation, to subscribe for Subsequent Tranches at the same price per share as the First Tranche at any time.] In addition, provided that the performance milestones referred to in paragraph 2.6 have been met, the Board of Directors of the Company (the "Board") will have the right to call Subsequent Tranches within months of a performance milestone being satisfied.] (See paragraph 2, Section IV above.)

1.5 The proceeds from the investment must be used for the Company's working capital requirements [in particular ].

2. Conditions of investment

2.1 The investment is conditional on negotiation of definitive legal documents, satisfactory completion of due diligence and approval by our Investment Committee. (See paragraph 26, Section IV above.)

2.2 Satisfactory completion of due diligence will include:

(a) Conclusion of our commercial due diligence [including ]

(b) References from customers and partners

(c) Market and technology review by an independent third party

(d) Management references

(e) Review of current trading and forecasts for the next - months

(f) Review of existing and/or proposed management service contracts

(g) Review of the Company's financial history and current financial situation by our advisors including, a review of the last set of audited accounts and the latest set of monthly management accounts prior to completion of our investment

(h) Full legal review of the Company by our lawyers, focusing particularly on ownership of all necessary intellectual property and benefit of all key commercial contracts

(i) [VCT tax clearance from the Inland Revenue]

2.3 The Company must secure institutional co-investment of at least £ on identical terms from other venture capital funds or similar organisations acceptable to us. We will not underwrite the total funding sought nor guarantee the securing of co-investors.

2.4 The expansion of the share option pool prior to the investment to represent % of the equity on a fully diluted basis. These extra share options will be reserved for new employees and will have an exercise price equal to the Original Issue Price (see paragraph 1.3) [or may be exercised at a discount to that price subject to consent from the relevant tax authority and the Investor Director (see paragraph 4.3)]. Following grant, these options will vest quarterly over a year period, [subject to a minimum employment of year]. (See paragraph 21, Section IV above.)

2.5 The investment must comply with the money laundering regulations and rules of the Financial Services Authority.

2.6 [Appendix 7 sets out the performance milestones which must be satisfied within the periods stated before Subsequent Tranches can be called.] (See paragraph 2, Section IV above.)

3. Founder Shares

3.1 The Founders (being [INSERT NAME OF FOUNDERS], will hold A Ordinary Shares ("Founder Shares") which will be purchased for £ per share. [The Founder Shares will be subject to [vesting rights] [and good leaver/bad leaver provisions] as summarised in Appendix 3.] (See paragraph 9, Section IV above.)

4. Terms of investment

4.1 The Company and the Founders will provide the Investors with customary representations and warranties examples of which are set out in Appendix 4 and the Founders will provide the Investors with customary non-competition, non-solicitation and confidentiality undertakings. (See paragraph 13, Section IV above.)

4.2 The Board will have a maximum of directors. [For so long as the Investors hold % of the issued share capital of the Company on an as converted basis] the Investors will have the right to appoint [one] director (the "Investor Director"). The composition of the Board on completion will be . There will be a minimum of board meetings each year. (See paragraph 16, Section IV above.)

4.3 The Investor's or the Investor Director's consent will be required for certain key decisions, examples of which are set out in Appendix 5. (See paragraph 16, Section IV above.)

4.4 [The Investors will also have at all times the right to designate a non-voting observer to the Board.] (See paragraph 16, Section IV above.)

4.5 The Company will form a Remuneration Committee [and an Audit Committee] upon completion and the Investor Director will be the chairman [of both]. (See paragraph 16, Section IV above.)

4.6 The Company will have an obligation to supply normal financial and operational information about the Company to the Investors. (See paragraph 17, Section IV above.)

4.7 The Investors and the Founders will have rights to acquire and sell shares as outlined in Appendix 6. (See paragraphs 10, 11 and 12, Section IV above.)

4.8 [If the Company were floated on a US market, registrable securities will include all Preferred Shares, or any shares issuable on their conversion and any other shares held by the Investors. The Investors will be given full registration rights customary in transactions of this type (including demand rights, unlimited piggy-back rights and S3 registration rights), with the expenses paid by the Company.] (See paragraph 19, Section IV above.)

4.9 The key members of the management team will be required to sign service agreements which include customary provisions for non-disclosure, non-competition, non-solicitation, confidentiality, assignment of intellectual property rights, and termination. (See paragraph 20, Section IV above.)

4.10 [Within [] months of completion,] [Before completion,] the Company must obtain key man insurance, naming the Company as beneficiary on the lives of and for an amount of £ and director and officer liability insurance, both in a form acceptable to the Investors.

4.11 The Company will agree to pay to the investors an annual, index-linked monitoring fee of £ per annum plus VAT, charged quarterly in advance, plus reasonable out of pocket expenses in respect of each Investor Director. (See paragraph 22, Section IV above.)

4.12 [The Investors' investment appraisal and legal costs will be borne by the Company. In addition, on completion, the Company will pay to us a transaction fee of £ plus VAT.]/[The Company and the Investors will bear their own costs in relation to the investment, save that the Company will contribute an aggregate of £ to the expenses of the Investor.] (See paragraph 22, Section IV above.)

5. Confidentiality

5.1 This Term Sheet is written on the basis that its contents and existence are confidential and will not (except with our agreement in writing or in order to comply with any statutory or stock exchange or other regulatory requirements) be revealed by the Investors or the Founders to any third party or be the subject of any announcement. (See paragraph 23, Section IV above.)

5.2 The Investors and the Founders agree that they will enter into a non-disclosure agreement before the Investors begin their due diligence investigations.

6. Applicable law

This letter is governed by English law and on acceptance the parties submit to the non-exclusive jurisdiction of the courts of England and Wales.

7. Expiry date

The Founders and the Company are requested to confirm their acceptance of the terms of our proposal within 14 days of the date of this letter, failing which our proposal will lapse.

8. Exclusivity

In consideration of the Investors expending time and professional and other fees (the "Costs)" in progressing this offer the Founders and the Company agree and undertake that they will not directly or indirectly until the earlier of the expiry of days from the date of acceptance of the terms of this proposal or the date that the Investors notify the Company of their intention not to proceed with this proposal (the "Period") solicit, directly or indirectly, further offers for the purchase and/or subscription of shares in the Company (or any part thereof) or any material part of the business, assets or undertakings of the Company or enter into or continue to seek negotiations with any party other than the Investors in connection with such matters. (See paragraph 24, Section IV above.)

The Founders and the Company agree and undertake to inform the Investors immediately of the identity of any third party who contacts the Founders or the Company with a view to the sale of any interest in the shares of the Company or any part of the business of the Company.

[By accepting this offer the Founders and the Company confirm that if:

(a) they withdraw from negotiations with the Investors during the Period; or

(b) if they breach the exclusivity provisions in paragraph 8][; or

(c) if the Investors decide not to proceed with this offer due to a materially adverse fact or circumstance [which exists today but] of which the Investors become aware during this Period,

then the Company and the Founders undertake to pay to the Investors:

(i) the sum of £ (such sum being a genuine pre-estimate of the loss to the Investors in the event that this offer does not proceed); and

(ii) to the extent not recovered under paragraph (i) above the Costs incurred by the Investors in relation to this proposal;
provided that under no circumstances shall the Company and the Founders be obliged to pay the Investors more than £ under this paragraph 8].

Each of the undertakings referred to in this paragraph 8 shall be read and construed independently so that if any undertaking is held to be invalid or unenforceable for any reason the remaining undertakings shall continue to apply.

9. No intention to create legal relations

Except for the provisions of each of paragraphs 5 to 10, which are intended to create legally binding obligations between the parties, this Term Sheet sets out indicative terms on which we would be prepared to make an investment in the Company and will not give rise to any contract between us. (See paragraph 25, Section IV above.)

10. Exclusion of representations and warranties

By accepting this proposal you acknowledge that you have not relied on any representation or warranty on our part or entered into any other agreement with us in connection with the provision of funding by the Investors.

To confirm your acceptance of the terms of this proposal please sign and date the duplicate copy of this Term Sheet and return it to us.

[On copy]

To: [INSERT NAME OF INVESTOR]

We hereby acknowledge and accept the terms of the above Term Sheet. We confirm that we grant you a day period of exclusivity from the date of acceptance and that in the event that we subsequently withdraw from the transaction, in accordance with paragraph 8 of the Term Sheet, we will reimburse to you on demand a sum equal to all the external professional costs and expenses incurred by you up to the date of our withdrawal. (See paragraph 25, Section IV above.)

Appendix 1

Capitalisation table

Part 1

[current capitalisation]

Part 2

[post funding capitalisation]

Appendix 2

Rights attaching to Preferred Shares

1. The price per Preferred Share will be £ [determined before completion] (the "Original Issue Price"). (See paragraph 2, Section IV above.)

2. The Preferred Shares will have a preferential cumulative coupon of % per annum [starting on 200]. Any other dividends or distributions will be payable to all shareholders on a pro rata basis (in the case of the holders of Preferred Shares, determined on an as converted basis). (See paragraph 3, Section IV above.)

3. Upon liquidation of the Company, the Preferred Shareholders will receive in preference to all other shareholders an amount in respect of each Preferred Share equal to [ times] the Original Issue Price (the "Liquidation Preference") (after adjusting for any Recapitalisation Events (see paragraph 5)), plus all accrued but unpaid dividends. The Founders and Ordinary Shareholders will also be entitled to recover an amount per Ordinary Share equal to the amount paid up on those Ordinary Shares. To the extent that the Company has assets remaining after the distribution of that amount, the Preferred Shareholders will participate with the Founders and Ordinary Shareholders pro rata to the number of shares held on an as converted basis. (See paragraph 4, Section IV above.)

4. Sale of all or substantially all of the assets of the Company or a sale of shares involving a change in control (each, a "Corporate Transaction") will be treated in the same way as a liquidation [if it is not a Qualified Sale (as defined below)] and the proceeds of sale will be distributed as set out in paragraph 3. [A Qualified Sale means a sale [where the consideration payable (including any deferred consideration) exceeds £][pursuant to which Preferred Shareholders receive proceeds (in cash or marketable securities free of trading restrictions) per Preferred Share that are equal to or more than [the greater of: (i)] [ times] the Original Issue Price, [or (ii) a price which will result in the Preferred Shareholders earning a notional % rate of return on the Original Issue Price calculated daily and compounded annually].] (See paragraph 4, Section IV above.)

5. Subject to any adjustment being made to the conversion rate following any recapitalisation, share split, consolidation or similar events (collectively "Recapitalisation Events") and/or the operation of the anti-dilution provision in paragraph 10, the Preferred Shares will be convertible at any time at the option of an Investor into an equivalent number of Ordinary Shares. (See paragraph 6, Section IV above.)

6. The Preferred Shares will be converted automatically into Ordinary Shares, at the then applicable conversion rate:

6.1 upon the completion of a firmly underwritten initial public offering ("IPO") of Ordinary Shares: (i) at a net offering price per share of at least [ times] the Original Issue Price (after adjusting for any Recapitalisation Events) and (ii) resulting in net aggregate proceeds to the Company of not less than £ (the "Qualified IPO");

6.2 when less than % of the Preferred Shares issued in this financing remain outstanding;

6.3 upon the affirmative vote of holders of more than % of the outstanding Preferred Shares. (See paragraph 7, Section IV above.)

7. An IPO [that is not a Qualified IPO] will be treated in the same way as a liquidation. The Company will issue to each holder of Preferred Shares that number (if any) of Ordinary Shares so that the proportion which the Ordinary Shares held by that shareholder bears to the fully diluted share capital following completion of all such issues and the conversion of the Preferred Shares will be equal to the proportion which the proceeds that that shareholder would have been entitled to receive on a sale on that date would bear to the valuation of the Company at that date. (See paragraph 4, Section IV above.)

8. Immediately prior to an IPO all accrued but unpaid dividends on the Preferred Shares must be paid save to the extent that the Company decides to capitalise some or all of such amounts into Ordinary Shares. Any capitalisation will be at the price of the Ordinary Shares at IPO. (See paragraph 3, Section IV above.)

9. The Preferred Shares will vote with Ordinary Shares on an as converted basis as a single class on all matters, other than those referred to in Appendix 5. (See paragraphs 14 and 15, Section IV above.)

10. The Preferred Shares will have a [full ratchet]/[weighted-average] anti-dilution protection in the case of any new issue of shares at a price below the Original Issue Price (after adjusting for any Recapitalisation Events) other than (i) shares issued pursuant to the share option pool approved by the Investors and (ii) shares issued to the Investors as a result of them electing to convert their Preferred Shares into Ordinary Shares. This anti-dilution protection will operate [so as to adjust the rate at which the Preferred Shares will convert into Ordinary Shares] [by the issue of Ordinary Shares at par [through a capitalisation of share premium account].] (See paragraph 8, Section IV above.)

11. If the Company makes a subsequent issue of shares in which the Investors are entitled to participate and an Investor elects not to do so (i.e. does not wish to pay to play) for at least % of its allocation [that Investor will lose its anti-dilution right in respect of any Preferred Shares it holds][that Investor's Preferred Shares will automatically convert into Ordinary Shares].

12. If no [Qualified] IPO or Corporate Transaction has occurred within years from completion, each of the Preferred Shares will be redeemable at the option of the holder for an amount in cash equal to [the Original Purchase Price][the Liquidation Preference], plus all accrued but unpaid dividends. (See paragraph 5, Section IV above.)

13. If no [Qualified] IPO or Corporate Transaction has occurred within years from completion or redemption of the Preferred Shares cannot be completed, the [majority of] Investors [holding % of the Preferred Shares], will have the right to require the Company to engage in a liquidation process by way of IPO, Corporate Transaction or liquidation. (See paragraph 5, Section IV above.)

14. [REDEMPTION: The Company shall redeem the Preferred Shares [annually in one-third increments beginning on ] at a redemption price equal to the Original Issue Price per share plus all declared but unpaid dividends (if any). The Company shall also redeem the Preferred Shares (at the same redemption price) in the event of (i) a sale of substantially all the assets of the Company or (ii) the sale of Ordinary Shares carrying in excess of 50 per cent of the voting rights in the Company at a price per Ordinary Share which (on an as converted basis) values each Preferred Share at less than the Original Issue Price. Notwithstanding either of the above, the holders of the Preferred Shares shall receive advance notice of each redemption and shall have the option to convert any or all of the Preferred Shares otherwise due to be redeemed into Ordinary Shares prior to the mandatory redemption. In the event that the Company shall fail to make:

(a) a mandatory redemption payment to the holders of the Preferred Shares while having funds and distributable reserves necessary to do so then the holders of the Preferred Shares shall have a majority of the votes on all matters submitted for the approval of the Company's shareholders until such defaults are rectified; or

(b) two mandatory redemption payments to the holders of the Preferred Shares regardless of whether or not it has the funds or distributable reserves necessary to do so, then the holders of the Preferred Shares shall have the right to appoint a majority of the Board of the Directors of the Company until such default is rectified.]

(See paragraph 5, Section IV above.)

Appendix 3

Rights attaching to Founder Shares

1. * Subject to paragraph 3 below, the Founder Shares will vest equally on a [quarterly/monthly] basis over a year period. (See paragraph 9, Section IV above.)

2. * If a Founder ceases to be an employee of the Company those Founder Shares which have not vested will convert into Deferred Shares. The Deferred Shares will have no right to receive a dividend, minimal rights to capital and will be non-voting. The Company will have the right to purchase back the Deferred Shares for an aggregate purchase price of £ at any time.

3. * If there is a Corporate Transaction at a time when any of the Founder Shares remain un-vested, the consideration may be structured in such a way that it defers realisation of the value attached to the un-vested shares until such time as they would have been vested.

4. * If a Founder is a Bad Leaver:

(a) within months of the start of his employment all vested shares will convert into Deferred Shares;

(b) after months from the commencement of his employment no shares will vest during the period of months before the date of his departure.

* Only to be used where Founders are to hold vested shares.

5. In the event of an employee shareholder [(other than a Founder)] being a Bad Leaver all of his shares [(other than those held following the exercise of share options)] must be offered for sale at the lower of market value or the subscription price (as adjusted by any Recapitalisation) to the Company, [the employee benefit trust] and then the Investors. [If an employee shareholder [(other than a Founder)] is a Good Leaver he must similarly offer his shares for sale at the market price.]

6. [Unless otherwise determined by the Board,] "Bad Leaver" means any employee shareholder [(other than a Founder)] who ceases to be employed within years of completion or if later the start of his employment as a result of summary dismissal and whose dismissal is not found to have been wrongful or constructive, or who terminates his contract of employment within years of completion or if later the start of his employment, other than as a result of constructive dismissal, death or permanent incapacity. "Good Leaver" means any employee shareholder [(other than a Founder)] who ceases to be employed within years of completion or if later start of his employment and who is not a Bad Leaver.

Appendix 4

Proposed warranties

The Investors will require the following items to be warranted by the Founders and the Company:

• Status of the Company
  
• Latest available audited accounts
  
• lManagement accounts covering the period from latest audited accounts to completion of the proposed investment
  
• Position since audited accounts date
  
• Business plan
  
• Ownership of assets and HP liabilities
  
• Employment contracts
  
• Intellectual property
  
• No outstanding liabilities to executives
  
• Pension plan
  
• No litigation pending or threatened
  
• No breaches of existing or recent contracts
  
• Register of members correct/no other share issues committed
  
• Insurance policies up to date
  
• Loans/guarantees
  
• Taxation
  
• Property leasehold – terms/rights/obligations.
  

The above items are not comprehensive and are only intended to provide a guide to the warranties that are likely to be included in the Investment Agreement. In particular, additional items may require warranting following due diligence. The objective of these and other warranties will be to ensure that Founders and the Company have provided the Investors with accurate information on matters upon which the Investors have based their investment decision.

(See paragraph 13, Section IV above.)

Appendix 5

Proposed covenants

1. Investor consent

[So long as there are at least % of the Preferred Shares outstanding] the prior written approval of the Investors [holding % of the Preferred Shares] will be required to:

• Amend Memorandum and Articles of Association
  
• Change share capital
  
• Acquire any new business, shares or other securities
  
• Sell or deal with assets other than in ordinary course of business
  
• Wind up the Company
  
• Appoint or remove directors to/from the Board of the Company and any subsidiary companies.
  

2. Board consent

The following issues to be discussed and approved by the Board including the Investor Directors:

• Make any change of trade/business plan [(including adherence to VCT “qualifying”'
  
• trade definition)]
  
• Declare ordinary dividends
  
• Adoption of share option or other incentive plans and increase in share option pool
  
• Approve annual budgets
  
• Agree any borrowings, loans, advances or credit outside the annual budget
  
• Create charges
  
• Create any subsidiaries/joint ventures
  
• Incur development or capital expenditure outside the annual budget
  
• Agree or vary the remuneration/service terms of directors of the Company and any subsidiary companies
  
• Acquire real estate and other real estate-related matters
  
• Commence or settle litigation
  
• Assign or license any of the intellectual property rights of the Company
  
• Any guarantees/indemnities other than in ordinary course of business
  
• Any material agreement other than in ordinary course of business
  
• Any change of auditor/accounting reference date/accounting policies
  
• Any including key man insurance
  
• Any change of bank
  
• Any appointment of an employee or variation of terms where emoluments exceed £.
  

Materiality and other financial limits for the above to be discussed. The above items are not comprehensive and are only intended to provide a guide to the consent items that are likely to be included in the Investment Agreement.

(See paragraph 15, Section IV above.)

Appendix 6

Conditions of issue and transfer of shares

1. [Investors will have a right of first refusal on any new issue of shares of any class.] [Investors will have the right to participate with the holders of Founder Shares [and Ordinary Shares] in any new issue of shares of any class pro rata to their holding of shares (determined on an as converted basis).] [In addition, the Investors will have the right but not the obligation to subscribe for % of the next £ raised by the Company in the following rounds of financing by the Company on no worse terms than offered to third party investors.] (See paragraph 10, Section IV above.)

2. [Investors] [All existing shareholders] will have a right of first refusal to acquire any shares which are proposed to be transferred or sold. Investors will be able to transfer Preferred Shares freely provided that the transferee agrees to be bound by the terms of the Investment Agreement. (See paragraph 11, Section IV above.)

3. For [] years from completion no Founder Shares can be sold without the Investor's prior consent (the "Prohibition Period") [and no Founder Shares can be sold until they have vested]. (See paragraph 11, Section IV above.)

4. The Investors will have tag-along rights such that if any founder has an opportunity to sell [any of his shares] [shares exceeding % of the issued share capital], the Investors must be given the opportunity to sell a pro rata number of their shareholding on the same terms and at the same price. (See paragraph 11, Section IV above.)

5. The Investors will have co-sale rights such that if any shareholder has an opportunity to sell any or all of its shares, the effect of which would result in a change of control of the Company, the Investors must be given the opportunity to sell all of their shares on the same terms and at the same price. (See paragraph 11, Section IV above.)

6. If holders of at least % of the Preferred Shares[, Founder Shares and Ordinary Shares] agree to sell their shares, there will be drag along rights so that all remaining shareholders and option holders will be required to sell on the same terms, provided that no Investor will be required to sell unless (i) the Investor will receive cash or marketable securities in return for its shares, and (ii) the Investor will not be required to provide to the purchaser representations or warranties concerning the Company (or indemnify those given by the Company or Founders) or covenants (e.g. non-compete and non-solicitation of employees). (See paragraph 12, Section IV above.)

Appendix 7

Performance milestones

(See paragraph 2, Section IV above.)

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