This Debt Financing Term Sheet sets forth terms and conditions for the issuance of
secured convertible promissory notes to raise capital for a startup company. The
promissory notes will convert to equity in the company after closing. A term sheet is a
non-binding agreement that lays the groundwork for ensuring that the parties involved in
a business transaction are in agreement on most aspects of the deal. Once the parties
agree to the term sheet, a binding agreement that conforms to the term sheet is drawn
up. This document contains numerous standard provisions commonly included in a
debt financing term sheet. It should be used in the financing process of a startup
company.
DEBT FINANCING TERM SHEET
FOR THE PURCHASE AND SALE OF SECURED CONVERTIBLE
PROMISSORY NOTES OF
____________________, INC. [Instruction: Enter company name here.]
_________________, 20__
This Debt Financing Term Sheet (this “Debt Financing Term Sheet”) sets forth the principal
terms offered to __________________ [Instruction: Enter name of investor here.] (the
“Investor”) for the purchase of convertible promissory notes of __________________
[Instruction: Enter company name here.], a _______ [Instruction: Enter state of
incorporation here.]corporation (the “Company”).
SECTION I. GENERAL
1. Type of Security:
Convertible notes, bearing interest at a simple interest rate of _________ (___%) percent
calculated on the basis of a 360-day year consisting of twelve, 30-day months (the “Notes”).
2. Amount Invested:
A minimum of __________ ($____) dollars and a maximum of _________ ($______) dollars.
3. Investors:
Investor, as well as other investors designated by Company (collectively, the “Note Investors”).
4. Closing:
As soon as practicable following the Company’s acceptance of this Debt Financing Term Sheet
and satisfaction of the conditions described below under the caption “Conditions to Closing”
(the “Initial Closing”). Up to ______ ( ) [Instruction: Enter number here.] additional closings
may occur at any time during the _____ ( ) [Instruction: Enter number of days here.] day
period following the Initial Closing.
SECTION II. TERMS OF THE NOTES
1. Term of Payment:
If not converted as provided in paragraph 2 of this section prior to the twelve-month
anniversary of the Initial Closing, the Notes would be payable upon demand. Prepayment is not
permitted prior to a payoff event (the due date, the closing of a change of control transaction
or the closing of the Company’s IPO).
2. Terms of Conversion:
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The Notes would be convertible on the following terms:
A. At any time after the Closing, at the Investor’s option, into a number of shares
of the Company’s Common Stock (the “Common Shares”), equal to __________
(____ %) percent of the Company’s capital stock calculated on a fully diluted
basis; or;
B. In the event that the conversion contemplated by the foregoing clause shall
not have already occurred, then into the Company’s next issued series of
preferred shares (the “Preferred Shares”) resulting in new money of not less
than _________ ($____) dollars (the “Preferred Financing”) at the per share
price of such Preferred Shares (interest would either be paid or converted at the
option of the Company).
3. Change of Control or IPO:
If a change of control transaction or the Company’s IPO occurs prior to the Series A Preferred
Financing, the Notes would, at the election of the holders of a majority of the outstanding
principal of the Notes, be either (i) payable upon demand as of the closing of such transaction
or (ii) convertible into shares of the Company’s Common Stock (the “Common Shares”)
immediately prior to such transaction at a price per share equal to the lesser of (the “Common
Price”) (y) the per share value of the Common Shares as then reasonably determined by the
Company’s Board of Directors acting in good faith, from time to time, in connection with either
the grant of an incentive stock option qualified under Section 422 of the Internal Revenue Code
of 1986, as amended, or the sale of common stock in a private sale to a third party in an “arms-
length” transaction, or (z) the per share consideration to be received by the holders of the
Common Shares in such transaction.
4. Warrant Coverage:
Upon issuance of the Notes in each Closing, purchasers would receive __-year warrants (the
“Warrants”) to purchase that number of shares of Warrant Stock determined by dividing
________ (__ %) percent of the original principal amount of such purchaser’s note by the
Warrant Exercise Price. “Warrant Stock” means the Series A Preferred Shares, unless the
warrant is exercised prior to the Series A Preferred Financing, in which case Warrant Stock
means the Common Shares. “Warrant Exercise Price” means the Series A Preferred Price,
unless the Warrant Stock is Common Shares, in which case the Warrant Exercise Price is the
Common Price.
5. Security:
Repayment of the Notes would be secured by a first priority security interest in collateral
consisting of all of the assets of the Company.
SECTION III. GOVERNANCE
1. Protective Provisions:
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The Company would not, without the written consent of the holders of at least a majority of the
principal amount of the Notes, either directly or by amendm