This slide show outlines and discusses the key elements of a preferred stock term sheet, and shows the range of negotiability of those terms in the best and worst of times.

1. Negotiating The Term Sheet Presented by Bart Greenberg Manatt, Phelps & Phillips, LLP TCVN Breakfast Workshop Series August 7 and 14, 2008

2. Certain Preliminary Matters

5. Defining the Terms of the Preferred Stock

12. Liquidation Preference More favorable to preferred holders More favorable to common holders Multiple of cost to PS; then pro rata participation Cost + AROI to PS; then pro rata participation Cost + AROI to PS; then pro rata up to multiple of PS cost; or else convert Cost + AROI to PS; cost + AROI to CS; then pro rata participation Cost + AROI to PS; negotiated amount to CS; then pro rata participation Cost + AROI to PS; same amount per share to CS; then pro rata participation Cost + annual ROI (“AROI”) or else convert Return cost only, or else convert H G F E D C B A

15. The “Waterfall” ( an illustration ) * Original investment of $4,100,000 Amount Available for Distribution: $15,000,000 First Second Third Total Creditors 0 0 0 $0.00 Series A* 0 $4,100,000 $4,100,000 $8,200,000 Common Stock (including option pool) 0 0 $6,800,000 $6,800,000 $15,000,000 First Second Third Total Creditors 0 0 0 $0.00 Series A* 0 $12,300,000 $1,350,000 $13,650,000 Common Stock (including option pool) 0 0 $1,350,000 $1,350,000 $15,000,000 Term Sheet: 1x preference for Series A, 1x participation) Term Sheet: 3x preference for Series A, full participation

17. Liquidation Preference “ First pay the original purchase price plus accrued dividends (if any) on each share of Series ___ Preferred Stock. Thereafter, Series ___ Preferred Stock participates with Common Stock on an as-converted basis until the holders of Series ___ Preferred Stock receive an aggregate of [ _ ]X original purchase price.” Example 2: Cap on Participation Rights

18. Liquidation Preference “ First pay the original purchase price [plus premium?] plus accrued dividends on each share of Series ___ Preferred Stock. The balance to holders of Common Stock.” Example 3: Non-Participating

21. Redemption “ Series ___ Preferred Stock redeemable at the election of holders [of 66-2/3rds] of the outstanding Series ___ Preferred Stock] on or after ____________ at a price equal to the original purchase price [plus accrued dividends] [plus ___% per year] or as soon thereafter as legally permissible.” Example 1: Lump Sum

22. Redemption “ [ See Example 1 ], to the extent of 1/3 of the shares of Series ___ Preferred Stock on the [____], [____] and [____] anniversary dates of the Closing or as soon thereafter as legally permissible[, but in no event will more than 1/3 of the outstanding shares of Series ___ Preferred Stock (plus 1/3 of the aggregate accrued dividends) be redeemed in any 12 month period.]” Example 2: Three Tranches

27. Antidilution Adjustments “ Conversion ratio for Series ___ Preferred Stock adjusted on [ratchet/[broad or narrow] weighted average] basis in the event of a dilutive issuance [so long as investor purchases full pro rata share of dilutive issuance (“pay to play”).]” Example 1: With Pay to Play

28. Antidilution Adjustments “ Dilutive issuance” shall not include: (i) up to ______ shares of Common Stock issued pursuant to a stock option plan approved [unanimously/by a majority] of the Board of Directors; (ii) Common Stock issued upon conversion of the Preferred Stock; (iii) stock issued in any IPO in which the Preferred Stock is converted into Common Stock; or (iv) stock issued in connection with mergers or acquisitions approved [unanimously/by a majority] of the Board of Directors.” Example 2: Specified Exceptions

31. Protective Provisions “ Votes on an as-converted basis, but also has [class/series] vote as provided by law and on (i) the creation of any senior [or pari passu] security, [(ii) payment of dividends on [Common Stock/on any class of Stock]],[(iii) any redemptions or repurchases of Common Stock or Preferred Stock [except for purchases at cost upon termination of employment], (iv) any liquidation, dissolution or winding up of the Company; (v) any merger, acquisition, recapitalization, reorganization or sale of all or substantially all of the assets of the Company, (vi) an Example

33. Defining the Terms of the Stock Purchase Agreement

38. Defining the Terms of the Investors’ Rights Agreement

40. Registration Rights “ Beginning on the earlier of [3-5] years from Closing, or [three/six] months after the Company’s IPO, [1-2] demand registrations [for underwritten public offerings] upon initiation by holders of at least [30]% of outstanding Series ___ Preferred Stock (or Common Stock issuable upon conversion of the Series ___ Preferred Stock or any combination thereof) for aggregate proceeds in excess of $_______.” Example 1: Demand Rights

41. Registration Rights “ Investors in Series __ Preferred Stock will have [unlimited] piggyback registration rights subject to pro rata cutback at the underwriter’s discretion. Full cutback upon the IPO; [30% minimum inclusion thereafter]. Investors will not be subject to cutback unless all other selling shareholders are excluded from registration.” Example 2: Piggyback Rights

42. Registration Rights “ [Unlimited] S-3 Registrations of at least $500,000 each [upon initiation by holders of at least [20%] of the outstanding Series ___ Preferred Stock (or Common Stock issuable upon conversion of the Series ___ Preferred Stock or any combination thereof)]. [No more than two S-3 Registrations in any 12 month period.]” Example 3: S3 Rights

43. Registration Rights “ Registration rights terminate [(i) [3-7] years after the IPO;] or (ii) when [the Company is publicly traded and] all shares can be sold [in any 90-day period] under Rule 144, whichever occurs first.][, provided that this clause (ii) shall not apply to any 5% holder deemed to be an affiliate of the Company.]” Example 4: Termination

45. Market Stand-Off “ Prior to the Closing, all shareholders shall agree that in connection with the IPO not to sell any shares of Preferred Stock or Common Stock issuable upon conversion thereof for a period of up to [180] days following the IPO [(provided directors and officers of the Company and [5]% shareholders agree to the same lock-up. Such shareholders also shall agree to sign the underwriter’s standard lock-up agreement reflecting the foregoing.” Example

48. Right of First Offer “ The Investors shall have a pro rata right, based on their percentage equity ownership of [Preferred Stock] [Common Stock, on a fully diluted basis], to participate in subsequent financings of the Company (excluding [ See List of Specified Exceptions to Antidilution Adjustments ]. Such right will terminate immediately prior to a Qualified Public Offering.” Example

51. Board of Directors “ [The Company’s Articles of Incorporation shall provide that the] Board shall consist of ____ members, with the holders of a majority of Series ___ Preferred Stock entitled to elect ____ member(s) [and the holders of a majority of the Common Stock entitled to elect ____ member(s)]. [The Company and the Investors intend to select ____ outside director(s) with relevant industry experience as soon as possible after Closing.] Board composition at Closing shall be _______, [with vacancy].” Example

52. Defining Terms of Other Agreements

55. Rights of First Refusal “ Any [vested] Common Stock acquired by [employees] [founders] [shareholders] shall be subject to a right of first refusal of [the Company] [the Investors] to repurchase any stock, at the bona fide offer price.” Example

59. Drag-Along Rights “ So long as the Investors own shares of Series ___ Preferred Stock representing at least [25]% of the Company’s Common Stock on a fully-diluted basis (as determined by ]), the Investors shall have drag-along rights with respect to securities of any of the Founders or principal Common Stock holders in the event of a proposed sale of the Company to a third party (whether structured as a merger, reorganization, asset sale or otherwise).” Example

61. Founder Vesting “ If a Founder voluntarily terminates his or her employment with the Company or is terminated for cause, then the [Company/the Investors] will have the right to repurchase 100% of the Founders’ shares less [1/48]th of those shares for each complete month of service the employee served with the Company.” Example 1: Single Trigger

62. Founder Vesting “ Upon termination of the employment of the shareholder, with or without cause, the Company may repurchase at cost any shares subject to the repurchase option. The Company’s repurchase option shall lapse by [___ percent (__%)] of the unvested portion in the event such Founder is terminated without Cause or Constructively Terminated as a result of and within six (6) months prior to or twelve (12) months following a Change in Control.” Example 2: Double Trigger

63. Certain Term Sheet Terms

64. Capitalization “ The Company’s capital structure before and after the Closing is set forth below [including founder’s shares to be issued prior to the Closing]:” Example

67. Questions?

68. Negotiating The Term Sheet Thank you! Presented by Bart Greenberg Manatt, Phelps & Phillips, LLP (714) 371-2518 [email_address]