Memorandum of Terms For Sale of Convertible Promissory Notes

COMPANY NAME, INC.

MEMORANDUM OF TERMS
FOR
SALE OF CONVERTIBLE PROMISSORY NOTES

COMPANY NAME, Inc., a Delaware corporation (the “Company”), intends to issue convertible promissory notes to purchase shares of the Company’s capital stock to certain qualified entities and/or individuals (the “Investors”) set forth on Schedule 1 attached hereto. The Company and the undersigned Investors hereby agree to proceed to closing in accordance with this Memorandum of Terms. No legally binding obligations will be created, implied or inferred until a note, in the form acceptable to each Investor and signed by the Company, is delivered to each of the Investors.

Amount:

The Company will authorize the issuance and sale of convertible, unsecured promissory notes (“Notes”) with an aggregate principal amount of up to $1,000,000.

Type of Security:

Notes with eight percent (8%) annual payment-in-kind coupon, convertible as described below, with warrants (the “Warrants”) to purchase shares of common stock of the Company (“Common Stock”).

Investors:

Individuals and entities who are “accredited investors” under Regulation D of the Securities Act of 1933, as amended.

Closing:

The initial closing, upon sale of a minimum of $50,000 worth of Notes (the “Initial Closing”), is expected to take place on or before December 31, 2004. The Company may sell up to an aggregate of $950,000 worth of additional Notes at such time or times (each, a “Subsequent Closing”) as the Company deems appropriate.

Conversion:

Upon the closing of the sale and issuance by the Company of shares of its Series A Preferred Stock, if any (the “Series A Financing”), the Notes will be automatically converted, without requiring any prior consent or approval of the Investors, into that number of shares of Series A Preferred Stock determined by dividing the aggregate principal amount of each Note plus accrued but unpaid interest thereon (the “Principal Amount”), by a conversion price equal to the purchase price for the Series A Preferred Stock established for the Series A Financing (the “Conversion Price”), with fractional shares to be rounded to the nearest whole share.

In the event that the Company is acquired prior to the closing of the Series A Financing, the Notes will be automatically converted, without requiring any prior consent or approval of the Investors, into that number of shares of Common Stock determined by dividing the Principal Amount by a conversion price equal to a price that is 20% less than the per share consideration to be paid to equity holders pursuant to the terms of such acquisition, with fractional shares to be rounded to the nearest whole share.

In the event that neither the Series A Financing nor an acquisition of the Company has taken place by June 30, 2006, then each such Note will be automatically converted, without requiring any prior consent or approval of any Investor, into that number of shares of Common Stock determined by dividing the Principal Amount by a deemed conversion price of $1.00 per share, with fractional shares rounded to the nearest whole share.

Series A Preferred Stock to be Issued Upon Conversion of Notes:

Upon the conversion of the Notes as a result of the Series A Financing, the Investors will receive shares of Series A Preferred Stock of the Company on identical terms as original purchasers of shares of Series A Preferred Stock in the Series A Financing (other than those rights typically granted only to lead or major investors).

Use of Proceeds:

The proceeds from the sale of the Notes will be used for general working capital.

Series A Financing:

The Series A Financing will be made pursuant to a Stock Purchase Agreement (with exhibits) drafted by counsel to the Company and acceptable to the purchasers of Series A Preferred Stock. The Stock Purchase Agreement will contain, among other things, appropriate representations and warranties of the Company, covenants of the Company reflecting the provisions set forth herein, an arbitration provision, an attorneys’ fees provision and other appropriate conditions, as well as requiring an investor lock-up, co-sale provision, and other standard obligations imposed on investors.

Conditions of Closing:

The Initial Closing will be conditioned upon the Company raising a minimum of $100,000 through the sale of Notes.

 

IN WITNESS WHEREOF, the undersigned parties have caused this Term Sheet to be executed as of date referenced below.

COMPANY NAME, Inc., a Delaware corporation

Dated: Date

By: Company Signor

Its: Company Signor Title

ACKNOWLEDGED AND AGREED:

“INVESTOR”
Entity Name: Investor Entity Name

Signature
By (print): Investor Signee Name
Its (title): Investor Signee Title
Address: Investor Address

 

OR:

 

“INVESTOR”
Individual

Signature
Printed Name: Printed Name
Address: Individual Address

 

 

 

 

SCHEDULE 1

SCHEDULE OF INVESTORS

 

 

 

Name of Investor	Amount of Investment
Investor 1	$[Investment 1]
Investor 2	$[Investment 2]
Investor 3	$[Investment 3]
Investor 4	$[Investment 4]
Investor 5	$[Investment 5]
Investor 6	$[Investment 6]
Investor 7	$[Investment 7]
Investor 8	$[Investment 8]
Investor 9	$[Investment 9]
Total:	$[Total]