term sheet: blood, sweat and tears june 6, 2007 henry wong diamond tech ventures sara rauchwerger bg...

TERM SHEET: BLOOD,SWEAT AND TEARS

June 6, 2007

Henry WongDiamond Tech Ventures

Sara RauchwergerBG Strategy

Samba Murthy, DirectorXambala

Fred GregurasFenwick & West LLP

1727808.1

2

SERIES A FINANCINGS KEY TERMS

Pre-money valuation – item 1, page 1

Size of option pool – item 5, page 1

Founders vesting schedules – item 13, page 6

Board size and composition – item 12, page 6

Liquidation preference – item 7(2), page 2

No shop period – item 16, page 7

Drag-along rights – item 17, page 7

3

IMPACT OF OPTION POOL SIZEEXAMPLE (I)

Fully-diluted means (1) outstanding stock, plus (2) outstanding options, plus (3) option reserve, plus (4) any other outstanding equity

Pre-money valuation includes fully-diluted stock not just issued shares

Pre-money of $6M

Investment of $4M

Shares %

Founders (CS) 4M 40%Stock Option Pool (CS) 2M 20%Series A Investors 4M 40%

Price per share = $6M/6M shares or $1 per share

4

IMPACT OF OPTION POOL SIZEEXAMPLE (II)

Pre-money of $6M

Investment of $4M

Shares %

Founders (CS) 4M 34.3%Stock Option Pool (CS) 3M 25.7% Series A Investors 4,667,445 40.0%

Price per share = $6M/7M shares or $0.857 per share

Series A shares purchased is $4M/$0.857 = 4,667,445

5

LIQUIDATION PREFERENCE EXAMPLE (I)

Startup, Inc. is acquired for $40M

Series A LP is for $4M, participating, no cap Series A owns 50% and common stock owns 50% of the outstanding shares

Distribution: 1) $4M to Series A (initial)

2) $18M to Series A $18M to common stock

3) Series A receives a total of $22M. common stock gets $18M

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LIQUIDATION PREFERENCE EXAMPLE (II)

Startup, Inc. is acquired for $40M

Series A LP is for $4M, participating, 3X cap

Series A owns 50% and common stock owns 50% of the outstanding shares

Distribution: 1) $4M to Series A (initial); next $18M to Series A, $18M to common stock but Series A capped at 3X or $12M

2) Conversion to common stock scenario-50% is $20M

3) Series A will elect to convert so will receive $20M as compared to $22M in a no cap situation. Common stock gets $20M.

7

DRAG-ALONG RIGHTS

Drag-along Rights – Item 17, page 7

• Purpose is to provide investors with control over having liquidity through an M&A

• Requires certain common stock holders to vote in favor of an acquisition

• Board and preferred stock approve the transaction

• Acquiror not affiliated with any major investor

• Base valuation for the acquisition