Vermont Term Sheet - Royalty Payment Convertible Note

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US-ENTREP-0049-1
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This Term Sheet summarizes the principal terms with respect to a potential private placement of equity securities of a "Company") by a group of investors ("Investors") led by a Venture Fund. This Term Sheet is intended solely as a basis for further discussion and is not intended to be and does not constitute a legally binding obligation except as provided under "Confidentiality," "Exclusivity", and "Expenses" below. No other legally binding obligation will be created, implied or inferred until a document in final form entitled "Stock Purchase Agreement" is executed and delivered by all parties. Without limiting the generality of the foregoing, it is the parties intent that, until that event, no agreement shall exist among them and there shall be no obligations whatsoever based on such things as parol evidence, extended negotiations, "handshakes," oral understandings, courses of conduct (including reliance and changes of position), except as provided under "Confidentiality," "Exclusivity", and "Expenses" below.

The Vermont Term Sheet — Royalty Payment Convertible Note is a legal document that outlines the terms and conditions for investment in a company. It is a type of financial instrument that offers investors the opportunity to convert their investment into equity at a later date, while also receiving regular royalty payments from the company's revenue. This term sheet is commonly used in Vermont and is a popular choice for both investors and startups. The royalty payment convertible note can be customized to suit the specific needs of the company and investor. Different types of Vermont Term Sheet — Royalty Payment Convertible Note include: 1. Simple Royalty Payment Convertible Note: This type of note offers a straightforward royalty payment structure, where the investor receives a predetermined percentage of the company's revenue. This gives the investor a consistent stream of income while retaining the option to convert their investment into equity in the future. 2. Variable Royalty Payment Convertible Note: In this variant of the term sheet, the royalties paid to the investor fluctuate based on the company's performance. The payment structure may be tied to specific performance metrics, such as gross sales or net profits. This type of note allows investors to share in the company's success and incentivizes the company to achieve higher levels of growth. 3. Tiered Royalty Payment Convertible Note: With a tiered structure, the royalty payments increase or decrease based on predefined revenue thresholds. As the company's revenue surpasses certain milestones, the investor may receive higher royalty rates. This type of note provides an additional level of flexibility and reward for investors as the company grows. 4. Deferred Royalty Payment Convertible Note: This type of note allows the company to defer royalty payments to the investor for a specified period. Instead of receiving immediate royalties, the investor may receive higher payments in the future, often at a predetermined interest rate. This structure allows the company to retain more cash flow in the early stages, while still compensating the investor over time. Investors and startups in Vermont can leverage the Vermont Term Sheet — Royalty Payment Convertible Note as a fair and flexible investment mechanism. It offers a balanced approach by providing income through royalties while offering the potential for equity ownership in the company. With various types of convertible notes available, both investors and companies can find a structure that aligns with their specific goals and needs.

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FAQ

Although it is customary to forego a term sheet, in some cases it may be required if the parties need to negotiate certain terms. It can be advantageous to use a term sheet for the company to easily summarize the terms of the notes for potential other investors purchasing a convertible note.

A valuation cap is applied during the pre-money valuation period of an investment which is when the convertible debt becomes equity. Is a Valuation Cap Pre or Post-Money? - Westchester Angels westchesterangels.com ? is-a-valuation-cap-pre-or... westchesterangels.com ? is-a-valuation-cap-pre-or...

Typical terms of convertible notes are: interest rate, maturity date, conversion provisions, a conversion discount, and a valuation cap.

It's very easy to determine the post-money valuation. To do so, use this formula: Post-money valuation = Investment dollar amount ÷ percent investor receives. Pre-Money vs. Post-Money: What's the Difference? - Investopedia investopedia.com ? ask ? answers ? differen... investopedia.com ? ask ? answers ? differen...

Calculating post-money valuation Post-money valuation = Pre-money valuation + Size of investment. ... Share price = New investment amount / # of new shares received. ... Post-money valuation / total # of shares post-investment = New investment amount / # of new shares received.

Discount. The discount rate, typically 15% to 25% percent, gets applied to the per-share price of the new investor. For example, let's say your convertible note had a 20% discount and the new investors are paying $1 per share. The convertible note investor will convert at $0.80 per share.

Convertible Notes are loans ? so they are recorded on the Balance Sheet of a company as a liability when they are made. Depending on the debt's maturity date, they can either be shown as a current liability (loans maturing within 12 months) or as a Long-term liability (loans maturing over 12 months).

Common provisions of a convertible debt financing include: The interest rate. Usually somewhere between 4% and 8%. The maturity date. Usually 12?24 months. A mandatory conversion paragraph. ... An optional conversion paragraph. ... A change of control provision. ... A conversion discount. ... A valuation cap. ... An amendment provision.

The simplest approach is to strip the equity component from the convertible note and treat the value as a sum-of-the-parts. The equity is most commonly valued in straight Black-Scholes option pricing model, and this value is deducted from the convertible note's notional amount to imply the ?value? of the straight-debt. Convertible Notes Valuation valuationresearch.com ? pure-perspectives valuationresearch.com ? pure-perspectives

The basic concept for valuing a convertible note is the same in theory as the valuation of any other financial asset. The value of the note is equal to the present value of the future income that the convertible note will receive, discounted to the present value based on its associated risk. Valuation of Convertible Notes - Eqvista eqvista.com ? resources ? valuation-of-convertible... eqvista.com ? resources ? valuation-of-convertible...

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Vermont Term Sheet - Royalty Payment Convertible Note