Down-Round / Recapitalization Term Sheet

DOWN-ROUND / RECAPITALIZATION TERM SHEET

Re: Proposed Series [__] Preferred Stock Financing and Recapitalization of [COMPANY NAME], INC.
Date: [__/__/____]
Status: Non-Binding (except exclusivity, confidentiality, expenses, and governing law)

PART I — STRUCTURE

1. Issuer

[COMPANY NAME], INC., a [STATE] corporation (the "Company").

2. Transaction Overview

The Company proposes to (a) issue a new senior series of preferred stock ("Series [__]") at a price per share below the most recent preferred financing, and (b) restructure the existing capital structure to eliminate overhangs and realign incentives (the "Recapitalization").

3. Investors

Lead: [LEAD INVESTOR NAME] — $[____]
Other: existing and new investors — $[____]
Total: $[____]

4. New Money Valuation

5. Use of Proceeds

Working capital, debt repayment, and operating runway of at least [____] months.

PART II — RECAPITALIZATION MECHANICS

6. Treatment of Existing Preferred (Choose one or combination)

Option A — Conversion to Common ("Wipeout Cramdown")
All existing Series Seed / Series A / Series B Preferred Stock shall be converted into Common Stock at the then-applicable conversion ratio, eliminating all existing preferences.

Option B — Exchange for New Junior Preferred
Existing Preferred Stock shall be exchanged for a new class of junior preferred stock ("Shadow Preferred") with economics of:

• Liquidation preference reduced to $[____] per share (from original $[____]);
• Participation rights [eliminated / retained];
• Anti-dilution protection [eliminated / retained].

Option C — Partial Cramdown
Existing Preferred Stock shall be partially converted into Common Stock at a ratio of [____]:1, with the balance retained with modified terms.

7. Anti-Dilution Adjustment

The conversion price of the existing Preferred shall be adjusted under the existing weighted-average anti-dilution provisions, subject to any waivers obtained pursuant to Section 11.

8. Pay-to-Play

Each holder of existing Preferred Stock that does NOT participate in the Series [__] financing at least pro rata shall have its shares of Preferred Stock automatically converted to Common Stock (or to Shadow Preferred) on a [1:1 / reduced] basis, losing:

• ☐ Liquidation preference
• ☐ Anti-dilution protection
• ☐ Protective provisions
• ☐ Pro rata rights
• ☐ Board representation
• ☐ Registration rights
• ☐ Information rights

9. Reverse Stock Split

To align the option pool refresh with the new valuation, the Company may effect a [____]-to-1 reverse stock split of all Common Stock (and as-converted Preferred) immediately prior to the closing.

10. Option Pool Refresh

Post-closing option pool: [____]% of the post-closing fully diluted capitalization. Pool expansion is included in the pre-money calculation.

11. Waivers and Consents

Closing is conditioned on receipt of written consents and waivers from:

• ☐ Holders of a majority of existing Preferred (or class votes as required);
• ☐ Holders of at least [____]% of the existing Common;
• ☐ Waivers of existing anti-dilution protection in excess of the broad-based weighted average baseline;
• ☐ Waivers of pro rata / rights of first offer under the existing IRA;
• ☐ Any required third-party consents (landlords, lenders, key customers).

PART III — TERMS OF SERIES [__] PREFERRED

12. Liquidation Preference

[1x] non-participating senior liquidation preference. Series [__] ranks senior to all existing preferred (as modified) and Common.

13. Seniority

Series [__] shall be senior to Shadow Preferred and Common in right of liquidation, dividends, and redemption (if any).

14. Dividends

Cumulative [____]% of the Original Issue Price per annum, accruing quarterly.

15. Anti-Dilution

Broad-based weighted average, subject to carve-outs for (a) this Recapitalization and (b) subsequent issuances approved by a majority of Series [__].

16. Conversion

Initial 1:1 conversion to Common, subject to adjustment.

17. Board Composition

Post-closing Board:

18. Protective Provisions

Customary, plus (a) approval of any future issuance below Series [__] Original Issue Price, (b) any modification of Shadow Preferred terms, and (c) any distribution to junior securities.

19. Management Carve-Out / Incentive Plan

Given the dilution to Common, the Board shall adopt a Management Incentive Plan providing [____]% of exit proceeds to specified employees (off the top of any liquidation waterfall), subject to vesting and Board approval.

PART IV — FIDUCIARY AND PROCESS SAFEGUARDS

20. Special Committee

The Company has established a Special Committee of disinterested directors, which is:

• ☐ Retaining independent legal counsel (not conflicted with lead investor);
• ☐ Obtaining a fairness analysis or valuation memo;
• ☐ Considering alternatives (sale, wind-down, asset sale);
• ☐ Documenting deliberations.

21. Rights Offering

All holders of existing Common and Preferred shall receive the opportunity to participate in the Series [__] financing at least pro rata based on current fully diluted ownership. The rights offering shall remain open for at least [20] business days and shall be preceded by fulsome disclosure of the transaction terms, including the dilutive effect.

22. Disclosure to Stockholders

A detailed disclosure schedule (including risk factors, pro forma capitalization tables under multiple scenarios, and a discussion of alternatives considered) shall accompany the stockholder consent solicitation.

23. Appraisal / Dissenter Rights

If the transaction requires a merger or conversion structure triggering statutory appraisal rights (e.g., DGCL § 262), proper notice shall be given and procedures followed.

24. Disinterested Stockholder Approval

To the extent practicable, the Recapitalization shall be approved by a majority of disinterested stockholders (holders other than the Investors and their affiliates) to enhance entire-fairness / cleansing analysis.

PART V — BINDING PROVISIONS

25. Exclusivity

[45] days of exclusivity from execution of this term sheet.

26. Expenses

Company to pay reasonable Investor legal and diligence expenses, capped at $[____], payable at closing or upon termination if caused by Company breach.

27. Confidentiality

The existence and terms of this term sheet are confidential.

28. Conditions to Closing

• ☐ Satisfactory due diligence;
• ☐ Negotiation of definitive documentation;
• ☐ Board, Special Committee, and stockholder approvals;
• ☐ Waivers and consents per Section 11;
• ☐ Management employment and retention arrangements;
• ☐ No material adverse change.

29. Governing Law

State of [Delaware], without regard to conflicts.

30. Non-Binding

Except as expressly stated, this term sheet is non-binding.

SIGNATURES

[LEAD INVESTOR]

By: _______________________________
Name: [____]
Title: [____]
Date: [__/__/____]

[COMPANY NAME], INC.

By: _______________________________
Name: [____]
Title: [____]
Date: [__/__/____]

Sources and References

• In re Trados Inc. S'holder Litig., 73 A.3d 17 (Del. Ch. 2013) — fiduciary duty analysis in down-round/sale involving VC-dominated board
• Carsanaro v. Bloodhound Techs., Inc., 65 A.3d 618 (Del. Ch. 2013) — cramdown financings and entire fairness
• Delaware General Corporation Law § 242 (charter amendments): https://delcode.delaware.gov/title8/c001/sc08/
• DGCL § 262 (appraisal rights): https://delcode.delaware.gov/title8/c001/sc09/
• NVCA Model Legal Documents: https://nvca.org/model-legal-documents/
• Securities Act § 4(a)(2): https://www.govinfo.gov/app/details/USCODE-2024-title15/USCODE-2024-title15-chap2A-subchapI-sec77d
• Rule 506 of Regulation D: https://www.ecfr.gov/current/title-17/part-230/section-230.506

Disclaimer: This template is provided for informational purposes only and does not constitute legal advice. Down rounds create substantial fiduciary duty risk; consult experienced corporate counsel before proceeding.