Term Sheet Analysis

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Key Assumptions
Expect Trendsetter to grow quickly
Revenue performance hurdles will be met (Alpha)
No dividends are declared
This is the first round of negotiations and both parties are open to at least one more round

Number of Shares
The number of shares held by the founders is a very important point they can try to renegotiate. In the Alpha term sheet the founders have a percentage ownership of 34% if the revenues hurdle of $500,000 is met. The founders hold 32.6% if the revenue hurdle is not met. Mega has no such revenue hurdle thus, with the number of shares outlined in the term sheet, the founders own 37.5%. Negotiation: In the Alpha term sheet a higher number of shares for the founders would be preferable. We assume the company will meet the revenue hurdle of $500,000 thus the minimum number of shares issued to the founders we will accept is 4,657,143 shares. This assumes the pool of 3 million for the employees is the same as well as the shares to the investors at 4,761,905.

Performance Hurdle
Alpha mandates a performance hurdle of $500,000 in revenue must be met by the end of fiscal year 2000 in order to avoid the issuance of the shares in escrow and Alpha getting to appoint the 5th board member. This performance hurdle does push the company to achieve tangible results but it would be preferable to have it removed from the term sheet primarily because Trendsetter does not want to lose control of the company in the composition of the board. Negotiation: I would negotiate to have this term removed from the term sheet. As mentioned above, the issuance of the shares in escrow decreases the ownership of the founders in the company from 34% to 32.6%. With a percentage ownership already lower than that outlined in Mega, this is not a term Trendsetter should be willing to accept. I would settle for a lower hurdle rate coupled with a longer timeline to hit the hurdle. The board composition is discussed below.

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