Beechwood Spout Term Sheet

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Question 2: Beechwood Spouts Term Sheet Analysis

1) Security: Series E Convertible Preferred Stock
In an entrepreneur’s point of view, the investor will gain an advantage of acquiring preferred stock, unlike the entrepreneur who holds common stock. Since Preferred stock is senior to common stock (but subordinate to bonds) in terms of claim of the assets of the company in an event of liquidation. Also, although preferred stock usually carries no voting rights, but it may carry a dividend and may have priority over common stock in the payment of dividends.

Moreover, since it is convertible preferred stock, it allows the investor to exchange preferred stock to common stock at a specific price and at the discretion of the shareholder. So,
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As a result, there are more people who have rights to votes. This is beneficial to investors.

10) Board of Directors
The investors have the right to appoint one member to the company’s board of director. Thus, the investors will have the right to vote and also to select a person to be the board of director. However, the entrepreneur may determine that the board of director from entrepreneur side should be more than the investor side.

11) Registration Rights
The entrepreneur is inferior to the investors because the Series A, C and E preferred stockholders have the equal voting right and the entrepreneur has to pay for the registration expenses.

12) Information Rights
The investors with at least $250,000 in series E preferred stock will receive the quarterly and annual budget and financial statements. This will be beneficial to these investors because the annual financial statement is audited by a “big six” accounting firms (Arthur Anderson, Coopers & Lybrand, Deloitte Touche, Earnst & Young, KPMG, PWC).

13) Proactive Covenants
The entrepreneur will lose the control because he has to ask for approval from series A, C, and E preferred stockholders first in the following issues;
- Authorization or issuance of additional capital stock
- The sale of equity securities, with exceptions for common stock issued to employees pursuant to board approval
- Liquidation, dissolution, recapitalization or reorganization
- Amendments to the Articles of Incorporation or Bylaws