{00050847;2} FOR EDUCATIONAL PURPOSES ONLY FRED GREGURAS

THIS TERM SHEET SUMMARIZES THE PRINCIPAL TERMS OF THE PROPOSED FINANCING OF ABC, INC. THIS TERM SHEET IS FOR DISCUSSION PURPOSES ONLY. THERE IS NO OBLIGATION ON THE PART OF ANY NEGOTIATING PARTY UNTIL A DEFINITIVE AGREEMENT IS SIGNED BY ALL PARTIES. THIS TERM SHEET DOES NOT CONSTITUTE EITHER AN OFFER TO SELL OR AN OFFER TO PURCHASE SECURITIES.

Non-Binding Term Sheet

November 18, 2014

ABC, Inc., a California Corporation (the “Company”)

Convertible Note Financing

1. Term of Loan – 18 months

2. Amount of Note – Up to U.S. $250,000 in convertible notes (the “Notes”) which may be issued in multiple closings. Each Note will be for the principal amount of at least $25,000 unless otherwise agreed by the Company. The Notes will be unsecured.

3. Interest – 6%/year, simple interest.

4. Conversion Features – Principal and interest due under the Notes automatically converts into preferred stock of the Company of the same series and with the same contract rights as is sold in the Company’s next equity financing in which the Company raises at least $1,000,000 (including conversion of the Notes) (a “Qualified Financing”); provided that, if a Qualified Financing does not close prior to a Note maturity date, then the Note shall no longer convert but rather shall be due and payable. Lender will receive preferred stock in the Qualified Financing as a result of automatic conversion on the same terms and conditions as other investors except that the conversion price will be the lower of (i) the price per share determined by applying a 20% discount to the equity price per share; or (ii) the price per share determined by applying a $10M pre-money valuation.

5. Acquisition – In the event that the Company is acquired prior to the earlier of the conversion of the Notes in a Qualified Financing or the maturity date, then a Note holder shall have the option of (i) being paid an amount equal to 125% times the principal outstanding under the Note in the same type of consideration as is paid in the acquisition within 30 days after such acquisition, or (ii) conversion of the Note into common stock immediately prior to the acquisition at a pre-money of the cap amount of $10M.

6. Securities – Lender must be an “accredited investor” or qualify under another securities law exemption.

IRS Circular 230 Disclosure: To ensure compliance with the requirements imposed by the IRS, we inform you that any tax advice contained in this communication, including any attachment to this communication, is not intended or written to be used, and cannot be used, by any taxpayer for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to any other person any transaction or matter addressed herein.

Fred Greguras Royse Law Firm, PC

Palo Alto, San Francisco fgreguras@rroyselaw.com

www.rroyselaw.com 650-422-3365

TRENDS IN CONVERTIBLE NOTE FINANCINGS NOVEMBER 18, 2014

SILICON VALLEY ROUND TABLE

TRENDS

–Size of financings –Cap on pre-money value for conversion

in qualified financing –Use of cap rather than warrants –Conversion to common option upon

sale of the company

SEED FINANCINGS: USE OF CONVERTIBLE NOTES

– Issue convertible promissory notes for "qualified financing" preferred stock

– Defers valuation decision and keeps the financing simple, fast and low cost

– Discount on conversion rate is a "sweetener" for the investors to take the risk

– Will likely be a maximum pre-money valuation for conversion when dealing with other than friends and family

CONVERTIBLE NOTE KEY TERMS (PART 1)

– Term/maturity date of loan

• 12-18 months – Section 1

• Demand for payment or automatic conversion into common stock

– Size of financing - Section 2

– Amount of each note – Section 2

• Scale vs. retail

– Company (Borrower) flexibility – Section 2

• Multiple closings

• No minimum closing

– Secured/unsecured – Section 2

*References are to CN Term Sheet

CONVERTIBLE NOTE KEY TERMS (PART 2)

– Interest rate – Section 3

– Qualified Financing – Section 4

• Size of financing defined to Include amount of notes

– Valuation base for conversion – Section 4

• 20% discount off equity price in Qualified Financing

• Lesser of discount or conversion at pre-money valuation cap

– Change of Control – Section 5

• Sale of Company (Borrower) prior to conversion or maturity

• Cash payment

• Conversion into common stock at specified pre-money valuation

– Securities laws – Section 6

– Typically not coupled with board representation

*References are to CN Term Sheet

DOCUMENTATION

– Term Sheet • Blue print for the financing

• Anchor investor approval

• Facilitates closing quickly and low transaction costs

– Note Purchase Agreement • Company (Borrower) representations and warranties

• Purchasers (Lender) securities Laws representations and warranties

• Amendments by majority-in-interest - extension

– Convertible Promissory Note • Debt instrument with conversion feature

• Security if lender is not in the business of lending

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