Read the attached Term Sheet Negotiations. case study and compare the two term sheets.

Provide detailed answers to the following questions:

1. What are the main differences and similarities between the two term sheets? Be specific about the impact.
2. If you were the entrepreneur and could not negotiate any of the terms in either term sheet, which one would you prefer and why?
3. How would you seek to alter the terms in each term sheet during negotiations with each venture capitalist? Which terms would you seek to alter first? Be specific on what you would ask for.
4. Does it make a difference to your answers whether you expect Trendsetter.com to grow fast or grow slowly?
5. What aspects other than term sheets would you take into consideration when choosing among potential venture capital investors?

801-358 Term Sheet Negotiations for Trendsetter, Inc. At first, the two operated with their own capital but knowing very well that they would need to raise outside money. Borg explained. This type of software solution will take a lot of money to develop. Also, we needed a partner firm for the development phase. Luckily, I was able to get a former client Waldo, a major fashion retailer, to commit to work with us while we were developing the product. Although we hadn't signed any contracts yet, I had a good relationship with the CEO and I was promised that we would get a signed agreement from them once we got funding. That's why we approached the VCs. Borg and Kushdog were no fools and knew that most top-tier venture capitalists received more than 2,000 unsolicited business plans per year. In most of these venture capital firms all 2000 plans made it straight into the garbage can - without receiving any consideration. Experience had shown VCs that it was not worth their time to look for needles in a haystack. Rather, VCs focused on plans that came with recommendations and endorsements (from other VCs, entrepreneurs whom the VC had previously backed, investors in the VCs' fund and from other "friends.") Fortunately, Borg and Kushdog knew two insiders who were well-connected in the venture capital community. "Our friends got us in the door at several firms," Kushdog recalled, "Once a first meeting had been arranged we knew that the ball had been teed up for us and we needed to hit it. We knew that we were on to something when our first meeting with a VC that was originally scheduled for 30 minutes ended up lasting 2 hours-and the VC did not complain." Borg and Kushdog received a lot of interest from the VC community. They presented to seven VCs. And six of them really liked the plan and the team that was in place. The process of meetings and presentations took almost two months, however. This was longer than the entrepreneurs had expected. So it was a real relief for the two when they finally received term sheets from the VCs they wanted the most: Alpha Ventures and Mega Fund. Both funds were top tier VCs and had a lot of experience in retail and software. Plus the chemistry with both firms seemed good. Borg explained: With Mega everything went smoothly. Alpha I think really liked our idea but was pretty skeptical about our ability to get a five-star client like Waldo on board early. As a result they really liked us but wanted to invest at a lower valuation than other VCs because they did not think we could book $500,000 in revenues in the first year. After a lot of talking they came around and made a fair offer. Since Borg and Kushdog thought that both VC firms, Alpha Ventures and Mega, were an equally good fit it would come down to who gave Trendsetter a better offer. Neither of the entrepreneurs had any experience in analyzing term sheets and although the top-line valuations from both VC firms were not that different the entrepreneurs knew that they had to be very careful when comparing covenants in both term sheets. "I don't like lawyers but I think we need one, now," said Kushdog as they left the restaurant. "I agree," replied Borg, "but wouldn't it be reassuring if we could figure this out on our own first?" Exhibit 1 Alpha Ventures Term Sheet Trendsetter, Inc. June 2000 Summary of Terms for Proposed Private Placement of Series A Convertible Preferred Stock Issuer: Amount and Securities: Aggregate Proceeds: Pre-money Valuation: Escrowed Shares: Issue Price: Dividend: Trendsetter, Inc. a Delaware corporation (the "Company"). 4,761,905 shares of Series A Convertible Preferred Stock (hereafter simply called Series A Preferred) and Escrowed Shares (as described below). $5,000,000 $7,350,000, assuming an employee option reserved pool of 3,000,000 shares and no issuance of Escrowed Shares. In addition to the 4,761,905 shares of Series A Convertible Preferred Stock, 501,253 shares of Series A Preferred are to be held in escrow and not issued unless the Company has not achieved fiscal year 2000 revenues of $500,000 ("Escrowed Shares) The weighted average issue price will be $1.05 if the Escrowed Shares remain in Escrow. If the Escrow Shares are released to the Investors, the Issue price will be $0.95. The holders of Series A Preferred shall be entitled to receive noncumulative dividends in preference to any dividend on the Common Stock in the amount $0.08 on all Series A Preferred outstanding, when and as declared by the Board of Directors. For any other dividend or distributions, Series A Preferred participates with Common Stock on an as-converted basis. June 16, 2000 Wendy Borg, Jason Kushdog Alpha Ventures ("Alpha") and Silicon Valley Partners ("SV") and other mutually agreeable investors ("Investors"). Alpha $2.25 million SV: S2.25 million Other Investors: $0.50 million Initial pay issuance Price plus declared but unpaid dividends on each share of Series A Preferred Stock. Thereafter each share of Series A Preferred Stock and Common Stock share on an as-converted basis until such time as each share of Series A Preferred Stock has received three times the initial pay issuance Price. A merger, reorganization or other transaction in which control of the Company is transferred will be treated as a liquidation. The holders A Preferred shall have the right to convert the Series A Preferred, at any time, into shares of Common Stock. The initial conversion rate shall be 1:1, subject to adjustment as provided below. Anticipated Closing Date (the "Closing"): Founders: Investors: Liquidation: Conversion: Restriction on Common Stock Transfers: Use of Proceeds: have 48 month vesting with 12-month cliff and linear monthly vesting thereafter. Wendy Borg's and Jason Kushdog's shares vest 25% on purchase, with remainder vesting linearly over a 36 month period with the unvested portion subject to buyback provisions. The Company has the right to repurchase unvested shares at cost in the event of employment termination. The Founders will receive six months additional vesting in the event of a termination without cause, and will also receive accelerated vesting, following a change of control transaction. In addition, the Founders will received six months salary as severance pay in the event of a termination without cause. (a) No transfers allowed prior to vesting. Right of first refusal on vested shares until initial public offering. (c) No transfers or sales permitted during lock-up period of up to 180 days required by underwriters in connection with stock offerings by the Company. The proceeds from the sale of the Series A Preferred will be used for working capital according to the Company's business plan. The Company and the Investors will each indemnify the other for any finder's fees for which either is responsible. The Company agrees to file a qualified Small Business Corporation. This summary of terms is not intended as a legally binding commitment by the Investors, and any obligation on the part of the Investors is subject to the following conditions precedent: Completion of legal and accounting documentation satisfactory to the prospective Investors. Satisfactory completion of due diligence by the prospective Investors. Execution by the Investors of definitive agreements approved by Investor's counsel and executed by the Investors and the Company. Finders: Other: Conditions Precedent to Financing: Alpha Ventures, Inc. Trendsetter, Inc. Nancy Downard, Managing Principal Wendy Borg, President & CEO Post-Closing Capitalization Table Common Stock outstanding: Employee Stock Options - Reserved Pool: Of which granted: 0 Series A Preferred Outstanding Total fully-diluted shares Exhibit 2 Mega Fund Term Sheet Trendsetter, Inc. June 02, 2000 Summary of Terms for Proposed Private Placement of Series A Convertible Preferred Stock Issuer Investors: Current Outstanding: Amount of Investment: Type of Securities: Number of Shares: Price per Share: Rights, Preferences, Privileges and Restrictions of Series A Preferred Trendsetter, Inc., a Delaware corporation ("Company). Mega Fund ("Mega" or "Investors"). 4,500,000 shares of Common Stock ("Common"). In addition, by closing the Company will have reserved for issuance under its stock option plan an aggregate of 2,500,000 shares of Common (the "Reserved Shares"), of which 929,889 shares are subject to previously granted options. $5,000,000 Series A Convertible Participating Preferred Stock ("Series A Preferred" or "Preferred"). 5,000,000 shares of Series A Preferred. $1.00 per share of Series A Preferred ("Series A Purchase Price"). (1) Dividend Provisions: A cumulative dividend on the Series A Preferred will accrue at the rate of ten percent (10%) per annum commencing on the one year anniversary of the issuance of the Series A Preferred (the "Accruing Dividends"). The Accruing Dividends shall cease to accrue when the per share amount of the Accruing Dividends total twenty-five percent (25%) of the Series A Purchase Price. Accruing Dividends shall be payable (a) if, as and when determined by the Board of Directors or (b) upon the liquidation or winding up of the Company. In addition, if a dividend is paid on Series A Preferred or Common, then Series A Preferred shall receive same dividend on an as- converted basis. No dividend will be declared or paid on Common without the consent of the holders of at least 60% of the then outstanding shares of Series A Preferred. (2) Liquidation Preference: In the event of the liquidation or winding up of the Company, the holders of Series A Preferred will be entitled to receive in preference to the holders of Common, an amount per share of Series A Preferred (the "Series A Liquidation Amount") equal to the sum of (a) one-and-one-quarter times the Series A Purchase Price and (b) all declared but unpaid dividends (including the Accruing Dividends) on such share of Series A Preferred. After payment in full of the Series A Liquidation Amount, the remaining amounts available for distribution shall be distributed ratably among all holders of Common and Series A Preferred on an as-if converted basis. A consolidation or merger of the Company into or with any other entity or entities (other than a merger to reincorporate the Company in a different jurisdiction or a merger in which the shares of the Company outstanding immediately prior to the closing of such merger (a) represent or are converted into shares of the surviving entity that represent at least two- thirds of the total number of shares of the surviving entity 801-358 Term Sheet Negotiations for Trendsetter, Inc. At first, the two operated with their own capital but knowing very well that they would need to raise outside money. Borg explained. This type of software solution will take a lot of money to develop. Also, we needed a partner firm for the development phase. Luckily, I was able to get a former client Waldo, a major fashion retailer, to commit to work with us while we were developing the product. Although we hadn't signed any contracts yet, I had a good relationship with the CEO and I was promised that we would get a signed agreement from them once we got funding. That's why we approached the VCs. Borg and Kushdog were no fools and knew that most top-tier venture capitalists received more than 2,000 unsolicited business plans per year. In most of these venture capital firms all 2000 plans made it straight into the garbage can - without receiving any consideration. Experience had shown VCs that it was not worth their time to look for needles in a haystack. Rather, VCs focused on plans that came with recommendations and endorsements (from other VCs, entrepreneurs whom the VC had previously backed, investors in the VCs' fund and from other "friends.") Fortunately, Borg and Kushdog knew two insiders who were well-connected in the venture capital community. "Our friends got us in the door at several firms," Kushdog recalled, "Once a first meeting had been arranged we knew that the ball had been teed up for us and we needed to hit it. We knew that we were on to something when our first meeting with a VC that was originally scheduled for 30 minutes ended up lasting 2 hours-and the VC did not complain." Borg and Kushdog received a lot of interest from the VC community. They presented to seven VCs. And six of them really liked the plan and the team that was in place. The process of meetings and presentations took almost two months, however. This was longer than the entrepreneurs had expected. So it was a real relief for the two when they finally received term sheets from the VCs they wanted the most: Alpha Ventures and Mega Fund. Both funds were top tier VCs and had a lot of experience in retail and software. Plus the chemistry with both firms seemed good. Borg explained: With Mega everything went smoothly. Alpha I think really liked our idea but was pretty skeptical about our ability to get a five-star client like Waldo on board early. As a result they really liked us but wanted to invest at a lower valuation than other VCs because they did not think we could book $500,000 in revenues in the first year. After a lot of talking they came around and made a fair offer. Since Borg and Kushdog thought that both VC firms, Alpha Ventures and Mega, were an equally good fit it would come down to who gave Trendsetter a better offer. Neither of the entrepreneurs had any experience in analyzing term sheets and although the top-line valuations from both VC firms were not that different the entrepreneurs knew that they had to be very careful when comparing covenants in both term sheets. "I don't like lawyers but I think we need one, now," said Kushdog as they left the restaurant. "I agree," replied Borg, "but wouldn't it be reassuring if we could figure this out on our own first?" Exhibit 1 Alpha Ventures Term Sheet Trendsetter, Inc. June 2000 Summary of Terms for Proposed Private Placement of Series A Convertible Preferred Stock Issuer: Amount and Securities: Aggregate Proceeds: Pre-money Valuation: Escrowed Shares: Issue Price: Dividend: Trendsetter, Inc. a Delaware corporation (the "Company"). 4,761,905 shares of Series A Convertible Preferred Stock (hereafter simply called Series A Preferred) and Escrowed Shares (as described below). $5,000,000 $7,350,000, assuming an employee option reserved pool of 3,000,000 shares and no issuance of Escrowed Shares. In addition to the 4,761,905 shares of Series A Convertible Preferred Stock, 501,253 shares of Series A Preferred are to be held in escrow and not issued unless the Company has not achieved fiscal year 2000 revenues of $500,000 ("Escrowed Shares) The weighted average issue price will be $1.05 if the Escrowed Shares remain in Escrow. If the Escrow Shares are released to the Investors, the Issue price will be $0.95. The holders of Series A Preferred shall be entitled to receive noncumulative dividends in preference to any dividend on the Common Stock in the amount $0.08 on all Series A Preferred outstanding, when and as declared by the Board of Directors. For any other dividend or distributions, Series A Preferred participates with Common Stock on an as-converted basis. June 16, 2000 Wendy Borg, Jason Kushdog Alpha Ventures ("Alpha") and Silicon Valley Partners ("SV") and other mutually agreeable investors ("Investors"). Alpha $2.25 million SV: S2.25 million Other Investors: $0.50 million Initial pay issuance Price plus declared but unpaid dividends on each share of Series A Preferred Stock. Thereafter each share of Series A Preferred Stock and Common Stock share on an as-converted basis until such time as each share of Series A Preferred Stock has received three times the initial pay issuance Price. A merger, reorganization or other transaction in which control of the Company is transferred will be treated as a liquidation. The holders A Preferred shall have the right to convert the Series A Preferred, at any time, into shares of Common Stock. The initial conversion rate shall be 1:1, subject to adjustment as provided below. Anticipated Closing Date (the "Closing"): Founders: Investors: Liquidation: Conversion: Restriction on Common Stock Transfers: Use of Proceeds: have 48 month vesting with 12-month cliff and linear monthly vesting thereafter. Wendy Borg's and Jason Kushdog's shares vest 25% on purchase, with remainder vesting linearly over a 36 month period with the unvested portion subject to buyback provisions. The Company has the right to repurchase unvested shares at cost in the event of employment termination. The Founders will receive six months additional vesting in the event of a termination without cause, and will also receive accelerated vesting, following a change of control transaction. In addition, the Founders will received six months salary as severance pay in the event of a termination without cause. (a) No transfers allowed prior to vesting. Right of first refusal on vested shares until initial public offering. (c) No transfers or sales permitted during lock-up period of up to 180 days required by underwriters in connection with stock offerings by the Company. The proceeds from the sale of the Series A Preferred will be used for working capital according to the Company's business plan. The Company and the Investors will each indemnify the other for any finder's fees for which either is responsible. The Company agrees to file a qualified Small Business Corporation. This summary of terms is not intended as a legally binding commitment by the Investors, and any obligation on the part of the Investors is subject to the following conditions precedent: Completion of legal and accounting documentation satisfactory to the prospective Investors. Satisfactory completion of due diligence by the prospective Investors. Execution by the Investors of definitive agreements approved by Investor's counsel and executed by the Investors and the Company. Finders: Other: Conditions Precedent to Financing: Alpha Ventures, Inc. Trendsetter, Inc. Nancy Downard, Managing Principal Wendy Borg, President & CEO Post-Closing Capitalization Table Common Stock outstanding: Employee Stock Options - Reserved Pool: Of which granted: 0 Series A Preferred Outstanding Total fully-diluted shares Exhibit 2 Mega Fund Term Sheet Trendsetter, Inc. June 02, 2000 Summary of Terms for Proposed Private Placement of Series A Convertible Preferred Stock Issuer Investors: Current Outstanding: Amount of Investment: Type of Securities: Number of Shares: Price per Share: Rights, Preferences, Privileges and Restrictions of Series A Preferred Trendsetter, Inc., a Delaware corporation ("Company). Mega Fund ("Mega" or "Investors"). 4,500,000 shares of Common Stock ("Common"). In addition, by closing the Company will have reserved for issuance under its stock option plan an aggregate of 2,500,000 shares of Common (the "Reserved Shares"), of which 929,889 shares are subject to previously granted options. $5,000,000 Series A Convertible Participating Preferred Stock ("Series A Preferred" or "Preferred"). 5,000,000 shares of Series A Preferred. $1.00 per share of Series A Preferred ("Series A Purchase Price"). (1) Dividend Provisions: A cumulative dividend on the Series A Preferred will accrue at the rate of ten percent (10%) per annum commencing on the one year anniversary of the issuance of the Series A Preferred (the "Accruing Dividends"). The Accruing Dividends shall cease to accrue when the per share amount of the Accruing Dividends total twenty-five percent (25%) of the Series A Purchase Price. Accruing Dividends shall be payable (a) if, as and when determined by the Board of Directors or (b) upon the liquidation or winding up of the Company. In addition, if a dividend is paid on Series A Preferred or Common, then Series A Preferred shall receive same dividend on an as- converted basis. No dividend will be declared or paid on Common without the consent of the holders of at least 60% of the then outstanding shares of Series A Preferred. (2) Liquidation Preference: In the event of the liquidation or winding up of the Company, the holders of Series A Preferred will be entitled to receive in preference to the holders of Common, an amount per share of Series A Preferred (the "Series A Liquidation Amount") equal to the sum of (a) one-and-one-quarter times the Series A Purchase Price and (b) all declared but unpaid dividends (including the Accruing Dividends) on such share of Series A Preferred. After payment in full of the Series A Liquidation Amount, the remaining amounts available for distribution shall be distributed ratably among all holders of Common and Series A Preferred on an as-if converted basis. A consolidation or merger of the Company into or with any other entity or entities (other than a merger to reincorporate the Company in a different jurisdiction or a merger in which the shares of the Company outstanding immediately prior to the closing of such merger (a) represent or are converted into shares of the surviving entity that represent at least two- thirds of the total number of shares of the surviving entity