USE OF FUNDS:

RIGHTS, PREFERENCES, PRIVILEGES AND RESTRICTIONS OF PREFERRED:

1.       Dividends:  A cumulative dividend on the Preferred will accrue at a rate of __% per annum (“Accruing Dividends”).  Accruing Dividends will be payable upon the liquidation or winding up of Investee and conversion of the Preferred.  For all other dividends, holders of Preferred will participate pro rata with holders of common shares on an as-converted basis.

2.       Liquidation Preference: In the event of the liquidation or winding up of Investee, the holders of Preferred will be entitled to receive, for each Preferred share held and in preference to the holders of common shares, an amount equal to the purchase price per share paid by holders of Preferred for the Preferred (the “Original Purchase Price”) plus any Accruing Dividends that have not been paid (collectively, the “Liquidation Amount”).  After the Liquidation Amount has been paid, the holders of Preferred and common shares will be entitled to receive the remaining assets pro-rata on an as-converted to common basis.  A consolidation or merger of Investee or sale of all or substantially all of its assets or a sale of all of its shares which attributes a value to the Preferreds of less than $___ per share (adjusted for stock splits, consolidations, stock dividends and the like) will be deemed to be a liquidation for purposes of the liquidation preference.

3.       Conversion:  A holder of Preferred will have the right to convert the Preferred, at the option of the holder, at any time, into common shares. The total number of Common shares into which the Preferred may be converted initially will be determined by dividing the Original Purchase Price plus accrued dividends by the conversion price.  The initial conversion price will be the Original Purchase Price.  The conversion price will be subject to adjustment as provided in paragraph (5) below.

4.       Automatic Conversion:  The Preferred will be automatically converted into Common shares, at the then applicable conversion price, immediately prior to the closing of an underwritten public offer­ing of Common shares at a public offering price per share that is not less than $_____ (adjusted for stock splits, consolidations, stock dividends and the like) in an offering of not less than $________Cdn on a senior exchange (a “Qualified IPO”) (amounts subject to adjustment at any future equity issue if higher thresholds established).

5.       Antidilution Provisions:  In the event that Investee issues additional Common shares or any right or option to purchase Common stock or other security convertible into Common stock at an issue price less than the then applicable conversion price of the Preferred, the conversion price of the Preferred will be reduced to such lower price to prevent dilution.  The conversion price will also be adjusted for stock splits or consolidations, stock dividends, recapitalizations and the like.  All adjustments to the conversion price under this paragraph 5 will be cumulative.

These anti-dilution provisions will not apply to Common shares issued:

(1)    pursuant to the ESOP or any increase in the ESOP approved by the holders of ____ of the Preferreds; and,

(2)    to financial institutions or lessors in connection with commercial credit arrangements, equipment financings or similar transactions where approved by Investee’s board of directors (the “Board”).

6.       Redemption:  If there has not been a Qualified IPO or sale of Investee prior to 5 years from the Closing of this transaction, Investee at the option of the Investor will redeem the Preferred at the request of a Preferred Shareholder(s) by paying in cash the Liquidation Amount on the Preferred.  

7.       Voting Rights: Except as set out under Protective Provisions and Shareholders’ Agreement below, the holders of Preferred will have the right to that number of votes equal to the number of Common shares issuable upon conversion of the Preferred.  All series of Preferred and Common shares shall vote together as a class, except (1) where required by law, and (2) as set out below.

8.       Protective Provisions:  Consent of the holders of at least ____% of the Preferred will be required for (i) any sale by Investee of substantially all of its assets, (ii) any merger of Investee with another entity, (iii) any liquidation or wind­ing up of Investee, (iv) any amendment of Investee’s charter or by-laws, (v) any authorization or issuance of securities, (vi) any amendment, alteration or repealing of the preferences, special rights or other powers of the Preferred so as to adversely affect the Preferred, or (vii) any reclassification of any shares junior to the Preferred into shares having any preference or priority as to dividends or assets superior to any such preference or priority of the Preferred.   

SHAREHOLDERS'

AGREEMENT:

Investee, the Founder, existing shareholders and the Investor will enter into a Shareholders’ Agreement, which will include, or will amend the existing articles of incorporation to include, inter alia, the following provisions:

1.       The Investor will receive annual audited financial statements within 90 days of the fiscal year end.   In addition, the Investor will receive quarterly management prepared financial statements compared with budget accompanied by variance analysis within 45 days of each fiscal quarter (except the last fiscal quarter), monthly management prepared financial statements compared with budget within 30 days of each month end and an annual budget and operating plan before the start of each fiscal year; 

2.       Investor to appoint two directors at its sole option.  The Founder to appoint one director at its sole option. Two other directors to be “external” directors, who are acceptable to Investor.    Total number of directors to be five.  Both the Investor and the Founder will be entitled to have an observer present at all meetings of the Board at their own cost.  The Investee will pay all “out of pocket expenses” of the directors and compensation to directors who are not employees of the Investee, Investor or the Founder at a rate to be established by the Board or a committee thereof; 

3.       Board meetings to be held not less than quarterly. Investor to receive all notifications, correspondence, and minutes relating thereto.  A quorum for a meeting of the Board shall be three, and must include at least one director nominated by Investor.  No material decision may be made at a meeting of the Board that was not included on the notice given to directors unless the directors nominated by Investor are present;

4.       Board approval – including the approval of at least one of the directors nominated by Investor – of quarterly and annual budgets, any capital expenditures in excess of $_____Cdn not included in a quarterly or annual budget, annual business plans, engagement of Key Employees (as defined below), Key Employee compensation and bonuses, and the entering into of any contracts by Investee in excess of $_____Cdn;

5.       An executive committee of the Board (including at least one director nominated by Investor) will be formed, which will be responsible for reviewing the audited financial statements, recommending compensation, bonuses and ESOP allocations to the Board (simple majority of the Board required for approval of such items unless otherwise indicated herein (e.g. Key Employees)), and such other matters as are delegated by the Board;

6.       Right of first refusal of the Investor in the event that any party to the Shareholders’ Agreement receives a bona fide third party offer to purchase their shares (“Permitted Sale”);

7.       Any Permitted Sale will still be subject to the right of first refusal noted above, and the right of co-sale noted below. If the right of first refusal is not exercised, the Investor will have a right of co-sale providing that before any shareholder may sell any of her/its shares, such shareholder will first give the Investor an opportunity to participate in such sale on a basis proportionate to the amount of securities held by the selling shareholder and those held by the Investor;

8.       Pre-emptive rights of the Investor to participate in any additional financing of Investee. Investor may assign its rights under the shareholder agreement to any limited partner(s) (or affiliate thereof) of Investor so long as such limited partner (or affiliate, if applicable) agrees to become a counterpart to Investee’s Shareholders’ Agreement;

9.       Prior written approval of Investor for: all alterations in capital structure (including issuance of equity), payment of dividends, any material change in the terms of employment of Key Employees (as defined below), any material change in the Business, any material change in accounting policy or change of year end, all non-arm’s length transactions including the appointment of any employees who are not acting at arm’s length with any directors, officers or shareholders of Investee, the creation of the ESOP and any increase in the ESOP, any change in the number of directors, any change in the by-laws or articles of incorporation of Investee, any corporate reorganization (including acquisition, sale or merger of Investee), the sale or disposal of material assets, technology or intellectual property of Investee outside of the normal course of business (including any exclusive license of all of the assets of Investee), and the liquidation, wind up or dissolution of Investee and other such matters as the Investor may specify;

10.   Provision of Corporate Indemnification, and Directors and Officers insurance for all Directors (satisfactory to the Investor);

11.   The mechanisms for and restrictions on the transferring of shares by and amongst shareholders, including the Investor’s right to transfer all or any of their holdings to limited partners or affiliates thereof;

12.   Drag along provisions if Shareholders owning at least ___% of the shares subject to the Shareholders Agreement choose to sell their shares to a bona fide third party offer.  Threshold subject to adjustment based on subsequent closing;  

13.   Provisions for mediation and arbitration;

14.   Investor’s right to transfer all or any of its holding or rights to its limited partners or affiliates thereof;

15.   Provisions such that, in the event that Investee does not proceed with an initial public offering by the fifth (5th) anniversary of the Closing, at any time thereafter upon written request of Investor, the Board will be required to engage a qualified merger and acquisition advisor to seek a buyer for all shares or assets of Investee.  If a third party offer is made for all but not less than all of the shares of Investee which the Investor has accepted, the remaining shareholders will be required to sell all of the shares then held by such remaining shareholders in order to effect the sale of Investee to the third party; 

16.   Other terms and conditions customary for this type of financing.

REGISTRATION

RIGHTS:

Investor will be granted two demand registration rights under applicable US securities laws.  In addition, the Investor shall also have the right to unlimited piggyback rights and unlimited form S3 registration rights.  All securities held by the Investor will be registrable securities.  The registration rights may be transferred by an Investor to a transferee of registrable securities. Registration expenses (exclusive of underwriting discounts and commissions and stock transfer taxes) will be borne by Investee for all demand, piggyback and the first two S-3 registrations.  Expenses for all other registrations shall be paid pro rata by selling shareholders (and by Investee if Investee sells shares).

If the Qualified IPO takes place on The Toronto Stock Exchange, Investee undertakes to use its commercial best efforts to permit the Investor (subject to underwriter approval) to sell a portion of their holdings as a secondary issue at the time of the Qualified IPO and limit any pooling or escrow provisions imposed on the Investor. 

KEY EMPLOYEES:

_________and others to be determined by the Investor based on the results of due diligence.   

SUBSCRIPTION AGREEMENT:

Investee, Founders and Investor will enter into a Subscription Agreement in which Investee and the Founders will each give appropriate representations and warranties satisfactory to the Investor, including representations with respect to the intellectual property of the Investee, which representations will survive the Closing.

CONDITIONS

PRECEDENT:

The obligation of Investor to make the investment set forth herein is subject to the following conditions precedent:

1.       Satisfactory completion of intellectual property, marketing, financial, technical, commercial, operational, financing and legal due diligence by the Investor, including the satisfactory review by the Investor of all contracts and other commitments related to the Business entered into by the Founders and the Investee, a thorough review of all intellectual property rights, and an assessment of the competitive environment of Investee;

2.       Audited financial statements satisfactory to the Investor;

3.       Preliminary market research evaluation satisfactory to the Investor; 

4.       Budget for next fiscal year to be approved by the Investor;

5.       Employment, non-competition, non-solicit, assignment of intellectual property and other such agreements with Key Employees and others  satisfactory to the Investor;

6.       Prior to Closing, Investee and the Founders and Key Employees will have entered into all necessary and desirable intellectual property, employment and licensing or transfer agreements on terms satisfactory to Investor, in order to transfer to Investee the exclusive right to develop and commercialize the intellectual property listed in Appendix B hereto;

7.       Confirmation of directors and officers liability insurance of a minimum of $___ million;

8.       The due execution and delivery of the Subscription Agreement, the Shareholders’ Agreement, other agreements and consents satisfactory to the Investor;

9.       Approval by Investor’s Boards of Directors;

10.   Approval of Investee and its shareholders, as necessary;

11.   Satisfactory legal opinion provided by Investee’s counsel to the Investor provided at least 3 days prior to Closing;

12.   No material adverse change in the business prospects of Investee;

13.   Prior to Tranche 2, confirmation of key person insurance on each of Key Employees identified by the Investor in the amount of satisfactory to the investor with Investee noted as beneficiary on both policies. Key person insurance requirement (including Key Persons covered by such policies and amount of such policies) to be reviewed by the Board annually;

14.   An undertaking of Investee to have a strategic planning session concurrent with the first board meeting subsequent to Closing which attendees and agenda are approved by the Investor;

15.   An undertaking of Investee to secure and advise Investor upon receipt of same, general liability insurance when necessary by the Board, and product liability insurance prior to any product using technology controlled by Investee being tested or sold, in each case in such amounts as are typical for a company of this nature;

16.   Usual representations and warranties; 

17.   Confirmation that the Company has met tranche milestones;

18.   Representations and warranties updated and confirmed at each subsequent tranche closing; and,

19.   Confirmation that the Company has fulfilled its obligations under the transaction agreements. 

CLOSING DATE:

The first tranche of this transaction is expected to close no later than ______ (the “Initial Closing”), which date can be extended by mutual agreement of all the parties hereto.  A subsequent closing may occur within ninety (90) days of the Initial Closing with parties satisfactory to the Investor on substantially the same terms and conditions as the Preferred for up to a maximum of $_____ (Cdn).

PUBLICITY:

Upon Closing, Investor, Founders and Investee shall be permitted reasonable publicity with regard to this transaction.  No such public disclosure shall be made without the prior approval of the other parties, which approval shall not be unreasonably withheld.

EXPENSES

AND FEES:

___% of due diligence fees will be payable by the Investee regardless of the whether the transaction closes and the remaining ___% of due diligence costs will be payable upon Closing.  

Investor will prepare all legal documentation associated with the proposed transaction. The legal fees of the Investor reasonably incurred to complete this transaction shall be paid by Investee regardless of whether the transaction closes.  

EXCLUSIVITY:

Each Founder and Investee hereby agrees that until the Closing, provided that Investor continues to conduct due diligence in good faith and/or document the transaction, they will not initiate, solicit, encourage, discuss, negotiate, or accept offers regarding (i) the sale of equity securities in Investee or in any similar entity established to pursue the Business, or (ii) the licensing, optioning or otherwise encumbering of any intellectual property related to the Business, with another company or investor other than the parties to this agreement.  The Founders and Investee agree to keep the terms of this Term Sheet strictly confidential.  If at any time Investor decides not to proceed with the transaction contemplated herein, it will promptly notify Investee in writing and at such time these exclusivity provisions shall terminate.

OSTENSIBLE

AUTHORITY:

Investor is a limited partnership formed under and governed by the provisions of the Civil Code of Québec, in particular sections 2236 to 2249 inclusive thereof, and consequently, all parties hereto agree that they will have no recourse against any limited partner of Investor Technologies Limited Partnership, except to the extent provided by the Civil Code of Québec.

ACCEPTANCE:

This Term Sheet is open for acceptance until ______