MEMORANDUM

To Apex Investment Partners:

According to my analysis of the Accessline’s proposed term sheet, I do not believe that Apex would serve its own interests, or those of its investing partners, by investing in Accessline according to the terms proposed. By investing at the proposed valuation, according to the proposed control and incentive structure, Apex would be shouldering a disproportionate share of the risk should Accessline fail to meet its performance targets, or require fresh inflows of capital from future investment rounds. Nor can Accessline take the sort of steps necessary to protect its investment in the case of management failure.

Should Apex make a counter-offer, I would suggest the following terms:
After that, the targets must continue to ratchet upwards. The written consent of 3/4ths of Preferred shareholders could override this requirement while preserving Apex’s ability to veto auto-conversion. This voting ratio should also be employed in the voting clause, since without it Apex lacks any ability to control future funding rounds.

Series B must be allowed to redeem all of their shares upon the failure of Accessline to come within 5% of its revenue and income projections for 2 consecutive years. Alternatively, Apex could require that unvested management/ESOP shares be returned to Series A and Series B on a pari passu basis in the case of performance failure. Alternatively, Accessline could insist on a right to replace management in the case of this eventuality. Given the large number of competitors already present in the market, it is likely that if Accessline’s business fails, it will do so quickly and drastically.

Negotiation considerations

It is important to note that a counterproposal from Accessline that strengthens or enhances any of these provisions in Apex’ favor in exchange for a higher issue price of the Series B shares should be considered. However, there are limits to the premium we should pay for enhanced control, and firm limits for how far such control can be reduced. A board member and the