Exhibit 10.9
INVESTOR RIGHTS AGREEMENT
This INVESTOR RIGHTS AGREEMENT is made as of August 12, 1999, by and among Freei
Networks, Inc., a Washington corporation (the "COMPANY"), Sequoia Capital IX,
Sequoia Capital Angel Fund, and Sequoia Capital IX Principals Fund
(individually, an "INVESTOR" and collectively, the "INVESTOR").
RECITALS
WHEREAS, the Company proposes to sell and issue an aggregate of
4,812,074 shares of its Series A Convertible Preferred Stock (the "SERIES A
STOCK") to the Investors pursuant to the Series A Preferred Stock Purchase
Agreement (the "PURCHASE AGREEMENT") of even date herewith;
WHEREAS, as a condition of entering into the Purchase Agreement, the
Investors have requested that the Company extend to them registration rights,
information rights, and certain other rights as set forth below, and the Company
is willing to grant such rights to the Investors;
NOW, THEREFORE, in consideration of the mutual promises,
representations, warranties, covenants, and conditions set forth herein and in
the Purchase Agreement, the parties mutually agree as follows:
1. DEFINITIONS
As used in this Agreement, the following terms shall have the following
respective meanings:
"ACT" means the Securities Act of 1933, as amended.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
"FORM S-3 " means such form under the Act as in effect on the
date hereof or any registration form under the Act subsequently adopted by the
SEC that permits inclusion or incorporation of substantial information by
reference to other documents filed by the Company with the SEC.
"HOLDER" means any person owning or having the right to
acquire Registrable Securities or any assignee thereof in accordance with
Section 2.12 hereof.
"INITIAL OFFERING" means the Company's initial firm commitment
underwritten public offering of its Common Stock registered under the Act.
"REGISTER," "REGISTERED," and "REGISTRATION" refer to a
registration effected by preparing and filing a registration statement or
similar document in compliance with the Act, and the declaration or ordering of
effectiveness of such registration statement or document.
"REGISTRABLE SECURITIES " means (i) the shares of Common Stock
issuable or issued upon conversion of the Series A Stock and (d) any shares of
Common Stock of the Company issued (or issuable upon the conversion or exercise
of any warrant, right or other security which is issued) as a dividend or other
distribution with respect to, or in exchange for or in replacement of the shares
referenced in (i) above, excluding in all cases, however, any Registrable
Securities sold by a person in a private transaction in which the transferor's
rights under Section 2 are. not assigned or assignable and any Registrable
Securities sold to the public pursuant to a registration statement or Rule 144
promulgated under the Act.
"REGISTRABLE SECURITIES THEN OUTSTANDING" means (i) the
aggregate number of shares of Common Stock outstanding and (ii) the number of
shares of Common Stock issuable pursuant to then exercisable or convertible
securities, that are Registrable Securities.
"SEC" means the Securities and Exchange Commission.
"SHARES" means any shares of, or securities convertible into
or exercisable for any shares of, any class of the Company's capital stock.
2. REGISTRATION RIGHTS
2.1 DEMAND REGISTRATION
(a) If the Company shall receive at any time or from
time to time after the earlier of (1) the effective date of the registration
statement pertaining to the Initial
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Offering or (ii) December 31, 2002, a written request from the Holders of at
least fifty percent (50%) of the Registrable Securities then outstanding (the
"INITIATING HOLDERS") that the Company file a registration statement under the
Act covering the registration of the Registrable Securities then outstanding,
then the Company shall, within ten (10) days after receipt thereof, give written
notice of such request to all Holders and shall, subject to the limitations set
forth in Section 2.1 (b), use its best efforts to effect, as soon as
practicable and in any event within sixty (60) days -after the receipt of such
request, the registration under the Act of all Registrable Securities that the
Holders request to be registered within twenty (20) days of the mailing of such
notice by the Company in accordance with Section 6.5, provided that the
Registrable Securities requested by the Holders to be registered pursuant to
such request must have an anticipated aggregate public offering price of not
less than five million dollars ($5,000,000).
(b) If the Initiating Holders intend to distribute
the Registrable Securities covered by their request by means of an underwriting,
they shall so advise the Company as a part of their request made pursuant to
subsection 2.1 (a) and the Company shall include such information in the
written notice referred to in subsection 2.1 (a). The underwriter will be
selected by the Company and shall be reasonably acceptable to a
majorityin-interest of the Initiating Holders, provided that such underwriter
shall be of nationally recognized standing and shall agree to firmly underwrite
such offering. In such event, the right of any Holder to include his Registrable
Securities in such registration shall be conditioned upon such Holder's
participation in such underwriting and the inclusion of such Holder's
Registrable Securities in the underwriting (unless otherwise mutually agreed by
a majority-in-interest of the Initiating Holders and such Holder) to the extent
provided herein. All Holders proposing to distribute their securities through
such underwriting shall (together with the Company as provided in subsection
2.3(e)) enter into an underwriting agreement in customary form with the
underwriter or underwriters selected for such underwriting. Notwithstanding any
other provisions of this Section 2.1, if the underwriter advises the Initiating
Holders in writing that marketing factors require a limitation of the number of
shares to be underwritten, then the Initiating Holders shall so advise all
Holders of Registrable Securities that would otherwise be underwritten pursuant
hereto, and the number of shares of Registrable Securities that may be included
in the underwriting shall be allocated among all Holders thereof, including the
Initiating Holders, in proportion (as nearly as practicable) to the amount of
Registrable Securities of the Company owned by each Holder; provided, however,
that the number of shares of Registrable Securities to be included in such
underwriting shall not be reduced unless all other securities are first entirely
excluded from the underwriting.
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(c) Notwithstanding the foregoing, if the Company
shall furnish to Holders requesting a registration statement pursuant to this
Section 2. 1, a certificate signed by the Chief Executive Officer of the Company
stating that, in the good faith judgment of the Board of Directors of the
Company, it would be seriously detrimental to the Company and its shareholders
for such registration statement to be filed and it is therefore essential to
defer the Ming of such registration statement, the Company shall have the right
to defer taking action with respect to such filing for a period of not more than
ninety (90) days after receipt of the request of the Initiating Holders;
provided, however, that the Company may not invoke this right more than once in
any twelve (12) month period.
(d) The Company shall not be obligated to effect, or
to take any action to effect any registration pursuant to Section 2.1:
(i) if, within thirty (30) days after receipt
of a written request from the Initiating Holders pursuant to Section 2.1 (a),
the Company gives notice to the Holders of its intent to undertake its Initial
Offering within ninety (90) days of such notice;
(ii) during the period commencing on the date
of filing of, and ending on the date one hundred eighty (180) days after the
effective date of, a registration statement pertaining to a public offering of
Shares, provided that the Company is actively employing in good faith all
reasonable efforts to cause such registration statement to become effective; or
(iii) after the Company has effected two
registrations pursuant thereto and such registrations have been declared or
ordered effective;
2.2 COMPANY REGISTRATION If (but without any obligation to do
so) the Company proposes to register (including for this purpose a registration
effected by the Company for shareholders other than the Holders) any of its
stock or other securities under the Act In connection with the public offering
of such securities solely for cash (other than registrations relating solely to
Company stock or option plans or with respect to corporate reorganizations or
other transactions under Rule 145 under the Act), the Company shall, at such
time, promptly give each Holder written notice of such registration. Upon the
written request of each Holder given within twenty (20) days after mailing of
such notice by the Company in accordance with Section the Company shall, subject
to the provisions of
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Section 2.7, cause to be registered under the Act all of the Registrable
Securities that each such Holder has requested to be registered.
2.3 OBLIGATIONS OF THE COMPANY. Whenever required under this
Section 2 to effect the registration of any Registrable Securities, the Company
shall, as expeditiously as reasonably possible:
(a) Prepare and file with the SEC a registration
statement with respect to such Registrable Securities and use its best efforts
to cause such registration statement to become effective, and, upon the request
of the Holders of a majority of the Registrable Securities registered
thereunder, keep such registration statement effective for a period of up to one
hundred eighty (180) days provided, however, that (i) such 180-day period shall
be extended for a period of time equal to the period the Holder refrains from
selling any securities included in such registration at the request of an
underwriter of Common Stock (or other securities) of the Company; and (ii) in
the case of any registration of Registrable Securities on Form S-3 which are
intended to be offered on a continuous or delayed basis, such 180-day period
shall be extended, if necessary, to keep the registration statement effective
until all such RegistrableSecurities are sold, provided that Rule 415, or any.
successor rule under the Act, permits an offering on a continuous or delayed
basis, and provided further that applicable rules under the Act governing the
obligation to file a post-effective amendment permit, in lieu of filing a
post-effective amendment that (I) includes any prospectus required by Section
10(a)(3) of the Act or (II) reflects facts or events representing a material or
fundamental change in the information set forth in the registration statement,
the incorporation by reference of information required to be included in (I) and
(II) above to be contained in periodic reports filed pursuant to Section 13 or
15(d) of the 1934 Act in the registration statement.
(b) Prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus used in connection
with such registration statement as MAY BE necessary to comply with the
provisions of the Act with respect to the disposition of all securities covered
by such registration statement.
(C) Furnish to the Holders such numbers of copies of
a prospectus, including a preliminary prospectus, in conformity with the
requirements of the Act, and such other documents AS they may reasonably request
in order to facilitate the disposition of Registrable Securities owned by them.
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(d) Use its best efforts to register and qualify the
securities covered by such registration statement under such other securities or
Blue Sky laws of such jurisdictions as shall be reasonably requested by the
Holders; provided that the Company shall not be required in connection therewith
or as a condition thereto to qualify to do business or to file a general consent
to service of process in any such states or jurisdictions, unless the Company is
already subject to service in such jurisdiction and except as may be required by
the Act.
(e) In the event of any underwritten public offering,
enter into and perform its obligations under an underwriting agreement, in usual
and customary form, with the managing underwriter of such offering. Each Holder
participating in such underwriting also shall enter into and perform its
obligations under such an agreement.
(f) Notify each Holder of Registrable Securities
covered by such registration statement at any time when a prospectus relating
thereto is required to be delivered under the Act of the happening of any event
as a result of which the prospectus included in such registration statement, as
then in effect, includes an untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances then
existing.
(g) Cause all such Registrable Securities registered
pursuant hereto to be listed on each securities exchange on which similar
securities issued by the Company are then listed.
(h) Provide a transfer agent and registrar for all
Registrable Securities registered pursuant hereto and a CUSIP number for all
such Registrable Securities, in each case not later than the effective date of
such registration.
(i) Furnish, at the request of any Holder requesting
registration of Registrable Securities pursuant to this Section 2, on the date
that such Registrable Securities are delivered to the underwriters for We in
connection with a registration pursuant to this Section 2, if such securities
are being sold through underwriters, or, if such securities are not being sold
through underwriters, on the Xxxx that the registration statement with respect
to such securities becomes effective, (I) an opinion, dated such date, of the
counsel representing the Company for the purposes of such registration, in form
and substance as is customarily given to underwriters in an underwritten PUBLIC
offering, addressed to the underwriters, if any, and
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to the Holders requesting registration of Registrable Securities, and (ii) a
letter, dated such date, from the independent certified public accountants of
the Company, in form and substance as is customarily given by independent
certified public accountants to underwriters in an underwritten public offering,
addressed to the underwriters, if any, and to the Holders requesting
registration of Registrable Securities.
2.4 FURNISH INFORMATION. It shall be a condition precedent to
the obligations of the Company to take any action pursuant to this Section 2
with respect to the Registrable Securities of any selling Holder that such
Holder shall furnish to the Company such information regarding itself, the
Registrable Securities held by it, and the intended method of disposition of
such securities, as shall be required to effect the registration of such
Holder's Registrable Securities.
2.5 EXPENSES OF DEMAND REGISTRATION. All expenses other than
underwriting discounts and commissions incurred in connection with
registrations, filings or qualifications pursuant to Section 2.1 (which right
may be assigned as provided in Section 2.12), including (without limitation) all
registration, filing, qualification, printers' and accounting fees, fees and
disbursements of counsel for the Company (including fees and disbursements of
counsel for the Company in its capacity as counsel to the selling Holders
hereunder; if Company counsel does not make itself available for this purpose,
the Company will pay the reasonable fees and disbursements, not to exceed
fifteen thousand dollars ($15,000), of one counsel for the selling Holders)
shall be borne by the Company; provided, however, that the Company shall not be
required to pay for any expenses of any registration proceeding begun pursuant
to Section 2.1 if the registration request is subsequently withdrawn at the
request of the Holders of a ma ority of the Registrable Securities to be
registered (in which case all participating Holders shall bear such expenses),
unless the Holders of a majority of the Registrable Securities agree to forfeit
their demand registration rights pursuant to Section 2. 1; provided further,
however, that if at the time of such withdrawal, the Holders have learned of a
material adverse change in the condition, business, or prospects of the Company
from that known to the Holders at the time of their request and have withdrawn
the request with reasonable promptness following disclosure by the Company of
such material adverse change, then the Holders shall not be required to pay
any of such expenses and shall retain their rights pursuant to Section 2.1.
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2.6 EXPENSES OF COMPANY REGISTRATIO . The Company shall bear
and pay all expenses incurred in connection with any registration, filing or
qualification of Registrable Securities with respect to the registrations
pursuant to Section 2.2 for each Holder (which right may be assigned as provided
in Section 2.12), including (without limitation) all registration, filing,
qualification, printers' and accounting fees, fees and disbursements of counsel
for the Company (including fees and disbursements of counsel for the Company in
its capacity as counsel to the selling Holders hereunder; if Company counsel
does not make itself available for this purpose, the Company will pay the
reasonable fees and disbursements, not to exceed fifteen thousand dollars
($15,000), of one counsel for the selling Holders), but excluding underwriting
discounts and commissions relating to Registrable Securities.
2.7 UNDERWRITING REQUIREMENTS.
(a) In connection with any offering involving an
underwriting of Shares, the Company shall not be required under Section 2.2 to
include any of the Registrable Securities in such underwriting unless the
Holders thereof accept the terms of the underwriting as agreed upon between the
Holders of a majority of the Registrable Securities that indicated interest in
including,: their Registrable Securities in the underwriting, the Company and
the underwriters selected by it (or by other persons entitled to select the
underwriters), and then only in such quantity as the underwriters determine, in
their sole discretion, will not jeopardize the success of the offering by the
Company.
(b) If the total number of Shares, including
Registrable Securities, requested by shareholders to be included in such
offering exceeds the number of Shares to be sold (other than by the Company)
that the underwriters determine, in their sole discretion, will be compatible
with the success of the offering, then the Company shall be required to include
In the offering only that number of Shares, including Registrable Securities,
that the underwriters determine in their sole discretion wi 11 not jeopardize
the success of the offering. The Shares held by selling shareholders to be
included in such offering shall be apportioned pro rata among the selling
shareholders according to the total number of Shares entitled to be included
therein owned by each selling shareholder or in such other proportions as they
shall mutually agree, but in no event shall (i) the number of Registrable
Securities included in the offering be reduced below twenty-five percent (25%)
of the total number of shares (including shares sold by the company) included in
such offering, unless such offering is the initial offering in which case the
selling shareholders may be excluded if the underwriters make the determination
described above and no other shareholder's securities are included; or (ii) any
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shares being sold by a shareholder exercising a demand registration right be
excluded from such offering, notwithstanding (i) above.
(c) In apportioning the Shares in accordance with
Section 2.7(b), if a to selling shareholder" is a Holder of Registrable
Securities and a partnership or corporation, then the partners, retired partners
and shareholders-of such Holder, or the estates and family members of any such
partners and retired partners and any trusts for the benefit of any of the
foregoing persons, shall be deemed to be a single "selling shareholder," and any
pro-rata reduction with respect to such "selling shareholder" shall be based
upon the aggregate number of shares having registration rights owned by all
entities and individuals deemed to be such "selling shareholder."
2.8 DELAY OF REGISTRATION. No Holder shall have any right to
obtain or seek an injunction restraining or otherwise delaying any such
registration as the result of any controversy that might arise with respect to
the interpretation or implementation of this Section 2.
2.9 INDEMNIFICATION. In the event any Registrable Securities
are included in a registration statement under this Section. 2:
(a) To the extent permitted by law, the Company will
indemnify and hold harmless each Holder, any underwriter (as defined in the Act)
for such Holder and each person, if any, who controls such Holder or underwriter
within the meaning of the Act or the Exchange Act, against any losses, claims,
damages, or liabilities (joint or several) to which they may become subject
under the Act, the Exchange Act or other federal or state law, insofar as such
losses, claims, damages, or liabilities or actions in respect thereof) arise out
of or are based upon any of the following statements I omissions or violations
(collectively a "VIOLATION"): (i) any untrue statement or alleged untrue
statement of a material fact contained In any registration statement, including
any preliminary prospectus or final prospectus contained therein or any
amendments or supplements thereto; (ii) the omission or alleged omission to
state therein a material fact required to be stated therein, or necessary to
make the statements made therein not misleading; or (iii) any violation or
alleged violation by the Company of the Act, the Exchange Act, any state
securities law, or any rule or regulation promulgated under the act, and the
company will pay to each such holder, underwriter or controlling person, as
incurred, any legal or other expenses reasonably incurred by them in connection
with investigating or defending any such loss, claim, damage, liability, or
action;
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provided; however, that the indemnity agreement contained in this subsection
2.9(a) shall not apply to amounts paid in settlement of any such loss, claim,
damage, liability, or action if such settlement is effected without the consent
of the Company (which consent shall not be unreasonably withheld), nor shall the
Company be liable in any such case for any such loss, claim, damage, liability,
or action to the extent that it arises out of or is based upon a Violation that
occurs in reliance upon and in conformity with-written information furnished
expressly for use in connection with such registration by any such Holder,
underwriter or controlling person.
(b) To the extent permitted by law, each selling
Holder will indemnify and hold harmless the Company, each of its directors, each
of its officers who has signed the registration statement, each person, if any,
who controls the Company within the meaning of the Act, any underwriter, any
other Holder selling securities in such registration statement and any
controlling person or any such underwriter or Holder, against any losses,
claims, damages, or liabilities (joint or several) to which any of the foregoing
persons may become subject, under the act, the exchange Act or other federal or
state law, insofar as such losses, claims, damages, or liabilities (or actions
in respect thereto) arise out of or are based upon any Violation,; in each case
to the extent (and only to the extent) that such Violation occurs in reliance
upon and in conformity with written information furnished by such Holder
expressly for use in connection with such registration; and each such Holder
will pay, as incurred, any legal or other expenses reasonably incurred by any
person intended to be indemnified pursuant to this subsection 2.9(b), in
connection with investigating or defending any such loss, claim, damage,
liability or action; provided, however, that the indemnity agreement contained
in this subsection 2.9(b) shall not apply to amounts paid in settlement of any
such loss, claim, damage, liability, or action if such settlement is effected
without the consent of the Holder, which consent shall net be unreasonably
withheld; provided, however, that in no event shall any indemnity under this
subsection 2.9(b) exceed the net proceeds from the offering received by such
Holder.
(c) Promptly after receipt by an indemnified party
under this Section 2.9 of notice of the commencement of any action (including
any governmental action), such indemnified party will, if a claim in respect
thereof is to be made against any indemnifying party under this section 2.9,
deliver to the indemnifying party a written notice of the commencement thereof
and the indemnifying party shall have the right to participate in, and, to the
extent the Indemnifying party so desires, jointly with any other indemnifying
party similarly notified, to assume the defense thereof with counsel mutually
satisfactory to the
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parties; provided, however, that an indemnified party (together with all other
indemnified parties that may be represented without conflict by one counsel)
shall have the right to retain one separate counsel, with the fees and expenses
to be paid by the indemnifying party, if representation of such indemnified
party by the coun sel retained by the indemnifying party would be inappropriate
due to actual or potential conflicts of interest between such indemnified party
and any other party represented by such counsel in such proceeding. The failure
to deliver written notice to the indemnifying party within a reasonable time of
the commencement of any such action, if prejudicial to its ability to defend
such action, shall relieve such indemnifying party of any liability to the
indemnified party under this Section 2.9, but the omission so to deliver written
notice to the indemnifying party will not relieve it of any liability that it
may have to any indemnified party otherwise than under this Section 2.9.
(d) If the indemnification provided for in this
Section 2.9 is held by a court of competent jurisdiction to be unavailable to an
indemnified party with respect to any loss, liability, claim, damage, or expense
referred to therein, then the indemnifying party, in lieu of indemnifying such
indemnified party hereunder, shall contribute to the amount paid or payable by
such indemnified party as a result of such loss, liability, claim, damage, or
expense in such proportion as is appropriate to reflect the relative fault of
the indemnifying party on the one hand and of the indemnified party on the other
in connection with the statements or omissions that resulted in such loss,
liability, claim, damage, or expense, as well as any other relevant equitable
considerations. The relative fault of the indemnifying party and of the
indemnified party shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission to state a material fact relates to information supplied by the
indemnifying party or by the indemnified party and the parties' relative intent,
knowledge, access to information, and opportunity to correct or prevent such
statement or omission.
(e) Notwithstanding the foregoing, to the extent that
the provisions on indemnification and contribution contained in the underwriting
agreement entered into in connection with an underwritten public offering are in
conflict with the foregoing provisions, the provisions of the underwriting
agreement shall control.
(f) The obligations of the Company and Holders under
this Section 2.9 shall survive the completion of any offering of Registrable
Securities in a registration statement under this Section 2. and otherwise.
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2.10 EXCHANGE ACT REPORTS. With a view to making available to
the Holders the benefits of Rule 144 promulgated under the Act and any other
rule or regulation of the SEC that may at any time permit a Holder to sell
securities of the Company to the public without registration or pursuant to a
registration on Form S-3, the Company agrees to:
(a) make and keep public information available, as
those terms are understood and defined in SEC Rule 144, at all times after
ninety (90) days after the effective date of the registration statement
pertaining to the Initial Offering;
(b) take such action, including the voluntary
registration of its Common Stock under Section 12 of the Exchange Act, as is
necessary to enable the Holders to use Form S-3 for the sale of their
Registrable Securities, such action to be taken as soon as practicable after the
end of the fiscal year in which the first registration statement filed by the
Company for the offering of its securities to the general public is declared
effective;
(c) file with the SEC in a timely manner all reports
and other documents required of the Company under the Act and the Exchange Act;
and
(d) furnish to any Holder, so long as the Holder owns
any Registrable Securities, promptly upon request (i) a written statement by the
Company that it has complied with the reporting requirements of SEC Rule 144 (at
any time after ninety (90) days after the effective date of the first
registration statement filed by the Company), the Act, and the Exchange Act (at
any time after it has become subject to such reporting requirements), or that it
qualifies as a registrant whose securities may be resold pursuant to Form S-3
(at any time after it so qualifies); (ii) a copy of the most recent annual or
quarterly report of the Company and such other reports and documents so filed by
the Company; and (iii) such other information as may be reasonably requested in
availing any Holder of any rule or regulation of the SEC which permits the
selling of any such securities without registration or pursuant to such form.
2.11 FORM S-3 REGISTRATION. In case the Company shall receive
from any Holder or Holders 4 written request or requests that the Company effect
a registration on Form S-3 and any related qualification or compliance with
respect to all or a part of the registrable securities owned by such Holder or
Holders, the company will,
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(a) promptly give written notice of the proposed
registration, and any related qualification or compliance, to all other Holders;
and
(b) as soon as practicable, effect such registration
and all such qualifications and compliances as may be so requested and as would
permit or facilitate the sale and distribution of all or such portion of such
Holder's or Holders' Registrable Securities as are specified in -such request,
together with all or such portion of the Registrable Securities of any other
Holder or Holders joining in such request as are specified in a written request
given within fifteen (15) days after receipt of such written notice from the
Company;. provided, however, that the Company shall not be obligated to effect
any such registration, qualification or compliance, pursuant to this Section 2.1
1 (i) if Form S-3 is not available for offering by the Holders; (ii) if the
Holders, together with the holders of any other securities of the Company
entitled to inclusion in such registration, propose to sell Registrable
Securities and such other securities (if any) at an aggregate price to the
public (net of any underwriters' discounts or commissions) of less than five
hundred thousand dollars ($500,000); (iii) if the Company shall furnish to the
Holders a certificate signed by the President of the Company stating that, in
the good faith judgment of the Board of Directors of the Company, it would be
seriously detrimental to the Company and its shareholders for such Form S-3
Registration to be effected at such time, in which event the Company shall have
the right to defer the filing of the Form S-3 registration statement for a
period of not more than ninety (90) days after receipt of the request of the
Holder or Holders under this Section 2. 11; provided, however, that the Company
shall not invoke this right more than once in any twelve (12) month period; (iv)
if the Company has, within the twelve (12) month period preceding the date of
such request, already effected one registration on Form S-3 for the Holders
pursuant to this Section 2. 11; or (v) In any particular jurisdiction in which
the Company would be required to qualify to do business or to execute a general
consent to service of process in effecting such registration, qualification or
compliance.
(c) Subject to the foregoing, the Company shall file
a registration statement covering the Registrable Securities and other
securities so requested to be registered as soon as practicable after receipt of
the request or requests of the Holders. The Company shall bear and pay all
expenses incurred in connection with a registration requested pursuant to
Section 2.11, including (without limitation) all registration, filing,
qualification, printer's and accounting fees, fees and disbursements of counsel
for the company (including fees and disbursements of counsel for the company in
its capacity as counsel to the selling Holder or Holders hereunder; if Company
counsel does not make itself available for this purpose, the
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Company will pay the reasonable fees and disbursements of one counsel for the
selling Holder or Holders), but excluding underwriting discounts and commissions
relating to the sale of the Registrable Securities; provided, however, that the
Company shall not be obligated to pay registration expenses under this paragraph
if the Company has already effected two registrations on Form S-3 pursuant to
this Section 2.11. Registrations effected pursuant to this Section 2.11 shall
not be counted as registrations effected pursuant to Sections 2.1 or 2.2.
2.12 ASSIGNMENT OF REGISTRATION RIGHTS. The rights to cause
the Company to register Registrable Securities pursuant to this Section 2 may be
assigned (but only with all related obligations) by a Holder to any partner or
retired partner of a Holder that is a partnership, any family member or trust
for the benefit of a Holder that is a natural person, or any transferee or
assignee who acquires not less than five hundred thousand (500,000) Registrable
Securities, provided (a) the Company is, within a reasonable time after such
transfer, furnished with written notice of the name and address of such
transferee or assignee and the securities with respect to which such
registration rights are being assigned; (b) such transferee or assignee agrees
in writing to be bound by and subject to the terms and conditions of this
Agreement, including without limitation the provisions of Section 2.14; and (c)
such assignment shall b-. effective only if, immediately following such
transfer, the further disposition of such securities by the transferee or
assignee is restricted under the Act.
2.13 LIMITATIONS ON SUBSEQUENT REGISTRATION RIGHTS. From and
after the date of this Agreement, the Company shall not, without the prior
written consent of the Holders of not less than two-thirds of Registrable
Securities then outstanding, enter into any agreement with any holder or
prospective holder of any securities of the Company that would allow such bolder
or prospective holder (a) to include such securities in any registration filed
under Section 2.1 hereof, unless under the terms of such agreement, such holder
or prospective holder may include such securities in any such registration. only
to the extent that the inclusion of his securities will not reduce the amount of
the registrable securities of the holders that is included therein, (b) to make
a demand registration that could result in such registration statement being
declared effective prior to the earlier of either of the dates set forth in
section 2.1 (a) or within one hundred twenty (120) days of the effective date
of any registration effected pursuant to Section 2.1, or (c) to include such
holder or prospective holder's securities in any registration by the Company of
any of its stock or other securities in connection with the public offering
thereof if such inclusion would reduce the number of registrable securities
includable therein by the Holders pursuant to Section 2.2 hereof,
14
2.14 "MARKET STAND-OFF" AGREEMENT. Each Holder hereby agrees
that, during the period of duration specified by the Company and the managing
underwriter of the Initial Offering, it shall not, to the extent requested by
the Company and such underwriter, directly or indirectly sell, offer to sell,
contract to sell (including, without limitation, any short sale), grant any
option to purchase or otherwise transfer or dispose of (other than to donees who
agree to be similarly bound) any securities of the Comp any held by it at any
time during such period except common stock included in such registration;
provided, however, that:
(a) such agreement shall be applicable only with
respect to the Initial Offering;
(b) all officers and directors of the Company, all
other persons with registration rights (whether or not pursuant to this
Agreement) and all shareholders who hold greater than one percent (1 %) of the
Company's outstanding stock enter into similar agreements;
(c) such market stand-off time period shall not
exceed one hundred eighty (180) days after the effective date of the
registration statement pertaining to the Initial Offering; and
(d) such agreement shall not apply to any Registrable
Securities included in the registration statement pertaining to the Initial
Offering.
In order to enforce the foregoing covenant, the Company may
impose stoptransfer instructions with respect to the Registrable Securities of
each Holder (and the shares or securities of every other person subject to the
foregoing restriction) until the end of the period.
Notwithstanding the foregoing, the obligations described in
this Section 2.14 shall not apply to a registration relating solely to employee
benefit plans on Form S-1 or Form S-8 or similar forms that may be promulgated
in the future, or a registration relating solely to a Commission Rule 145
transaction on Form s-4 or similar forms that may be promulgated in the future.
15
2.15 TERMINATION OF REGISTRATION RIGHTS.
(a) No Holder shall be entitled to exercise any right
provided for in this Section 2 after five (5) years following the closing of the
Initial Offering.
(b) In addition, the right of any Holder to request
registration or inclusion in any -registration pursuant to Section 2 shall
terminate on such date, after the closing of the Initial Offering, that all
shares of Registrable Securities held or entitled to be held upon conve rsion by
such Holder may immediately be sold under Rule 144 during any 90-day period;
provided, however, that the provisions of this Section 2.15(b) shall not apply
to any Holder who owns at least one percent (1%) of the Company's outstanding
stock.
3. COVENANTS OF THE COMPANY
3.1 DELIVERY OF FINANCIAL STATEMENTS.
(a) The Company shall deliver to each Holder who
holds any shares of Preferred Stock or the shares issued or issuable upon
conversion thereof:
(i) as soon as practicable, but in any event
within ninety (90) days after the end of each fiscal year of the Company, an
income statement for such fiscal year, a balance sheet of the Company and
statement of shareholder's equity as of the end of such year, and a statement
of cash flows for such year, such year-end financial reports to be prepared in
accordance with generally accepted accounting principles ("GAAP"), and audited
and certified by independent public accountants of nationally recognized
standing selected by the Company's Board of Directors; and
(ii) as soon as practicable, but in any event
within forty-five (45) days after the end of each of the first three (3)
quarters of each fiscal year of the Company, an unaudited profit or loss
statement, statement of cash flows for such fiscal quarter and an unaudited
balance sheet as of the end of such fiscal quarter, together with an instrument
executed by the Chief Financial Officer or President of the Company certifying
that such financial reports were prepared in accordance with GAAP consistently
applied with prior practice for earlier periods (with the exception of footnotes
that may be required by GAAP)
16
and fairly present the financial condition of the Company and its results of
operation for the period specified, subject to year-end audit adjustments.
(b) The Company shall deliver to each Holder who
holds at least one million (1,000,000) Registrable Securities (or Common Stock
issued or issuable upon conversion thereof, as adjusted for stock splits, stock,
dividends, and the like):
(i) as soon as practicable, but in any event
thirty (30) days prior to the end of each fiscal year, a budget and business
plan for the next fiscal year, prepared on a monthly basis, including balance
sheets and statements of cash flows for such months (the "ANNUAL FINANCIAL
PLAN") and, as soon as prepared, any other budgets or revised budgets prepared
by the Company;
(ii) within twenty (20) days of the end of
each month, an unaudited income statement and statement of cash flows and
balance sheet for and as of the end of such month, in reasonable detail, and
comparing the results to the Annual Financial Plan and to the prior year
comparable period, together with an instrument executed by the Chief Financial
Officer or president of the company certifying that such financial reports were
prepared in accordance with GAAP consistently applied with prior practice for
earlier periods (with the exception of footnotes that may be required by gaap)
and fairly present the financial condition of the company and its results of
operation for the period specified, subject to yearend audit adjustments; and
(iii) such other information relating to the
financial condition, business, prospects or corporate affairs of the company as
any of such holders or any assignee of any of such holders may from time to time
request; provided, however, that the company shall not be obligated under this
subsection (b)(iii) or any other subsection of section 3.1 to provide
information that it deems in good faith to be a trade secret or similar
confidential information unless the holder or holders provide assurances in
writing to the company that it will maintain the confidentiality of the
information.
3.2 INSPECTION. the company shall permit each holder, at such
holder's expense, to visit and inspect the company's properties, to examine its
books of account and records, and to discuss the company's affairs, finances and
accounts with its officers, all at such reasonable times as may be requested by
such holder; provided, however, that the Company shall not be obligated pursuant
to this section 3.2 to provide access to any
17
information that it reasonably considers to be a trade secret or similar
confidential information unless such Holder provides assurances in writing to
the Company that it will maintain the confidentiality of the information.
3.3 DIRECTORS' EXPENSES. The Company shall pay all reasonable
out-of-pocket expenses incurred by members of the Company's Board of Directors
when such members are acting on behalf of the Company, including attending
meetings of the Board of Directors.
3.4 LIFE INSURANCE. The Company shall use its best efforts to
obtain and maintain from an insurer satisfactory to the Investors a key man life
insurance policy, the proceeds of which are payable to the Company, in the
amount of $1,500.000, on the life of Xxx XxXxxxxxxx.
3.5 CERTAIN OPERATING COVENANTS. Without the consent of the
Holders of a majority of the Registrable Securities, the Company shall not:
(a) invest in, acquire an equity interest in, or
otherwise acquire, any other business entity;
(b) make any loan or guarantee (excluding accounts
receivable) in excess of $10,000 per transaction;
(c) make any material change within two years of the
date of this Agreement in the nature of the business as now conducted or as
contemplated by the Company's current business plan;
(d) engage in any material transaction not in the
ordinary course of the Company's business; or
(e) engage in any transaction of a business nature
with any member of management of the Company, other than the payment of
compensation, including, but not limited to, base salaries, cash bonuses, and
employee stock option grants, in the ordinary course of business as approved by
the board of directors.
the company shall not, without the unanimous approval of all members of
its board of directors, increase the number of shares reserved for issuance
pursuant to the company's stock option plans to more than 4,210,564 shares of
the company's common stock.
18
3.6 EMPLOYMENT AGREEMENTS. The Company shall enter into
employment agreements with Xxx XxXxxxxxxx, Xxx Xxxxx and Xxxxx Xxxxx (the
"FOUNDERS") within ten (10) business days of the date hereof. The employment
agreements will provide that 3,000,000 shares of the 12,000,000 shares owned by
the Founders will have vested upon the date hereof, and that the remaining
9,000,000 shares will vest in equal monthly increments for a 36 month period
beginning on the date hereof. Any unvested shares owned by the Founders shall
vest in full upon the completion of the Company's initial public offering, the
sale or merger of the Company or the termination of the Founder's employment by
the Company. The employment agreements will provide that the Company will have a
right to repurchase vested shares upon a termination of employment for the fair
market value of the shares at the time of termination.
3.7 CONFIDENTIALITY AND EMPLOYEE INVENTIONS AGREEMENT. The
Company shall cause each of its officers, employees, consultants, and
independent contractors to enter into a confidentiality and employee inventions
agreement with the Company (which agreement shall be in a form acceptable to the
investor) that restricts the disclosure, of the company's proprietary
information to third parties and provides for assignment to the Company of all
inventions and intellectual property created and developed by such employees,
consultants, and contractors in the course of their employment or engagement, as
the case may be, by the Company.
3.8 ASSIGNMENT OF COMPANY RIGHTS. In the event the Company
elects not to exercise any right of first refusal or right of first offer that
the Company may have on a proposed transfer of any of the Company's outstanding
capital stock pursuant to the Company's charter documents, by contract or
otherwise, the Company shall, to the extent it may do so, assign such right of
first refusal or right of first offer to the Investor. In the event of such
assignment, the Investors shall have a right to purchase the capital stock
proposed to be transferred.
3.9 STOCK VESTING. Unless otherwise approved unanimously by
the Board of Directors, all shares of the Company's capital stock, stock
options, and other stock equivalents Issued after the date of this Agreement to
employees, directors, consultants and other service providers shall be subject
to vesting as follows: (a) twenty-five percent (25 %) of such stock, options, or
equivalents shall vest at the end of the first year following the earlier of the
date of issuance or the date of commencement of such person's services to the
Company, and (b) seventy-five percent (75 %) of such stock, options, or
equivalents shall vest quarterly over the remaining three (3) years thereafter.
with respect to any stock, options, or equivalents issued to any such person,
the Company's repurchase option shall provide that, upon such person's
termination of employment or service with the company, prior to the company's
initial Offering with or without cause, the company or its assignee (to the
extent permissible under
19
applicable securities laws and other laws) shall have the option to purchase, at
fair market value, such stock, options, or equivalents, less the exercise price
of any vested options held by such person.
3. 10 TERMINATION OF COVENANTS. The covenants set forth in
this Section 3 shall, except as otherwise specifically provided, terminate and
be of no further force or effect upon the earlier of.
(a) the effective date of the Registration Statement
pertaining to the Initial Offering;
(b) the closing date of (i) a sale, lease or other
disposition of all or substantially all of the Company's assets, or (ii) an
acquisition of the Company by another entity by stock purchase, consolidation,
merger or other reorganization in which the holders of the Company's outstanding
voting stock immediately prior to such transaction own, immediately after such
transaction, securities representing less than fifty percent (50%) of the voting
power of the entity surviving such transaction; or
(c) when the Company first becomes subject to the
periodic reporting requirements of Section 15(d) of the Securities Exchange Act
of 1934, as amended;
4. RIGHT OF FIRST REFUSAL
4.1 FUTURE SALES OF SHARES. Subject to the terms and
conditions specified in this Section 4, the Company hereby grants to each Holder
who holds at least one million (1,000,000) Registrable Securities a right of
first refusal with respect to future sales by the Company of its Shares. For
purposes of this, Section 4, a "Holder" includes any general partners,
affiliates, immediate family members (or a trust for the benefit therefor) to
whom Registrable Securities were gifted or transferred, and any trust for the
benefit of a Holder (collectively, "ALL RELATED PARTIES"). Each Holder shall be
entitled to apportion the right of first offer hereby granted it among itself
and all related parties in such proportions as it deems appropriate.
4.2 EXERCISE OF RIGHT. Each time the Company proposes to offer
any Shares, the Company shall first make an offer of such shares to each holder
as follows:
20
(a) The Company shall deliver a notice ("NOTICE") to
each Holder stating (i) the Company's bona fide intention to offer such Shares,
(ii) the number of such Shares to be offered, and (iii) the price and other
terms upon which it proposes to offer such Shares.
(b) By written notification received by the Company,
within seven (7) days after receiving the Notice, a Holder may elect to purchase
or obtain, at the price and on the terms specified in the Notice, up to that
portion of such Shares that equals the proportion that the number of shares of
Common Stock issued and held, or issuable upon conversion of the Series A Stock
then held, by such Holder bears to the total number of shares of Common Stock
outstanding, or issuable upon conversion of outstanding Series A Preferred
Stock.
4.3 SALE TO THIRD PARTIES. If all Shares that the Holders are
entitled to purchase or obtain pursuant to Section 4.2(b) are not elected to be
purchased or obtained, the Company may, during the sixty (60) day period
following the expiration of the period provided in Section 4.2(b), offer the
remaining subscribed portion of such Shares to any person or persons at a price
not less than that, and upon terms no more materially favorable to the offeree
than those, specified in the Notice, If the Company does not enter into an
agreement for the sale of the Shares within such period, or if such agreement is
not consummated within fifteen (15) days of the execution thereof, the right
provided hereunder shall be deemed to be revived and such Shares shall not be
offered unless first reoffered to the Holders in accordance herewith.
4.4 EXCLUDED SHARES, The right of first refusal in this
Section 4 shall not be applicable to (a) up to an aggregate of 3,890,802 shares
of Common Stock issuable or issued to directors, employees or consultants of or
advisors to the Company, pursuant to stock purchase or stock option plans or any
other arrangements approved by the Board of Directors; (b) up to 153,987 shares
of Common Stock issuable upon the exercise of a warrant held by Pacific Crest
Securities Inc.; (c) up to 165,775 shares of Common Stock issuable upon the
exercise of a warrant held by Ascend Communications Inc.; (d) up to an aggregate
of 1,439,500 shares issuable upon the exercise of certain warrants issued to
prior investors; and (e) shares of Common Stock issued or issuable to leasing
companies, investment bankers, landlord, lenders, and other vendors of goods and
services to the Company; or (f) shares of Common Stock issued or Issuable to any
Holder.
4.5 ASSIGNMENT OF RIGHTS. The rights of first refusal set
forth in this Section 4 may be assigned or transferred to the same parties,
subject to the same restrictions, as any transfer or assignment of registration
rights as set forth in Section 2.12,
4.6 TERMINATION OF RIGHTS. The rights of first refusal set
forth in this Section 4 shall terminate upon the earlier of (a) The effective
date of the registration statement
21
pertaining to a public offering of shares of Common Stock that results in the
Series A Stock being converted to Common Stock; (b) a sale, lease or other
disposition of all or substantially all of the Company's assets; or (c) an
acquisition of the Company by another entity by stock purchase, consolidation,
merger or other reorganization in which the holders of the Company's outstanding
voting stock immediately prior to such transaction own, immediately after such
transaction, securities representing less than fifty percent (50%) of the voting
power of the entity surviving such transaction.
5. RIGHT OF CO-SALE
5.1 RIGHT OF CO-SALE Subject to the terms and conditions
specified in this Section 5, each of Xxx XxXxxxxxxx, Xxxxx Xxxxx, and Xxx Xxxxx
(individually, a "FOUNDER" and collectively, the "FOUNDERS") grants the Holders
the right to participate in any sale, assignment, gift, bequest, pledge or other
transfer ("TRANSFER") of any Shares owned by the Founder on the same terms and
conditions on which they, or any one of them, proposes to Transfer their Shares.
To the extent that the Holders exercise their right of co-sale as set forth
below, the number of shares that the Founders, or any one of them, may Transfer
in a proposed the transaction shall be correspondingly reduced.
5.2 EXERCISE OF RIGHT. Each time a Founder proposes to
Transfer any Shares, he shall first notify the Investors as follows:
(a) The selling Founder shall deliver a notice
("PARTICIPATION NOTICE") to the Holders stating (i) the Founder's bona fide
intention to Transfer his Shares, (ii) the number of such Shares to be
Transferred, and (iii) the price and other terms upon which he proposes to
Transfer his Shares.
(b) By written notification received by the selling
Founder within thirty (30) days after receiving the Participation Notice, the
Holders may elect to Transfer, at the price and on the terms specified in the
Participation Notice, up to that portion of such Shares that equals the
proportion that the number of shares of common stock issued and held, or
issuable upon conversion of the series a stock then held, by such holder bears
to the total number of shares of common stock outstanding, or issuable upon
conversion of outstanding Series A Preferred Stock.
(c) Each Holder shall effect its participation in the
transfer by promptly delivering to the selling founder, for transfer to the
prospective purchaser, one or more cerfificates, properly endorsed for transfer,
which represent (i) the type and number of Shares that the Holder elects to
transfer; or (ii) that number of Shares of Series A Stock that is at such time
convertible into the number of Shares of Common Stock that such Holder elects to
sell; provided, however, that if the prospective purchaser objects to the
delivery of Series A
22
stock in lieu of Common Stock, such Holder shall convert such Series A Stock
into Common Stock and deliver Common Stock to the prospective purchaser. The
Company agrees to make any such conversion concurrent with the actual transfer
of such shares to the purchaser.
5.3 OBLIGATION TO EFFECT TRANSFER. The stock certificate or
certificates that the Holders deliver to the selling Founder pursuant to
paragraph 5.2(c) shall be transferred to the prospective purchaser upon
consummation of the Transfer of the Shares pursuant to the terms and conditions
specified in the Participation Notice, and the Founder shall concurrently
therewith remit to each participating Holder that portion of the Transfer
proceeds to which such Holder is entitled by reason of its participation in such
Transfer.
5.4 TERMINATION OF RIGHTS. The rights of co-sale set forth in
this Section 5 shall terminate upon die earlier of (a) the effective date of the
registration statement pertaining to a public offering of shares of Common Stock
that results in the Series A Stock being converted to Common Stock; (b) a sale,
lease or other disposition of all or substantially all of the Company's assets;
or (c) an acquisition of the Company by another entity by stock purchase,
consolidation, merger or other reorganization in which the holders of the
Company's outstanding voting stock immediately prior to such transaction own,
immediately after such transaction, securities representing less than fifty
percent (50%) of the voting power of the entity surviving such transaction.
6. MISCELLANEOUS
6.1 SUCCESSORS AND-ASSIGNS. Except as otherwise provided
herein, the terms and conditions of this Agreement shall inure to the benefit of
and be binding upon the respective successors and assigns of the parties,
including permitted transferees of any Registrable Securities. Nothing in this
Agreement, express or implied, is intended to confer upon any party other than
the parties hereto or their respective successors and assigns any rights,
remedies, obligations, or liabilities under or by reason of this Agreement,
except as expressly provided in this Agreement.
6.2 GOVERNING LAW. This Agreement shall be governed by and
construed under the laws of the State of Washington as applied to agreements
among Washington residents entered into and to be performed entirely within
Washington.
6.3 COUNTERPARTS. This Agreement may be executed in two or
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
23
6.4 TITLES AND SUBTITLES. The titles and subtitles used in
this Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
6.5 NOTICES. Unless otherwise provided, any notice required or
permitted under this Agreement shall be given in writing and shall be deemed
effectively given upon personal delivery to the party to be notified or upon
deposit with the United States Post Office, by registered or certified mail,
postage prepaid or upon delivery to a recognized courier service and addressed
to the party to be notified at the address indicated for such party on the
signature page hereof, or at such other address as such party may designate by
ten (10) days' advance written notice to the other parties.
6.6 EXPENSES. If any action at law or in equity is necessary
to enforce or interpret the terms of this Agreement, the prevailing party shall
be entitled to reasonable attorneys' fees, costs and necessary disbursements in
addition to any other relief to which such party may be entitled.
6.7 AMENDMENTS AND WAIVER . Any term of this Agreement may be
amended and the observance of any term of this Agreement may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company and the Holders of
more than fifty percent (50%) of the Registrable Securities. Any amendment or
waiver effected in accordance with this paragraph shall be binding upon each
Holder of any Registrable Securities, or shares of Series A Stock, then
outstanding and the Company.
6.8 SEVERABILITY. If one or more provisions of this Agreement
are held to be unenforceable under applicable law, such provision shall be
excluded from this Agreement and the balance of the Agreement shall be
interpreted as if such provision were so excluded and shall be enforceable in
accordance with its terms.
6.9 AGGREGATION OF STOCK. All shares of Registrable Securities
or Series A Preferred Stock held or acquired by an Investor and All Related
Parties of such Investor shall be aggregated together for the purpose of
determining the availability of any rights under this Agreement.
6.10 ENTIRE AGREEMENT. This Agreement and the Purchase
Agreement constitute the full and entire understanding and agreement between the
parties with regard to the subject matter hereof and thereof.
24
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
THE COMPANY: FREEI NETWORKS, INC.
By: /s/ Xxx XxXxxxxxxx
------------------------------
Printed Name: Xxx XxXxxxxxxx
Title: President
INVESTORS: SEQUOIA CAPITAL IX
SEQUOIA CAPITAL ANGEL FUND
SEQUOIA CAPITAL IX PRINCIPALS FUND
By: SC IX Management, LLC
A California Limited Liability Company
Its General Partner
Illegible
------------------------------
Title: Managing Member
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
THE COMPANY: FREEI NETWORKS, INC.
By:
-------------------------
Printed Name: Xxx XxXxxxxxxx
Title: President
INVESTORS: SEQUOIA CAPITAL IX
SEQUOIA CAPITAL ANGEL FUND
SEQUOIA CAPITAL IX PRINCIPALS FUND
By: SC IX Management, LLC
A California Limited Liability Company
Its General Partner
By: Illegible
-------------------------
Title: Managing Member
FOUNDER: XXX XxXXXXXXXX
/s/ Xxx XxXxxxxxxx
-----------------------------
FOUNDER: XXXXX XXXXX
/s/ Xxxxx Xxxxx
----------------------------
FOUNDER XXX XXXXX
/s/ Xxx Xxxxx
----------------------------
