Contract analysis

I. Executive Summary This memorandum analyzes the current impasse over drag-along rights arising in connection with Pinnacle Venture Fund II LP's proposed $60,000,000 Series D Preferred Stock investment in Verdana Software, Inc. ("Verdana" or the "Company"). The dispute centers on a fundamental disagreement between Pinnacle and Verdana's co-founders regarding the terms under which a sale of the Company may be compell

II. Background and Transaction Context A. The Proposed Investment Pinnacle Venture Fund II LP ("Pinnacle" or the "Fund"), an $850,000,000 fund of 2020 vintage organized as a Delaware limited partnership with its general partner Pinnacle Capital Management LLC located at 2400 Sand Hill Road, Suite 310, Menlo Park, California 94025, proposes to invest $60,000,000 in newly issued shares of Series D Preferred Stock of Ve

1. Raj Anand — Founder designee (CEO & Co-Founder)

2. Lena Kovac — Founder designee (CTO & Co-Founder)

3. Priya Dasgupta — Ridgeline Ventures designee (Series A)

4. Elliott Margolis — Northgate Growth Partners designee (Series B)

5. Diana Chen — Brindoval Capital Group designee (Series C) Pinnacle has proposed that the post-close board be expanded to seven members, consisting of:

1. Raj Anand — Founder designee

2. Lena Kovac — Founder designee

3. Priya Dasgupta (or successor) — Ridgeline Ventures designee

4. Elliott Margolis (or successor) — Northgate Growth Partners designee

5. Diana Chen (or successor) — Brindoval Capital Group designee

6. Marcus Trejo (or his designee) — Pinnacle designee

7. Mutually agreed independent director — to be nominated by the board and approved by both the founders and Pinnacle Board composition discussions are ongoing and trending toward resolution. We understand from informal communications that the parties are close to agreement on the seven-member structure described above, and we anticipate that the board composition terms will be formally confirmed in the coming weeks.

III. Pinnacle's Proposed Drag-Along Provision A. Summary of Drafted Terms As drafted in the C&H Voting Agreement Draft dated June 20, 2022, the drag-along provision operates as follows: Trigger Event. The drag-along is triggered upon the approval of a "Sale of the Company" by holders of a majority of the then-outstanding shares of Preferred Stock, voting together as a single class on an as-converted-to-common-stock b

IV. Founders' Counter-Position A. The $500,000,000 Enterprise Value Floor On August 10, 2022, counsel for the founders — Jonathan Hale of Langford Price & Associates LLP — formally communicated to this firm that Raj Anand and Lena Kovac will not accept the drag-along provision as currently drafted in the C&H Voting Agreement Draft. The founders' counter-proposal is straightforward: the drag-along cannot be triggered

V. Existing Investor Positions The existing preferred investors are divided on the drag-along dispute, with each series holder's position reflecting its particular investment basis, economic incentives, and relationship with the founders. We summarize each investor's position below, followed by a consolidated voting analysis. A. Ridgeline Ventures Fund III LP (Series A) — Supports Founder Threshold Board Representati

VI. Tag-Along (Co-Sale) Rights — Current Status A. Terms as Drafted The tag-along and co-sale provisions are contained in the draft Amended and Restated Right of First Refusal and Co-Sale Agreement, prepared by this firm and circulated on June 20, 2022. The key terms of the co-sale provision are as follows: Trigger. The co-sale right is triggered by any proposed transfer by a "Key Holder" (defined to include each of

VII. Delaware Law Analysis A. Enforceability of Drag-Along Provisions Under Delaware Law Delaware courts have generally upheld drag-along provisions in stockholders' agreements and voting agreements as valid and enforceable contractual obligations. The principle underlying this body of law is straightforward: stockholders are free to contract among themselves regarding the manner in which they will vote their shares,

VIII. Market Precedent Analysis A. Prevalence of Drag-Along Provisions in Growth-Stage VC Deals Drag-along rights are a near-universal feature of venture-backed company voting agreements. According to the most recent survey data from the National Venture Capital Association (NVCA), more than 95% of venture-backed company financing transactions in the Series C and later stages include a drag-along provision in some fo

IX. Analysis of Key Risks and Considerations A. Risks of Accepting Pinnacle's Position (No Floor) If Pinnacle maintains its position that the drag-along should include no enterprise value floor and the parties cannot reach agreement, the following risks are implicated: Founder Walk-Away Risk. The most immediate and significant risk is that the founders walk away from the transaction entirely. Raj Anand and Lena Kovac