Contract analysis

From: Andrew Fitzpatrick <afitzpatrick@calderwoodharkness.com> To: Rebecca Thornton <rthornton@langfordprice.com> Cc: Harrison Wexford <hwexford@calderwoodharkness.com> Date: Thu, 08 Sep 2022 03:47:00 -0000 Subject: Verdana Software, Inc. — Series D Preferred Stock Investment — Open Issues List

I hope you are doing well. I am writing in connection with the ongoing negotiations regarding Pinnacle Venture Fund II, LP's proposed $60,000,000 Series D Preferred Stock investment in Verdana Software, Inc. Following the partial agreement on board composition that the parties reached on September 6, I thought it would be useful to circulate an updated open issues list capturing the remaining unresolved items across

As you know, the parties have made meaningful progress on several fronts. In particular, the seven-member board composition — two Founder designees, one Ridgeline designee, one Northgate designee, one Brindoval designee, one Pinnacle designee, and one mutually agreed independent director — is now largely settled, which is an important milestone. That said, a number of significant commercial and structural terms remai

Set forth below is a summary of the principal open issues as we see them:

**1. Pre-Money Valuation.** This remains the most significant gap between the parties — a $60,000,000 spread on pre-money valuation. Pinnacle's position is a $260,000,000 pre-money valuation, which would imply a price per share of $3.25 and approximately 18.75% post-close ownership on a fully-diluted basis (18,461,538 Series D shares). Verdana's position is a $320,000,000 pre-money valuation, implying a price per sha

**2. ESOP Expansion Timing and Option Pool Treatment.** Verdana has proposed expanding the ESOP by 5,000,000 shares (from 12,000,000 to 17,000,000) prior to closing, which would increase fully-diluted shares to 100,000,000 post-investment and reduce Pinnacle's ownership to 15.00% even at the $4.00 per share price. Pinnacle's position is that any option pool increase should be included in the pre-money capitalization

**3. Anti-Dilution Mechanism.** Pinnacle has proposed full-ratchet anti-dilution protection for the Series D Preferred Stock. Verdana's position, as reflected in your July 22 markup of the Investors' Rights Agreement, is broad-based weighted average anti-dilution, consistent with the terms applicable to the Series A, Series B, and Series C Preferred Stock. We note that Brindoval Capital Group has separately objected

**4. Liquidation Preference Multiple.** Pinnacle has proposed a 1.5x non-participating liquidation preference, representing an aggregate preference of $90,000,000. Verdana's position is a 1.0x non-participating liquidation preference ($60,000,000 aggregate preference), consistent with the terms of the Series A, B, and C Preferred Stock. The existing investors have supported Verdana's position that uniformity across t

**5. Drag-Along Threshold.** As reflected in the current draft of the Amended and Restated Voting Agreement, Pinnacle has proposed a drag-along provision requiring all stockholders to consent to a sale or IPO supported by holders of a majority of then-outstanding preferred stock, with no minimum enterprise value floor. The Founders formally communicated on August 10 their position that any drag-along sale below a $50

**6. Pacific Summit Bank Lender Consent.** Verdana's existing $10,000,000 revolving credit facility with Pacific Summit Bank, N.A. ($6,200,000 drawn as of March 31, 2022; maturing June 30, 2024) contains negative covenants that may restrict the issuance of Series D Preferred Stock without lender consent. Pinnacle's position is that obtaining an affirmative consent or waiver from Pacific Summit Bank must be a conditio

**7. Pay-to-Play Provisions.** Pinnacle has proposed mandatory pay-to-play provisions for all preferred holders in future financing rounds, under which non-participating holders would have their preferred stock converted to common stock. Verdana's position, as reflected in your July 22 markup, is to delete the pay-to-play provision entirely. We would note that this provision would affect all existing preferred holder

**8. Redemption Rights.** Pinnacle has proposed redemption rights exercisable at Pinnacle's election after five years from closing, at the original purchase price plus accrued and unpaid dividends. Verdana's position is that no redemption rights should be included. For reference, the 8% cumulative dividend (accruing $4,800,000 annually on the $60,000,000 investment) is agreed, so the redemption amount would include a

A few additional process notes: The Stock Purchase Agreement remains in second-draft form (our July 18 revision), and the Investors' Rights Agreement has not been revised since your July 22 markup. Further drafting on both documents is on hold pending resolution of the foregoing commercial issues. The draft ROFR/Co-Sale Agreement and Voting Agreement are similarly awaiting commercial resolution on the drag-along and

Given the number and significance of the open items, I would propose that the principals — Marcus Trejo on the Pinnacle side, and Raj Anand and/or Thomas Brightwell on the Verdana side, together with counsel — schedule a call for the week of September 12 to discuss these issues and explore whether a path to resolution exists. If you could coordinate availability with the Verdana team and let us know what works, we wi

Please do not hesitate to reach out if you or Jonathan have any questions about the open issues list or would like to discuss any of the foregoing. We look forward to hearing from you.

Andrew Fitzpatrick Associate Calderwood & Harkness LLP 101 Montgomery Street, Suite 3500 San Francisco, CA 94104 T: (415) 555-0178 E: afitzpatrick@calderwoodharkness.com

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