Contract analysis

I. Executive Summary This memorandum summarizes the findings of the employment and benefits due diligence conducted by Calderwood & Harkness LLP ("C&H") in connection with Pinnacle Venture Fund II LP's ("Pinnacle") proposed $60,000,000 Series D Preferred Stock investment in Verdana Software, Inc. ("Verdana" or the "Company"). The purpose of this memorandum is to identify and assess employment-related liabilities, ris

1. ESOP Pool Expansion. The Company has proposed a 5,000,000-share expansion of its equity incentive plan prior to the Series D closing, which has material dilutive implications for Pinnacle's post-investment ownership percentage and is a significant point of contention in the valuation negotiation.

2. Executive Employment Agreements and Key Person Risk. The Company's co-founders, Raj Anand (CEO) and Lena Kovac (CTO), are critical to the Company's product development, customer relationships, and overall business trajectory. Their employment agreements contain severance and change-of-control provisions, and their combined equity holdings represent 35.0% of the pre-investment fully diluted capitalization.

3. Independent Contractor Classification. The Company engages approximately 15–20 independent contractors, primarily in software development and consulting capacities, and C&H recommends that Pinnacle confirm that the Company has conducted a classification analysis under applicable Oregon and federal standards.

4. Oregon Non-Competition Agreement Enforceability. Enforceability of the non-competition covenants in the executive employment agreements is subject to specific requirements under Oregon law (ORS 653.295), which impose certain procedural and substantive conditions on such agreements. Company Background. Verdana Software, Inc. is a Delaware C-corporation headquartered at 1175 NW Couch Street, Suite 800, Portland, Ore

II. Workforce Overview A. Employee Headcount and Composition As of March 31, 2022 — the date of the most recent financial data provided in diligence — Verdana employs approximately 310 employees. Based on C&H's review of the organizational charts, payroll data, and departmental headcount summaries provided in the data room, the Company's workforce is broken down by functional area approximately as follows: The compos

III. Executive Employment Agreements C&H reviewed the employment agreements and offer letters for the Company's four senior executives: Raj Anand (CEO & Co-Founder), Lena Kovac (CTO & Co-Founder), Thomas Brightwell (CFO), and Sandra Mikkelsen (General Counsel). A summary of the key terms of each agreement is set forth below. A. Raj Anand — Chief Executive Officer & Co-Founder Agreement History. Mr. Anand's employment

IV. Equity Incentive Plan (ESOP) A. Current Plan Structure Verdana maintains the Verdana Software, Inc. 2016 Equity Incentive Plan (the "Plan"), which was adopted by the Board of Directors and approved by the Company's stockholders in 2016. The Plan has been amended from time to time, including in connection with prior financing rounds. The key terms and current status of the Plan are summarized as follows: The Plan

Section 409A of the Internal Revenue Code imposes strict requirements on the design and administration of deferred compensation arrangements, including stock options. An option that is granted with an exercise price below the fair market value of the underlying stock on the date of grant is treated as deferred compensation subject to Section 409A, which can result in severe adverse tax consequences for the option hol

V. Benefits Programs A. Health and Welfare Benefits Verdana provides group health insurance benefits to its full-time employees and their eligible dependents, including medical, dental, and vision coverage. The Company's health insurance plans are provided through Cascade Health Insurance Co., an Oregon-based health insurance carrier. Based on C&H's review of the plan summaries and enrollment materials in the data ro

VI. Employment Policies and Compliance A. Employee Handbook and Policies C&H reviewed the Company's employee handbook, which was last updated in January 2022. The handbook is a comprehensive document that addresses the Company's employment policies and procedures across a range of topics. The handbook contains policies that are standard for a company of Verdana's size, industry, and geographic location, including the

VII. Employment-Related Claims and Litigation A. Pending Claims Based on the representations of the Company's General Counsel, Sandra Mikkelsen, and the materials reviewed in the data room, there are no pending employment-related lawsuits, arbitrations, or administrative charges against the Company as of the date of this diligence review. Specifically: • No lawsuits or arbitration proceedings have been filed against

VIII. Key Observations and Recommendations A. Summary of Key Findings Based on C&H's review of the employment and benefits diligence materials described in this memorandum, the key findings are summarized as follows:

1. Workforce Size and Structure. Verdana employs approximately 310 employees, the majority of whom are based in the Portland, Oregon metropolitan area. All employees are at-will (subject to the terms of executive employment agreements for certain senior executives). There are no collective bargaining agreements, union representation, or evidence of union organizing activity.

2. Executive Employment Agreements. The Company's co-founders, Raj Anand (CEO) and Lena Kovac (CTO), and its CFO, Thomas Brightwell, are parties to employment agreements that provide for severance benefits (12 months for the co-founders; 9 months for the CFO), double-trigger change-of-control equity acceleration, and post-termination non-competition and non-solicitation covenants. The enforceability of the non-compet

3. ESOP Pool. The Company's 2016 Equity Incentive Plan currently reserves 12,000,000 shares (15.0% of the pre-investment fully diluted capitalization), of which approximately 1,500,000 shares remain available for future grant. The Company has proposed a 5,000,000-share expansion of the Plan, which is a significant point of contention in the valuation negotiation and would reduce Pinnacle's post-investment ownership f

4. Benefits. The Company maintains standard health and welfare benefits (medical, dental, vision, life insurance, long-term disability), a 401(k) plan with a 2% employer match, and an unlimited PTO policy for salaried employees. No defined benefit or pension plan obligations exist. No material benefits compliance issues have been identified.

5. Claims. There are no pending employment-related lawsuits, arbitrations, or administrative charges. One low-value pre-litigation demand letter (approximately $180,000) from a former engineering manager was identified; the claim appears to have been resolved without formal proceedings.

6. Contractor Classification. The Company engages approximately 15–20 independent contractors, primarily in software development. C&H recommends further diligence on the Company's compliance with the Oregon ABC test and IRS classification guidelines. B. Recommended Conditions and Protections for the SPA Based on the findings summarized above, C&H recommends that the following representations, warranties, closing cond

1. Key Executive Closing Condition. A closing condition providing that the employment agreements of Raj Anand, Lena Kovac, and Thomas Brightwell remain in full force and effect as of the closing date and that no notice of termination has been given by or to any such executive prior to closing.

2. CIIAA Representation. A specific representation and warranty that all current employees and contractors of the Company have executed Confidential Information and Invention Assignment Agreements (or substantially equivalent agreements), and that no exceptions exist that could materially impact the Company's ownership of its intellectual property portfolio.

3. Section 409A Compliance Representation. A representation and warranty that all outstanding stock options and other equity awards under the Plan have been granted at fair market value in compliance with Section 409A of the Internal Revenue Code, and that no option holder has incurred or will incur adverse tax consequences under Section 409A as a result of any grant made by the Company.

4. Disclosure of Former Employee Demand Letter. The January 2022 demand letter from the former engineering manager should be disclosed in the Disclosure Schedules under the representations and warranties relating to litigation, claims, and employment matters.

5. ESOP Expansion Closing Condition. If the parties agree to the proposed ESOP expansion, a closing condition requiring that the Board of Directors and the Company's stockholders have duly authorized the increase in the number of shares reserved under the Plan, with evidence of such authorization delivered to Pinnacle at or prior to closing.

6. Independent Contractor Classification Audit. A covenant requiring the Company to conduct an independent contractor classification audit, either prior to closing or within a specified period (e.g., 90 days) following closing, to confirm compliance with the Oregon ABC test and applicable IRS guidelines. The audit should cover all current independent contractor relationships and should be conducted by qualified emplo