Contract analysis

I. Executive Summary This memorandum analyzes the implications of Section 1061 of the Internal Revenue Code of 1986, as amended (the "Code"), as they relate to the holding period requirements applicable to the carried interest held by the general partner of Pinnacle Venture Fund II LP ("Fund II") in connection with the proposed GP-led secondary transaction and the formation of Pinnacle Continuation Vehicle LP (the "C

II. Background and Transaction Overview A. Pinnacle Venture Fund II LP — Existing Fund Structure Pinnacle Venture Fund II LP ("Fund II") is a Delaware limited partnership (EIN 84-3291067; Delaware LP File No. DE-LP-2019-04817) that held its final close in December 2019, making it a 2019 vintage fund. Fund II was formed for the purpose of making venture capital and growth equity investments in technology companies, wi

1. Luminos Systems Inc. Luminos Systems Inc. ("Luminos") is a Delaware C-corporation (EIN 47-8823156) that operates an AI-powered revenue operations platform designed for enterprise-scale software-as-a-service companies. Fund II holds a 24.7% fully diluted equity stake in Luminos. Based on the June 2025 Section 409A valuation of Luminos, the company's enterprise value is $2.48 billion, yielding a fair market value fo

2. ClearArc Software Inc. ClearArc Software Inc. ("ClearArc") is a Delaware C-corporation (EIN 83-5519274) that provides a cloud-native compliance and audit automation platform serving regulated industries, including financial services, healthcare, and government contracting. Fund II holds a 31.2% fully diluted equity stake in ClearArc. Based on the current valuation, ClearArc's enterprise value is approximately $1.5

3. Vectral Cloud Inc. Vectral Cloud Inc. ("Vectral") is a Delaware C-corporation (EIN 85-1102847) that provides a multi-cloud infrastructure orchestration and FinOps platform enabling enterprises to optimize their cloud spending and operations across multiple hyperscaler environments. Fund II holds an 18.9% fully diluted equity stake in Vectral. Based on the current valuation, Vectral's enterprise value is approximat

III. Statutory Framework — Section 1061 A. Overview of Section 1061

Section 1061 of the Code was enacted as part of the Tax Cuts and Jobs Act of 2017 ("TCJA"), Public Law No. 115-97, and is effective for taxable years beginning after December 31, 2017. Section 1061 addresses the tax treatment of certain partnership interests — commonly referred to as "carried interests" — that are received by fund managers and other investment professionals in connection with the performance of inves

Section 1061 did not eliminate long-term capital gain treatment for carried interests. Instead, it extended the holding period required for favorable capital gains treatment from more than one year to more than three years for gains allocable to an "applicable partnership interest" (an "API"). Specifically, Section 1061(a) provides that, in the case of a taxpayer that holds an API, the taxpayer's net long-term capita

Section 1061(c)(1) defines an "applicable partnership interest" as any interest in a partnership which, directly or indirectly, is transferred to (or is held by) the taxpayer in connection with the performance of substantial services by the taxpayer, or any other related person, in any "applicable trade or business." The term "applicable trade or business" is defined in Section 1061(c)(2) as any activity conducted on

Section 1061(c)(4)(A) provides that an applicable partnership interest does not include an interest held by a person to the extent that the interest is a "capital interest" in the partnership which provides the taxpayer with a right to share in partnership capital commensurate with: (i) the amount of capital contributed directly by that taxpayer to the partnership; or (ii) the value of services provided to the partne

IV. Analysis of Existing Fund II Carried Interest A. Fund II Carry Terms As described in Section II.A above, the Fund II Carry provides for the following economic terms: • Carry Percentage: 20% of net profits. • Preferred Return: 8% per annum, compounded annually. • Catch-Up: 100% GP catch-up to a 20/80 split. • Waterfall Structure: Whole-fund waterfall (i.e., distributions to the GP in respect of the carry do not co

V. Proposed Legacy Carry Tranche — Structure and Analysis A. Structural Design We recommend that the CV LPA bifurcate the GP's carried interest into two separate and distinct tranches, each with its own allocation and distribution mechanics: Legacy Carry Tranche. The Legacy Carry Tranche relates to the GP's share of gain attributable to the portfolio company interests contributed from Fund II to the CV — specifically

Section 721(a) of the Code provides the general rule of non-recognition for contributions of property to partnerships: "No gain or loss shall be recognized to a partnership or to any of its partners in the case of a contribution of property to the partnership in exchange for an interest in the partnership." Under this provision, the GP would contribute its Fund II carried interest — which is itself a partnership inte

VI. New Carry Tranche — Analysis A. Terms of New CV Carry The New Carry Tranche in the CV will carry the following economic terms, as negotiated between the GP and Garrison (the lead secondary buyer): • Carry Percentage: 15% of net profits (reduced from the Fund II carry rate of 20%, reflecting the GP's reduced negotiating leverage in a continuation vehicle context and the established market standard for GP-led secon

VII. GP Co-Invest Analysis — Capital Interest Exception A. Structure of GP Co-Invest In addition to their carried interest, the GP principals will contribute $14 million in capital to the CV as a co-investment alongside LP capital. The co-invest will be funded by the GP principals in proportion to their GP economics: • Marcus Aldren: $8.68 million (62% of $14 million). • Diana Tsao: $3.92 million (28% of $14 million)

1. LPA Designation. The CV LPA should include a specific provision identifying the GP co-invest as a "Capital Interest" that is distinct from both the Legacy Carry Tranche and the New Carry Tranche. The provision should state that the co-invest constitutes a capital interest within the meaning of Section 1061(c)(4)(A) and participates pro rata with LP capital in the CV's distribution waterfall.

2. Separate Capital Accounts. The CV should maintain separate capital accounts for the GP co-invest, distinct from the capital accounts maintained for the Legacy Carry Tranche and the New Carry Tranche. This segregation ensures that allocations and distributions attributable to the co-invest can be clearly traced and distinguished from carry allocations.

3. Allocation and Distribution Provisions. The CV LPA's allocation and distribution provisions should clearly distinguish between returns on the co-invest capital and carry distributions. Returns on the co-invest should be allocated and distributed in the same manner as returns to LP interests, without any enhancement or preferential treatment.

4. Tax Reporting. Andover & Strauss LLP (the fund auditor and tax return preparer, Patricia Clemons) should be instructed to track and report the co-invest separately on each GP principal's Schedule K-1. The K-1 should clearly distinguish between items of income, gain, loss, and deduction attributable to the co-invest (subject to the standard one-year holding period) and items attributable to the carry tranches (subj

VIII. Interaction Between Legacy and New Carry Tranches A. Bifurcation Mechanics in the LPA The success of the proposed structure depends critically on the CV LPA's ability to clearly delineate the allocation of gains between the Legacy Carry Tranche and the New Carry Tranche. Without precise drafting, the IRS may challenge the allocation, and the tax benefits of the bifurcated structure could be lost. Built-in gain