PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT This memorandum is protected by the attorney-client privilege and the work product doctrine. It is intended solely for the use of the addressee and should not be distributed, copied, or disclosed to any third party without the prior written consent of Calderwood & Harkness LLP.
CALDERWOOD & HARKNESS LLP 555 California Street, 30th Floor San Francisco, California 94104 Telephone: (415) 555-7200
MEMORANDUM
TO: Patricia Dunmore, Partner
FROM: Omar Siddiqui, Associate
DATE: September 9, 2023
RE: Analysis of Whitfield Harte & Associates LLP Markup of Post-Money SAFE — Lumos Analytics Inc. / Vantage Peak Ventures Fund II, L.P.
Matter No.: 1008-00003
I. Executive Summary
On September 5, 2023, we circulated the first draft of the Post-Money SAFE (based on the modified Calderon Partners LLC standard form) to Jonathan Whitfield at Whitfield Harte & Associates LLP, counsel to Vantage Peak Ventures Fund II, L.P. ("Vantage Peak," "VPV," or the "Investor"), the lead investor in Lumos Analytics Inc.'s ("Lumos," the "Company," or the "Issuer") $6.8 million SAFE financing round. The draft was transmitted via email with a cover letter outlining the principal commercial terms as reflected in the executed term sheet dated September 1, 2023, and invited Whitfield Harte's review and comment on a timeline consistent with the parties' mutual objective of executing the definitive instrument on or about September 12, 2023.
On September 8, 2023, we received Whitfield Harte's markup of the SAFE instrument. The markup was prepared by Megan Trost, associate, with oversight from Jonathan Whitfield, partner. The redline was transmitted to my attention via email at 4:47 p.m. Pacific Time, accompanied by a brief cover note summarizing the principal areas of revision and indicating Whitfield Harte's willingness to discuss each point by telephone at our convenience.
The markup contains approximately fifteen substantive comments and proposed revisions, spanning the core economic terms of the SAFE as well as ancillary provisions relating to governance, notice mechanics, and dispute resolution. This memorandum analyzes each material change in detail, provides a recommendation with respect to each (accept, reject, or counter-propose), and identifies the key negotiation points requiring partner-level guidance before we circulate a revised draft.
The three most significant areas of negotiation concern: (1) the breadth of the Most Favored Nation ("MFN") provision, where Whitfield Harte seeks to expand the scope beyond subsequent SAFEs to encompass all convertible securities and to eliminate the equity incentive plan carve-out; (2) the scope and frequency of information rights, where Whitfield Harte seeks quarterly unaudited financial statements, monthly key metrics reporting, and annual audited financial statements, with survival of such rights post-conversion; and (3) a request for a standalone pro rata rights side letter, separate from the SAFE instrument, granting Vantage Peak the right to participate on a pro rata (and potentially super pro rata) basis in the next two equity financing rounds following SAFE conversion.
As essential context for the analysis that follows, Vantage Peak is committing $3,500,000 of the $6,800,000 total round target, at a post-money valuation cap of $28,000,000 with no discount. Their SAFE will serve as the template instrument for the three follow-on investors in this round: Ridgeline Angel Fund, L.P., committing $1,200,000; Canopy Growth Capital LLC, committing $1,100,000; and Atlas Fintech Syndicate, L.P., committing $1,000,000. Any concessions made to Vantage Peak will, by operation of the MFN clause, flow through to co-investors, and each negotiation point must therefore be evaluated with that cascading dynamic firmly in mind. Overly generous terms granted to the lead investor will not remain bilateral — they will define the floor for the entire round.
II. Background
A. SAFE Round Structure
The Company is conducting a seed-stage financing via the issuance of Post-Money SAFEs, utilizing a modified version of the standard Calderon Partners LLC Post-Money SAFE template. The principal terms of the round, as reflected in the executed term sheet dated September 1, 2023, are as follows:
• Instrument: Post-Money SAFE (Simple Agreement for Future Equity)
• Total Round Target: $6,800,000 in aggregate purchase amounts across all participating investors
• Post-Money Valuation Cap: $28,000,000
• discount Rate: None
• Conversion Events: Equity Financing (minimum $1,000,000 aggregate), Liquidity Event, Dissolution Event
• Governing Law: State of Delaware
B. Investor Syndicate
Vantage Peak Ventures Fund II, L.P. is the lead investor in the round, committing $3,500,000 of the $6,800,000 total. On a pro forma basis, assuming conversion of all SAFEs at the $28,000,000 post-money valuation cap, Vantage Peak's ownership at conversion would be $3,500,000 ÷ $28,000,000 = 12.50% on a fully diluted basis. The total new investor ownership at conversion across the full round, again on a fully diluted basis, would be $6,800,000 ÷ $28,000,000 = 24.29%.
The three follow-on investors and their respective commitments are:
Each co-investor will execute a substantially identical SAFE instrument. The Vantage Peak SAFE is being negotiated first and will serve as the template for the remaining investors. This sequencing underscores the importance of carefully calibrating the terms agreed upon with Vantage Peak, as those terms will establish the baseline for the entire syndicate.
C. Company Authorization
The Board of Directors of Lumos Analytics Inc. authorized the issuance of the SAFEs via a written consent of the Board dated August 30, 2023. The written consent delegated execution authority to Priya Narasimhan, Chief Executive Officer, to execute the definitive SAFE instruments and all ancillary documents in connection with the financing on behalf of the Company, subject to the principal terms set forth in the approved term sheet.
D. Counsel and Advisors
Vantage Peak's legal counsel in this transaction is Whitfield Harte & Associates LLP, located at 3000 El Camino Real, Suite 500, Palo Alto, California 94306. The lead partner on the engagement is Jonathan Whitfield, who has represented Vantage Peak Capital Management LLC and its affiliated funds for approximately six years. The associate principally responsible for the markup under review is Megan Trost.
The Company's Chief Financial Officer, Danielle Okoye (who joined Lumos in March 2023), is the Company's principal financial officer and the primary internal contact for questions relating to financial reporting, audit readiness, and cash management. The Company's outside accounting firm is Ashgrove Equity Partners Accounting Group LLP, with Karen Yoshida serving as the engagement partner. Ashgrove Equity Partners currently prepares Lumos's tax returns and provides accounting advisory services but does not conduct an independent audit of the Company's financial statements.
E. Timeline
The deal lead for Vantage Peak on the investment side is Samantha Reyes, Principal. Per the timeline agreed with Ms. Reyes and communicated in correspondence dated September 2, 2023, the parties are targeting execution of the definitive SAFE on or about September 12, 2023, with wire transfer of the purchase amount to follow within two business days of execution. Meeting this target requires that we circulate a revised SAFE draft by no later than September 11, 2023, allowing Whitfield Harte one business day for final review and sign-off.
III. Analysis of Material Markup Comments
A. Most Favored Nation (MFN) Provision
1. Whitfield Harte's Proposed Changes
Whitfield Harte proposes three material modifications to the MFN provision as drafted in our first draft:
First, the markup broadens the scope of the MFN clause beyond subsequent SAFEs to encompass any convertible securities — including, expressly, convertible promissory notes — issued by the Company prior to an Equity Financing. As drafted in our first version, the MFN clause applies only to "subsequent SAFEs," consistent with the standard YC Post-Money SAFE form. Whitfield Harte's redline replaces "subsequent SAFEs" with "subsequent Convertible Securities," a newly defined term that includes SAFEs, convertible promissory notes, and any other instruments convertible into equity of the Company.
Second, Whitfield Harte proposes that the MFN right be exercisable at VPV's sole election within fifteen (15) business days of written notice from the Company of the issuance of any subsequent Convertible Security containing more favorable terms. Under our first draft, the MFN provision operated automatically: if the Company issued a subsequent SAFE on more favorable terms, those terms would be deemed to apply to VPV's SAFE without any action required by VPV. The proposed revision shifts to an elective model, granting VPV the option — but not the obligation — to adopt the more favorable terms.
Third, Whitfield Harte proposes the deletion of the carve-out in our first draft that excludes SAFEs (or other equity securities) issued to employees, consultants, and advisors of the Company under the Company's equity incentive plan from the scope of instruments that could trigger the MFN provision.
2. Analysis. Broadening MFN to all convertible securities. Market practice for post-money SAFEs generally limits the MFN provision to subsequent SAFEs only, consistent with the standard YC form. The logic is straightforward: the MFN is designed to protect early SAFE holders from later SAFE holders receiving a better deal on the same type of instrument. Expanding the MFN to cover convertible notes introduces meaningful complexity, because convertible notes are structurally different instruments — they bear interest, have maturity dates, may carry different conversion mechanics, and involve different risk profiles. Comparing the "favorability" of a convertible note to a SAFE is not apples-to-apples, and disputes over whether a given note term is "more favorable" could arise.
That said, there is a legitimate investor concern underlying this request. If the Company were to issue convertible notes on terms more favorable than the SAFE — for instance, with a lower valuation cap, a discount, or warrant coverage — the SAFE holders could find themselves disadvantaged relative to later-stage convertible debt investors. Some leading venture funds do request MFN coverage that extends to convertible notes for precisely this reason, and it is not an unreasonable protective measure from the investor's perspective.
From the Company's standpoint, accepting an MFN that covers convertible notes limits the Company's flexibility to structure interim bridge financings using different instruments. However, this concern can be mitigated by limiting the expansion to convertible notes issued for "primary capital-raising purposes," which would exclude, for example, convertible notes issued in connection with strategic partnerships, commercial arrangements, or other non-dilutive financing contexts.
Sole election within 15 business days. This proposed modification is reasonable and, in our experience, consistent with standard market practice in many venture-backed SAFE transactions. An elective MFN mechanism provides VPV with optionality without imposing automatic restructuring of the SAFE terms. It also gives the Company certainty: if VPV does not elect to adopt the new terms within the specified period, the existing terms remain in effect. The fifteen-business-day window is reasonable and provides adequate time for VPV to evaluate the subsequent issuance and make an informed decision.
Deletion of the equity incentive plan carve-out. This proposal should be firmly rejected. The Company has an existing 2022 Equity Incentive Plan (the "Plan") under which 1,200,000 shares of Common Stock have been reserved for issuance. As of the date of this memorandum, approximately 480,000 shares have been granted under the Plan (comprising option grants to founding team members and early employees), with 720,000 shares remaining available for future grants. Removing the carve-out would mean that any equity grant or restricted stock award to an employee, consultant, or advisor under the Plan could potentially trigger MFN claims if any term of the equity grant were deemed "more favorable" than the SAFE terms. This is plainly unworkable, as equity incentive grants serve an entirely different purpose (employee compensation and retention) than SAFE instruments (capital raising), and the comparison of terms across these fundamentally different contexts is not meaningful. This carve-out is universally present in market SAFEs, and we are not aware of any legitimate basis for its removal.
3. Recommendation. Counter-propose. We recommend the following approach:
(a) Accept the extension of the MFN clause to convertible promissory notes, but add a qualifier providing that the MFN applies to convertible notes only if issued for primary capital-raising purposes (expressly excluding convertible instruments issued in connection with strategic partnerships, vendor arrangements, or other commercial transactions that are not primarily equity-financing in nature).
(b) Accept the fifteen (15) business-day elective exercise mechanism. This is reasonable and market-standard.
(c) Firmly reject the deletion of the equity incentive plan carve-out. This carve-out is non-negotiable and essential to the Company's ability to operate its employee equity compensation program without creating unintended MFN obligations.
Rationale for caution on MFN scope: Because the MFN terms negotiated with Vantage Peak will flow through to all co-investors (Ridgeline Angel Fund, Canopy Growth Capital, and Atlas Fintech Syndicate), any broadening of the MFN creates cascading obligations. If the MFN is extended to convertible notes for VPV, each co-investor will be entitled to the same right. The Company must therefore be confident that the "primary capital-raising" qualifier is robust enough to preserve its flexibility for non-dilutive or strategic financing arrangements.
B. Information Rights
1. Whitfield Harte's Proposed Changes
Whitfield Harte's markup proposes a significantly expanded set of information rights for VPV, covering both the frequency and scope of financial and operational reporting. Specifically, the markup proposes the following:
(a) Quarterly financial statements. Quarterly (rather than annual) delivery of unaudited financial statements, to include an income statement, balance sheet, and statement of cash flows, to be delivered within forty-five (45) days of the end of each fiscal quarter.
(b) Monthly key metrics report. Monthly delivery of a "key metrics report" to include, at a minimum, monthly recurring revenue ("MRR"), cash burn rate, employee headcount, and product milestone updates. The markup provides that this report is to be delivered within fifteen (15) days of the end of each calendar month.
(c) Annual audited financial statements. Annual delivery of audited financial statements, prepared by an independent accounting firm in accordance with generally accepted accounting principles ("GAAP"), to be delivered within one hundred twenty (120) days of the end of each fiscal year.
(d) Survival of information rights. The markup proposes that information rights survive the conversion of the SAFE into equity and continue for so long as VPV (or its permitted transferees) continues to hold equity securities of the Company.
(e) Inspection rights. VPV shall have the right to inspect the Company's books and records, including but not limited to financial records, corporate records, contracts, and intellectual property records, upon ten (10) business days' prior written notice, during normal business hours, at the Company's principal offices.
2. Analysis. Quarterly unaudited financial statements. This request is reasonable for a lead investor committing $3,500,000 to a seed-stage company. Quarterly financial reporting is increasingly expected by institutional investors at this commitment level, and the Company should be building the internal capacity to produce regular financial statements in any event as part of its maturation toward a Series A financing. That said, Lumos is a seed-stage company with fourteen (14) employees and has not historically produced quarterly financial packages. Danielle Okoye (CFO) joined the Company in March 2023 and has been working to establish internal financial processes, but the Company's ability to produce reliable quarterly financial statements within a forty-five (45) day turnaround should be confirmed with Ms. Okoye and with Ashgrove Equity Partners Accounting Group LLP (Karen Yoshida, engagement partner) before we commit the Company to this obligation. Assuming feasibility is confirmed, we recommend accepting this provision.
Monthly key metrics report. While we appreciate VPV's desire for visibility into operational performance, a monthly key metrics report of the scope proposed — covering MRR, burn rate, headcount, and product milestone updates — is overly burdensome for a seed-stage company with limited administrative resources. The preparation and delivery of such reports on a monthly basis would impose a meaningful operational burden on the Company's small finance and operations team, and the inclusion of qualitative items such as "product milestone updates" is particularly problematic because it is vague and open-ended, potentially requiring significant time from the Company's engineering and product leadership.
We recommend counter-proposing one of two alternatives: (i) quarterly delivery of a key metrics report on the schedule proposed (MRR, burn rate, headcount, and product milestones), which would align with the quarterly financial statement delivery; or (ii) if Whitfield Harte insists on a monthly cadence, limiting the monthly report to two quantitative metrics only — MRR and cash position — with the fuller key metrics report delivered quarterly. This compromise provides VPV with regular visibility into the Company's revenue trajectory and cash runway on a monthly basis while reserving the more comprehensive reporting for a quarterly cadence.
Annual audited financial statements. This request is premature for a company at Lumos's stage. Lumos does not currently produce audited financial statements, and the cost and administrative burden of engaging an independent accounting firm for a full GAAP audit at this stage would be significant. Ashgrove Equity Partners Accounting Group LLP currently provides tax preparation and advisory services under a limited engagement, and a transition to a full audit engagement would require a substantial expansion of scope, additional staffing from Ashgrove Equity Partners, and meaningful incremental cost to the Company — likely in the range of $50,000 to $80,000 per year for a company of Lumos's size and complexity, based on our experience with similarly situated clients.
We recommend counter-proposing that the obligation to deliver annual audited financial statements be triggered only after the earlier of (i) the Company achieving $5,000,000 in annual revenue (calculated on a trailing twelve-month basis), or (ii) the Company completing a Series A or subsequent priced equity financing. This approach ensures that the audit requirement arises only when the Company has reached a stage of maturity that warrants the cost and complexity, and it is consistent with market practice for seed-stage SAFE transactions.
Survival of information rights post-conversion. This is standard for major investors and is consistent with the terms typically included in Series A preferred stock purchase agreements and related investor rights agreements. Upon conversion, VPV will become an equity holder, and continuation of information rights is appropriate for an investor of this size. We recommend accepting this provision.
Inspection rights. The right to inspect books and records is a reasonable request for a lead investor but should be subject to appropriate safeguards. We recommend accepting the inspection right with the following modifications: (i) require fifteen (15) business days' prior written notice rather than the proposed ten (10) business days, to provide the Company adequate time to prepare and to coordinate with counsel; (ii) limit inspections to normal business hours at the Company's principal offices; and (iii) condition the exercise of inspection rights on the execution of a confidentiality agreement or, if a broader confidentiality obligation is already in place, explicit acknowledgment that the inspection is subject to such obligations.
MFN cascade effect. A critical consideration with respect to information rights is the MFN dynamic. If expanded information rights are included in the VPV SAFE, the co-investors — Ridgeline Angel Fund, Canopy Growth Capital, and Atlas Fintech Syndicate — will each be entitled to assert those same rights through the MFN provision. This means the Company would be obligated to provide quarterly financial statements, key metrics reports, and (potentially) annual audited financials to four investors rather than one, and to accommodate inspection requests from each of them. This multiplicative effect should weigh heavily in our assessment of how much reporting the Company can realistically sustain.
3. Recommendation. Counter-propose. We recommend the following:
(a) Accept quarterly delivery of unaudited financial statements (income statement, balance sheet, and cash flow statement), subject to confirmation from Danielle Okoye and Ashgrove Equity Partners Accounting Group that the Company can meet a forty-five (45) day delivery window.
(b) Reject monthly key metrics reporting in the form proposed. Counter-propose quarterly key metrics reporting (MRR, burn rate, headcount, and product milestones), or, in the alternative, monthly reporting limited to MRR and cash position only, with the fuller metrics package delivered quarterly.
(c) Counter-propose on annual audited financial statements: audited financials shall be required only upon the earlier of the Company achieving $5,000,000 in trailing twelve-month revenue or the Company's completion of a Series A or subsequent priced equity financing.
(d) Accept the survival provision, providing that information rights continue post-conversion for so long as VPV holds equity in the Company.
(e) Accept inspection rights with modifications: fifteen (15) business days' prior written notice, limited to normal business hours at the Company's principal offices, and subject to confidentiality obligations.
C. Pro Rata Rights Side Letter
1. Whitfield Harte's Proposed Changes
Whitfield Harte requests that Vantage Peak receive a standalone pro rata rights side letter, separate from the SAFE instrument, granting VPV the following rights in connection with future equity financings:
(a) Standalone format. The pro rata rights would be documented in a separate side letter rather than incorporated into the SAFE, allowing for a tailored and independent set of provisions governing VPV's participation rights.
(b) As-converted ownership basis. VPV's pro rata allocation in any future equity financing would be calculated based on VPV's as-converted ownership percentage at the time of the equity financing, determined by reference to the conversion of VPV's SAFE at the applicable valuation cap.
(c) Extension to two rounds. The pro rata right would extend to the next two equity financing rounds following conversion of VPV's SAFE (e.g., both the Series A and the Series B, if applicable), rather than being limited to the immediately following equity financing.
(d) Super pro rata right. VPV would have the right to invest up to two times (2x) its pro rata share in any qualifying equity financing, to the extent that other pro rata rights holders do not fully exercise their own participation rights. In other words, VPV could absorb unexercised pro rata allocations up to a total of 2x its own pro rata allocation.
(e) Pay-to-play waiver. VPV's failure to exercise its pro rata right in any qualifying equity financing would not trigger forfeiture of any other rights held by VPV under the SAFE, the side letter, or any other agreement with the Company.
2. Analysis. Standalone side letter format. The use of a standalone pro rata rights side letter, separate from the SAFE instrument, is standard market practice for lead investors in SAFE financing rounds. This approach was expressly contemplated in Section 7 of the term sheet signed September 1, 2023, which provided that the lead investor would receive a pro rata rights side letter "in customary form." Documenting pro rata rights in a standalone instrument provides clarity and avoids complicating the SAFE form (which should remain relatively simple and standardized for the co-investors). We recommend accepting this format.
Pro rata based on as-converted ownership. This is the standard methodology for calculating pro rata allocations in venture transactions and is consistent with the economics of the SAFE. At conversion, VPV's pro rata share would be calculated as $3,500,000 ÷ $28,000,000 = 12.50%, subject to dilution from the Company's option pool and any outstanding pre-seed SAFEs or other convertible securities. We recommend accepting this provision.
Extension to two equity financing rounds. This is a non-standard request. The prevailing market practice for pro rata side letters issued in connection with seed-stage SAFE financings is to grant pro rata rights in the immediately following equity financing — typically the Series A — and to leave the question of participation in subsequent rounds (Series B and beyond) to be negotiated as part of the investor rights agreement in connection with the Series A closing. Extending the pro rata right to a second financing round provides VPV with a contractual entitlement that could complicate future fundraising dynamics. A Series B lead investor, for example, may resist VPV's contractual right to participate pro rata (let alone super pro rata) in the Series B, viewing it as an encumbrance on the round and a constraint on the lead investor's ability to build its position.
We recommend counter-proposing that the pro rata right be limited to one equity financing round (the next qualifying equity financing following conversion of VPV's SAFE, which is expected to be the Series A), with an acknowledgment that the parties will negotiate in good faith regarding VPV's participation rights in subsequent rounds as part of the definitive documents for such financings. This approach preserves VPV's expectation of participating in the Series A while maintaining the Company's flexibility for future fundraising.
Super pro rata right (2x). This is an aggressive and non-standard request at the seed stage. A super pro rata right would give VPV the ability to disproportionately increase its ownership stake in subsequent financing rounds, potentially up to 25.00% ownership (2x its 12.50% pro rata share) if other holders do not exercise. This has several problematic implications. First, it could deter future lead investors in subsequent rounds who may be unwilling to share the round with a seed investor holding a contractual right to absorb 2x its pro rata allocation. Second, it may be viewed unfavorably by other existing investors (including the co-investors in this round) who may perceive it as giving VPV an unfair advantage. Third, it is unusual at the seed stage, where investors have not yet demonstrated the kind of value-add that typically justifies enhanced participation rights.
We recommend rejecting the super pro rata right. If VPV pushes back, the most we would recommend conceding is a right of first refusal on unexercised pro rata allocations from other investors (i.e., VPV can absorb unexercised allocations on a 1:1 basis, not 2x), but only in the immediately following equity financing round.
Pay-to-play waiver. This provision is standard and appropriate at the seed stage. Pay-to-play provisions — which penalize investors who decline to participate in subsequent financings by converting their preferred stock to common stock or otherwise reducing their rights — are typically introduced in Series A or later investor rights agreements and are not appropriate for a SAFE side letter. VPV's failure to exercise its pro rata right should not trigger any forfeiture of rights under the SAFE or side letter. We recommend accepting this provision.
3. Recommendation.
(a) Accept the standalone side letter format. This is consistent with the term sheet and market practice.
(b) Accept the as-converted ownership basis for calculating VPV's pro rata allocation.
(c) Counter-propose limiting the pro rata right to one equity financing round (the next qualifying equity financing following SAFE conversion), with a good-faith negotiation provision for subsequent rounds.
(d) Reject the super pro rata (2x) right. This is aggressive, non-standard, and potentially detrimental to future fundraising dynamics.
(e) Accept the pay-to-play waiver.
D. Definition of "Equity Financing" — Minimum Threshold
1. Whitfield Harte's Proposed Changes
The markup proposes reducing the minimum aggregate threshold for an "Equity Financing" — the event that triggers conversion of the SAFE into equity — from $1,000,000 to $500,000. As drafted in our first version, an "Equity Financing" is defined as a bona fide transaction or series of transactions in which the Company issues and sells shares of its Preferred Stock for aggregate gross proceeds of at least $1,000,000, with the principal purpose of raising capital. Whitfield Harte's redline would reduce this threshold to $500,000.
2. Analysis. The $1,000,000 minimum threshold is consistent with the standard YC Post-Money SAFE form and reflects a well-established market norm. The purpose of the threshold is to ensure that conversion is triggered only by a meaningful equity financing event — one of sufficient size to warrant the full apparatus of a priced equity round (negotiated term sheet, preferred stock purchase agreement, investor rights agreement, voting agreement, right of first refusal and co-sale agreement, and related documents). A threshold of $500,000 is insufficient to justify such a transaction and could result in premature conversion on the basis of a small bridge or interim financing.
From VPV's perspective, the rationale for a lower threshold may be that it wishes to accelerate conversion into equity, thereby gaining voting rights, board representation (if negotiated in the priced round), and the contractual protections afforded by a preferred stock investor rights agreement. However, premature conversion on a small interim financing could actually work against VPV's interests: a $500,000 priced round would likely be led by a small investor with limited negotiating leverage, potentially resulting in conversion on terms less favorable to VPV than those it could negotiate as part of a larger, more competitive Series A process.
From the Company's perspective, a lower threshold materially reduces the Company's flexibility to raise small bridge financings — for example, a $750,000 extension round or a small insider bridge — without triggering SAFE conversion and all of the attendant transaction costs, legal complexity, and governance implications of a priced round.
Furthermore, the executed term sheet dated September 1, 2023, expressly specified a minimum Equity Financing threshold of $1,000,000. While the term sheet is not itself a binding agreement (other than with respect to certain specified provisions, including exclusivity and confidentiality), it reflects the mutual understanding of the parties at the time of signing and should serve as the baseline for negotiations on the definitive instruments.
3. Recommendation. Reject. We recommend maintaining the $1,000,000 minimum Equity Financing threshold as drafted. This is the market standard reflected in the YC form, is protective of both parties' interests, and is consistent with the threshold specified in the executed term sheet. We do not believe this point warrants a counter-proposal; it should be declined on the basis of the term sheet and market practice.
E. Dissolution Event — Distribution Preference
1. Whitfield Harte's Proposed Changes
Whitfield Harte proposes modifying the treatment of the SAFE upon a Dissolution Event (defined to include voluntary or involuntary dissolution, liquidation, or winding up of the Company). Under our first draft, consistent with the standard YC form, a Dissolution Event entitles the SAFE holder to receive the Purchase Amount (i.e., the original investment amount) from the Company's remaining assets, subject to any priority payments required by law and any senior obligations.
Whitfield Harte's markup proposes that upon a Dissolution Event, the SAFE holder instead receive the greater of (a) the Purchase Amount and (b) the amount that would be payable to the SAFE holder if the SAFE were deemed to have converted into shares of Common Stock at the post-money valuation cap immediately prior to the Dissolution Event, with such shares participating in the distribution of the Company's remaining assets on a pro rata basis with all other holders of Common Stock.
2. Analysis. The proposed change provides VPV with optionality between two payout calculations in a dissolution scenario. In practical terms, this means:
(a) Downside scenario (most likely in a dissolution): If the Company's remaining assets at dissolution are worth less than $28,000,000 (the post-money valuation cap), VPV would elect option (a) and receive its $3,500,000 Purchase Amount (subject to available assets), which is likely more favorable than 12.50% of a diminished asset pool.
(b) upside scenario (unlikely in a typical dissolution, but possible in an acqui-hire or controlled wind-down): If the Company's remaining assets at dissolution are worth more than $28,000,000, VPV would elect option (b) and receive 12.50% of the asset pool, which would exceed its $3,500,000 Purchase Amount.
This structure creates what is effectively a quasi-liquidation preference embedded in the SAFE instrument. While VPV characterizes this as simply providing the holder with the benefit of conversion economics in a favorable dissolution scenario, the practical effect is to give the SAFE holder downside protection (through the Purchase Amount floor) and upside participation (through the conversion alternative), replicating key features of preferred stock without the formalities of a priced equity round.
This is a departure from the YC standard form, which intentionally provides only for return of the Purchase Amount in a dissolution. The YC approach reflects the principle that a SAFE is not equity and should not carry the governance and economic features of preferred stock. Granting a liquidation-preference-like payout at the SAFE stage sets a precedent that could complicate future financings: a Series A lead investor may object to the fact that SAFE holders already hold quasi-preferred economic rights, and it could create confusion about the waterfall in a dissolution or liquidation scenario.
Moreover, by operation of the MFN clause, this enhanced dissolution treatment would be available to all co-investors in the round, amplifying the impact on the Company's capital structure and the expectations of future investors.
3. Recommendation. Reject. We recommend maintaining the Purchase Amount return as the sole distribution upon a Dissolution Event, consistent with the standard YC approach. This structure has been widely adopted by the venture community and is understood and accepted by investors and founders alike. If Whitfield Harte presses on this point, an acceptable counter-position would be to confirm that the alternative payout is capped at 1x the Purchase Amount — which effectively produces the same result as the current draft but may be presented as a concession in negotiation framing. Under no circumstances should we agree to an uncapped conversion-based payout in a dissolution context at the SAFE stage.
F. Representations and Warranties of the Company
1. Whitfield Harte's Proposed Changes
Whitfield Harte's markup proposes the addition of several Company representations and warranties that are not present in our first draft. The first draft, consistent with the standard YC SAFE form, includes only the minimal representations necessary for a SAFE: due organization and good standing, due authorization and enforceability, and no conflicts with the Company's organizational documents or material agreements. Whitfield Harte's markup adds the following:
(i) No pending or threatened litigation. The Company represents that there is no action, suit, proceeding, or investigation pending or, to the knowledge of the Company, threatened against the Company before any court, arbitrator, or governmental agency.
(ii) No material adverse changes. The Company represents that since the end of the Company's most recent financial reporting period, there has been no material adverse change in the Company's business, financial condition, results of operations, or prospects.
(iii) Accuracy of information. The Company represents that all information provided to the Investor in connection with the financing — including, without limitation, any financial projections, business plans, product demonstrations, and investor presentations — is accurate and complete in all material respects and does not omit any material fact necessary to make the information provided not misleading.
(iv) Valid ownership of intellectual property. The Company represents that it owns or has valid licenses to all intellectual property rights necessary to conduct its business as currently conducted and as proposed to be conducted, free and clear of all liens, claims, and encumbrances.
(v) Compliance with laws. The Company represents that it is in compliance with all applicable federal, state, and local laws, regulations, and ordinances.
In addition, the markup proposes that all representations and warranties survive for a period of eighteen (18) months following the date of execution of the SAFE.
2. Analysis. SAFEs are intentionally designed as lightweight instruments with minimal representations and warranties. The standard YC form includes only the representations necessary to establish that the Company is duly organized, that the SAFE has been duly authorized and is enforceable, and that the execution of the SAFE does not conflict with existing obligations. The addition of extensive representations converts the SAFE into something approaching a preferred stock purchase agreement in terms of the Company's disclosure obligations and potential liability — a shift that is inconsistent with the nature and purpose of the SAFE instrument.
We analyze each proposed representation below:
No pending or threatened litigation. This representation is not unreasonable in concept, but the formulation proposed is overbroad. As drafted, it would cover any action, suit, or proceeding — including routine employment disputes, minor regulatory inquiries, or demand letters — regardless of materiality. We would recommend accepting a narrowed version, limited to material litigation known to the Company's management, with an appropriate knowledge qualifier ("to the Company's knowledge" or "to the knowledge of the Company's officers").
No material adverse change. This is a standard representation in priced equity rounds and is not inherently objectionable, provided it includes a reasonable materiality qualifier and is measured from a defined date (e.g., the most recent quarter-end). We would recommend accepting with appropriate qualifiers.
Accuracy of information. This is the most problematic proposed representation and should be rejected or, at minimum, narrowed significantly. As drafted, it would create exposure for the Company based on the content of pitch decks, investor presentations, product demonstrations, and financial projections shared with VPV during the fundraising process. Investor presentations necessarily contain forward-looking statements, projections, and management estimates that involve inherent uncertainty. A broad accuracy-of-information representation could give rise to claims based on the non-materialization of revenue projections, product roadmap delays, or other ordinary-course deviations from projected performance. This type of representation is not standard in SAFE transactions and should be resisted.
Valid ownership of intellectual property. This representation warrants careful consideration given Lumos's IP posture. The Company has a pending U.S. Provisional Patent Application No. 63/987,214, filed June 15, 2023, covering the Prism Core predictive risk algorithm — the Company's core technology. A broad IP ownership representation could create exposure in several scenarios: (i) if the provisional patent application is not converted to a non-provisional application within the twelve-month priority period, or if the eventual non-provisional application is rejected; (ii) if a third-party asserts an infringement claim against the Company; or (iii) if any element of the Company's technology stack incorporates open-source software or third-party components under licenses that impose restrictions on commercial use or redistribution.
We would recommend accepting a narrowed IP representation limited to the Company's knowledge that it is not infringing the intellectual property rights of any third party, rather than a broad affirmative representation of ownership and freedom from encumbrances. This formulation is more protective of the Company and is consistent with the representations typically seen in seed-stage transactions.
Compliance with laws. This representation is extremely broad and could create exposure based on any regulatory non-compliance, however minor. We would recommend accepting only with a materiality qualifier (e.g., "in material compliance with all applicable laws") and an appropriate knowledge qualifier.
Eighteen-month survival period. An eighteen-month survival period for representations in a SAFE instrument is non-standard. Representations in SAFEs, to the extent they are included at all, are typically understood to be made as of the date of execution and to expire upon the earlier of conversion of the SAFE or a defined period (typically six to twelve months). We recommend counter-proposing that representations and warranties survive until the earlier of (i) conversion of the SAFE into equity in connection with an Equity Financing, or (ii) twelve (12) months following the date of execution.
3. Recommendation. Counter-propose. We recommend the following approach:
(a) Accept a limited set of representations, including due authorization, valid issuance, no conflicts, and no material litigation known to the Company's management.
(b) Accept a narrowed "no material adverse change" representation with materiality qualifiers, measured from the most recent quarter-end.
(c) Reject the broad "accuracy of all information" representation. This is not market for SAFE instruments and creates unacceptable exposure based on the inherent uncertainty of early-stage projections and forward-looking statements.
(d) Accept a narrowed intellectual property representation, limited to the Company's knowledge that the Company is not infringing the intellectual property rights of any third party (rather than a broad affirmative representation of ownership free and clear of encumbrances).
(e) Accept a narrowed compliance-with-laws representation with materiality and knowledge qualifiers.
(f) Counter-propose on survival: representations survive until the earlier of conversion of the SAFE or twelve (12) months post-execution, rather than the proposed eighteen (18) months.
G. Transfer Restrictions
1. Whitfield Harte's Proposed Changes
The markup proposes that VPV have the right to assign or transfer the SAFE to any affiliate of Vantage Peak Capital Management LLC — the general partner of Vantage Peak Ventures Fund II, L.P. — without the prior written consent of the Company. Under our first draft, any transfer or assignment of the SAFE requires the Company's prior written consent, which may not be unreasonably withheld, conditioned, or delayed.
2. Analysis. Affiliate transfers are standard and routinely permitted in venture capital transactions. A fund manager may need to transfer a SAFE between affiliated fund vehicles for range legitimate reasons, including portfolio rebalancing between a main fund and a parallel fund, transfers to a special purpose vehicle established for regulatory or tax purposes, or transfers in connection with fund restructurings or successor fund arrangements. Requiring Company consent for such intra-fund transfers imposes an unnecessary administrative burden and could delay legitimate internal restructurings.
The key safeguard is to ensure that the definition of "affiliate" is appropriately bounded. We recommend that "affiliate" be defined by reference to entities under common control with Vantage Peak Capital Management LLC, the general partner of VPV, and that any transferee affiliate be required to assume all obligations of VPV under the SAFE as a condition to transfer.
Company consent for non-affiliate transfers should be maintained in all cases. This ensures that the Company retains control over who holds its SAFE obligations and can prevent transfers to parties that may be competitors, adverse counterparties, or otherwise objectionable.
3. Recommendation. Accept the affiliate transfer carve-out, defined by reference to entities under common control with Vantage Peak Capital Management LLC (the general partner of VPV). The transferee affiliate must execute an assumption agreement or joinder. Maintain the Company consent requirement for all non-affiliate transfers.
H. Notices Provision
1. Whitfield Harte's Proposed Changes
The markup proposes two changes to the notices provision:
(a) Addition of email as a permitted method of notice delivery, in addition to the methods specified in our first draft (personal delivery, nationally recognized overnight courier service, and registered or certified mail, return receipt requested).
(b) Specification that notices delivered by email shall be deemed received three (3) business days after the date of transmission, provided the sender does not receive an automated delivery failure notification.
2. Analysis. The inclusion of email as a permitted method of notice delivery is increasingly standard in venture financing transactions and reflects the practical reality that most communications between parties in the venture context occur via email. The three (3) business-day deemed receipt period is reasonable and provides a buffer to account for the possibility that email communications may not be read immediately.
One important administrative point: the Company should ensure that its designated notice recipients and addresses are accurately specified in the SAFE. We recommend the following notice information for the Company:
If to the Company: Lumos Analytics Inc. 340 Folsom Street, Suite 1100 San Francisco, California 94105
Attention: Priya Narasimhan, Chief Executive Officer
Email: priya@lumosanalytics.com
With a copy (which shall not constitute notice) to: Calderwood & Harkness LLP 555 California Street, 30th Floor San Francisco, California 94104
Attention: Patricia Dunmore
Email: pdunmore@calderwoodharkness.com
3. Recommendation. Accept the addition of email as a permitted method of notice delivery with the three (3) business-day deemed receipt provision. Confirm and update the Company's notice information as set forth above.
I. Governing Law and Dispute Resolution
1. Whitfield Harte's Proposed Changes
The markup does not propose any change to the governing law, which remains the State of Delaware, consistent with our first draft and the executed term sheet.
However, the markup proposes the addition of two new dispute resolution provisions:
(a) Mandatory arbitration. All disputes arising out of or in connection with the SAFE shall be resolved by binding arbitration administered by the American Arbitration Association ("AAA") in accordance with its Commercial Arbitration Rules, with the seat of arbitration in San Francisco, California. The arbitration shall be conducted by a single arbitrator selected in accordance with the AAA rules.
(b) Waiver of jury trial. Each party irrevocably waives, to the fullest extent permitted by applicable law, any right to trial by jury in any action, proceeding, or counterclaim arising out of or relating to the SAFE.
2. Analysis. Mandatory arbitration. The inclusion of a mandatory arbitration clause is not standard in YC SAFEs or in venture financing documents more broadly. While arbitration can offer certain advantages — including privacy, speed, and the ability to select arbitrators with subject-matter expertise — it also carries significant disadvantages. Arbitration eliminates judicial oversight and materially limits the availability of appellate remedies: an arbitration award is subject to very limited judicial review under the Federal Arbitration Act and can be vacated only on narrow grounds (e.g., arbitrator misconduct, excess of authority). For the Company, this is a significant concern, because venture financing disputes often turn on questions of Delaware corporate law, and the Delaware Court of Chancery provides specialized expertise, well-developed precedent, and robust appellate review that would not be available in an AAA arbitration.
Additionally, the AAA's filing and administration fees, together with arbitrator compensation, can be substantial, particularly for a seed-stage company. In our experience, the total cost of an AAA commercial arbitration involving a venture financing dispute can range from $50,000 to $150,000 or more, depending on the complexity of the dispute and the duration of the proceedings.
From a strategic perspective, we also note that mandatory arbitration could work to VPV's advantage in certain scenarios: because arbitration proceedings are confidential, VPV could pursue claims against the Company without the reputational risk associated with public litigation.
Waiver of jury trial. A mutual waiver of the right to jury trial, standing alone (without mandatory arbitration), is a common and generally accepted provision in venture financing documents. Jury trials in corporate disputes can be unpredictable, and both parties typically benefit from having disputes resolved by a judge with expertise in commercial and corporate law. This provision is consistent with market practice and should be acceptable.
3. Recommendation. Reject the mandatory arbitration clause. The Company's interests are better served by preserving access to the Delaware courts and the well-developed body of Delaware corporate law. Accept the mutual waiver of jury trial. Maintain Delaware courts as the exclusive forum for disputes arising under the SAFE, consistent with the term sheet and our first draft. We recommend that the exclusive forum provision specify the Court of Chancery of the State of Delaware (or, if the Court of Chancery declines jurisdiction, any other state or federal court located in the State of Delaware) as the exclusive forum for any dispute arising out of or relating to the SAFE.
J. Minor / Administrative Changes
Whitfield Harte's markup includes a number of non-substantive changes throughout the document, including the following:
• Reformatting of certain defined terms for consistency (e.g., standardizing capitalization and bold-facing of defined terms upon first use)
• Correction of internal cross-references in Sections 2(a), 3(b), and 5(c) of the first draft
• Minor grammatical edits (e.g., correction of subject-verb agreement in Section 4(a); replacement of "which" with "that" in restrictive clauses throughout; removal of redundant "and/or" constructions)
• Standardization of date references to a uniform format
• Correction of a typographical error in the recitals (the Company's state of incorporation was listed as "Deleware" in our first draft and has been corrected to "Delaware")
All of the above edits are immaterial to the substance of the SAFE and reflect standard cleanup of the document. We have reviewed each edit for substantive impact and have found none.
Recommendation. Accept all non-substantive formatting, cross-reference, grammatical, and typographical edits. We will incorporate these changes into the revised draft.
IV. Summary of Recommendations
The following table summarizes our recommendation with respect to each material markup item:
V. Negotiation Strategy and Next Steps
Based on the foregoing analysis, we recommend the following approach for the next phase of negotiation:
1. Partner-level call with Whitfield Harte. We recommend scheduling a call between Patricia Dunmore and Jonathan Whitfield to address the three primary negotiation areas — MFN breadth, information rights, and pro rata side letter terms — before we circulate a revised draft. These are the issues most likely to require extended discussion, and resolving them at the partner level will avoid a protracted exchange of markups on these points. We suggest scheduling this call for Monday, September 11, 2023, or earlier if possible.
2. Revised draft circulation. To maintain the target execution date of September 12, 2023, we should aim to circulate the revised SAFE (incorporating our counter-proposals and accepted changes) by September 11, 2023. This will allow Whitfield Harte one business day for final review and sign-off. If the partner-level call resolves the major open issues, the revised draft should be close to execution form.
3. Partner guidance on information rights and MFN cascade. We need specific guidance from Patricia Dunmore on the Company's flexibility regarding information rights, in light of the fact that these terms will propagate to all co-investors via the MFN clause. If the Company agrees to quarterly financial statements and key metrics reporting for VPV, it must be prepared to provide the same to Ridgeline Angel Fund, Canopy Growth Capital, and Atlas Fintech Syndicate. The cumulative reporting burden should be factored into the Company's decision. We should discuss whether the Company prefers to (a) accept a standardized reporting package for all investors, or (b) attempt to negotiate the information rights outside the MFN framework (e.g., in the side letter rather than the SAFE), though the latter approach may be resisted by Whitfield Harte.
4. Consultation with the Company's finance team and outside accountants. We should consult with Danielle Okoye (CFO) and Ashgrove Equity Partners Accounting Group LLP (Karen Yoshida, engagement partner) to confirm the Company's capacity to produce quarterly unaudited financial statements within a forty-five (45) day turnaround, and to assess the cost and feasibility of an annual audit engagement. This information will be critical for framing our counter-proposal on audited financial statements and for setting realistic expectations with the Company's board.
5. IP and representations considerations. We should flag for the Company that the representations and warranties section warrants careful attention given two specific considerations: (a) the ongoing development of Prism Core v2.0 (the next iteration of the Company's core predictive risk algorithm), which may involve integration of new technology components, open-source libraries, or third-party data sets that could affect the scope of any IP representation; and (b) the pending U.S. Provisional Patent Application No. 63/987,214, filed June 15, 2023, which is still in the early stages of prosecution and whose ultimate outcome is uncertain. Any broad accuracy-of-information or IP representation should be carefully scoped to avoid creating unintended exposure in light of these factors.
6. Preparation of revised documents. Upon partner approval of the negotiation positions outlined in this memorandum, Christy Bauer and I will prepare the revised draft SAFE (incorporating accepted changes, counter-proposals, and comments for Whitfield Harte's review) and the pro rata rights side letter for circulation. We will provide Patricia Dunmore with a clean and redline version of each document for review before transmission to Whitfield Harte.
7. Co-investor coordination. Once the VPV SAFE is finalized, we will need to prepare substantially identical SAFEs for execution with the three co-investors and coordinate with their respective counsel (if any) on a parallel track. We should anticipate that the co-investors may request their own modifications, but the executed VPV SAFE will establish the standard form and the MFN floor.
Please let me know if you would like to discuss any aspect of this analysis before we proceed. I am available at your convenience.
VI. Attachments
The following documents are attached for reference:
Attachment A: Whitfield Harte & Associates LLP Markup of Post-Money SAFE (received September 8, 2023) — redline version showing all proposed revisions against our first draft
Attachment B: Calderwood & Harkness LLP First Draft Post-Money SAFE (circulated September 5, 2023) — clean version
Attachment C: Executed Term Sheet — Lumos Analytics Inc. / Vantage Peak Ventures Fund II, L.P. (dated September 1, 2023)
This memorandum is intended solely as an internal analysis of the Whitfield Harte markup and does not constitute legal advice to any person other than the addressee. All recommendations are subject to partner review and approval. The factual summaries contained herein are based on the documents identified above and on information provided by the client; they have not been independently verified. This memorandum should not be circulated to the Company, to Vantage Peak or its counsel, or to any third party without the prior approval of Patricia Dunmore.
Respectfully submitted,
CALDERWOOD & HARKNESS LLP
By: ________