MEMORANDUM
PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT COMMUNICATION
TO: Arjun Mehta, CEO & Co-Founder, Skybridge Fintech Ltd. David Lindstrom, CFO, Skybridge Fintech Ltd. Priya Ramanathan, General Counsel, Skybridge Fintech Ltd.
FROM: Leonard Ashford, Of Counsel, Emerging Companies & Venture Capital, Calderwood & Harkness LLP Nina Reyes, Senior Associate, Emerging Companies & Venture Capital, Calderwood & Harkness LLP
DATE: December 1, 2023
RE: Review of Existing Charter, Bylaws, and Amended and Restated Investors' Rights Agreement — Authorization and Consent Requirements for Proposed $60,000,000 Convertible Note Bridge Financing
Matter No.: 1009-00001
I. Executive Summary
This memorandum analyzes whether the proposed issuance of $60,000,000 in aggregate principal amount of convertible promissory notes (the "Notes") by Skybridge Fintech Ltd. ("Skybridge" or the "Company"), a Delaware corporation, to a syndicate of investors led by Ridgeline Ventures Fund IV, L.P. ("Ridgeline Fund IV") is authorized under, and what consents or waivers are required by, the Company's existing organizational and contractual governance documents. This analysis is intended to provide the Company's management and in-house counsel with a comprehensive roadmap of the authorization steps and consent mechanics necessary to consummate the proposed bridge financing in advance of the anticipated Series D Preferred Stock round.
In preparing this memorandum, we have reviewed the following documents: (1) the Amended and Restated Certificate of Incorporation of Skybridge Fintech Ltd. (the "Charter"); (2) the Bylaws of Skybridge Fintech Ltd. (the "Bylaws"); (3) the Amended and Restated Investors' Rights Agreement, dated as of July 2021 (the "IRA"); (4) the Right of First Refusal and Co-Sale Agreement, dated as of July 2021 (the "ROFR/Co-Sale Agreement"); and (5) the Voting Agreement, dated as of July 2021 (the "Voting Agreement"). We have also reviewed the Company's capitalization table as of the date of this memorandum and the 409A valuation report dated September 15, 2023, prepared by Atlas Valuation Services, Inc.
By way of background, Skybridge is a Delaware corporation incorporated in 2017 and headquartered at 1400 Market Street, Suite 2200, Wilmington, DE 19801. The Company's federal Employer Identification Number is 83-2147605 and its Delaware File Number is 6384291. The Company operates a cloud-based payments orchestration and embedded lending platform serving financial institutions, neobanks, and fintech partners. The Company has raised equity capital through three prior rounds of preferred stock financing: Series A Preferred Stock (led by Crestpoint Seed Partners, L.P.), Series B Preferred Stock (led by Halcyon Growth Equity, L.P.), and Series C Preferred Stock (led by Ridgeline Ventures Fund III, L.P. and Beacon Hill Capital Partners, LLC, which closed in July 2021 at a post-money valuation of approximately $620,000,000).
Based on our review, we have reached the following key conclusions, each of which is discussed in detail in the body of this memorandum:
(a) Board Authorization. Board authorization is required and is sufficient under the Charter, the Bylaws, and the Delaware General Corporation Law (the "DGCL") for the issuance of the Notes themselves. The Board of Directors has the statutory and charter-based authority to authorize the creation and issuance of convertible debt instruments without stockholder approval, provided that sufficient authorized but unissued shares are available for issuance upon conversion.
(b) Stockholder Approval. Stockholder approval is advisable and may be required for two independent reasons: first, the protective provisions contained in the Charter's preferred stock designations likely require the consent of holders of a specified percentage of outstanding Preferred Stock before the Company may incur indebtedness above a specified threshold or issue securities convertible into equity; and second, it is prudent to confirm that sufficient authorized but unissued shares exist to accommodate the potential conversion of the Notes, and if they do not, a Charter amendment requiring stockholder approval will be necessary.
(c) Investors' Rights Agreement. The IRA contains preemptive rights (pro rata participation rights), information rights, and consent provisions that must be addressed. The issuance of convertible notes likely constitutes the issuance of "New Securities" triggering preemptive rights held by Major Investors under the IRA, and waivers or confirmations of exclusion must be obtained. Additionally, the IRA must be amended to add the Purchasers—particularly Northstar Innovation Fund II, L.P., which is a new investor—as parties thereto.
(d) ROFR/Co-Sale Agreement and Voting Agreement. The ROFR/Co-Sale Agreement will require amendment to add the Purchasers as "Investors" thereunder. The Voting Agreement does not require amendment at this stage, but will likely be amended and restated at the Series D closing.
The balance of this memorandum sets forth our detailed analysis of each governing document and applicable statutory provision, followed by a summary table of required authorizations and consents and our recommendations regarding next steps and timeline.
II. Scope and Documents Reviewed
A. Documents Reviewed
In connection with this memorandum, we have reviewed the following documents and materials provided by the Company or otherwise in our possession:
1. Amended and Restated Certificate of Incorporation of Skybridge Fintech Ltd., as filed with the Secretary of State of the State of Delaware and as currently in effect (the "Charter").
2. Bylaws of Skybridge Fintech Ltd., as currently in effect (the "Bylaws").
3. Amended and Restated Investors' Rights Agreement, dated as of July 15, 2021, by and among the Company and the investors named therein (the "IRA").
4. Right of First Refusal and Co-Sale Agreement, dated as of July 15, 2021, by and among the Company, certain key holders named therein, and the investors named therein (the "ROFR/Co-Sale Agreement").
5. Voting Agreement, dated as of July 15, 2021, by and among the Company and the investors named therein (the "Voting Agreement").
6. Capitalization table of the Company as of the date of this memorandum, reflecting approximately 48,500,000 fully diluted shares outstanding (inclusive of all outstanding shares of Common Stock, all shares of Preferred Stock on an as-converted-to-Common-Stock basis, outstanding options, and reserved but unissued shares under the Company's equity incentive plans).
7. Independent 409A valuation report dated September 15, 2023, prepared by Atlas Valuation Services, Inc. (the "409A Report"), establishing a fair market value of the Company's Common Stock at $8.42 per share.
We have not been asked to, and do not in this memorandum, analyze state or federal securities law exemptions applicable to the proposed issuance, the tax consequences of the transaction to the Company or the investors, or intellectual property or employment-related matters. Those analyses are addressed in separate memoranda being prepared by our colleagues in the relevant practice groups.
B. Proposed Transaction Overview
Based on the term sheet circulated by Ridgeline Fund IV and discussions with the Company's management, the proposed transaction involves the issuance by the Company of convertible promissory notes in the aggregate principal amount of $60,000,000 (the "Notes") pursuant to a Note Purchase Agreement (the "NPA") to be entered into by and among the Company and the purchasers named therein (collectively, the "Purchasers"). The material terms of the proposed Notes are as follows:
• Aggregate Principal Amount: $60,000,000.
• Interest Rate: 6.00% per annum (600 basis points), calculated as simple interest on the basis of a 365-day year.
• Maturity Date: Twenty-four (24) months from the date of closing. Assuming a closing date of January 15, 2024, the maturity date would be January 15, 2026.
• Conversion — Qualified Financing: Upon the closing of a "Qualified Financing," defined as an equity financing round (anticipated to be the Series D Preferred Stock round) in which the Company raises at least $80,000,000 in gross proceeds, the outstanding principal balance of the Notes, together with all accrued and unpaid interest, shall automatically convert into the equity securities issued in the Qualified Financing at a conversion price equal to the lower of: (i) a 20% discount to the per-share price paid by investors in the Qualified Financing; or (ii) the price per share implied by a $750,000,000 pre-money valuation cap (the "Valuation Cap"), which, based on 48,500,000 fully diluted shares, implies a price of approximately $15.46 per share (the "Cap-Implied Price").
• Conversion — Maturity Default: If no Qualified Financing has occurred prior to the Maturity Date, the Notes shall, at the election of holders of a majority in principal amount of the then-outstanding Notes, either (a) convert into shares of Common Stock at the Cap-Implied Price, or (b) become due and payable in full.
• Subordination: The Notes will be contractually subordinated to the Company's existing indebtedness under the Loan and Security Agreement with Kelvantis Lending Corp. pursuant to a Subordination Agreement to be entered into by and among the Company, the Purchasers, and Kelvantis Lending Corp.
C. Purchasers
The Notes are proposed to be purchased by the following investors, in the following amounts:
It is significant for purposes of this analysis that Northstar Innovation Fund II, L.P. ("Northstar") is a new investor that is not currently a party to any of the Company's existing governance agreements (the IRA, the ROFR/Co-Sale Agreement, or the Voting Agreement). All other Purchasers are either existing investors who are parties to those agreements or affiliates of existing investors. This distinction has implications for the preemptive rights analysis, the information rights analysis, and the need for amendments to the IRA and ROFR/Co-Sale Agreement, as discussed in detail below.
III. Analysis of the Amended and Restated Certificate of Incorporation (Charter)
A. Authorized Capital Stock
The Charter authorizes the Company to issue a specified number of shares of capital stock, divided between Common Stock and Preferred Stock. As of the date of this memorandum, the Charter authorizes the following classes and series of capital stock:
• Common Stock: A specified number of authorized shares of Common Stock, par value $0.0001 per share.
• Preferred Stock: A specified number of authorized shares of Preferred Stock, par value $0.0001 per share, of which designated portions have been allocated to Series A Preferred Stock, Series B Preferred Stock, and Series C Preferred Stock.
Our analysis requires a determination of whether a sufficient number of authorized but unissued shares of Common Stock (or, if applicable, a new series of Preferred Stock to be created in connection with the Qualified Financing) exist to accommodate the conversion of the Notes. This is a critical threshold question because, under Delaware law, a corporation may not issue shares in excess of the number authorized in its certificate of incorporation, and any attempt to do so would be void.
The conversion mathematics are as follows: at the Cap-Implied Price of approximately $15.46 per share, the conversion of $60,000,000 in principal amount of Notes would require the issuance of approximately 3,881,000 shares (calculated as $60,000,000 ÷ $15.46). In addition, accrued and unpaid interest must be taken into account. Assuming the full 24-month term and no prepayment, the accrued interest at 6.00% per annum on $60,000,000 would be approximately $7,200,000 (calculated as $60,000,000 × 6.00% × 2 years), which, at the Cap-Implied Price, would require an additional approximately 466,000 shares. Thus, the total number of shares potentially issuable upon conversion of the Notes (principal and interest) at the Cap-Implied Price is approximately 4,347,000 shares.
However, it is important to note that the effective conversion price may be lower than the Cap-Implied Price if the 20% discount to the eventual Series D price results in a lower per-share price. In that scenario, a greater number of shares would be issuable upon conversion, and the Company must ensure that sufficient authorized shares are available to cover such an eventuality.
If the Qualified Financing is structured as a Series D Preferred Stock round—as is anticipated—the Notes would convert into shares of Series D Preferred Stock. The Company's Charter does not currently authorize a "Series D Preferred Stock" series, and the Charter would need to be amended to create and authorize the Series D Preferred Stock at the time of the Qualified Financing. This Charter amendment would be a standard component of the Series D closing and would be prepared in connection with the Series D documentation. The current Note issuance does not itself require a Charter amendment, as no shares are being issued at the time of the Note issuance. However, the Company must ensure that it has or will have sufficient authorized but unissued shares to accommodate the future conversion.
Recommendation: We recommend that the Company confirm, in consultation with its transfer agent, the precise number of authorized but unissued shares of each class and series currently available. If the headroom analysis reveals that the authorized share count is insufficient to accommodate the potential conversion of the Notes (taking into account existing outstanding shares, reserved option pool shares, and all other obligations to issue shares), we will flag the need for a Charter amendment to increase authorized shares. Such an amendment could be effected at the time of the Series D closing, but the Company and the Purchasers should be aware of this requirement, and appropriate representations and covenants should be included in the NPA to address it.
B. Board Authority to Issue Debt Securities
Under the DGCL, the board of directors of a Delaware corporation possesses broad authority to manage the business and affairs of the corporation, including the authority to authorize the issuance of debt instruments and securities convertible into equity.
Specifically, the following provisions of the DGCL are relevant:
• DGCL § 141(a): Provides that "[t]he business and affairs of every corporation organized under this chapter shall be managed by or under the direction of a board of directors, except as may be otherwise provided in this chapter or in its certificate of incorporation." This general grant of authority encompasses the power to cause the corporation to borrow money and incur indebtedness in the ordinary course of the corporation's business.
• DGCL §§ 152 and 153: Address the board's authority to issue shares of the corporation's capital stock and to determine the consideration for which shares are issued. While these sections principally govern the issuance of equity securities, they inform the broader analysis of the board's power to authorize instruments that may ultimately result in equity issuance.
• DGCL § 157: Provides that "[s]ubject to any provisions in the certificate of incorporation, every corporation may create and issue, whether or not in connection with the issue and sale of any shares of stock or other securities of the corporation, rights or options entitling the holders thereof to acquire from the corporation any shares of its capital stock of any class or classes, such rights or options to be evidenced by or in such instrument or instruments as shall be approved by the board of directors." This section authorizes the board to create convertible instruments—including convertible promissory notes—without stockholder approval, provided that shares are authorized and available for issuance upon conversion and that the certificate of incorporation does not impose restrictions beyond those provided by the DGCL.
We have reviewed the Charter and have confirmed that it does not contain any provision restricting the board's authority to incur indebtedness or to issue convertible instruments beyond what is provided under the DGCL. The Charter does contain protective provisions requiring preferred stockholder consent for certain actions (discussed in Section III.C below), but the general grant of authority to the board to manage the business and affairs of the Company, including the authority to authorize the incurrence of indebtedness and the issuance of convertible securities, is consistent with and not narrower than the authority provided under the DGCL.
Conclusion: The Board of Directors of the Company has the authority under the Charter and the DGCL to authorize the issuance of the Notes, the execution and delivery of the NPA and related transaction documents, and the reservation of shares for issuance upon conversion of the Notes, subject to compliance with the protective provisions discussed below.
C. Protective Provisions — Preferred Stock Consent Rights
The Charter contains protective provisions in the sections setting forth the designations, preferences, rights, privileges, and restrictions of the Series A Preferred Stock, Series B Preferred Stock, and Series C Preferred Stock. These protective provisions restrict the Company's ability to take certain actions without the prior written consent of the holders of a specified percentage of the outstanding shares of one or more series of Preferred Stock.
Based on our review of the Charter, the protective provisions require the written consent of the holders of at least a majority of the outstanding shares of Preferred Stock (voting together as a single class on an as-converted basis), and in certain cases the separate consent of the holders of at least a majority of the outstanding shares of Series C Preferred Stock (voting as a separate class), before the Company may take any of the following actions (among others):
(i) Incur, guarantee, or assume any indebtedness in excess of a specified threshold amount (we have identified a threshold of $10,000,000 in the aggregate, subject to certain exceptions for equipment financing and ordinary course trade payables);
(ii) Issue, sell, or otherwise dispose of any equity securities or any securities convertible into or exercisable for equity securities, other than pursuant to specified exclusions (such as issuances under the Company's equity incentive plan, issuances in connection with approved acquisitions, and issuances of shares upon conversion of existing Preferred Stock);
(iii) Amend, alter, or repeal any provision of the Charter (including the Certificate of Designations of any series of Preferred Stock) in a manner that adversely affects the rights, preferences, or privileges of the Preferred Stock;
(iv) Create, authorize, or issue any new class or series of capital stock having rights, preferences, or privileges senior to or on parity with any existing series of Preferred Stock;
(v) Reclassify, alter, or amend any existing security of the Company if such action would render such security senior to or on parity with any existing series of Preferred Stock;
(vi) Increase or decrease the authorized number of shares of any series of Preferred Stock;
(vii) Declare or pay any dividend or make any other distribution on any shares of Common Stock or Preferred Stock;
(viii) Redeem, repurchase, or otherwise acquire any shares of Common Stock or Preferred Stock, other than pursuant to equity incentive plan repurchase rights; or
(ix) Effect a liquidation, dissolution, or winding up of the Company, or any Deemed Liquidation Event (as defined in the Charter).
Application to the Proposed Transaction. The issuance of $60,000,000 in convertible promissory notes implicates at least two of the foregoing protective provisions:
Indebtedness Covenant. The Notes constitute indebtedness of the Company. The proposed $60,000,000 aggregate principal amount significantly exceeds the $10,000,000 indebtedness threshold set forth in the protective provisions. Accordingly, the consent of the holders of at least a majority of the outstanding shares of Preferred Stock (voting together as a single class on an as-converted basis) is required before the Company may issue the Notes.
Issuance of Convertible Securities. Even though the Notes are structured as debt instruments prior to conversion, their convertible nature brings them within the scope of the protective provision restricting the issuance of securities convertible into equity. The exclusions from this provision (e.g., issuances under the equity incentive plan, issuances upon conversion of existing Preferred Stock) do not encompass the issuance of convertible debt in a bridge financing. Accordingly, this protective provision independently requires the consent of the holders of the requisite percentage of Preferred Stock.
The following existing preferred stockholders hold the shares necessary to satisfy the consent requirements:
• Series A Preferred Stock: Crestpoint Seed Partners, L.P.
• Series B Preferred Stock: Halcyon Growth Equity, L.P.
• Series C Preferred Stock: Ridgeline Ventures Fund III, L.P. and Beacon Hill Capital Partners, LLC.
We note that three of the four Purchasers in the proposed bridge financing are either existing preferred stockholders or affiliates of existing preferred stockholders. Specifically, Ridgeline Ventures Fund IV, L.P. is an affiliate of Ridgeline Ventures Fund III, L.P. (an existing Series C holder); Beacon Hill Capital Partners, LLC is an existing Series C holder; and Halcyon Growth Equity, L.P. is an existing Series B holder. This alignment of interests should significantly facilitate the process of obtaining the requisite preferred stockholder consents, as these investors have both a contractual obligation to consent (as participants in the bridge financing) and an economic incentive to do so.
The principal question is whether Crestpoint Seed Partners, L.P. (as the Series A holder) must separately consent or whether the combined holdings of the Series B and Series C holders are sufficient to meet the requisite threshold. If the protective provision requires the consent of the holders of a majority of all Preferred Stock voting together as a single class, and if the Series B and Series C holders collectively hold a majority of the outstanding Preferred Stock on an as-converted basis, then Crestpoint's consent is not strictly required (though it is advisable to obtain it as a matter of good corporate governance and investor relations). If, however, any protective provision requires the separate consent of a particular series, the consent of the holders of a majority of that series must be independently obtained.
Recommendation: We recommend that the Company obtain the written consent of the holders of at least a majority of all outstanding shares of Preferred Stock (voting together as a single class on an as-converted basis) as part of the closing process. If any protective provision requires the separate consent of the holders of a majority of any individual series of Preferred Stock, such separate consent should also be obtained. These consents can be incorporated into a single Written Consent of Stockholders in Lieu of Special Meeting, which will streamline the process and create a clean documentary record for the Company's minute book.
D. Anti-Dilution Provisions
The Charter contains anti-dilution provisions applicable to each series of Preferred Stock. These provisions are designed to protect existing preferred stockholders from dilution in the event the Company issues equity securities at a price per share below the applicable series' original issue price (a "down-round" issuance). The anti-dilution mechanism may take the form of a broad-based weighted average adjustment or, less commonly, a full-ratchet adjustment.
Based on our review, the Charter employs a broad-based weighted average anti-dilution formula for each series of Preferred Stock. Under this formula, if the Company issues additional shares of Common Stock (or securities convertible into Common Stock) at an effective price per share below the applicable series' then-current conversion price, the conversion price of that series is adjusted downward according to the weighted average formula, resulting in the holders of that series being entitled to a greater number of shares of Common Stock upon conversion.
Application to the Proposed Transaction. The issuance of the Notes does not itself trigger anti-dilution adjustments, because no shares of equity are being issued at the time of the Note issuance. The anti-dilution analysis becomes relevant at the time of conversion. If the Notes convert at the Cap-Implied Price of approximately $15.46 per share, we must determine whether this effective conversion price is below the original issue price of any series of Preferred Stock.
Based on the Series C closing at a post-money valuation of $620,000,000, the implied Series C price per share (on a per-share basis taking into account the number of shares outstanding at the time of the Series C closing) would need to be compared to the Cap-Implied Price. Assuming the Cap-Implied Price of $15.46 exceeds the Series C original issue price, the conversion of the Notes at the Cap-Implied Price would not trigger broad-based weighted average anti-dilution adjustments for the Series C holders. The same analysis must be performed for the Series A and Series B original issue prices, which, given the earlier stage of those rounds and their presumably lower per-share prices, are even less likely to be implicated.
However, if the eventual Series D pricing results in a 20% discount conversion price that is below any series' original issue price, anti-dilution protections could be triggered at the time of conversion. This scenario is more likely to occur if the Series D is priced at a valuation below the Valuation Cap, which would suggest a flat or down round. In such a case, the 20% discount would result in an effective conversion price for the Notes that is 20% below the already-reduced Series D price, potentially falling below one or more series' original issue prices.
The 409A fair market value per share of Common Stock is $8.42 as of September 15, 2023. The Cap-Implied Price of approximately $15.46 is well above this figure, which provides some comfort that the conversion would not be at a dilutive price. However, the 409A value reflects Common Stock value (which is inherently lower than the Preferred Stock value due to the liquidation preference and other preferential rights), and the relevant comparison for anti-dilution purposes is the effective conversion price versus the Preferred Stock original issue price, not the Common Stock fair market value.
A more detailed analysis of the interaction between the Note conversion mechanics and the anti-dilution provisions, including modeling of various Series D pricing scenarios, is set forth in a separate MFN and Anti-Dilution Interaction Analysis memorandum being prepared by this office and dated December 5, 2023.
Recommendation: We recommend that the Note documentation include customary carve-outs or exclusions from the anti-dilution adjustment provisions, such that the issuance of the Notes (and the reservation of shares for conversion) does not itself trigger anti-dilution adjustments. The interaction between the Note conversion and the anti-dilution provisions should be addressed at the time of the Series D closing, at which point the Charter will be amended and restated to reflect the Series D terms and any necessary adjustments to the conversion prices of the existing series.
IV. Analysis of the Bylaws
A. Board Action — Meeting vs. Written Consent
The Bylaws of the Company contain provisions governing the manner in which the Board of Directors may take action, including provisions for action by written consent in lieu of a meeting. Consistent with DGCL § 141(f), the Bylaws provide that any action required or permitted to be taken at a meeting of the Board of Directors may be taken without a meeting if all members of the Board consent thereto in writing (or by electronic transmission), and the writing or writings (or electronic transmissions) are filed with the minutes of proceedings of the Board.
This provision requires unanimous consent of all directors. Unlike stockholder action by written consent (which, under DGCL § 228, may be taken by the minimum number of votes that would be necessary to authorize such action at a meeting), board action by written consent under DGCL § 141(f) requires the consent of every director then in office. Accordingly, each and every member of the Board of Directors must sign the written consent in order for the board action to be validly taken without a meeting.
We understand from discussions with the Company's General Counsel that the Company's Board of Directors currently consists of five (5) members. The proposed convertible note issuance can be authorized by Unanimous Written Consent of the Board of Directors without a formal meeting, provided that all five directors execute the consent.
Recommendation: We recommend that Calderwood & Harkness prepare a draft Unanimous Written Consent of the Board of Directors (the "Board Consent") authorizing the following actions, among others:
(a) Approval and authorization of the Note Purchase Agreement in substantially the form attached as an exhibit to the Board Consent;
(b) Approval and authorization of the form of Convertible Promissory Note;
(c) Approval and authorization of the Subordination Agreement by and among the Company, the Purchasers, and Kelvantis Lending Corp.;
(d) Approval and authorization of Amendment No. 1 to the Amended and Restated Investors' Rights Agreement;
(e) Approval and authorization of Amendment No. 1 to the Right of First Refusal and Co-Sale Agreement;
(f) Approval and authorization of any Escrow Agreement, if applicable;
(g) Authorization of the reservation of a sufficient number of shares of Common Stock (or, upon creation of the Series D Preferred Stock, Series D Preferred Stock) to accommodate the conversion of the Notes;
(h) Authorization of the officers of the Company to execute and deliver the foregoing documents and any ancillary documents, certificates, or instruments necessary or desirable in connection with the consummation of the transactions contemplated thereby; and
(i) Ratification of any prior actions taken by officers or agents of the Company in connection with the proposed transaction.
Based on the anticipated timeline for the transaction, we recommend targeting a Board approval date of approximately January 10, 2024, which would provide sufficient lead time before the anticipated closing date of January 15, 2024. The draft Board Consent should be circulated to all directors for review no later than January 3, 2024, to allow adequate time for review and comment.
B. Officer Authority to Execute Documents
The Bylaws contain provisions governing the authority of the Company's officers to execute contracts, agreements, and other instruments on behalf of the Company. The Bylaws typically provide that the Chief Executive Officer, the President, or any Vice President may execute and deliver contracts and instruments in the name and on behalf of the Company when authorized to do so by the Board of Directors. The Bylaws also typically provide that the Chief Financial Officer or Treasurer may execute and deliver financial instruments, and that the Secretary may attest to the execution of documents and affix the corporate seal.
In order to ensure that the execution of the transaction documents is properly authorized and to create a clear documentary record, the Board Consent should specifically authorize and direct the following officers to execute and deliver the transaction documents on behalf of the Company:
• Arjun Mehta, Chief Executive Officer;
• David Lindstrom, Chief Financial Officer; and/or
• Priya Ramanathan, General Counsel.
The Board Consent should provide that any one of the foregoing officers, acting alone, shall have the authority to execute and deliver the NPA, the Notes, the Subordination Agreement, the IRA Amendment, the ROFR/Co-Sale Amendment, and any other related transaction documents, and to take any and all further actions as such officer deems necessary or advisable to consummate the transactions contemplated thereby.
Additionally, as a closing deliverable, the Corporate Secretary of the Company should prepare and deliver a Secretary's Certificate certifying: (i) the Charter as currently in effect; (ii) the Bylaws as currently in effect; (iii) the Board Consent; and (iv) the incumbency and signature authority of the authorized officers. The Secretary's Certificate is a standard closing deliverable in venture capital financings and will be required by the Purchasers and their counsel as a condition to closing.
C. Stockholder Action — Written Consent in Lieu of Meeting
As discussed in Section III.C above, the protective provisions in the Charter require the consent of the holders of a specified percentage of the outstanding Preferred Stock before the Company may issue the Notes. This Section addresses the procedural mechanism by which such stockholder consent may be obtained.
Under DGCL § 228, unless the certificate of incorporation provides otherwise, any action required or permitted to be taken at a meeting of stockholders may be taken without a meeting, without prior notice, and without a vote, if a consent or consents in writing (or by electronic transmission), setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted.
We have reviewed the Charter and confirmed that it does not contain any provision restricting or prohibiting stockholder action by written consent. Accordingly, the Company may obtain the requisite stockholder approvals (including the preferred stockholder consents required by the protective provisions) by means of a Written Consent of Stockholders in Lieu of Special Meeting (the "Stockholder Consent"), rather than convening a formal meeting of stockholders.
This is a significant procedural advantage, as it eliminates the need for advance notice, the establishment of a record date for notice purposes (as distinguished from a record date for determining consent eligibility, which is still required), and the logistical burden of organizing a formal stockholder meeting. The Written Consent mechanism is especially well-suited to private company transactions where a small number of institutional investors hold the requisite voting power.
We note that DGCL § 228(e) imposes an important post-consent notice requirement: "[p]rompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders or members who have not consented in writing and who, if the action had been taken at a meeting, would have been entitled to notice of the meeting if the record date for notice of such meeting had been the date that written consents signed by a sufficient number of holders or members to take the action were delivered to the corporation." Accordingly, if the Stockholder Consent is not unanimous—that is, if any stockholder does not sign the consent—the Company must deliver a Section 228 Notice to Non-Consenting Stockholders promptly after the corporate action becomes effective.
Recommendation: We recommend that the Company prepare a Written Consent of Stockholders in Lieu of Special Meeting incorporating: (a) the preferred stockholder consent required by the protective provisions in the Charter for the incurrence of indebtedness and the issuance of convertible securities; (b) the waiver of preemptive rights under the IRA (to the extent applicable and not otherwise excluded); and (c) the approval of the amendments to the IRA and ROFR/Co-Sale Agreement. The target execution date for the Stockholder Consent is approximately January 12, 2024. In addition, we recommend that the Company prepare a Section 228 Notice for prompt delivery to any non-consenting stockholders following the effectiveness of the Stockholder Consent.
V. Analysis of the Amended and Restated Investors' Rights Agreement (IRA)
A. Preemptive Rights / Right of First Offer (Pro Rata Rights)
The IRA grants "Major Investors" (as defined therein) a preemptive right, often referred to as a "pro rata participation right" or "right of first offer," to purchase their pro rata share of any "New Securities" issued by the Company. This right is designed to enable existing investors to maintain their percentage ownership of the Company's capital stock in the face of dilutive issuances.
Definition of "New Securities." The scope of the preemptive right depends critically on the definition of "New Securities" in the IRA. The IRA defines "New Securities" broadly to include any shares of capital stock of the Company, whether now authorized or not, and any securities convertible into or exercisable or exchangeable for shares of capital stock of the Company. This definition is subject to certain exclusions, which typically include:
(i) shares of Common Stock issuable upon conversion of Preferred Stock;
(ii) shares of Common Stock (or options to purchase Common Stock) issued to employees, consultants, officers, or directors of the Company pursuant to an equity incentive plan approved by the Board;
(iii) shares issued as consideration in an acquisition or strategic transaction approved by the Board;
(iv) shares issued in connection with equipment leasing, bank financing, or similar transactions primarily for non-equity financing purposes, approved by the Board;
(v) shares issued upon exercise of warrants or conversion of convertible instruments outstanding as of the date of the IRA; and
(vi) shares issued in an IPO.
Analysis. The convertible promissory notes proposed to be issued in the bridge financing are securities convertible into equity securities of the Company. If the IRA's definition of "New Securities" encompasses debt securities convertible into equity—as the broad language of the definition suggests—then the issuance of the Notes would constitute an issuance of "New Securities" triggering the preemptive right.
The key question is whether any of the exclusions applies. The most potentially relevant exclusion is the one for "shares issued in connection with equipment leasing, bank financing, or similar transactions primarily for non-equity financing purposes." A convertible note bridge financing is arguably distinguishable from a "bank financing" or "equipment lease," as the primary purpose of the bridge financing is to provide interim equity-like capital, and the notes are designed to convert into equity upon the Qualified Financing. On the other hand, the bridge notes are debt instruments that bear interest, have a maturity date, and are contractually subordinated to senior debt, which gives them debt-like characteristics. We believe the better interpretation is that the convertible note bridge financing does not fall within this exclusion, and that the issuance of the Notes would trigger the preemptive right.
Alternatively, some IRA provisions contain a separate exclusion for bridge financing approved by the Board and by holders of a specified percentage of the outstanding Registrable Securities or Preferred Stock. If such an exclusion exists in the Company's IRA, and if the requisite approval is obtained, the preemptive right may not apply. We recommend that the Company review the specific language of the exclusions with care and confer with our office to confirm the applicability of any such exclusion.
Major Investor Identification. The IRA defines "Major Investors" as investors holding at least a specified number of shares of Registrable Securities (or securities convertible into Registrable Securities). Based on the IRA and the Company's capitalization table, the following investors qualify as Major Investors:
• Crestpoint Seed Partners, L.P. (Series A holder)
• Halcyon Growth Equity, L.P. (Series B holder)
• Ridgeline Ventures Fund III, L.P. (Series C holder)
• Beacon Hill Capital Partners, LLC (Series C holder)
Three of the four Purchasers in the proposed bridge financing are either existing Major Investors or affiliates of existing Major Investors. Specifically:
• Ridgeline Ventures Fund IV, L.P. is an affiliate of Ridgeline Ventures Fund III, L.P. (Major Investor). To the extent the preemptive right runs to affiliates of Major Investors (as it does under many IRAs), Ridgeline Fund IV's participation in the bridge may be treated as an exercise of Ridgeline Fund III's pro rata right.
• Beacon Hill Capital Partners, LLC is itself a Major Investor. Its $15,000,000 participation in the bridge may be treated as an exercise of its pro rata right.
• Halcyon Growth Equity, L.P. is itself a Major Investor. Its $5,000,000 participation in the bridge may be treated as an exercise of its pro rata right.
The participation of these three investors in the bridge financing effectively addresses their preemptive rights with respect to the portion of the bridge financing allocated to them. However, the $10,000,000 allocated to Northstar Innovation Fund II, L.P. represents an allocation to a new investor that is not currently a Major Investor or a party to the IRA. To the extent that the existing Major Investors' pro rata allocations would, in the aggregate, have entitled them to purchase the full $60,000,000 (or more than $50,000,000) of the bridge financing, the $10,000,000 allocated to Northstar may infringe on one or more Major Investors' pro rata rights. Conversely, if the Major Investors' aggregate pro rata entitlement is less than $60,000,000, there may be room in the allocation for Northstar without any infringement.
Additionally, Crestpoint Seed Partners, L.P. is a Major Investor that is not participating in the bridge financing. To the extent that Crestpoint has a preemptive right to participate and the bridge financing is not excluded from the definition of "New Securities," Crestpoint's preemptive right must be either exercised or waived.
Recommendation: We recommend one of the following approaches:
(a) Obtain a written waiver of preemptive rights from all Major Investors who are not participating in the bridge financing (principally Crestpoint) and from any participating Major Investors whose pro rata allocation is exceeded by their actual commitment amount. This waiver can be incorporated into the Written Consent of Stockholders.
(b) Confirm, based on a careful reading of the IRA's exclusion provisions, that the convertible note bridge financing falls within an existing exclusion from the preemptive right. If such an exclusion exists and is applicable, no waiver is required, but we recommend obtaining a waiver as a belt-and-suspenders measure.
(c) Provide each Major Investor with the requisite notice and opportunity to exercise (or waive) its preemptive right in accordance with the procedural requirements of the IRA, including any required advance notice period. This approach is the most conservative but may introduce timing delays depending on the length of the notice period specified in the IRA.
B. Information Rights
The IRA grants certain information rights to Major Investors, including:
• Annual audited financial statements of the Company, to be delivered within 120 days following the end of each fiscal year;
• Quarterly unaudited financial statements, to be delivered within 45 days following the end of each fiscal quarter;
• Monthly management reports, including unaudited financial statements and key operating metrics;
• Annual budgets and operating plans; and
• Such other information as a Major Investor may reasonably request from time to time.
The Company's audited financial statements for fiscal year 2022 were prepared by Pinnacle Audit Group LLP (engagement partner Lisa Johannsen), and we understand that the Company has been providing reviewed financial statements on a quarterly basis. The Company's most recent reviewed financial statements are as of September 30, 2023.
The existing investors that are parties to the IRA—specifically, Ridgeline (via Fund III), Beacon Hill, and Halcyon—already enjoy information rights as Major Investors under the IRA. Their participation in the bridge financing does not alter or diminish these existing information rights.
Northstar Innovation Fund II, L.P., however, is a new investor that is not currently a party to the IRA. Northstar will not receive information rights under the IRA unless it is added as a party thereto. From a commercial perspective, it is standard practice in venture capital bridge financings to provide new investors with information rights on the same basis as existing investors, and we anticipate that Northstar will require such rights as a condition to its investment.
Recommendation: We recommend that the IRA be amended to add all Purchasers as parties thereto with full information rights and pro rata participation rights. This amendment (referred to herein as "Amendment No. 1 to the Amended and Restated Investors' Rights Agreement") should be prepared as part of the closing documentation and executed simultaneously with the closing of the bridge financing. The specific terms of the amendment are discussed further in Section V.D below.
C. Registration Rights
The IRA contains registration rights provisions granting the investors party thereto certain rights with respect to the registration of their "Registrable Securities" under the Securities Act of 1933, as amended. These registration rights typically include:
• Demand Registration Rights: The right of holders of a specified percentage of Registrable Securities to demand that the Company file a registration statement covering the resale of their Registrable Securities (subject to customary limitations on the number of demand registrations and lock-up periods).
• Piggyback Registration Rights: The right of holders of Registrable Securities to include their shares in any registration statement filed by the Company for its own account or for the account of other securityholders (subject to customary cutback provisions).
• S-3 Registration Rights: The right of holders of a specified amount of Registrable Securities to demand that the Company file a registration statement on Form S-3 (or any successor form), if and when the Company becomes eligible to use such form.
The shares issuable upon conversion of the Notes will, upon issuance, constitute "Registrable Securities" under the IRA, provided that the Purchasers are added as parties to the IRA (as recommended above) and that the shares are not excluded from the definition of "Registrable Securities" by any provision of the IRA. We have reviewed the definition of "Registrable Securities" in the IRA and believe that shares of Preferred Stock (or Common Stock) issued upon conversion of convertible notes purchased in a private placement would fall within the definition, subject to the customary exclusions for shares that have been sold pursuant to an effective registration statement or that may be sold without restriction under Rule 144.
No immediate action is required with respect to registration rights at the Note issuance stage. Registration rights become relevant upon conversion of the Notes and in the context of any future initial public offering or registered offering by the Company. At the time of the Series D closing, the IRA will likely be amended and restated to reflect the registration rights of all investors, including the shares issued upon conversion of the Notes.
D. Consent and Amendment Provisions
The IRA contains provisions governing the manner in which the agreement may be amended, modified, or waived. The IRA typically provides that it may be amended, or any provision thereof may be waived, only with the written consent of (i) the Company and (ii) the holders of a specified percentage (e.g., a majority) of the Registrable Securities then outstanding.
We have reviewed the amendment provision of the IRA and note the following:
• The IRA may be amended or any provision thereof may be waived by the written consent of the Company and the holders of a majority of the Registrable Securities then outstanding (the "Requisite IRA Holders").
• Certain provisions of the IRA that specifically benefit a particular investor or group of investors may require the consent of such investor or group for amendment or waiver.
We must confirm that the Purchasers and other participating existing investors collectively hold, or can obtain from other investors, the requisite number of Registrable Securities to meet the amendment threshold. Based on our preliminary review of the Company's capitalization table, we believe that Ridgeline (Fund III), Beacon Hill, and Halcyon collectively hold a sufficient number of Registrable Securities to constitute the Requisite IRA Holders. However, this must be confirmed by reference to the precise holdings set forth in the capitalization table and the specific threshold set forth in the IRA.
Recommendation: We recommend that the approval of Amendment No. 1 to the IRA be included in the Written Consent of Stockholders, or, if the IRA's amendment provision requires a separate written consent instrument distinct from a stockholder consent under the DGCL, that a separate written consent of the Requisite IRA Holders be prepared and circulated for execution. We will coordinate with the Company's General Counsel to determine the appropriate procedural mechanism.
E. Board Observation / Board Seat Rights
The IRA may contain provisions granting certain investors the contractual right to designate one or more members of the Company's Board of Directors or to appoint a board observer who is entitled to attend board meetings in a non-voting capacity. These rights are typically granted to lead investors in connection with their investment.
We have reviewed the IRA and note that certain investors hold board designation rights or board observation rights. The convertible note issuance does not alter or dilute these existing rights, as the Notes do not carry voting rights (prior to conversion) and do not entitle the Purchasers to any board representation.
We understand that Northstar Innovation Fund II, L.P. is not expected to receive a board seat or board observation right in connection with the bridge financing. If Northstar negotiates for such a right, the Voting Agreement (discussed in Section VII below) would need to be amended, and the Board Consent would need to reflect the addition of a new board observer, if applicable.
Recommendation: No amendment to the board designation or board observation provisions is anticipated in connection with this transaction. This issue should be revisited if Northstar or any other Purchaser requests board representation.
VI. Analysis of the Right of First Refusal and Co-Sale Agreement
The ROFR/Co-Sale Agreement, dated as of July 15, 2021, grants to the investors party thereto (the "Investor Parties") a right of first refusal and a co-sale right (also known as a "tag-along" right) with respect to proposed transfers of shares of capital stock by certain "Key Holders" identified therein. The Key Holders under the ROFR/Co-Sale Agreement include Arjun Mehta (CEO & Co-Founder), Elena Vasquez (CTO & Co-Founder), and potentially other significant common stockholders.
Right of First Refusal. The ROFR provides that if a Key Holder proposes to transfer shares to a third party, the Key Holder must first offer those shares to the Investor Parties on the same terms and conditions as the proposed transfer. The Investor Parties then have a specified period (typically 15 to 30 days) to elect to purchase all or a portion of the offered shares.
Co-Sale Right. If the Investor Parties do not exercise their ROFR in full, the Investor Parties have the right to participate in the proposed transfer on a pro rata basis, selling a proportionate number of their own shares to the proposed transferee on the same terms and conditions.
Application to the Proposed Transaction. The ROFR/Co-Sale Agreement applies to transfers of existing shares by Key Holders, not to new issuances of securities by the Company. The proposed convertible note bridge financing involves the issuance of new securities (the Notes) by the Company; it does not involve the transfer of existing shares by any Key Holder. Accordingly, the convertible note issuance should not directly trigger any rights under the ROFR/Co-Sale Agreement.
Similarly, the future conversion of the Notes into equity securities would constitute a new issuance by the Company (of the shares issuable upon conversion), not a transfer by a Key Holder, and therefore should not trigger the ROFR or co-sale provisions.
Notwithstanding the foregoing, the Purchasers—particularly Northstar Innovation Fund II, L.P. as a new investor—should be added as parties to the ROFR/Co-Sale Agreement so that they receive the benefit of the ROFR and co-sale protections on the same basis as the existing Investor Parties. This is standard practice in venture capital financings and ensures that all investors are treated equally with respect to Key Holder transfers.
Amendment Provisions. The ROFR/Co-Sale Agreement contains provisions governing its amendment. The ROFR/Co-Sale Agreement may be amended by the written consent of (i) the Company, (ii) the holders of a majority of the shares then held by the Key Holders party thereto, and (iii) the holders of a majority of the shares then held by the Investor Parties. We must confirm that the requisite consent threshold can be met by the participating existing investors and the Key Holders.
Recommendation: We recommend that Calderwood & Harkness prepare Amendment No. 1 to the Right of First Refusal and Co-Sale Agreement adding all Purchasers (Ridgeline Ventures Fund IV, L.P., Beacon Hill Capital Partners, LLC, Northstar Innovation Fund II, L.P., and Halcyon Growth Equity, L.P.) as "Investors" thereunder. The approval of this amendment should be included in the Written Consent of Stockholders, and the Key Holders (Arjun Mehta and Elena Vasquez) should be asked to execute the amendment or provide their written consent thereto.
VII. Analysis of the Voting Agreement
The Voting Agreement, dated as of July 15, 2021, governs the composition of the Company's Board of Directors by requiring the parties thereto to vote their respective shares in favor of the board nominees designated by specified investors, the Key Holders, and the parties voting together. The Voting Agreement typically provides for a Board of Directors consisting of a specified number of seats, allocated as follows (by way of example):
• One or more seats designated by the holders of a majority of the Series C Preferred Stock;
• One or more seats designated by the holders of a majority of the Series A Preferred Stock;
• One or more seats designated by the Key Holders (founders);
• One or more independent seats designated by mutual agreement of the other designating parties; and
• The Company's Chief Executive Officer (as an ex officio or designated seat).
The Voting Agreement is primarily relevant in the context of the bridge financing insofar as the addition of a new investor (Northstar) could raise the question of whether Northstar is entitled to designate a board seat. Based on our discussions with the Company, Northstar is not expected to receive a board designation right in connection with the bridge financing. Accordingly, no amendment to the Voting Agreement is necessary at this stage.
The Voting Agreement will, however, apply to shares issued upon conversion of the Notes at the time of the Series D closing. At that point, the Purchasers (including Northstar) will hold shares of Series D Preferred Stock (or such other equity securities as are issued upon conversion), and those shares will be subject to the voting obligations set forth in the Voting Agreement. It is customary for the Voting Agreement to be amended and restated at each subsequent financing round to reflect the updated board composition and the addition of new investors as parties. We anticipate that the Voting Agreement will be amended and restated as part of the Series D documentation.
Recommendation: No amendment to the Voting Agreement is required at this time. The Voting Agreement should be revisited and amended and restated at the time of the Series D closing.
VIII. Existing Kelvantis Venture Debt Facility — Interaction with Governance Documents
Although the Charter and Bylaws do not themselves impose contractual restrictions on the Company's ability to incur additional indebtedness, we note that the Company is party to a Loan and Security Agreement dated August 15, 2022, by and between Kelvantis Lending Corp. ("Kelvantis") and the Company (the "Kelvantis LSA"), pursuant to which Kelvantis extended a $15,000,000 venture debt facility to the Company, maturing August 15, 2025. A detailed analysis of the Kelvantis LSA's covenants and the interaction of the proposed bridge financing with the Kelvantis facility is set forth in our separate Kelvantis Covenant Analysis Memorandum dated November 28, 2023, and we cross-reference that memorandum here for the convenience of the reader.
For purposes of this memorandum, the key point is as follows: the Kelvantis LSA contains negative covenants restricting the Company's ability to incur additional indebtedness without the prior written consent of Kelvantis. The proposed issuance of $60,000,000 in convertible promissory notes constitutes the incurrence of additional indebtedness under the Kelvantis LSA, and Kelvantis's written consent and waiver is required as a condition to the closing of the bridge financing.
To address this requirement: