1009-00001 · Skybridge Fintech Ltd · Analysis & Strategy

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MEMORANDUM

PRIVILEGED & 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 5, 2023

RE: Interaction Between Most Favored Nation Provision in Proposed Convertible Notes and Existing Anti-Dilution Protections — $60,000,000 Convertible Note Bridge Financing

MATTER NO.: 1009-00001

I. EXECUTIVE SUMMARY

This memorandum analyzes the interaction between the Most Favored Nation ("MFN") clause proposed to be included in the convertible promissory notes (the "Bridge Notes") to be issued in Skybridge Fintech Ltd.'s (the "Company") $60,000,000 convertible note bridge financing (the "Bridge Financing") and the existing anti-dilution protections set forth in the Company's Amended and Restated Certificate of Incorporation, as amended (the "Charter"), which are held by the Company's Series A Preferred Stock, Series B Preferred Stock, and Series C Preferred Stock holders.

Our principal conclusion is as follows: while the MFN provision and the anti-dilution protections operate on fundamentally different planes — the MFN adjusts the economic terms of the Bridge Notes relative to subsequently issued convertible instruments, whereas the anti-dilution provisions adjust the conversion prices and ratios of existing preferred stock upon the issuance of equity at prices below specified thresholds — there are meaningful interaction risks that, if not addressed through careful structuring and drafting, could produce compounding dilutive effects that are adverse to the Company's founders, common stockholders, and, in certain circumstances, to the preferred stockholders themselves. These risks are most acute in a scenario in which the Company issues subsequent convertible debt or Simple Agreements for Future Equity ("SAFEs") at a lower valuation, thereby triggering MFN adjustments to the Bridge Notes, followed by a conversion event at which shares are issued at prices below the existing conversion prices of one or more series of preferred stock.

Three categories of preferred stock are affected by this analysis:

• Series A Preferred Stock, held by Crestpoint Seed Partners, L.P. ("Crestpoint");

• Series B Preferred Stock, held by Halcyon Growth Equity, L.P. ("Halcyon"); and

• Series C Preferred Stock, held by Ridgeline Ventures Fund III, L.P. ("Ridgeline III") and Beacon Hill Capital Partners, LLC ("Beacon Hill").

Critically, two of the four proposed Purchasers in the Bridge Financing — Halcyon (Series B holder) and Beacon Hill (Series C holder) — are also existing preferred stockholders. In addition, the lead investor in the Bridge Financing, Ridgeline Ventures Fund IV, L.P. ("Ridgeline IV"), which is committing $30,000,000 of the $60,000,000 aggregate principal amount, is an affiliate of Ridgeline III, the largest Series C holder. Ridgeline IV and Ridgeline III share the same general partner family (Ridgeline Ventures Management IV, LLC). These "dual-hat" positions create potential conflicts of interest that must be disclosed and managed as described in greater detail in Section VII below.

This memorandum is prepared with reference to the executed term sheet dated December 4, 2023 (the "Term Sheet"), which was delivered by Ridgeline IV as lead investor and accepted by the Company. The Term Sheet contemplates the MFN provision at issue in this analysis. We have also reviewed the Charter, the existing Investors' Rights Agreement dated July 9, 2021, the existing Right of First Refusal and Co-Sale Agreement dated July 9, 2021, the existing Voting Agreement dated July 9, 2021, and certain ancillary documents referenced herein.

II. BACKGROUND

A. The Proposed Convertible Note Bridge Financing

The Bridge Financing contemplates the issuance and sale of convertible promissory notes in an aggregate principal amount of $60,000,000 pursuant to a Note Purchase Agreement to be entered into by the Company and the Purchasers. The key economic and structural terms of the Bridge Notes, as set forth in the Term Sheet, are summarized below.

Interest. The Bridge Notes will bear simple interest at a rate of 6.00% per annum (600 basis points), calculated on the basis of a 365-day year and actual days elapsed. Interest will accrue from the date of issuance and will not be payable in cash prior to maturity or conversion; rather, accrued and unpaid interest will be added to the outstanding principal amount for purposes of conversion.

Maturity. The Bridge Notes will mature 24 months from the closing date of the Bridge Financing. Based on an anticipated closing date of January 15, 2024, the expected maturity date is January 15, 2026 (the "Maturity Date").

Conversion discount. The Bridge Notes will convert into equity securities of the Company at a 20% discount to the price per share paid by investors in the next Qualified Financing (as defined below), meaning that each noteholder will receive shares at a price equal to 80% of the price per share paid by the Series D investors.

Valuation Cap. The Bridge Notes will include a valuation cap of $750,000,000 on a pre-money basis (the "Valuation Cap"). The Valuation Cap provides a ceiling on the conversion price, ensuring that noteholders receive a minimum ownership percentage regardless of the price at which the Qualified Financing is priced.

Qualified Financing. A "Qualified Financing" is defined as a bona fide equity financing of the Company in which the Company raises at least $80,000,000 in new equity capital (exclusive of any amounts converted from the Bridge Notes), at a pre-money valuation to be determined (the "Series D Financing" or "Qualified Financing").

Conversion Price. The conversion price per share applicable to the Bridge Notes (the "Conversion Price") will be the lower of: (a) 80% of the price per share in the Qualified Financing (i.e., the discounted price), or (b) the price per share implied by the Valuation Cap divided by the number of fully diluted shares outstanding (i.e., the "Cap Price"). Based on the Company's current fully diluted share count of approximately 48,500,000 shares, the Cap Price is approximately $15.46 per share ($750,000,000 ÷ 48,500,000 = ~$15.4639). The Conversion Price thus provides a "best of" mechanic that protects noteholders in both up-round and down-round scenarios.

Automatic Conversion. The Bridge Notes will convert automatically into shares of the series of preferred stock issued in the Qualified Financing, at the Conversion Price, upon the closing of the Qualified Financing.

Optional Conversion or Repayment at Maturity. If no Qualified Financing has occurred by the Maturity Date, each holder of Bridge Notes may elect either (i) to convert the outstanding principal and accrued interest into shares of the Company's most recently issued series of preferred stock at the Cap Price, or (ii) to demand repayment of the outstanding principal and accrued interest in cash.

Change of Control. Upon a "Change of Control" (as defined in the Term Sheet to include a merger, acquisition, or sale of substantially all assets), each holder of Bridge Notes will receive the greater of: (a) 2.0 times the outstanding principal amount of such holder's Bridge Note plus all accrued and unpaid interest thereon, or (b) the number of shares of common stock that would be issuable upon conversion of such holder's Bridge Note at the Cap Price, multiplied by the per-share consideration payable to common stockholders in the Change of Control transaction.

Subordination. The Bridge Notes will be subordinated in right of payment to the Company's existing venture debt facility — specifically, the $15,000,000 term loan and revolving credit facility with Kelvantis Lending Corp. pursuant to the Loan and Security Agreement dated August 15, 2022, as amended (the "Kelvantis Facility"). The subordination terms will be set forth in an intercreditor agreement or subordination agreement to be negotiated with Kelvantis.

Purchaser Syndicate. The Bridge Notes will be purchased by the following investors in the amounts indicated:

B. The Most Favored Nation Provision

The Term Sheet includes a Most Favored Nation ("MFN") provision applicable to the Bridge Notes. As proposed, the MFN clause provides that if, at any time during the period from the closing of the Bridge Financing until the conversion or repayment of the Bridge Notes, the Company issues any subsequent convertible promissory notes or SAFEs (collectively, "Subsequent Convertible Instruments") on terms that are more favorable to the holders of such Subsequent Convertible Instruments than the terms of the Bridge Notes, each holder of the Bridge Notes will have the right, upon written notice to the Company within a specified election period after receiving notice of such issuance, to adopt any or all of the more favorable terms.

The MFN clause is intended to be broadly protective. Under the Term Sheet, the following categories of terms are expressly identified as subject to the MFN right:

• A lower valuation cap than the $750,000,000 Valuation Cap;

• A greater conversion discount than the 20% discount;

• A lower interest rate than the 6.00% rate (although this would be unusual as a "more favorable" term, since a lower rate is less favorable to the holder; we interpret this as referring to any term that is more favorable from the holder's economic perspective, which could include a higher interest rate);

• More favorable Change of Control provisions, such as a higher multiple or a more protective conversion mechanic;

• Additional rights not contained in the Bridge Notes, including but not limited to information rights, participation rights in subsequent financings, Board observer rights, or governance rights; or

• Any other term that, in the reasonable determination of the holder, is economically more favorable to the holders of the Subsequent Convertible Instruments than the corresponding term (or absence thereof) in the Bridge Notes.

The MFN right operates during the period from the closing of the Bridge Financing until the earlier of (i) the conversion of the Bridge Notes upon a Qualified Financing or (ii) the Maturity Date. After conversion or repayment, the MFN provision ceases to have any force or effect, as the Bridge Notes will have been extinguished.

The commercial rationale for the MFN provision is straightforward: it protects the early bridge investors — particularly Ridgeline IV as lead — against the risk that the Company will subsequently issue convertible instruments on more favorable terms, thereby disadvantaging the Bridge Note holders relative to later entrants. In the current financing environment, where bridge financings are frequently followed by additional bridge rounds or SAFE issuances prior to a priced equity round, the MFN provision has become a near-standard market term for lead investors in convertible note rounds of this size.

C. Skybridge's Existing Capital Structure and Anti-Dilution Protections

Skybridge Fintech Ltd. was incorporated under the laws of the State of Delaware in 2017 (EIN 83-2147605; Delaware Secretary of State File Number 6384291). The Company is a C corporation for federal income tax purposes.

Financing History. The Company has completed three prior rounds of preferred stock financing:

• Series A Preferred Stock: Issued to Crestpoint Seed Partners, L.P. in the Company's seed/Series A financing round. The Series A round represented the Company's initial institutional venture capital investment.

• Series B Preferred Stock: Issued to Halcyon Growth Equity, L.P. in the Company's Series B financing round. Halcyon led the Series B round and has been an active investor and Board observer since that time.

• Series C Preferred Stock: Issued to Ridgeline Ventures Fund III, L.P. and Beacon Hill Capital Partners, LLC in the Company's Series C financing round, which closed in July 2021 at a $620,000,000 post-money valuation. The Series C round was the Company's most recent priced equity financing and established the current reference valuation for the Company's preferred stock.

Fully Diluted Shares Outstanding. As of the date of this memorandum, the Company has approximately 48,500,000 shares outstanding on a fully diluted basis, inclusive of all shares of common stock outstanding, all shares of preferred stock outstanding on an as-converted basis, all shares reserved for issuance upon exercise of outstanding stock options under the Company's 2018 Equity Incentive Plan (as amended), and any shares issuable upon exercise of outstanding warrants.

409A Valuation. The Company's most recent independent fair market value determination under Section 409A of the Internal Revenue Code was completed by Atlas Valuation Services, Inc. and is dated September 15, 2023. The 409A valuation determined a fair market value per share of common stock of $8.42.

Anti-Dilution Protections. The Charter contains weighted-average anti-dilution provisions applicable to each series of preferred stock (Series A, Series B, and Series C). These provisions are structured as broad-based weighted-average anti-dilution adjustments, which is customary for venture-backed companies at this stage of development.

Under the broad-based weighted-average formula, upon the issuance of "Additional Shares of Common Stock" (as defined in the Charter) at a price per share below the then-applicable conversion price for any series of preferred stock, the conversion price for that series is adjusted downward in accordance with the formula set forth in Section IV.A below. The broad-based weighted-average mechanic is more moderate than a full ratchet approach, as it weights the dilutive impact of the new issuance against the total number of shares outstanding on a fully diluted basis, thereby tempering the magnitude of the adjustment.

The anti-dilution provisions are charter-level protections that operate independently of any contractual provisions in the Bridge Notes or the Note Purchase Agreement. They are triggered by the actual issuance of Additional Shares of Common Stock, not by the execution of agreements to issue such shares in the future.

III. LEGAL ANALYSIS: THE MFN PROVISION IN DETAIL

A. Mechanics of the MFN Provision

The MFN provision, as contemplated in the Term Sheet and as we anticipate drafting it in the Note Purchase Agreement, operates as follows:

Applicability. The MFN right applies exclusively to the Bridge Notes issued in the Bridge Financing. It does not apply to any other securities of the Company, including the existing preferred stock, common stock, or any securities that may be issued in the Qualified Financing. The MFN is a creature of contract, embodied in the Note Purchase Agreement, and confers rights solely on the holders of Bridge Notes.

Triggering Event. The MFN is triggered by the Company's issuance of Subsequent Convertible Instruments — that is, convertible promissory notes or SAFEs — after the closing of the Bridge Financing but prior to the conversion or repayment of the Bridge Notes. Importantly, the MFN is not triggered by equity issuances, whether in a priced round (such as the Qualified Financing) or otherwise. Equity issuances are governed separately by the anti-dilution provisions in the Charter and by preemptive rights under the Investors' Rights Agreement. This distinction is important: the MFN and the anti-dilution protections are designed to address different categories of subsequent issuances, but as we discuss in Section V below, they can interact when a single course of conduct (e.g., a subsequent bridge financing followed by a priced round) triggers both mechanisms sequentially.

Holder Election. Upon the issuance of any Subsequent Convertible Instruments, the Company is required to provide written notice to each holder of Bridge Notes within a specified period (typically five to ten business days) after the closing of such issuance. The notice must describe the material terms of the Subsequent Convertible Instruments. Each holder then has the right, exercisable within a specified election period (typically 15 to 30 days after receipt of notice), to elect to adopt any or all of the more favorable terms applicable to the Subsequent Convertible Instruments. The election is made on a term-by-term basis; a holder may, for example, adopt a lower valuation cap from the Subsequent Convertible Instruments without also adopting a different interest rate.

Effect of MFN Election. When a holder exercises the MFN right, the terms of such holder's Bridge Note are deemed amended to reflect the more favorable terms adopted. For example, if the Company issues a subsequent SAFE with a $500,000,000 valuation cap, and a Bridge Note holder elects to adopt that lower cap, the Valuation Cap applicable to such holder's Bridge Note would be reduced from $750,000,000 to $500,000,000. The MFN adjustment modifies the terms of the existing Bridge Notes; it does not create new securities, nor does it require the issuance of replacement notes (though the Company may be required to issue amended and restated notes reflecting the adjusted terms, depending on the mechanics specified in the Note Purchase Agreement). This is a significant point for purposes of the interaction analysis: the MFN adjustment itself is not a securities issuance and does not independently trigger anti-dilution provisions.

B. Scope and Limitations

In our drafting of the MFN provision, we recommend including the following standard carve-outs, which are typical in convertible note transactions of this nature and which are consistent with the market terms observed in comparable bridge financings:

(i) Equity Incentive Plan Issuances. The MFN should not be triggered by the issuance of stock options, restricted stock, restricted stock units, or other equity awards under the Company's 2018 Equity Incentive Plan (as amended) or any successor equity incentive plan approved by the Company's Board of Directors and stockholders.

(ii) Conversion Shares. The MFN should not be triggered by the issuance of shares of preferred stock or common stock upon conversion of the Bridge Notes themselves, nor upon conversion of any Subsequent Convertible Instruments.

(iii) Qualified Financing Shares. The MFN should not be triggered by the issuance of shares of preferred stock in the Qualified Financing. The Qualified Financing is an equity issuance, not a convertible instrument issuance, and falls outside the scope of the MFN in any event, but an express carve-out provides additional clarity.

(iv) Kelvantis-Related Instruments. The MFN should not be triggered by the issuance of warrants or other equity-linked instruments to Kelvantis Lending Corp. in connection with the Kelvantis Facility, whether pursuant to the existing Loan and Security Agreement or any amendment, modification, or refinancing thereof.

Duration. The MFN right will terminate upon the earlier of (i) the conversion of the Bridge Notes upon a Qualified Financing, (ii) the conversion or repayment of the Bridge Notes at the Maturity Date, or (iii) the acceleration of the Bridge Notes upon an event of default. Upon termination, no further MFN rights may be exercised, and any previously made MFN elections will remain in effect with respect to the conversion terms of the adjusted Bridge Notes.

Contractual vs. Charter-Level Distinction. We emphasize that the MFN is a contractual right contained in the Note Purchase Agreement. It is not a charter-level protection. This distinction is relevant because the MFN may be amended or waived by the contractual parties (i.e., the Company and the requisite holders of Bridge Notes) without the need for a charter amendment or stockholder vote. By contrast, the anti-dilution provisions are contained in the Charter and may only be amended with the approval of the requisite holders of each affected series of preferred stock, voting as separate classes.

IV. LEGAL ANALYSIS: EXISTING ANTI-DILUTION PROTECTIONS

A. Structure of the Weighted-Average Anti-Dilution Provisions

The Charter provides that upon the issuance of Additional Shares of Common Stock at a price per share below the then-effective conversion price for any series of preferred stock, the conversion price for that series is adjusted downward pursuant to a broad-based weighted-average formula. The formula, as set forth in the Charter, is as follows:

CP₁ = CP₀ × (A + B) / (A + C)

Where:

CP₁ = the adjusted conversion price immediately after the new issuance;

CP₀ = the conversion price in effect immediately prior to the new issuance;

A = the number of shares of common stock outstanding immediately prior to the new issuance, calculated on an as-converted, fully diluted basis (including all shares of common stock issuable upon conversion of all outstanding preferred stock, exercise of all outstanding options and warrants, and conversion of all outstanding convertible instruments);

B = the number of shares of common stock that would have been issuable if the aggregate consideration received by the Company for the new shares had been received at the conversion price in effect immediately prior to the new issuance (i.e., aggregate consideration ÷ CP₀);

C = the number of new shares of common stock actually issued (or deemed issued) in the new issuance.

The effect of this formula is intuitive: the lower the price of the new issuance relative to the existing conversion price, the greater the downward adjustment to the conversion price — but the adjustment is tempered by weighting against the entire fully diluted capitalization (the "broad-based" element). This is in contrast to a "narrow-based" weighted-average formula, which would use only the number of shares of the affected series in the denominator, producing a more aggressive adjustment, or a "full ratchet" approach, which would reduce the conversion price to the new issuance price regardless of the number of new shares issued.

The broad-based weighted-average approach is the most common anti-dilution mechanic in venture capital financings at the Company's stage and is generally viewed as a reasonable compromise between protecting preferred holders from dilution and preserving value for common stockholders and founders.

B. What Constitutes a Triggering Issuance

Under the Charter, the anti-dilution adjustment is triggered by the issuance of "Additional Shares of Common Stock", which is a defined term. "Additional Shares of Common Stock" generally includes any shares of common stock, or any securities convertible into or exercisable for shares of common stock, issued by the Company after the original issuance date of each series of preferred stock, with certain standard exemptions.

The following categories of issuances are typically exempted from the definition of Additional Shares of Common Stock and therefore do not trigger anti-dilution adjustments:

(i) Shares of common stock (or options to purchase common stock) issued to employees, officers, directors, consultants, or advisors of the Company pursuant to equity incentive plans or arrangements approved by the Board of Directors (including the requisite preferred director approval);

(ii) Shares of common stock issued upon conversion of preferred stock in accordance with the Charter;

(iii) Shares of common stock issued as a stock dividend or upon a stock split, subdivision, or similar recapitalization;

(iv) Shares of common stock issued upon exercise or conversion of options, warrants, or other convertible instruments outstanding as of the original issuance date of the applicable series of preferred stock; and

(v) Shares of common stock issued in connection with certain strategic transactions (e.g., joint ventures, licensing arrangements, equipment financing, or debt financing), in each case as approved by the Board of Directors (including the requisite preferred director approval).

Key Question: Does the Issuance of the Bridge Notes Itself Trigger Anti-Dilution?

A threshold question is whether the issuance of the Bridge Notes in the Bridge Financing constitutes an issuance of Additional Shares of Common Stock that would trigger anti-dilution adjustments at the time of issuance. We conclude that, under the standard construction of the Charter's anti-dilution provisions and consistent with prevailing Delaware law and venture capital market practice, the answer is no — the issuance of the Bridge Notes does not constitute an issuance of equity at the time the notes are executed and delivered.

Convertible debt instruments are treated as debt, not equity, until the conversion event occurs. The anti-dilution adjustment is triggered at the time of conversion, when shares of common stock (or preferred stock convertible into common stock) are actually issued at the Conversion Price. If the Conversion Price at the time of conversion is below the then-effective conversion price of any series of preferred stock, the anti-dilution provisions would apply at that point. This timing distinction is critical to the interaction analysis set forth in Section V below.

We note, however, that some charter provisions contain a "deemed issuance" clause that treats convertible instruments as having been issued at the time of execution, at a deemed issuance price equal to the conversion price. We have reviewed the Charter and confirm that the Company's anti-dilution provisions follow the standard approach: the triggering event is the actual issuance of shares, not the issuance of the convertible instrument.

C. Analysis by Series

The impact of the anti-dilution provisions depends on the relationship between the Conversion Price of the Bridge Notes and the then-effective conversion price of each series of preferred stock. We analyze each series below.

Series A Preferred Stock (Crestpoint Seed Partners, L.P.). The Series A Preferred Stock was issued in the Company's earliest institutional financing round. The original issuance price — and therefore the initial conversion price — is the lowest of the three series. Moreover, the Series A conversion price may have already been adjusted downward as a result of the Series B and Series C issuances, depending on the pricing of those rounds relative to the Series A conversion price. Based on our review of the Company's capitalization records, we believe it is likely that the Bridge Note Conversion Price (whether at the Cap Price of approximately $15.46 per share or at the 20% discount to the Series D price) will be above the current effective conversion price of the Series A Preferred Stock. If this is the case, the issuance of shares upon conversion of the Bridge Notes would not trigger an anti-dilution adjustment for the Series A Preferred Stock.

Series B Preferred Stock (Halcyon Growth Equity, L.P.). The Series B Preferred Stock was issued at a higher price per share than the Series A. The Series B conversion price, as originally established or as subsequently adjusted, is higher than the Series A conversion price. Whether the Bridge Note Conversion Price would fall below the Series B conversion price depends on the specific pricing of the Series B round and any subsequent adjustments. We recommend that David Lindstrom and Marcus Tillman confirm the current effective conversion price of the Series B Preferred Stock so that we can perform a definitive comparison. It is worth noting that Halcyon, the sole holder of Series B Preferred Stock, is also committing $5,000,000 as a Purchaser of Bridge Notes. This dual position creates an alignment consideration: Halcyon benefits from the conversion economics and MFN protection of the Bridge Notes, but would be diluted by anti-dilution adjustments on its Series B Preferred Stock if the Conversion Price falls below the Series B conversion price. The net economic impact on Halcyon depends on the relative magnitudes of these two effects.

Series C Preferred Stock (Ridgeline Ventures Fund III, L.P. and Beacon Hill Capital Partners, LLC). The Series C Preferred Stock was issued in July 2021 at a $620,000,000 post-money valuation, making the Series C conversion price the highest of the three series. The Bridge Note Valuation Cap of $750,000,000 pre-money is above the $620,000,000 post-money valuation at which the Series C round was priced. Accordingly, the Cap Price of approximately $15.46 per share should be at or above the Series C conversion price, assuming that the Series C conversion price was established based on the $620,000,000 post-money valuation. In this scenario, conversion at the Cap Price would not trigger anti-dilution for the Series C Preferred Stock.

However, if conversion occurs at the 20% discount to the Series D price, and if the Series D price (after application of the discount) is lower than the Series C conversion price, anti-dilution would be triggered for the Series C Preferred Stock. This scenario is analyzed in greater detail in Section V.B below.

We further note that both Ridgeline III and Beacon Hill, the Series C holders, are also Purchasers in the Bridge Financing (through Ridgeline IV, an affiliate of Ridgeline III, and directly in the case of Beacon Hill). This dual-hat dynamic is discussed in Section VII below.

V. INTERACTION SCENARIOS

The following scenarios illustrate the range of potential interactions between the MFN provision and the anti-dilution protections. These scenarios are not exhaustive but are designed to capture the most likely outcomes and the most significant risk vectors.

A. Scenario 1: Qualified Financing (Series D) at or Above the Valuation Cap

Assumptions. The Company completes the Series D Financing at a pre-money valuation of $750,000,000 or higher. No Subsequent Convertible Instruments are issued between the closing of the Bridge Financing and the closing of the Series D Financing.

Bridge Note Conversion. The Bridge Notes convert automatically upon the closing of the Series D Financing. Because the Series D pre-money valuation equals or exceeds the Valuation Cap, the 20% discount to the Series D price per share produces a Conversion Price that is at or above the Cap Price of approximately $15.46 per share. The Bridge Notes therefore convert at the discounted Series D price.

Anti-Dilution Impact. Because the Conversion Price exceeds all existing conversion prices (Series A, Series B, and Series C), no anti-dilution adjustment is triggered for any series of preferred stock. The issuance of shares upon conversion of the Bridge Notes is at a price above all applicable thresholds.

MFN Impact. The MFN provision is irrelevant in this scenario because no Subsequent Convertible Instruments were issued prior to conversion. The MFN right terminates upon conversion without ever having been triggered.

Assessment. This is the cleanest outcome with no interaction issues. If the Company's trajectory supports a Series D round at or above the Valuation Cap, the structural risks identified in this memorandum do not materialize. We note, however, that market conditions and company performance between now and the anticipated Series D timing (Q3-Q4 2024) are inherently uncertain, and the Company should not rely exclusively on this favorable scenario.

B. Scenario 2: Qualified Financing (Series D) Below the Series C Price but Above the Valuation Cap Implied Price

Assumptions. The Company completes the Series D Financing at a pre-money valuation that is below the Series C post-money valuation of $620,000,000 (representing a "down round" relative to the Series C) but above the level at which the 20% discounted Series D price would fall below the Cap Price. In other words, the Series D is priced such that the 80% of the Series D price per share exceeds the Cap Price of approximately $15.46 per share.

Bridge Note Conversion. The Bridge Notes convert at the Cap Price of approximately $15.46 per share, because the Cap Price is lower than the discounted Series D price. This conversion results in the issuance of shares at $15.46 per share.

Anti-Dilution Impact. Whether the issuance of shares at $15.46 per share triggers anti-dilution depends on the specific conversion prices of each series of preferred stock:

• Series A: As discussed above, the Series A conversion price is likely below $15.46 per share. No anti-dilution trigger.

• Series B: Depends on the Series B conversion price. If the Series B conversion price is below $15.46 per share, no trigger. If above, the broad-based weighted-average adjustment applies.

• Series C: The Series C conversion price, based on the $620,000,000 post-money valuation, must be compared to the Cap Price. If the $750,000,000 pre-money Valuation Cap produces a Cap Price that is at or above the Series C conversion price, no trigger. However, there is a meaningful range of outcomes in which the Cap Price is modestly below the Series C conversion price, particularly if the fully diluted share count used to calculate the Cap Price differs from the share count used to calculate the original Series C conversion price.

Circularity Risk. If the issuance of shares upon conversion of the Bridge Notes at $15.46 per share triggers an anti-dilution adjustment for the Series C Preferred Stock, the adjustment increases the number of shares issuable upon conversion of the Series C Preferred Stock. This increase in the fully diluted share count, if the "fully diluted capitalization" used to calculate the Cap Price is defined dynamically (i.e., as of the time of conversion, inclusive of all anti-dilution adjustments), would increase the denominator of the Cap Price calculation, thereby decreasing the Cap Price. The decreased Cap Price would in turn produce a larger anti-dilution adjustment, which would further increase the denominator, and so on — creating a circular reference that must be resolved either iteratively or through a definitional fix in the Bridge Notes (as discussed in Section VI below).

Assessment. Scenario 2 presents a moderate interaction risk, primarily related to the circularity problem described above. The magnitude of the dilutive impact depends on the precise relationship between the Cap Price and the Series C conversion price, and on the definitional treatment of "fully diluted capitalization" in the Bridge Notes.

C. Scenario 3: No Qualified Financing; Optional Conversion at Maturity at the Valuation Cap

Assumptions. No Qualified Financing occurs by the Maturity Date of January 15, 2026. Holders of Bridge Notes elect to convert their notes at the Cap Price of approximately $15.46 per share, rather than demanding cash repayment.

Bridge Note Conversion. The Bridge Notes convert into shares of the Company's most recently issued series of preferred stock (Series C Preferred Stock, absent a subsequent priced round) at the Cap Price. This results in the issuance of new shares of Series C Preferred Stock (or a separate sub-series thereof) at $15.46 per share.

Anti-Dilution Impact. The analysis is substantially the same as in Scenario 2. If $15.46 per share is below the effective conversion price of the Series B or Series C Preferred Stock, anti-dilution adjustments are triggered. The circularity risk described in Scenario 2 is equally present.

Additional Consideration. If holders elect cash repayment instead of conversion, no equity issuance occurs and no anti-dilution adjustment is triggered. The Company's obligation is limited to repayment of principal and accrued interest in cash. However, the Company's ability to repay $60,000,000 in principal (plus approximately $7,200,000 in accrued interest over 24 months at 6.00% simple interest) in cash at maturity — while remaining subordinated to the Kelvantis Facility — should be evaluated in the context of the Company's projected cash position and liquidity. If the Company lacks sufficient cash to repay, holders may be effectively compelled to convert, making the anti-dilution interaction unavoidable.

Assessment. Scenario 3 represents a similar risk profile to Scenario 2, with the additional complication that the absence of a Qualified Financing may indicate broader business challenges that increase the likelihood of a down-round event in a subsequent financing.

D. Scenario 4: MFN Triggered by Subsequent Bridge or SAFE Issuance

Assumptions. After the closing of the Bridge Financing but before the conversion or repayment of the Bridge Notes, the Company issues Subsequent Convertible Instruments — for example, a second bridge note or a SAFE — with a lower valuation cap of $500,000,000. The holders of the Bridge Notes exercise their MFN rights and adopt the lower valuation cap.

MFN Adjustment. The Valuation Cap applicable to the Bridge Notes is reduced from $750,000,000 to $500,000,000. The Cap Price is recalculated as $500,000,000 ÷ 48,500,000 shares = approximately $10.31 per share (subject to any changes in the fully diluted share count between the closing of the Bridge Financing and the MFN adjustment).

Bridge Note Conversion. Upon a subsequent Qualified Financing, or at maturity if no Qualified Financing occurs, the Bridge Notes convert at the lower of (a) 80% of the Series D price or (b) the adjusted Cap Price of approximately $10.31 per share. The likelihood that the adjusted Cap Price is the binding constraint is significantly higher at $500,000,000 than at $750,000,000, meaning that conversion at $10.31 per share is the most probable outcome.

Anti-Dilution Impact. Conversion at approximately $10.31 per share is substantially more likely to fall below the conversion prices of both the Series B and Series C Preferred Stock. In addition, the Subsequent Convertible Instruments (the second bridge notes or SAFEs) will themselves convert into equity at the lower valuation, independently triggering anti-dilution adjustments when that conversion occurs. The result is a compounding dilution effect:

(1) The issuance of the Subsequent Convertible Instruments, upon conversion, triggers anti-dilution adjustments for the affected series of preferred stock.

(2) The MFN-adjusted Bridge Notes convert at the lower Cap Price of approximately $10.31 per share, further triggering anti-dilution adjustments (or increasing the magnitude of adjustments already triggered by the Subsequent Convertible Instruments).

(3) Each round of anti-dilution adjustments increases the fully diluted share count, which, if the Cap Price is calculated dynamically, further decreases the Cap Price, exacerbating the circularity problem described in Scenario 2.

Impact on Founders and Common Stockholders. The compounding dilution effect is most acutely felt by common stockholders, including the Company's founders, Arjun Mehta and Elena Vasquez. As the fully diluted share count increases through anti-dilution adjustments, the proportional ownership of common stockholders decreases. In a severe down-round scenario with MFN-adjusted bridge notes and multiple anti-dilution triggers, the founders' ownership could be significantly diluted.

Assessment. Scenario 4 represents the most complex interaction and the greatest dilution risk to existing preferred holders and common stockholders. This scenario is also the most likely to arise in adverse market conditions, precisely when the Company is most vulnerable to dilution. We recommend that the Company's Board and management team understand this scenario thoroughly and take the mitigating steps described in Section IX below.

E. Scenario 5: MFN Triggered and Change of Control Occurs

Assumptions. The MFN has been triggered by a Subsequent Convertible Instrument issuance, and the Bridge Notes have been adjusted to reflect more favorable terms (e.g., a lower Valuation Cap of $500,000,000). A Change of Control transaction is then proposed or consummated prior to the conversion or maturity of the Bridge Notes.

Change of Control Treatment. Each holder of Bridge Notes receives the greater of (a) 2.0 times the outstanding principal amount plus all accrued and unpaid interest, or (b) the amount payable upon conversion at the (now adjusted) Cap Price. If the MFN-adjusted Cap Price is lower (e.g., $10.31 per share instead of $15.46 per share), the number of shares issuable upon conversion is higher, which may make the conversion value more favorable to the holders than the 2.0x multiple in scenarios where the per-share consideration in the Change of Control transaction is sufficiently high.

For example, if a Bridge Note holder holds a note with $10,000,000 in principal (plus, say, $600,000 in accrued interest), the 2.0x multiple produces $21,200,000. At a Cap Price of $10.31 per share, the same $10,600,000 converts into approximately 1,028,127 shares. If the per-share merger consideration exceeds approximately $20.62 ($21,200,000 ÷ 1,028,127), the conversion option is more favorable than the 2.0x multiple.

Anti-Dilution Impact. In a Change of Control scenario, the Bridge Notes are either repaid at the 2.0x multiple or converted into equity, at the holder's election (or as determined by the terms of the note). If holders elect the 2.0x multiple, no equity conversion occurs and no anti-dilution adjustment is triggered. If holders elect conversion, the analysis is the same as in Scenarios 2 through 4 — anti-dilution may be triggered depending on the relationship between the Conversion Price and the existing preferred conversion prices.

Merger Consideration Waterfall. Even if anti-dilution is not technically triggered in the Change of Control (because no conversion into permanent equity occurs), the Change of Control premium and the fully diluted share calculation in the merger consideration waterfall are affected by the existence of the MFN-adjusted Bridge Notes. The waterfall analysis — which determines the per-share distribution of merger consideration among common stockholders, preferred stockholders (with their respective liquidation preferences), and convertible instrument holders — must account for the Bridge Notes as either (i) debt claims entitled to the 2.0x premium or (ii) as-converted equity claims, depending on the election. The MFN-adjusted terms change the magnitude of both the debt claim and the as-converted equity claim, which can materially affect the distribution to other security holders.

Assessment. Scenario 5 introduces additional complexity into the merger consideration waterfall but does not create the same circularity risks as Scenarios 2 through 4. The primary risk in this scenario is that the MFN-adjusted Bridge Notes consume a disproportionate share of the merger consideration, to the detriment of common stockholders and, potentially, junior preferred stockholders.

VI. CIRCULARITY AND DEFINITIONAL ISSUES

A. The Fully Diluted Share Count Problem

As illustrated in Scenarios 2, 3, and 4, the interaction between the Bridge Note conversion mechanics and the anti-dilution provisions can create a circularity problem when the Valuation Cap conversion price is defined as a function of the fully diluted share count, and the fully diluted share count is itself affected by anti-dilution adjustments that are triggered by the conversion.

The mechanics of the circularity are as follows:

1. The Cap Price is calculated by dividing the Valuation Cap ($750,000,000, or $500,000,000 if MFN-adjusted) by the number of fully diluted shares outstanding.

2. If the Cap Price is below the conversion price of any series of preferred stock, conversion at the Cap Price triggers a weighted-average anti-dilution adjustment for that series.

3. The anti-dilution adjustment reduces the conversion price of the affected series, which increases the number of shares issuable upon conversion of that series on an as-converted basis.

4. The increased number of as-converted shares increases the fully diluted share count.

5. The increased fully diluted share count, if used as the denominator in the Cap Price calculation, decreases the Cap Price.

6. The decreased Cap Price may trigger additional anti-dilution adjustments, or increase the magnitude of existing adjustments, restarting the cycle at step 2.

This circularity is a well-recognized problem in convertible note transactions with valuation caps, particularly when the issuer's charter contains anti-dilution provisions. The circularity does not produce an infinite loop — it converges to a fixed point through iterative calculation — but the iterative process can be cumbersome and can produce results that differ materially from the parties' initial expectations.

Recommendation. We recommend that the Note Purchase Agreement and the form of Bridge Note define "fully diluted capitalization" (or the equivalent term used in the Cap Price calculation) to be calculated on one of the following bases, in order to break the circularity:

Option 1: Fixed-Date Measurement. Define the fully diluted share count as the number of shares outstanding on a fully diluted basis as of a fixed date — for example, as of immediately prior to the closing of the Qualified Financing (or, in the case of conversion at maturity, as of the Maturity Date) — without giving effect to any anti-dilution adjustments triggered by the conversion of the Bridge Notes themselves.

Option 2: Pre-Adjustment Basis. Define the fully diluted share count to be calculated on a "pre-adjustment" basis, excluding the effect of any anti-dilution adjustments triggered by the issuance of shares upon conversion of the Bridge Notes or any other convertible instruments converting concurrently.

Option 3: Company-Provided Certification. Require the Company to certify the fully diluted share count as of a specified measurement date, with such certification being binding on the parties for purposes of the Cap Price calculation, subject to adjustment only for manifest error.

Each of these options effectively "freezes" the denominator of the Cap Price calculation, preventing the circular feedback loop. We recommend Option 1 or Option 2 as the most straightforward and commercially reasonable approaches. The choice between these options should be discussed with investor counsel, as the Purchasers may have preferences regarding the measurement methodology.

B. Interaction with Outstanding Options and Warrants

The fully diluted share count of approximately 48,500,000 shares includes, among other things, shares reserved for issuance upon exercise of outstanding stock options under the Company's 2018 Equity Incentive Plan (as amended) and any shares issuable upon exercise of outstanding warrants (including any warrants issued or issuable to Kelvantis Lending Corp. in connection with the Kelvantis Facility).

Between the closing of the Bridge Financing and the conversion event, the Company may grant additional stock options or issue additional warrants, which would increase the fully diluted share count and decrease the Cap Price. For example, if the Company grants options for an additional 1,000,000 shares between closing and conversion, the fully diluted share count would increase to approximately 49,500,000, and the Cap Price would decrease from approximately $15.46 to approximately $15.15 ($750,000,000 ÷ 49,500,000). While this decrease is modest in absolute terms, it illustrates the sensitivity of the Cap Price to changes in the fully diluted share count.

Recommendation. We recommend that the Note Purchase Agreement include a clear and detailed definition of "fully diluted capitalization" that specifies which categories of securities are included in the calculation. At a minimum, the definition should address:

(i) Outstanding shares of common stock;

(ii) Shares issuable upon conversion of all outstanding series of preferred stock (at their then-effective conversion prices, or at their original conversion prices if a pre-adjustment basis is used);

(iii) Shares issuable upon exercise of all outstanding and vested stock options (and, potentially, all outstanding options whether or not vested);

(iv) Shares issuable upon exercise of all outstanding warrants;

(v) Shares reserved but unissued under the equity incentive plan (the treatment of the "unallocated pool" is a negotiating point — Purchasers typically seek to include the full pool, which increases the denominator and decreases the Cap Price to their benefit);

(vi) Shares issuable upon conversion of the Bridge Notes themselves and any other outstanding convertible instruments.

We will coordinate with Priya Ramanathan and Marcus Tillman to confirm the precise composition of the 48,500,000 fully diluted share count and ensure that the definition in the Note Purchase Agreement is consistent with the Company's capitalization records.

VII. DUAL-HAT INVESTOR CONSIDERATIONS

Three of the four Purchasers in the Bridge Financing also hold existing preferred stock in the Company, creating dual-hat positions that warrant careful attention from a fiduciary, disclosure, and structural perspective.

Halcyon Growth Equity, L.P. Halcyon is the sole holder of the Company's Series B Preferred Stock and is committing $5,000,000 as a Purchaser of Bridge Notes. In its capacity as a holder of Series B Preferred Stock, Halcyon benefits from the anti-dilution protections in the Charter, which would adjust the Series B conversion price downward if shares are issued at a price below the Series B conversion price. In its capacity as a holder of Bridge Notes, Halcyon benefits from the MFN provision and the conversion economics of the Bridge Notes (including the 20% discount and the Valuation Cap). These interests can diverge: if the MFN is triggered and the Bridge Notes convert at a lower Cap Price, Halcyon benefits as a noteholder (receiving more shares per dollar of principal) but may be diluted as a Series B holder (if the anti-dilution adjustment does not fully offset the dilutive impact of the lower-priced issuance). The net economic impact on Halcyon depends on the relative magnitudes of its Series B position and its Bridge Note position.

Beacon Hill Capital Partners, LLC. Beacon Hill holds Series C Preferred Stock and is committing $15,000,000 as a Purchaser of Bridge Notes. The same dual-hat dynamic applies: Beacon Hill benefits from the Bridge Note conversion economics and MFN protection as a noteholder, and from anti-dilution protection as a Series C holder. Because the Series C conversion price is the highest of the three series, the likelihood of anti-dilution being triggered for the Series C is greater than for the Series A or Series B, and the potential magnitude of the adjustment is larger. Beacon Hill's $15,000,000 Bridge Note commitment is also more significant in absolute terms than Halcyon's $5,000,000 commitment, meaning that Beacon Hill's noteholder economics are proportionally more important to its overall position in the Company.

Ridgeline Ventures Fund III, L.P. / Ridgeline Ventures Fund IV, L.P. Fund III holds Series C Preferred Stock; Fund IV is the lead investor in the Bridge Financing, committing $30,000,000. Fund III and Fund IV are separate fund entities, but they share the same management company (Ridgeline Ventures Management IV, LLC) and the same general partner family. The investment professionals managing Fund III and Fund IV are substantially the same individuals. In this context, Fund IV's interest in favorable Bridge Note terms (including a robust MFN) may diverge from Fund III's interest in maintaining the value of its Series C investment. If anti-dilution is triggered by Bridge Note conversions, Fund III benefits from the downward adjustment to its Series C conversion price, receiving additional as-converted shares. However, the dilutive impact of the Bridge Note conversion on the overall capitalization may reduce the value of Fund III's preferred stock position on a mark-to-market basis.

The divergence of interests between Fund III and Fund IV is a recognized issue in the venture capital industry, and fund managers generally address it through internal conflict-of-interest policies, advisory committee approvals, and allocation procedures. From the Company's perspective, however, the relevant concern is ensuring that the Board is fully informed of these dual-hat positions when approving the Bridge Financing, and that any waivers of anti-dilution protections are obtained from disinterested holders or with full disclosure.

Recommendation. We recommend the following measures:

(i) Board Disclosure. The dual-hat positions of Halcyon, Beacon Hill, and the Ridgeline fund family should be prominently disclosed in the Board presentation materials prepared in connection with the Board's consideration and approval of the Bridge Financing. The disclosure should identify each dual-hat investor, the nature of its existing preferred stock holdings, its proposed Bridge Note commitment, and the potential for divergent interests.

(ii) Disclosure Schedule. The Note Purchase Agreement should include a disclosure schedule or exhibit that identifies the dual-hat positions and any potential conflicts of interest.

(iii) Waiver Mechanics. Any waiver of anti-dilution protection sought in connection with the Bridge Financing should be obtained from holders representing the requisite percentage under the Charter (typically a majority of the outstanding shares of the affected series, voting as a separate class). To the extent that a dual-hat investor's vote is necessary to achieve the requisite threshold, the Company should consider whether such investor should be treated as a "disinterested" holder for purposes of the waiver vote, and should seek separate consent or advice from independent Board members or outside counsel as appropriate.

(iv) Related-Party Transaction Procedures. The Bridge Financing may constitute a "related-party transaction" under the Company's corporate governance policies and under Delaware law, given the participation of existing preferred holders as Purchasers. The Board should follow its established procedures for reviewing and approving related-party transactions, including obtaining the approval of disinterested directors.

VIII. IMPACT ON PLANNED SERIES D

The Company plans to raise at least $80,000,000 in new equity capital in a Series D Preferred Stock financing in the Q3-Q4 2024 timeframe (the "Series D Financing"). The Series D Financing is expected to constitute the "Qualified Financing" under the Bridge Notes, triggering automatic conversion of the Bridge Notes into Series D Preferred Stock. The interaction between the Bridge Notes (including the MFN provision), the existing anti-dilution protections, and the Series D Financing warrants careful planning.

Series D Pricing and Bridge Note Conversion. The price per share of the Series D Preferred Stock will determine the Conversion Price of the Bridge Notes, subject to the Valuation Cap. If the Series D pre-money valuation is at or above $750,000,000, the Bridge Notes convert at the discounted Series D price (80% of the Series D price per share), which will be at or above the Cap Price. If the Series D pre-money valuation is below $750,000,000, the Bridge Notes convert at the Cap Price of approximately $15.46 per share (or lower, if MFN adjustments have been made).

Anti-Dilution Triggers. As discussed in Scenario 2, if the Conversion Price of the Bridge Notes upon a Series D Financing is below the conversion price of any series of preferred stock, anti-dilution adjustments will be triggered. In addition, the Series D Financing itself may trigger anti-dilution adjustments if the Series D price per share is below the conversion prices of existing preferred stock. This is the definition of a "down round," and it is independently governed by the anti-dilution provisions regardless of the Bridge Notes.

Cumulative Dilution. The more Bridge Notes outstanding at the time of conversion — including any notes issued in subsequent bridge rounds that trigger MFN adjustments — the greater the aggregate number of shares issued upon conversion. Each share issued upon conversion at a price below the existing preferred conversion prices contributes to the magnitude of the anti-dilution adjustment. The cumulative dilutive effect on existing stockholders can be substantial in a down-round Series D scenario, particularly if:

(a) The Bridge Notes convert at the MFN-adjusted Cap Price (e.g., $10.31 per share at a $500M cap);

(b) The Subsequent Convertible Instruments also convert at a low price;

(d) Anti-dilution adjustments are triggered for both the Series B and Series C Preferred Stock.

In this compound scenario, the fully diluted share count at the time of the Series D closing could be significantly higher than the current 48,500,000, with the founders' and common stockholders' proportional ownership correspondingly reduced.

Series D Anti-Dilution. Investors in the Series D Financing will almost certainly negotiate for their own anti-dilution protections, which would apply to the Series D Preferred Stock in the event of future down-round issuances. If the Company subsequently issues equity at a price below the Series D price (e.g., in a Series E or in a subsequent bridge round), the Series D anti-dilution would be triggered, compounding the dilutive effects described above for the existing preferred series.

Recommendation. We recommend that the Company's finance team, led by David Lindstrom and Marcus Tillman, prepare comprehensive dilution scenario models for the anticipated Series D Financing across a range of pre-money valuations, from $500,000,000 to $1,000,000,000 (in $50,000,000 increments). These models should show:

(i) The number of shares issued upon conversion of the Bridge Notes at each valuation level;

(ii) The anti-dilution adjustments (if any) triggered for each series of preferred stock at each valuation level;

(iii) The impact of MFN adjustments (if applicable) on the conversion share count;

(iv) The resulting fully diluted capitalization table at each valuation level, including the proportional ownership of founders, common stockholders, each series of preferred stock, and Bridge Note holders; and

(v) The effective price per share received by each category of security holder in the Series D, taking into account all adjustments.

These models should be shared with the Board of Directors and the management team in advance of any substantive Series D negotiations, and should be updated periodically as the Company's capitalization and financing timeline evolve.

IX. RECOMMENDATIONS

Based on the foregoing analysis, we respectfully recommend that the Company take the following steps in connection with the drafting and negotiation of the Bridge Financing documentation:

1. Definitional Clarity. Define "fully diluted capitalization" (or the equivalent term) precisely in the Note Purchase Agreement and in the form of Bridge Note. The definition should specify the measurement date and methodology to avoid circularity with anti-dilution adjustments triggered by the conversion of the Bridge Notes. We recommend using either a fixed-date measurement (e.g., immediately prior to the Qualified Financing) or a pre-adjustment basis that excludes the effect of anti-dilution adjustments triggered by the conversion itself. The specific definitional language should be coordinated with investor counsel and reviewed by all parties prior to execution. This is, in our view, the single most important structural safeguard against unintended interaction effects.

2. MFN Scope Limitations. Consider narrowing the MFN provision to exclude certain categories of immaterial or non-dilutive issuances. At a minimum, ensure that the MFN does not apply to equity issuances (which are separately governed by anti-dilution and preemptive rights) and confirm the inclusion of the standard carve-outs descr

MEMORANDUM
PRIVILEGED & 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 5, 2023
RE: Interaction Between Most Favored Nation Provision in Proposed Convertible Notes and Existing Anti-Dilution Protections — $60,000,000 Convertible Note Bridge Financing
MATTER NO.: 1009-00001
I. EXECUTIVE SUMMARY
This memorandum analyzes the interaction between the Most Favored Nation ("MFN") clause proposed to be included in the convertible promissory notes (the "Bridge Notes") to be issued in Skybridge Fintech Ltd.'s (the "Company") $60,000,000 convertible note bridge financing (the "Bridge Financing") and the existing anti-dilution protections set forth in the Company's Amended and Restated Certificate of Incorporation, as amended (the "Charter"), which are held by the Company's Series A Preferred Stock, Series B Preferred Stock, and Series C Preferred Stock holders.
Our principal conclusion is as follows: while the MFN provision and the anti-dilution protections operate on fundamentally different planes — the MFN adjusts the economic terms of the Bridge Notes relative to subsequently issued convertible instruments, whereas the anti-dilution provisions adjust the conversion prices and ratios of existing preferred stock upon the issuance of equity at prices below specified thresholds — there are meaningful interaction risks that, if not addressed through careful structuring and drafting, could produce compounding dilutive effects that are adverse to the Company's founders, common stockholders, and, in certain circumstances, to the preferred stockholders themselves. These risks are most acute in a scenario in which the Company issues subsequent convertible debt or Simple Agreements for Future Equity ("SAFEs") at a lower valuation, thereby triggering MFN adjustments to the Bridge Notes, followed by a conversion event at which shares are issued at prices below the existing conversion prices of one or more series of preferred stock.
Three categories of preferred stock are affected by this analysis:
• Series A Preferred Stock, held by Crestpoint Seed Partners, L.P. ("Crestpoint");
• Series B Preferred Stock, held by Halcyon Growth Equity, L.P. ("Halcyon"); and
• Series C Preferred Stock, held by Ridgeline Ventures Fund III, L.P. ("Ridgeline III") and Beacon Hill Capital Partners, LLC ("Beacon Hill").
Critically, two of the four proposed Purchasers in the Bridge Financing — Halcyon (Series B holder) and Beacon Hill (Series C holder) — are also existing preferred stockholders. In addition, the lead investor in the Bridge Financing, Ridgeline Ventures Fund IV, L.P. ("Ridgeline IV"), which is committing $30,000,000 of the $60,000,000 aggregate principal amount, is an affiliate of Ridgeline III, the largest Series C holder. Ridgeline IV and Ridgeline III share the same general partner family (Ridgeline Ventures Management IV, LLC). These "dual-hat" positions create potential conflicts of interest that must be disclosed and managed as described in greater detail in Section VII below.
This memorandum is prepared with reference to the executed term sheet dated December 4, 2023 (the "Term Sheet"), which was delivered by Ridgeline IV as lead investor and accepted by the Company. The Term Sheet contemplates the MFN provision at issue in this analysis. We have also reviewed the Charter, the existing Investors' Rights Agreement dated July 9, 2021, the existing Right of First Refusal and Co-Sale Agreement dated July 9, 2021, the existing Voting Agreement dated July 9, 2021, and certain ancillary documents referenced herein.
II. BACKGROUND
A. The Proposed Convertible Note Bridge Financing
The Bridge Financing contemplates the issuance and sale of convertible promissory notes in an aggregate principal amount of $60,000,000 pursuant to a Note Purchase Agreement to be entered into by the Company and the Purchasers. The key economic and structural terms of the Bridge Notes, as set forth in the Term Sheet, are summarized below.
Interest. The Bridge Notes will bear simple interest at a rate of 6.00% per annum (600 basis points), calculated on the basis of a 365-day year and actual days elapsed. Interest will accrue from the date of issuance and will not be payable in cash prior to maturity or conversion; rather, accrued and unpaid interest will be added to the outstanding principal amount for purposes of conversion.
Maturity. The Bridge Notes will mature 24 months from the closing date of the Bridge Financing. Based on an anticipated closing date of January 15, 2024, the expected maturity date is January 15, 2026 (the "Maturity Date").
Conversion discount. The Bridge Notes will convert into equity securities of the Company at a 20% discount to the price per share paid by investors in the next Qualified Financing (as defined below), meaning that each noteholder will receive shares at a price equal to 80% of the price per share paid by the Series D investors.
Valuation Cap. The Bridge Notes will include a valuation cap of $750,000,000 on a pre-money basis (the "Valuation Cap"). The Valuation Cap provides a ceiling on the conversion price, ensuring that noteholders receive a minimum ownership percentage regardless of the price at which the Qualified Financing is priced.
Qualified Financing. A "Qualified Financing" is defined as a bona fide equity financing of the Company in which the Company raises at least $80,000,000 in new equity capital (exclusive of any amounts converted from the Bridge Notes), at a pre-money valuation to be determined (the "Series D Financing" or "Qualified Financing").
Conversion Price. The conversion price per share applicable to the Bridge Notes (the "Conversion Price") will be the lower of: (a) 80% of the price per share in the Qualified Financing (i.e., the discounted price), or (b) the price per share implied by the Valuation Cap divided by the number of fully diluted shares outstanding (i.e., the "Cap Price"). Based on the Company's current fully diluted share count of approximately 48,500,000 shares, the Cap Price is approximately $15.46 per share ($750,000,000 ÷ 48,500,000 = ~$15.4639). The Conversion Price thus provides a "best of" mechanic that protects noteholders in both up-round and down-round scenarios.
Automatic Conversion. The Bridge Notes will convert automatically into shares of the series of preferred stock issued in the Qualified Financing, at the Conversion Price, upon the closing of the Qualified Financing.
Optional Conversion or Repayment at Maturity. If no Qualified Financing has occurred by the Maturity Date, each holder of Bridge Notes may elect either (i) to convert the outstanding principal and accrued interest into shares of the Company's most recently issued series of preferred stock at the Cap Price, or (ii) to demand repayment of the outstanding principal and accrued interest in cash.
Change of Control. Upon a "Change of Control" (as defined in the Term Sheet to include a merger, acquisition, or sale of substantially all assets), each holder of Bridge Notes will receive the greater of: (a) 2.0 times the outstanding principal amount of such holder's Bridge Note plus all accrued and unpaid interest thereon, or (b) the number of shares of common stock that would be issuable upon conversion of such holder's Bridge Note at the Cap Price, multiplied by the per-share consideration payable to common stockholders in the Change of Control transaction.
Subordination. The Bridge Notes will be subordinated in right of payment to the Company's existing venture debt facility — specifically, the $15,000,000 term loan and revolving credit facility with Kelvantis Lending Corp. pursuant to the Loan and Security Agreement dated August 15, 2022, as amended (the "Kelvantis Facility"). The subordination terms will be set forth in an intercreditor agreement or subordination agreement to be negotiated with Kelvantis.
Purchaser Syndicate. The Bridge Notes will be purchased by the following investors in the amounts indicated:
B. The Most Favored Nation Provision
The Term Sheet includes a Most Favored Nation ("MFN") provision applicable to the Bridge Notes. As proposed, the MFN clause provides that if, at any time during the period from the closing of the Bridge Financing until the conversion or repayment of the Bridge Notes, the Company issues any subsequent convertible promissory notes or SAFEs (collectively, "Subsequent Convertible Instruments") on terms that are more favorable to the holders of such Subsequent Convertible Instruments than the terms of the Bridge Notes, each holder of the Bridge Notes will have the right, upon written notice to the Company within a specified election period after receiving notice of such issuance, to adopt any or all of the more favorable terms.
The MFN clause is intended to be broadly protective. Under the Term Sheet, the following categories of terms are expressly identified as subject to the MFN right:
• A lower valuation cap than the $750,000,000 Valuation Cap;
• A greater conversion discount than the 20% discount;
• A lower interest rate than the 6.00% rate (although this would be unusual as a "more favorable" term, since a lower rate is less favorable to the holder; we interpret this as referring to any term that is more favorable from the holder's economic perspective, which could include a higher interest rate);
• More favorable Change of Control provisions, such as a higher multiple or a more protective conversion mechanic;
• Additional rights not contained in the Bridge Notes, including but not limited to information rights, participation rights in subsequent financings, Board observer rights, or governance rights; or
• Any other term that, in the reasonable determination of the holder, is economically more favorable to the holders of the Subsequent Convertible Instruments than the corresponding term (or absence thereof) in the Bridge Notes.
The MFN right operates during the period from the closing of the Bridge Financing until the earlier of (i) the conversion of the Bridge Notes upon a Qualified Financing or (ii) the Maturity Date. After conversion or repayment, the MFN provision ceases to have any force or effect, as the Bridge Notes will have been extinguished.
The commercial rationale for the MFN provision is straightforward: it protects the early bridge investors — particularly Ridgeline IV as lead — against the risk that the Company will subsequently issue convertible instruments on more favorable terms, thereby disadvantaging the Bridge Note holders relative to later entrants. In the current financing environment, where bridge financings are frequently followed by additional bridge rounds or SAFE issuances prior to a priced equity round, the MFN provision has become a near-standard market term for lead investors in convertible note rounds of this size.
C. Skybridge's Existing Capital Structure and Anti-Dilution Protections
Skybridge Fintech Ltd. was incorporated under the laws of the State of Delaware in 2017 (EIN 83-2147605; Delaware Secretary of State File Number 6384291). The Company is a C corporation for federal income tax purposes.
Financing History. The Company has completed three prior rounds of preferred stock financing:
• Series A Preferred Stock: Issued to Crestpoint Seed Partners, L.P. in the Company's seed/Series A financing round. The Series A round represented the Company's initial institutional venture capital investment.
• Series B Preferred Stock: Issued to Halcyon Growth Equity, L.P. in the Company's Series B financing round. Halcyon led the Series B round and has been an active investor and Board observer since that time.
• Series C Preferred Stock: Issued to Ridgeline Ventures Fund III, L.P. and Beacon Hill Capital Partners, LLC in the Company's Series C financing round, which closed in July 2021 at a $620,000,000 post-money valuation. The Series C round was the Company's most recent priced equity financing and established the current reference valuation for the Company's preferred stock.
Fully Diluted Shares Outstanding. As of the date of this memorandum, the Company has approximately 48,500,000 shares outstanding on a fully diluted basis, inclusive of all shares of common stock outstanding, all shares of preferred stock outstanding on an as-converted basis, all shares reserved for issuance upon exercise of outstanding stock options under the Company's 2018 Equity Incentive Plan (as amended), and any shares issuable upon exercise of outstanding warrants.
409A Valuation. The Company's most recent independent fair market value determination under Section 409A of the Internal Revenue Code was completed by Atlas Valuation Services, Inc. and is dated September 15, 2023. The 409A valuation determined a fair market value per share of common stock of $8.42.
Anti-Dilution Protections. The Charter contains weighted-average anti-dilution provisions applicable to each series of preferred stock (Series A, Series B, and Series C). These provisions are structured as broad-based weighted-average anti-dilution adjustments, which is customary for venture-backed companies at this stage of development.
Under the broad-based weighted-average formula, upon the issuance of "Additional Shares of Common Stock" (as defined in the Charter) at a price per share below the then-applicable conversion price for any series of preferred stock, the conversion price for that series is adjusted downward in accordance with the formula set forth in Section IV.A below. The broad-based weighted-average mechanic is more moderate than a full ratchet approach, as it weights the dilutive impact of the new issuance against the total number of shares outstanding on a fully diluted basis, thereby tempering the magnitude of the adjustment.
The anti-dilution provisions are charter-level protections that operate independently of any contractual provisions in the Bridge Notes or the Note Purchase Agreement. They are triggered by the actual issuance of Additional Shares of Common Stock, not by the execution of agreements to issue such shares in the future.
III. LEGAL ANALYSIS: THE MFN PROVISION IN DETAIL
A. Mechanics of the MFN Provision
The MFN provision, as contemplated in the Term Sheet and as we anticipate drafting it in the Note Purchase Agreement, operates as follows:
Applicability. The MFN right applies exclusively to the Bridge Notes issued in the Bridge Financing. It does not apply to any other securities of the Company, including the existing preferred stock, common stock, or any securities that may be issued in the Qualified Financing. The MFN is a creature of contract, embodied in the Note Purchase Agreement, and confers rights solely on the holders of Bridge Notes.
Triggering Event. The MFN is triggered by the Company's issuance of Subsequent Convertible Instruments — that is, convertible promissory notes or SAFEs — after the closing of the Bridge Financing but prior to the conversion or repayment of the Bridge Notes. Importantly, the MFN is not triggered by equity issuances, whether in a priced round (such as the Qualified Financing) or otherwise. Equity issuances are governed separately by the anti-dilution provisions in the Charter and by preemptive rights under the Investors' Rights Agreement. This distinction is important: the MFN and the anti-dilution protections are designed to address different categories of subsequent issuances, but as we discuss in Section V below, they can interact when a single course of conduct (e.g., a subsequent bridge financing followed by a priced round) triggers both mechanisms sequentially.
Holder Election. Upon the issuance of any Subsequent Convertible Instruments, the Company is required to provide written notice to each holder of Bridge Notes within a specified period (typically five to ten business days) after the closing of such issuance. The notice must describe the material terms of the Subsequent Convertible Instruments. Each holder then has the right, exercisable within a specified election period (typically 15 to 30 days after receipt of notice), to elect to adopt any or all of the more favorable terms applicable to the Subsequent Convertible Instruments. The election is made on a term-by-term basis; a holder may, for example, adopt a lower valuation cap from the Subsequent Convertible Instruments without also adopting a different interest rate.
Effect of MFN Election. When a holder exercises the MFN right, the terms of such holder's Bridge Note are deemed amended to reflect the more favorable terms adopted. For example, if the Company issues a subsequent SAFE with a $500,000,000 valuation cap, and a Bridge Note holder elects to adopt that lower cap, the Valuation Cap applicable to such holder's Bridge Note would be reduced from $750,000,000 to $500,000,000. The MFN adjustment modifies the terms of the existing Bridge Notes; it does not create new securities, nor does it require the issuance of replacement notes (though the Company may be required to issue amended and restated notes reflecting the adjusted terms, depending on the mechanics specified in the Note Purchase Agreement). This is a significant point for purposes of the interaction analysis: the MFN adjustment itself is not a securities issuance and does not independently trigger anti-dilution provisions.
B. Scope and Limitations
In our drafting of the MFN provision, we recommend including the following standard carve-outs, which are typical in convertible note transactions of this nature and which are consistent with the market terms observed in comparable bridge financings:
(i) Equity Incentive Plan Issuances. The MFN should not be triggered by the issuance of stock options, restricted stock, restricted stock units, or other equity awards under the Company's 2018 Equity Incentive Plan (as amended) or any successor equity incentive plan approved by the Company's Board of Directors and stockholders.
(ii) Conversion Shares. The MFN should not be triggered by the issuance of shares of preferred stock or common stock upon conversion of the Bridge Notes themselves, nor upon conversion of any Subsequent Convertible Instruments.
(iii) Qualified Financing Shares. The MFN should not be triggered by the issuance of shares of preferred stock in the Qualified Financing. The Qualified Financing is an equity issuance, not a convertible instrument issuance, and falls outside the scope of the MFN in any event, but an express carve-out provides additional clarity.
(iv) Kelvantis-Related Instruments. The MFN should not be triggered by the issuance of warrants or other equity-linked instruments to Kelvantis Lending Corp. in connection with the Kelvantis Facility, whether pursuant to the existing Loan and Security Agreement or any amendment, modification, or refinancing thereof.
Duration. The MFN right will terminate upon the earlier of (i) the conversion of the Bridge Notes upon a Qualified Financing, (ii) the conversion or repayment of the Bridge Notes at the Maturity Date, or (iii) the acceleration of the Bridge Notes upon an event of default. Upon termination, no further MFN rights may be exercised, and any previously made MFN elections will remain in effect with respect to the conversion terms of the adjusted Bridge Notes.
Contractual vs. Charter-Level Distinction. We emphasize that the MFN is a contractual right contained in the Note Purchase Agreement. It is not a charter-level protection. This distinction is relevant because the MFN may be amended or waived by the contractual parties (i.e., the Company and the requisite holders of Bridge Notes) without the need for a charter amendment or stockholder vote. By contrast, the anti-dilution provisions are contained in the Charter and may only be amended with the approval of the requisite holders of each affected series of preferred stock, voting as separate classes.
IV. LEGAL ANALYSIS: EXISTING ANTI-DILUTION PROTECTIONS
A. Structure of the Weighted-Average Anti-Dilution Provisions
The Charter provides that upon the issuance of Additional Shares of Common Stock at a price per share below the then-effective conversion price for any series of preferred stock, the conversion price for that series is adjusted downward pursuant to a broad-based weighted-average formula. The formula, as set forth in the Charter, is as follows:
CP₁ = CP₀ × (A + B) / (A + C)
Where:
CP₁ = the adjusted conversion price immediately after the new issuance;
CP₀ = the conversion price in effect immediately prior to the new issuance;
A = the number of shares of common stock outstanding immediately prior to the new issuance, calculated on an as-converted, fully diluted basis (including all shares of common stock issuable upon conversion of all outstanding preferred stock, exercise of all outstanding options and warrants, and conversion of all outstanding convertible instruments);
B = the number of shares of common stock that would have been issuable if the aggregate consideration received by the Company for the new shares had been received at the conversion price in effect immediately prior to the new issuance (i.e., aggregate consideration ÷ CP₀);
C = the number of new shares of common stock actually issued (or deemed issued) in the new issuance.
The effect of this formula is intuitive: the lower the price of the new issuance relative to the existing conversion price, the greater the downward adjustment to the conversion price — but the adjustment is tempered by weighting against the entire fully diluted capitalization (the "broad-based" element). This is in contrast to a "narrow-based" weighted-average formula, which would use only the number of shares of the affected series in the denominator, producing a more aggressive adjustment, or a "full ratchet" approach, which would reduce the conversion price to the new issuance price regardless of the number of new shares issued.
The broad-based weighted-average approach is the most common anti-dilution mechanic in venture capital financings at the Company's stage and is generally viewed as a reasonable compromise between protecting preferred holders from dilution and preserving value for common stockholders and founders.
B. What Constitutes a Triggering Issuance
Under the Charter, the anti-dilution adjustment is triggered by the issuance of "Additional Shares of Common Stock", which is a defined term. "Additional Shares of Common Stock" generally includes any shares of common stock, or any securities convertible into or exercisable for shares of common stock, issued by the Company after the original issuance date of each series of preferred stock, with certain standard exemptions.
The following categories of issuances are typically exempted from the definition of Additional Shares of Common Stock and therefore do not trigger anti-dilution adjustments:
(i) Shares of common stock (or options to purchase common stock) issued to employees, officers, directors, consultants, or advisors of the Company pursuant to equity incentive plans or arrangements approved by the Board of Directors (including the requisite preferred director approval);
(ii) Shares of common stock issued upon conversion of preferred stock in accordance with the Charter;
(iii) Shares of common stock issued as a stock dividend or upon a stock split, subdivision, or similar recapitalization;
(iv) Shares of common stock issued upon exercise or conversion of options, warrants, or other convertible instruments outstanding as of the original issuance date of the applicable series of preferred stock; and
(v) Shares of common stock issued in connection with certain strategic transactions (e.g., joint ventures, licensing arrangements, equipment financing, or debt financing), in each case as approved by the Board of Directors (including the requisite preferred director approval).
Key Question: Does the Issuance of the Bridge Notes Itself Trigger Anti-Dilution?
A threshold question is whether the issuance of the Bridge Notes in the Bridge Financing constitutes an issuance of Additional Shares of Common Stock that would trigger anti-dilution adjustments at the time of issuance. We conclude that, under the standard construction of the Charter's anti-dilution provisions and consistent with prevailing Delaware law and venture capital market practice, the answer is no — the issuance of the Bridge Notes does not constitute an issuance of equity at the time the notes are executed and delivered.
Convertible debt instruments are treated as debt, not equity, until the conversion event occurs. The anti-dilution adjustment is triggered at the time of conversion, when shares of common stock (or preferred stock convertible into common stock) are actually issued at the Conversion Price. If the Conversion Price at the time of conversion is below the then-effective conversion price of any series of preferred stock, the anti-dilution provisions would apply at that point. This timing distinction is critical to the interaction analysis set forth in Section V below.
We note, however, that some charter provisions contain a "deemed issuance" clause that treats convertible instruments as having been issued at the time of execution, at a deemed issuance price equal to the conversion price. We have reviewed the Charter and confirm that the Company's anti-dilution provisions follow the standard approach: the triggering event is the actual issuance of shares, not the issuance of the convertible instrument.
C. Analysis by Series
The impact of the anti-dilution provisions depends on the relationship between the Conversion Price of the Bridge Notes and the then-effective conversion price of each series of preferred stock. We analyze each series below.
Series A Preferred Stock (Crestpoint Seed Partners, L.P.). The Series A Preferred Stock was issued in the Company's earliest institutional financing round. The original issuance price — and therefore the initial conversion price — is the lowest of the three series. Moreover, the Series A conversion price may have already been adjusted downward as a result of the Series B and Series C issuances, depending on the pricing of those rounds relative to the Series A conversion price. Based on our review of the Company's capitalization records, we believe it is likely that the Bridge Note Conversion Price (whether at the Cap Price of approximately $15.46 per share or at the 20% discount to the Series D price) will be above the current effective conversion price of the Series A Preferred Stock. If this is the case, the issuance of shares upon conversion of the Bridge Notes would not trigger an anti-dilution adjustment for the Series A Preferred Stock.
Series B Preferred Stock (Halcyon Growth Equity, L.P.). The Series B Preferred Stock was issued at a higher price per share than the Series A. The Series B conversion price, as originally established or as subsequently adjusted, is higher than the Series A conversion price. Whether the Bridge Note Conversion Price would fall below the Series B conversion price depends on the specific pricing of the Series B round and any subsequent adjustments. We recommend that David Lindstrom and Marcus Tillman confirm the current effective conversion price of the Series B Preferred Stock so that we can perform a definitive comparison. It is worth noting that Halcyon, the sole holder of Series B Preferred Stock, is also committing $5,000,000 as a Purchaser of Bridge Notes. This dual position creates an alignment consideration: Halcyon benefits from the conversion economics and MFN protection of the Bridge Notes, but would be diluted by anti-dilution adjustments on its Series B Preferred Stock if the Conversion Price falls below the Series B conversion price. The net economic impact on Halcyon depends on the relative magnitudes of these two effects.
Series C Preferred Stock (Ridgeline Ventures Fund III, L.P. and Beacon Hill Capital Partners, LLC). The Series C Preferred Stock was issued in July 2021 at a $620,000,000 post-money valuation, making the Series C conversion price the highest of the three series. The Bridge Note Valuation Cap of $750,000,000 pre-money is above the $620,000,000 post-money valuation at which the Series C round was priced. Accordingly, the Cap Price of approximately $15.46 per share should be at or above the Series C conversion price, assuming that the Series C conversion price was established based on the $620,000,000 post-money valuation. In this scenario, conversion at the Cap Price would not trigger anti-dilution for the Series C Preferred Stock.
However, if conversion occurs at the 20% discount to the Series D price, and if the Series D price (after application of the discount) is lower than the Series C conversion price, anti-dilution would be triggered for the Series C Preferred Stock. This scenario is analyzed in greater detail in Section V.B below.
We further note that both Ridgeline III and Beacon Hill, the Series C holders, are also Purchasers in the Bridge Financing (through Ridgeline IV, an affiliate of Ridgeline III, and directly in the case of Beacon Hill). This dual-hat dynamic is discussed in Section VII below.
V. INTERACTION SCENARIOS
The following scenarios illustrate the range of potential interactions between the MFN provision and the anti-dilution protections. These scenarios are not exhaustive but are designed to capture the most likely outcomes and the most significant risk vectors.
A. Scenario 1: Qualified Financing (Series D) at or Above the Valuation Cap
Assumptions. The Company completes the Series D Financing at a pre-money valuation of $750,000,000 or higher. No Subsequent Convertible Instruments are issued between the closing of the Bridge Financing and the closing of the Series D Financing.
Bridge Note Conversion. The Bridge Notes convert automatically upon the closing of the Series D Financing. Because the Series D pre-money valuation equals or exceeds the Valuation Cap, the 20% discount to the Series D price per share produces a Conversion Price that is at or above the Cap Price of approximately $15.46 per share. The Bridge Notes therefore convert at the discounted Series D price.
Anti-Dilution Impact. Because the Conversion Price exceeds all existing conversion prices (Series A, Series B, and Series C), no anti-dilution adjustment is triggered for any series of preferred stock. The issuance of shares upon conversion of the Bridge Notes is at a price above all applicable thresholds.
MFN Impact. The MFN provision is irrelevant in this scenario because no Subsequent Convertible Instruments were issued prior to conversion. The MFN right terminates upon conversion without ever having been triggered.
Assessment. This is the cleanest outcome with no interaction issues. If the Company's trajectory supports a Series D round at or above the Valuation Cap, the structural risks identified in this memorandum do not materialize. We note, however, that market conditions and company performance between now and the anticipated Series D timing (Q3-Q4 2024) are inherently uncertain, and the Company should not rely exclusively on this favorable scenario.
B. Scenario 2: Qualified Financing (Series D) Below the Series C Price but Above the Valuation Cap Implied Price
Assumptions. The Company completes the Series D Financing at a pre-money valuation that is below the Series C post-money valuation of $620,000,000 (representing a "down round" relative to the Series C) but above the level at which the 20% discounted Series D price would fall below the Cap Price. In other words, the Series D is priced such that the 80% of the Series D price per share exceeds the Cap Price of approximately $15.46 per share.
Bridge Note Conversion. The Bridge Notes convert at the Cap Price of approximately $15.46 per share, because the Cap Price is lower than the discounted Series D price. This conversion results in the issuance of shares at $15.46 per share.
Anti-Dilution Impact. Whether the issuance of shares at $15.46 per share triggers anti-dilution depends on the specific conversion prices of each series of preferred stock:
• Series A: As discussed above, the Series A conversion price is likely below $15.46 per share. No anti-dilution trigger.
• Series B: Depends on the Series B conversion price. If the Series B conversion price is below $15.46 per share, no trigger. If above, the broad-based weighted-average adjustment applies.
• Series C: The Series C conversion price, based on the $620,000,000 post-money valuation, must be compared to the Cap Price. If the $750,000,000 pre-money Valuation Cap produces a Cap Price that is at or above the Series C conversion price, no trigger. However, there is a meaningful range of outcomes in which the Cap Price is modestly below the Series C conversion price, particularly if the fully diluted share count used to calculate the Cap Price differs from the share count used to calculate the original Series C conversion price.
Circularity Risk. If the issuance of shares upon conversion of the Bridge Notes at $15.46 per share triggers an anti-dilution adjustment for the Series C Preferred Stock, the adjustment increases the number of shares issuable upon conversion of the Series C Preferred Stock. This increase in the fully diluted share count, if the "fully diluted capitalization" used to calculate the Cap Price is defined dynamically (i.e., as of the time of conversion, inclusive of all anti-dilution adjustments), would increase the denominator of the Cap Price calculation, thereby decreasing the Cap Price. The decreased Cap Price would in turn produce a larger anti-dilution adjustment, which would further increase the denominator, and so on — creating a circular reference that must be resolved either iteratively or through a definitional fix in the Bridge Notes (as discussed in Section VI below).
Assessment. Scenario 2 presents a moderate interaction risk, primarily related to the circularity problem described above. The magnitude of the dilutive impact depends on the precise relationship between the Cap Price and the Series C conversion price, and on the definitional treatment of "fully diluted capitalization" in the Bridge Notes.
C. Scenario 3: No Qualified Financing; Optional Conversion at Maturity at the Valuation Cap
Assumptions. No Qualified Financing occurs by the Maturity Date of January 15, 2026. Holders of Bridge Notes elect to convert their notes at the Cap Price of approximately $15.46 per share, rather than demanding cash repayment.
Bridge Note Conversion. The Bridge Notes convert into shares of the Company's most recently issued series of preferred stock (Series C Preferred Stock, absent a subsequent priced round) at the Cap Price. This results in the issuance of new shares of Series C Preferred Stock (or a separate sub-series thereof) at $15.46 per share.
Anti-Dilution Impact. The analysis is substantially the same as in Scenario 2. If $15.46 per share is below the effective conversion price of the Series B or Series C Preferred Stock, anti-dilution adjustments are triggered. The circularity risk described in Scenario 2 is equally present.
Additional Consideration. If holders elect cash repayment instead of conversion, no equity issuance occurs and no anti-dilution adjustment is triggered. The Company's obligation is limited to repayment of principal and accrued interest in cash. However, the Company's ability to repay $60,000,000 in principal (plus approximately $7,200,000 in accrued interest over 24 months at 6.00% simple interest) in cash at maturity — while remaining subordinated to the Kelvantis Facility — should be evaluated in the context of the Company's projected cash position and liquidity. If the Company lacks sufficient cash to repay, holders may be effectively compelled to convert, making the anti-dilution interaction unavoidable.
Assessment. Scenario 3 represents a similar risk profile to Scenario 2, with the additional complication that the absence of a Qualified Financing may indicate broader business challenges that increase the likelihood of a down-round event in a subsequent financing.
D. Scenario 4: MFN Triggered by Subsequent Bridge or SAFE Issuance
Assumptions. After the closing of the Bridge Financing but before the conversion or repayment of the Bridge Notes, the Company issues Subsequent Convertible Instruments — for example, a second bridge note or a SAFE — with a lower valuation cap of $500,000,000. The holders of the Bridge Notes exercise their MFN rights and adopt the lower valuation cap.
MFN Adjustment. The Valuation Cap applicable to the Bridge Notes is reduced from $750,000,000 to $500,000,000. The Cap Price is recalculated as $500,000,000 ÷ 48,500,000 shares = approximately $10.31 per share (subject to any changes in the fully diluted share count between the closing of the Bridge Financing and the MFN adjustment).
Bridge Note Conversion. Upon a subsequent Qualified Financing, or at maturity if no Qualified Financing occurs, the Bridge Notes convert at the lower of (a) 80% of the Series D price or (b) the adjusted Cap Price of approximately $10.31 per share. The likelihood that the adjusted Cap Price is the binding constraint is significantly higher at $500,000,000 than at $750,000,000, meaning that conversion at $10.31 per share is the most probable outcome.
Anti-Dilution Impact. Conversion at approximately $10.31 per share is substantially more likely to fall below the conversion prices of both the Series B and Series C Preferred Stock. In addition, the Subsequent Convertible Instruments (the second bridge notes or SAFEs) will themselves convert into equity at the lower valuation, independently triggering anti-dilution adjustments when that conversion occurs. The result is a compounding dilution effect:
(1) The issuance of the Subsequent Convertible Instruments, upon conversion, triggers anti-dilution adjustments for the affected series of preferred stock.
(2) The MFN-adjusted Bridge Notes convert at the lower Cap Price of approximately $10.31 per share, further triggering anti-dilution adjustments (or increasing the magnitude of adjustments already triggered by the Subsequent Convertible Instruments).
(3) Each round of anti-dilution adjustments increases the fully diluted share count, which, if the Cap Price is calculated dynamically, further decreases the Cap Price, exacerbating the circularity problem described in Scenario 2.
Impact on Founders and Common Stockholders. The compounding dilution effect is most acutely felt by common stockholders, including the Company's founders, Arjun Mehta and Elena Vasquez. As the fully diluted share count increases through anti-dilution adjustments, the proportional ownership of common stockholders decreases. In a severe down-round scenario with MFN-adjusted bridge notes and multiple anti-dilution triggers, the founders' ownership could be significantly diluted.
Assessment. Scenario 4 represents the most complex interaction and the greatest dilution risk to existing preferred holders and common stockholders. This scenario is also the most likely to arise in adverse market conditions, precisely when the Company is most vulnerable to dilution. We recommend that the Company's Board and management team understand this scenario thoroughly and take the mitigating steps described in Section IX below.
E. Scenario 5: MFN Triggered and Change of Control Occurs
Assumptions. The MFN has been triggered by a Subsequent Convertible Instrument issuance, and the Bridge Notes have been adjusted to reflect more favorable terms (e.g., a lower Valuation Cap of $500,000,000). A Change of Control transaction is then proposed or consummated prior to the conversion or maturity of the Bridge Notes.
Change of Control Treatment. Each holder of Bridge Notes receives the greater of (a) 2.0 times the outstanding principal amount plus all accrued and unpaid interest, or (b) the amount payable upon conversion at the (now adjusted) Cap Price. If the MFN-adjusted Cap Price is lower (e.g., $10.31 per share instead of $15.46 per share), the number of shares issuable upon conversion is higher, which may make the conversion value more favorable to the holders than the 2.0x multiple in scenarios where the per-share consideration in the Change of Control transaction is sufficiently high.
For example, if a Bridge Note holder holds a note with $10,000,000 in principal (plus, say, $600,000 in accrued interest), the 2.0x multiple produces $21,200,000. At a Cap Price of $10.31 per share, the same $10,600,000 converts into approximately 1,028,127 shares. If the per-share merger consideration exceeds approximately $20.62 ($21,200,000 ÷ 1,028,127), the conversion option is more favorable than the 2.0x multiple.
Anti-Dilution Impact. In a Change of Control scenario, the Bridge Notes are either repaid at the 2.0x multiple or converted into equity, at the holder's election (or as determined by the terms of the note). If holders elect the 2.0x multiple, no equity conversion occurs and no anti-dilution adjustment is triggered. If holders elect conversion, the analysis is the same as in Scenarios 2 through 4 — anti-dilution may be triggered depending on the relationship between the Conversion Price and the existing preferred conversion prices.
Merger Consideration Waterfall. Even if anti-dilution is not technically triggered in the Change of Control (because no conversion into permanent equity occurs), the Change of Control premium and the fully diluted share calculation in the merger consideration waterfall are affected by the existence of the MFN-adjusted Bridge Notes. The waterfall analysis — which determines the per-share distribution of merger consideration among common stockholders, preferred stockholders (with their respective liquidation preferences), and convertible instrument holders — must account for the Bridge Notes as either (i) debt claims entitled to the 2.0x premium or (ii) as-converted equity claims, depending on the election. The MFN-adjusted terms change the magnitude of both the debt claim and the as-converted equity claim, which can materially affect the distribution to other security holders.
Assessment. Scenario 5 introduces additional complexity into the merger consideration waterfall but does not create the same circularity risks as Scenarios 2 through 4. The primary risk in this scenario is that the MFN-adjusted Bridge Notes consume a disproportionate share of the merger consideration, to the detriment of common stockholders and, potentially, junior preferred stockholders.
VI. CIRCULARITY AND DEFINITIONAL ISSUES
A. The Fully Diluted Share Count Problem
As illustrated in Scenarios 2, 3, and 4, the interaction between the Bridge Note conversion mechanics and the anti-dilution provisions can create a circularity problem when the Valuation Cap conversion price is defined as a function of the fully diluted share count, and the fully diluted share count is itself affected by anti-dilution adjustments that are triggered by the conversion.
The mechanics of the circularity are as follows:
1. The Cap Price is calculated by dividing the Valuation Cap ($750,000,000, or $500,000,000 if MFN-adjusted) by the number of fully diluted shares outstanding.
2. If the Cap Price is below the conversion price of any series of preferred stock, conversion at the Cap Price triggers a weighted-average anti-dilution adjustment for that series.
3. The anti-dilution adjustment reduces the conversion price of the affected series, which increases the number of shares issuable upon conversion of that series on an as-converted basis.
4. The increased number of as-converted shares increases the fully diluted share count.
5. The increased fully diluted share count, if used as the denominator in the Cap Price calculation, decreases the Cap Price.
6. The decreased Cap Price may trigger additional anti-dilution adjustments, or increase the magnitude of existing adjustments, restarting the cycle at step 2.
This circularity is a well-recognized problem in convertible note transactions with valuation caps, particularly when the issuer's charter contains anti-dilution provisions. The circularity does not produce an infinite loop — it converges to a fixed point through iterative calculation — but the iterative process can be cumbersome and can produce results that differ materially from the parties' initial expectations.
Recommendation. We recommend that the Note Purchase Agreement and the form of Bridge Note define "fully diluted capitalization" (or the equivalent term used in the Cap Price calculation) to be calculated on one of the following bases, in order to break the circularity:
Option 1: Fixed-Date Measurement. Define the fully diluted share count as the number of shares outstanding on a fully diluted basis as of a fixed date — for example, as of immediately prior to the closing of the Qualified Financing (or, in the case of conversion at maturity, as of the Maturity Date) — without giving effect to any anti-dilution adjustments triggered by the conversion of the Bridge Notes themselves.
Option 2: Pre-Adjustment Basis. Define the fully diluted share count to be calculated on a "pre-adjustment" basis, excluding the effect of any anti-dilution adjustments triggered by the issuance of shares upon conversion of the Bridge Notes or any other convertible instruments converting concurrently.
Option 3: Company-Provided Certification. Require the Company to certify the fully diluted share count as of a specified measurement date, with such certification being binding on the parties for purposes of the Cap Price calculation, subject to adjustment only for manifest error.
Each of these options effectively "freezes" the denominator of the Cap Price calculation, preventing the circular feedback loop. We recommend Option 1 or Option 2 as the most straightforward and commercially reasonable approaches. The choice between these options should be discussed with investor counsel, as the Purchasers may have preferences regarding the measurement methodology.
B. Interaction with Outstanding Options and Warrants
The fully diluted share count of approximately 48,500,000 shares includes, among other things, shares reserved for issuance upon exercise of outstanding stock options under the Company's 2018 Equity Incentive Plan (as amended) and any shares issuable upon exercise of outstanding warrants (including any warrants issued or issuable to Kelvantis Lending Corp. in connection with the Kelvantis Facility).
Between the closing of the Bridge Financing and the conversion event, the Company may grant additional stock options or issue additional warrants, which would increase the fully diluted share count and decrease the Cap Price. For example, if the Company grants options for an additional 1,000,000 shares between closing and conversion, the fully diluted share count would increase to approximately 49,500,000, and the Cap Price would decrease from approximately $15.46 to approximately $15.15 ($750,000,000 ÷ 49,500,000). While this decrease is modest in absolute terms, it illustrates the sensitivity of the Cap Price to changes in the fully diluted share count.
Recommendation. We recommend that the Note Purchase Agreement include a clear and detailed definition of "fully diluted capitalization" that specifies which categories of securities are included in the calculation. At a minimum, the definition should address:
(i) Outstanding shares of common stock;
(ii) Shares issuable upon conversion of all outstanding series of preferred stock (at their then-effective conversion prices, or at their original conversion prices if a pre-adjustment basis is used);
(iii) Shares issuable upon exercise of all outstanding and vested stock options (and, potentially, all outstanding options whether or not vested);
(iv) Shares issuable upon exercise of all outstanding warrants;
(v) Shares reserved but unissued under the equity incentive plan (the treatment of the "unallocated pool" is a negotiating point — Purchasers typically seek to include the full pool, which increases the denominator and decreases the Cap Price to their benefit);
(vi) Shares issuable upon conversion of the Bridge Notes themselves and any other outstanding convertible instruments.
We will coordinate with Priya Ramanathan and Marcus Tillman to confirm the precise composition of the 48,500,000 fully diluted share count and ensure that the definition in the Note Purchase Agreement is consistent with the Company's capitalization records.
VII. DUAL-HAT INVESTOR CONSIDERATIONS
Three of the four Purchasers in the Bridge Financing also hold existing preferred stock in the Company, creating dual-hat positions that warrant careful attention from a fiduciary, disclosure, and structural perspective.
Halcyon Growth Equity, L.P. Halcyon is the sole holder of the Company's Series B Preferred Stock and is committing $5,000,000 as a Purchaser of Bridge Notes. In its capacity as a holder of Series B Preferred Stock, Halcyon benefits from the anti-dilution protections in the Charter, which would adjust the Series B conversion price downward if shares are issued at a price below the Series B conversion price. In its capacity as a holder of Bridge Notes, Halcyon benefits from the MFN provision and the conversion economics of the Bridge Notes (including the 20% discount and the Valuation Cap). These interests can diverge: if the MFN is triggered and the Bridge Notes convert at a lower Cap Price, Halcyon benefits as a noteholder (receiving more shares per dollar of principal) but may be diluted as a Series B holder (if the anti-dilution adjustment does not fully offset the dilutive impact of the lower-priced issuance). The net economic impact on Halcyon depends on the relative magnitudes of its Series B position and its Bridge Note position.
Beacon Hill Capital Partners, LLC. Beacon Hill holds Series C Preferred Stock and is committing $15,000,000 as a Purchaser of Bridge Notes. The same dual-hat dynamic applies: Beacon Hill benefits from the Bridge Note conversion economics and MFN protection as a noteholder, and from anti-dilution protection as a Series C holder. Because the Series C conversion price is the highest of the three series, the likelihood of anti-dilution being triggered for the Series C is greater than for the Series A or Series B, and the potential magnitude of the adjustment is larger. Beacon Hill's $15,000,000 Bridge Note commitment is also more significant in absolute terms than Halcyon's $5,000,000 commitment, meaning that Beacon Hill's noteholder economics are proportionally more important to its overall position in the Company.
Ridgeline Ventures Fund III, L.P. / Ridgeline Ventures Fund IV, L.P. Fund III holds Series C Preferred Stock; Fund IV is the lead investor in the Bridge Financing, committing $30,000,000. Fund III and Fund IV are separate fund entities, but they share the same management company (Ridgeline Ventures Management IV, LLC) and the same general partner family. The investment professionals managing Fund III and Fund IV are substantially the same individuals. In this context, Fund IV's interest in favorable Bridge Note terms (including a robust MFN) may diverge from Fund III's interest in maintaining the value of its Series C investment. If anti-dilution is triggered by Bridge Note conversions, Fund III benefits from the downward adjustment to its Series C conversion price, receiving additional as-converted shares. However, the dilutive impact of the Bridge Note conversion on the overall capitalization may reduce the value of Fund III's preferred stock position on a mark-to-market basis.
The divergence of interests between Fund III and Fund IV is a recognized issue in the venture capital industry, and fund managers generally address it through internal conflict-of-interest policies, advisory committee approvals, and allocation procedures. From the Company's perspective, however, the relevant concern is ensuring that the Board is fully informed of these dual-hat positions when approving the Bridge Financing, and that any waivers of anti-dilution protections are obtained from disinterested holders or with full disclosure.
Recommendation. We recommend the following measures:
(i) Board Disclosure. The dual-hat positions of Halcyon, Beacon Hill, and the Ridgeline fund family should be prominently disclosed in the Board presentation materials prepared in connection with the Board's consideration and approval of the Bridge Financing. The disclosure should identify each dual-hat investor, the nature of its existing preferred stock holdings, its proposed Bridge Note commitment, and the potential for divergent interests.
(ii) Disclosure Schedule. The Note Purchase Agreement should include a disclosure schedule or exhibit that identifies the dual-hat positions and any potential conflicts of interest.
(iii) Waiver Mechanics. Any waiver of anti-dilution protection sought in connection with the Bridge Financing should be obtained from holders representing the requisite percentage under the Charter (typically a majority of the outstanding shares of the affected series, voting as a separate class). To the extent that a dual-hat investor's vote is necessary to achieve the requisite threshold, the Company should consider whether such investor should be treated as a "disinterested" holder for purposes of the waiver vote, and should seek separate consent or advice from independent Board members or outside counsel as appropriate.
(iv) Related-Party Transaction Procedures. The Bridge Financing may constitute a "related-party transaction" under the Company's corporate governance policies and under Delaware law, given the participation of existing preferred holders as Purchasers. The Board should follow its established procedures for reviewing and approving related-party transactions, including obtaining the approval of disinterested directors.
VIII. IMPACT ON PLANNED SERIES D
The Company plans to raise at least $80,000,000 in new equity capital in a Series D Preferred Stock financing in the Q3-Q4 2024 timeframe (the "Series D Financing"). The Series D Financing is expected to constitute the "Qualified Financing" under the Bridge Notes, triggering automatic conversion of the Bridge Notes into Series D Preferred Stock. The interaction between the Bridge Notes (including the MFN provision), the existing anti-dilution protections, and the Series D Financing warrants careful planning.
Series D Pricing and Bridge Note Conversion. The price per share of the Series D Preferred Stock will determine the Conversion Price of the Bridge Notes, subject to the Valuation Cap. If the Series D pre-money valuation is at or above $750,000,000, the Bridge Notes convert at the discounted Series D price (80% of the Series D price per share), which will be at or above the Cap Price. If the Series D pre-money valuation is below $750,000,000, the Bridge Notes convert at the Cap Price of approximately $15.46 per share (or lower, if MFN adjustments have been made).
Anti-Dilution Triggers. As discussed in Scenario 2, if the Conversion Price of the Bridge Notes upon a Series D Financing is below the conversion price of any series of preferred stock, anti-dilution adjustments will be triggered. In addition, the Series D Financing itself may trigger anti-dilution adjustments if the Series D price per share is below the conversion prices of existing preferred stock. This is the definition of a "down round," and it is independently governed by the anti-dilution provisions regardless of the Bridge Notes.
Cumulative Dilution. The more Bridge Notes outstanding at the time of conversion — including any notes issued in subsequent bridge rounds that trigger MFN adjustments — the greater the aggregate number of shares issued upon conversion. Each share issued upon conversion at a price below the existing preferred conversion prices contributes to the magnitude of the anti-dilution adjustment. The cumulative dilutive effect on existing stockholders can be substantial in a down-round Series D scenario, particularly if:
(a) The Bridge Notes convert at the MFN-adjusted Cap Price (e.g., $10.31 per share at a $500M cap);
(b) The Subsequent Convertible Instruments also convert at a low price;
(c) The Series D is priced below the Series C conversion price; and
(d) Anti-dilution adjustments are triggered for both the Series B and Series C Preferred Stock.
In this compound scenario, the fully diluted share count at the time of the Series D closing could be significantly higher than the current 48,500,000, with the founders' and common stockholders' proportional ownership correspondingly reduced.
Series D Anti-Dilution. Investors in the Series D Financing will almost certainly negotiate for their own anti-dilution protections, which would apply to the Series D Preferred Stock in the event of future down-round issuances. If the Company subsequently issues equity at a price below the Series D price (e.g., in a Series E or in a subsequent bridge round), the Series D anti-dilution would be triggered, compounding the dilutive effects described above for the existing preferred series.
Recommendation. We recommend that the Company's finance team, led by David Lindstrom and Marcus Tillman, prepare comprehensive dilution scenario models for the anticipated Series D Financing across a range of pre-money valuations, from $500,000,000 to $1,000,000,000 (in $50,000,000 increments). These models should show:
(i) The number of shares issued upon conversion of the Bridge Notes at each valuation level;
(ii) The anti-dilution adjustments (if any) triggered for each series of preferred stock at each valuation level;
(iii) The impact of MFN adjustments (if applicable) on the conversion share count;
(iv) The resulting fully diluted capitalization table at each valuation level, including the proportional ownership of founders, common stockholders, each series of preferred stock, and Bridge Note holders; and
(v) The effective price per share received by each category of security holder in the Series D, taking into account all adjustments.
These models should be shared with the Board of Directors and the management team in advance of any substantive Series D negotiations, and should be updated periodically as the Company's capitalization and financing timeline evolve.
IX. RECOMMENDATIONS
Based on the foregoing analysis, we respectfully recommend that the Company take the following steps in connection with the drafting and negotiation of the Bridge Financing documentation:
1. Definitional Clarity. Define "fully diluted capitalization" (or the equivalent term) precisely in the Note Purchase Agreement and in the form of Bridge Note. The definition should specify the measurement date and methodology to avoid circularity with anti-dilution adjustments triggered by the conversion of the Bridge Notes. We recommend using either a fixed-date measurement (e.g., immediately prior to the Qualified Financing) or a pre-adjustment basis that excludes the effect of anti-dilution adjustments triggered by the conversion itself. The specific definitional language should be coordinated with investor counsel and reviewed by all parties prior to execution. This is, in our view, the single most important structural safeguard against unintended interaction effects.
2. MFN Scope Limitations. Consider narrowing the MFN provision to exclude certain categories of immaterial or non-dilutive issuances. At a minimum, ensure that the MFN does not apply to equity issuances (which are separately governed by anti-dilution and preemptive rights) and confirm the inclusion of the standard carve-outs descr