PRIVILEGED & CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGE ATTORNEY WORK PRODUCT
CALDERWOOD & HARKNESS LLP Attorneys at Law
600 Lexington Avenue New York, NY 10022 Tel: (212) 554-7800
MEMORANDUM
November 10, 2023
Date: November 10, 2023
To: Arjun Mehta, Chief Executive Officer & Co-Founder, Skybridge Fintech Ltd. David Lindstrom, Chief Financial Officer, Skybridge Fintech Ltd. Priya Ramanathan, General Counsel, Skybridge Fintech Ltd.
From: Leonard Ashford, Of Counsel, Emerging Companies & Venture Capital Victoria Chambers, Partner Nina Reyes, Senior Associate, Emerging Companies & Venture Capital Calderwood & Harkness LLP
Re: Preliminary Analysis of Proposed Convertible Bridge Note Financing — Deal Structure and Key Terms
Matter No.: 1009-00001
This memorandum is protected by the attorney-client privilege and constitutes attorney work product. It is intended solely for the use of the addressees identified above and should not be disclosed to, or relied upon by, any third party without the prior written consent of Calderwood & Harkness LLP.
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I. Executive Summary
Calderwood & Harkness LLP ("Calderwood & Harkness" or the "Firm") has been engaged by Skybridge Fintech Ltd. ("Skybridge" or the "Company") as of November 6, 2023, to serve as issuer's counsel in connection with a proposed $60,000,000 convertible promissory note bridge financing (the "Bridge Financing"). The purpose of this memorandum is to provide the Company's leadership team with a preliminary analysis of the proposed deal structure, key economic and legal terms, and an identification of issues requiring further discussion and resolution before a term sheet is circulated to the proposed investor syndicate.
The Bridge Financing is intended to extend the Company's cash runway in advance of a planned Series D equity financing round currently expected to occur in Q3–Q4 2024 (the "Series D"). As discussed in greater detail in Section II.C below, the Company's current cash position supports approximately 3.9 months of operations at current burn rates, making the expedient consummation of the Bridge Financing a matter of considerable urgency.
The proposed investor syndicate is led by Ridgeline Ventures Fund IV, L.P. ("Ridgeline"), which will commit $30,000,000 — representing 50% of the total round. Additional participants include Beacon Hill Capital Partners, LLC ("Beacon Hill"), Northstar Innovation Fund II, L.P. ("Northstar"), and Halcyon Growth Equity, L.P. ("Halcyon"). Ridgeline, Beacon Hill, and Halcyon are existing investors in the Company through prior preferred equity rounds, providing meaningful alignment and familiarity with the Company's business, management team, and growth trajectory. Northstar is a new investor to Skybridge, which will necessitate certain additional onboarding steps, including joinder to the Company's existing investor agreements and enhanced due diligence, as addressed in detail below.
Structurally, the Bridge Financing will be effected through the issuance and sale of convertible promissory notes (the "Notes" or "Bridge Notes") pursuant to a Note Purchase Agreement (the "NPA"). The Notes will bear interest at a rate of 600 basis points (6.00%) per annum, calculated on a simple interest basis, and will convert into equity upon a Qualified Financing — defined as an equity financing raising at least $80,000,000 in new equity capital — at a conversion price equal to the lower of (a) a 20% discount to the price per share in the Qualified Financing, or (b) the price per share implied by a $750,000,000 pre-money valuation cap. These terms, and the remaining economic provisions, are discussed in detail in Section IV.
The Notes will be subordinated to the Company's existing $15,000,000 venture debt facility with Kelvantis Lending Corp. ("Kelvantis"), and obtaining Kelvantis's prior written consent to the incurrence of the additional indebtedness represented by the Notes will be a critical-path closing condition, as discussed in Section VII.
This memorandum is organized as follows: Section II provides relevant company background and financial context; Section III outlines the proposed deal structure at a high level; Section IV addresses each of the key economic terms in detail; Section V presents the proposed allocation among the investor syndicate; Sections VI through IX address closing mechanics, subordination requirements, corporate governance considerations, and securities law matters, respectively; Section X provides preliminary tax observations; Section XI catalogs the anticipated transaction documents; Section XII addresses fee arrangements; Section XIII identifies key risks and open issues; Section XIV sets forth recommended next steps; and Section XV concludes.
We look forward to discussing the contents of this memorandum with you at your earliest convenience and to receiving your direction on the open issues identified herein so that we may proceed to term sheet preparation and definitive document drafting.
II. Company Background and Current Financial Position
A. Company Overview
Skybridge Fintech Ltd. is a Delaware C-corporation (EIN: 83-2147605; Delaware Secretary of State File Number: 6384291), originally incorporated in 2017. The Company's principal executive offices are located at 1400 Market Street, Suite 2200, Wilmington, Delaware 19801. The Company also maintains operational offices in New York, New York, and San Francisco, California.
Skybridge operates a cloud-based payments orchestration and embedded lending platform designed to serve mid-market e-commerce companies. The platform enables merchants to integrate multiple payment processors, optimize transaction routing, and offer embedded credit products to their end customers through a single unified API and dashboard experience. The Company's value proposition centers on reducing payment processing costs, improving authorization rates, and unlocking incremental revenue streams through embedded financial products.
As of the date of this memorandum, the Company's platform processes approximately $4.2 billion in annualized gross payment volume ("GPV"), reflecting meaningful growth from prior-year levels. The Company's annualized recurring revenue ("ARR") as of the quarter ended September 30, 2023 was approximately $78 million. The Company reports a net revenue retention rate of approximately 128%, indicating strong expansion within its existing customer base and low churn. The Company currently employs approximately 310 full-time equivalents ("FTEs") across its engineering, product, sales, customer success, and general and administrative functions.
B. Capitalization History
The Company has raised multiple rounds of institutional equity financing since its founding, reflecting a progression through early-stage and growth-stage capital raises with well-known venture capital and growth equity investors:
• Series A: Led by Crestpoint Seed Partners, L.P., the Series A financing provided the Company with its initial institutional capital following a pre-seed phase funded by angel investors and the co-founders.
• Series B: Led by Halcyon Growth Equity, L.P., the Series B financing supported the Company's expansion into new merchant verticals and the initial buildout of its embedded lending product.
• Series C: Led by Ridgeline Ventures Fund III, L.P. and Beacon Hill Capital Partners, LLC, the Series C financing closed in July 2021 at a post-money valuation of $620,000,000. This was the Company's most recent priced equity round and established the current preferred stock waterfall and governance framework.
As of the date of this memorandum, the Company has approximately 48,500,000 shares outstanding on a fully diluted basis, inclusive of all issued and outstanding common stock, preferred stock (on an as-converted-to-common basis), outstanding options, and reserved shares under the Company's equity incentive plan. The Company's most recent Section 409A fair market value determination valued the Company's common stock at $8.42 per share, as reflected in a valuation report dated September 15, 2023, prepared by Atlas Valuation Services, Inc.
C. Current Financial Position and Runway Analysis
A clear understanding of the Company's current financial position is essential context for evaluating the Bridge Financing. As of the date of this memorandum, the Company's key financial metrics are as follows:
• Cash on hand (pre-bridge): Approximately $18,500,000
• Monthly net cash burn rate: Approximately $4,800,000
• Pre-bridge implied cash runway: Approximately 3.9 months ($18,500,000 ÷ $4,800,000 per month)
The urgency of the Bridge Financing is underscored by the Company's limited remaining cash runway. At the current burn rate, and absent any intervening financing, the Company would exhaust its available cash reserves by approximately late February or early March 2024. This timeline leaves minimal margin for error in the execution of the Bridge Financing and highlights the importance of the recommended next steps set forth in Section XIV below, particularly the early initiation of the Kelvantis consent process and the preparation of board and stockholder authorization materials.
Upon full funding of the Bridge Financing at an aggregate principal amount of $60,000,000, the Company's financial position would be materially improved:
• Post-bridge cash: Approximately $78,500,000 ($18,500,000 existing cash + $60,000,000 bridge proceeds)
• Post-bridge implied cash runway: Approximately 16.4 months ($78,500,000 ÷ $4,800,000 per month)
This extended runway would carry the Company into approximately mid-2025, providing sufficient time and financial cushion to consummate the Series D on the planned Q3–Q4 2024 timeline with a meaningful buffer in the event the Series D process experiences delays. We note that the runway calculation above assumes a constant monthly burn rate of $4,800,000; to the extent the Company's operating expenses increase — as may be expected with continued growth — the effective runway would be correspondingly shorter. We recommend that David Lindstrom and his finance team prepare updated cash flow projections reflecting anticipated operating expense trajectories to refine the runway analysis.
D. Existing Indebtedness
The Company's existing indebtedness includes a $15,000,000 venture debt facility with Kelvantis Lending Corp. (the "Kelvantis Facility"), governed by a Loan and Security Agreement dated August 15, 2022 (the "Kelvantis LSA"). The Kelvantis Facility matures on August 15, 2025. As discussed further in Section VII, the convertible notes issued in the Bridge Financing must be expressly subordinated to the Kelvantis Facility, and the Kelvantis LSA contains negative covenants that restrict the Company's ability to incur additional indebtedness without Kelvantis's prior written consent. Obtaining this consent will be a condition precedent to closing the Bridge Financing.
We are not aware of any other material indebtedness of the Company at this time, but we will confirm this through due diligence and the Company's representations in the NPA. We ask that the Company provide us with complete copies of all credit agreements, promissory notes, and other instruments evidencing indebtedness currently outstanding, together with all amendments, waivers, and related correspondence.
III. Proposed Deal Structure — Overview
The following table summarizes the key structural elements of the proposed Bridge Financing:
The selection of a convertible note structure — as opposed to a priced equity round, a SAFE (Simple Agreement for Future Equity), or other instrument — reflects a deliberate strategic choice by the Company and the investor syndicate. The convertible note structure is preferred at this stage for several reasons:
(a) Avoidance of Valuation Negotiation. A convertible note defers the pricing of the Company's equity to the Series D, thereby avoiding a potentially protracted and contentious valuation negotiation at a time when market conditions for fintech companies may not be optimal and when the Company's limited runway constrains its bargaining position.
(b) Minimization of Interim Dilution. By deferring conversion until the Series D, the convertible note structure minimizes the immediate dilutive impact on existing common and preferred stockholders. The founders and management team retain a larger percentage of the Company's equity during the bridge period, which supports retention and alignment of incentives.
(c) Expedited Closing Timeline. Convertible note financings are generally simpler to document and close than priced equity rounds, which require a full set of investment agreements, charter amendments, updated capitalization tables, and 409A revaluations. Given the Company's runway constraints, a faster path to funding is strongly preferred.
(d) Downside Protections for Investors. The conversion mechanics — including the 20% discount, the $750,000,000 valuation cap, and the Change of Control provision — provide the investor syndicate with meaningful downside protections and an economic incentive to participate in the Bridge Financing, while the debt structure provides a liquidation preference that ranks ahead of equity in the event of insolvency or dissolution.
The convertible note will be structured as a traditional promissory note instrument (as opposed to a SAFE) in order to provide the investors with a maturity date, a stated interest rate, and repayment rights at maturity — features that are important to certain institutional investors and that provide the Company with a definitive timeline for resolving the bridge through a Qualified Financing or maturity-date conversion.
IV. Key Economic Terms
This section provides a detailed analysis of each of the key economic terms proposed for the Bridge Notes. Where appropriate, we have included market context and our preliminary recommendations for the Company's consideration.
A. Interest Rate
The Bridge Notes will bear interest at a rate of 600 basis points (6.00%) per annum, computed on a simple interest basis using a 365-day year (i.e., actual/365 day-count convention). At the full aggregate principal amount of $60,000,000, the annual interest accrual would be $3,600,000 per year, or approximately $300,000 per month.
Interest will accrue from the date of issuance of each Note and will not be payable in cash during the term of the Notes. Instead, accrued but unpaid interest will convert alongside the outstanding principal into equity upon the occurrence of a Qualified Financing, or will become payable in cash only upon maturity (if the holders elect repayment rather than conversion) or upon acceleration following an event of default.
From a market context perspective, a 6.00% simple interest rate is well within the typical range for venture bridge note financings, which generally carry interest rates between 5.00% and 8.00% per annum. Simple interest — as opposed to compound interest — is the standard convention in venture bridge transactions and is more favorable to the Company, as it avoids the incremental cost associated with the compounding of accrued interest over the 24-month term. We recommend that the NPA expressly confirm the simple interest methodology and the 365-day year convention to avoid any ambiguity.
B. Maturity Date
The Bridge Notes will mature 24 months from the Closing Date of the Bridge Financing (the "Maturity Date"). Assuming an Initial Closing on or around January 15, 2024 — which is consistent with the anticipated closing timeline discussed in Section VI — the Maturity Date would be January 15, 2026.
If no Qualified Financing has occurred by the Maturity Date, each holder of Bridge Notes will have the right to elect, at its sole option, either:
(a) conversion of its outstanding principal and accrued interest into equity at the Valuation Cap price (approximately $15.46 per share, as discussed in Section IV.D), with the resulting shares being shares of the most senior series of preferred stock then outstanding; or
(b) repayment in full of outstanding principal plus all accrued but unpaid interest.
A 24-month maturity provides the Company with a generous timeframe to consummate the Series D, which is currently expected in Q3–Q4 2024. Even accounting for potential delays in the Series D process, the 24-month maturity provides approximately 12 to 15 months of buffer beyond the target Series D closing date, which is a meaningful and appropriate cushion.
We note, however, that the optional repayment right at maturity creates a contingent cash obligation of significant magnitude. If the Series D does not materialize and all holders elect repayment, the aggregate repayment obligation would be $60,000,000 in principal plus accrued interest of up to approximately $7,200,000 (based on a full 24-month accrual at $3,600,000 per year), for a total of approximately $67,200,000. We recommend that the Company negotiate for a majority-in-interest election mechanism, whereby the decision to convert or demand repayment at maturity would be made by holders representing a majority of the outstanding principal amount, with all holders bound by that election. This would prevent a fragmented outcome in which some holders convert while others demand repayment, creating both dilution and a cash drain simultaneously. We anticipate that the lead investor, Ridgeline, may resist this provision, as Ridgeline's 50% allocation would give it effective veto power only if the threshold is set at a simple majority; the Company may need to negotiate the threshold carefully.
C. Conversion discount
Upon the occurrence of a Qualified Financing, the outstanding principal and accrued interest under the Bridge Notes will convert into shares of the series of preferred stock issued in the Qualified Financing at a price per share equal to 80% of the price per share paid by the new investors in the Qualified Financing — that is, a 20% discount to the Series D price.
The 20% discount sits at the midpoint of the standard market range for conversion discounts in bridge financings, which typically fall between 15% and 25%. The discount compensates noteholders for the incremental risk assumed during the bridge period — including the possibility that the Series D may not occur, that the Company's business may deteriorate, or that market conditions may adversely affect valuation — and rewards them for their willingness to provide capital in advance of the priced round. A 20% discount is neither unusually generous to the investors nor unduly punitive to the Company, and we believe this rate is appropriate for a transaction of this nature and magnitude.
We note that the conversion discount operates as a complement to the valuation cap, with the noteholders receiving the benefit of whichever mechanism produces a lower conversion price. The interaction between the discount and the cap is discussed in greater detail in Section IV.E below.
D. Valuation Cap
The Bridge Notes will be subject to a pre-money valuation cap of $750,000,000 (the "Valuation Cap"). The cap-implied price per share, calculated by dividing the Valuation Cap by the Company's fully diluted share count immediately prior to the Bridge Financing, is approximately $15.46 per share:
$750,000,000 ÷ 48,500,000 fully diluted shares = ~$15.46 per share
To place this in context, the Company's most recent priced equity round — the Series C, which closed in July 2021 — valued the Company at a post-money valuation of $620,000,000. The proposed Valuation Cap of $750,000,000 represents an approximately 21% premium to the Series C post-money valuation ($750M ÷ $620M ≈ 1.21×). This premium reflects the Company's growth since the Series C, including the expansion of ARR from approximately $45 million at the time of the Series C to approximately $78 million as of Q3 2023, and the increase in GPV.
The Valuation Cap serves as a ceiling on the effective valuation at which the Bridge Notes convert into equity. If the Series D prices at a valuation that implies a per-share price above the cap-implied price of $15.46, the noteholders receive the benefit of converting at the lower cap-implied price rather than the higher discounted price. Conversely, if the Series D prices at a valuation that implies a per-share price below the cap-implied price, the conversion discount — rather than the cap — governs, and the noteholders convert at 80% of the Series D price.
We note that the Valuation Cap has meaningful implications for the Company's dilution profile at the Series D. If the Series D prices at a high valuation — for example, $1.2 billion pre-money — the noteholders would convert at the cap-implied price of $15.46, resulting in the issuance of significantly more shares to the noteholders than would be the case at the Series D price. We recommend that the Company model dilution scenarios at various Series D price points to fully understand the range of potential outcomes. We are prepared to assist with this analysis.
E. Conversion Price Mechanics
The conversion price for the Bridge Notes upon a Qualified Financing is determined as the lower of:
(a) 80% of the price per share in the Qualified Financing (i.e., the Series D price less the 20% discount); or
(b) the price per share implied by the $750,000,000 pre-money Valuation Cap on a fully diluted basis (approximately $15.46 per share).
The "lower of" formulation ensures that the noteholders receive the more favorable conversion price in all scenarios, which is the standard market convention for convertible bridge notes incorporating both a discount and a cap.
To illustrate the mechanics, we provide two examples:
Illustrative Example 1 — Valuation Cap Governs:
If the Series D prices at $20.00 per share, the conversion discount would yield a conversion price of $16.00 (80% × $20.00). The cap-implied price is approximately $15.46. Because $15.46 is lower than $16.00, the noteholders would convert at the cap-implied price of approximately $15.46 per share. In this scenario, the Valuation Cap is the binding constraint.
Illustrative Example 2 — Conversion discount Governs:
If the Series D prices at $18.00 per share, the conversion discount would yield a conversion price of $14.40 (80% × $18.00). The cap-implied price remains approximately $15.46. Because $14.40 is lower than $15.46, the noteholders would convert at $14.40 per share. In this scenario, the conversion discount is the binding constraint.
The "crossover point" — the Series D price at which the discount and the cap yield the same conversion price — can be calculated as approximately $19.33 per share ($15.46 ÷ 0.80 ≈ $19.33). At Series D prices above $19.33, the Valuation Cap governs; at Series D prices below $19.33, the conversion discount governs.
Both accrued interest and outstanding principal convert at the applicable conversion price. Accordingly, the total number of shares issuable upon conversion will reflect not only the $60,000,000 principal amount but also all interest accrued through the date of conversion.
F. Qualified Financing Trigger
A "Qualified Financing" is defined for purposes of the Bridge Notes as a bona fide equity financing round raising at least $80,000,000 in new equity capital, excluding the conversion of the Bridge Notes themselves. This definition is intended to capture the Series D and is sized to ensure that the triggering event represents a genuine, substantial priced equity round rather than a small follow-on or inside round.
Upon the occurrence of a Qualified Financing, all outstanding principal and accrued but unpaid interest under the Bridge Notes will automatically convert — without any action required on the part of the noteholders — into shares of the series of preferred stock issued in the Qualified Financing (expected to be Series D Preferred Stock), at the applicable conversion price determined under the mechanics described in Section IV.E above.
The automatic conversion mechanism is a critical feature from the Company's perspective. By eliminating optionality for the noteholders upon a Qualified Financing, the automatic conversion provision ensures that the Company can consummate the Series D with certainty regarding the disposition of the Bridge Notes. This avoids the scenario in which individual noteholders strategically elect to remain as debtholders rather than converting, which could create complications in the Series D negotiations and cap table management.
We recommend that the NPA define "Qualified Financing" with precision, including express exclusions for (a) the conversion of the Bridge Notes themselves, (b) any equity issued under the Company's equity incentive plan, (c) strategic partnership transactions involving equity issuances, and (d) any equity issued in connection with equipment leasing or debt facilities. These exclusions are standard and are designed to prevent an inadvertent triggering of automatic conversion by a financing event that does not represent the intended Series D.
G. Optional Conversion at Maturity
If no Qualified Financing occurs prior to the Maturity Date (January 15, 2026, assuming an Initial Closing on January 15, 2024), each holder of Bridge Notes may elect, at its sole option, either:
(a) to convert its outstanding principal and accrued but unpaid interest into shares of the most senior series of preferred stock then outstanding (currently Series C Preferred Stock), at the cap-implied price of approximately $15.46 per share; or
(b) to demand repayment in full of its outstanding principal plus all accrued but unpaid interest in cash.
As noted in Section IV.B above, the repayment right at maturity creates a potentially significant contingent cash obligation for the Company. If all holders were to elect repayment following a full 24-month accrual period, the aggregate obligation would be approximately $67,200,000 — consisting of $60,000,000 in principal and approximately $7,200,000 in accrued interest ($60,000,000 × 6.00% × 2 years). This amount would almost certainly exceed the Company's available cash resources if the Series D has not closed, as the failure to consummate the Series D would suggest ongoing cash consumption without a significant capital infusion.
We reiterate our recommendation to negotiate for a majority-in-interest election mechanism at maturity, pursuant to which the holders representing a majority (or supermajority) of the outstanding principal would make the conversion-or-repayment election on behalf of all holders. This structure avoids the problematic and potentially destabilizing scenario in which some holders convert while others demand cash, and it provides the Company with a single, unified outcome at maturity. We acknowledge that this provision may meet resistance from the investor syndicate, particularly from smaller investors who may not wish to be bound by Ridgeline's election, and we are prepared to discuss alternative formulations.
H. Change of Control Provision
The Bridge Notes will include a Change of Control provision addressing the disposition of the Notes in the event of a Change of Control occurring prior to conversion. A "Change of Control" will be defined in the NPA to include, at a minimum:
(i) a merger, consolidation, or similar business combination of the Company with or into another entity in which the stockholders of the Company immediately prior to such transaction hold less than 50% of the voting power of the surviving or resulting entity;
(ii) a sale, lease, exclusive license, or other disposition of all or substantially all of the assets of the Company; and
(iii) a transaction or series of related transactions resulting in a change in the beneficial ownership of more than 50% of the outstanding voting securities of the Company.
Upon a Change of Control, each noteholder will be entitled to receive a payment equal to the greater of:
(i) 2.0× the outstanding principal amount under such noteholder's Bridge Note, plus all accrued but unpaid interest; or
(ii) the amount that such noteholder would receive if the outstanding principal and accrued interest were converted into equity at the Valuation Cap price immediately prior to the Change of Control, and such equity participated in the distribution of Change of Control proceeds in accordance with the applicable liquidation preference waterfall.
The maximum Change of Control payment at issuance, assuming the 2.0× multiple governs and no interest has accrued, would be $120,000,000 (2.0 × $60,000,000). With the addition of accrued interest over the full 24-month term, the maximum exposure could reach approximately $127,200,000. This represents a significant contingent obligation and should be carefully considered by the Company's Board of Directors and existing preferred stockholders, particularly in the context of any ongoing M&A discussions or strategic transaction exploration.
We note that the 2.0× multiple is at the upper end of the market range for Change of Control provisions in venture bridge note financings, which typically range from 1.5× to 2.0×. A 1.5× multiple would reduce the maximum Change of Control payment at issuance to $90,000,000, representing a $30,000,000 reduction. We recommend that the Company consider whether a 1.5× multiple would be acceptable to the investor syndicate and, if so, whether to propose this in the initial term sheet.
Additionally, the Company should consider whether any carve-outs from the Change of Control definition are appropriate. For example, internal corporate restructurings (such as the formation of a holding company structure), spin-offs of non-core business lines, or reorganizations for tax purposes should arguably be excluded from the Change of Control definition to preserve the Company's operational flexibility. We are prepared to draft these carve-outs for inclusion in the NPA.
I. Most Favored Nation (MFN) Provision
The Bridge Notes will include a Most Favored Nation ("MFN") provision. Under this provision, if the Company issues any subsequent convertible promissory notes or SAFEs (Simple Agreements for Future Equity) on terms more favorable than those of the Bridge Notes at any time prior to the conversion or repayment of the Bridge Notes, the holders of the Bridge Notes will have the right to adopt those more favorable terms, retroactively modifying the economic terms of their Bridge Notes to match the subsequently issued instruments.
The scope of the MFN provision is a critical negotiation point that requires careful attention. The central question is whether the MFN covers only the core economic terms — specifically, the conversion discount percentage, the valuation cap, and the interest rate — or whether it extends more broadly to encompass governance rights, information rights, board representation rights, and other non-economic provisions.
Our recommendation is to limit the MFN provision to economic terms only. An overly broad MFN could significantly constrain the Company's flexibility in structuring any subsequent smaller bridge financing, extension note, or SAFE issuance. For example, if the Company were to issue a small bridge note to a strategic partner with favorable governance terms (such as board observer rights), a broad MFN would automatically extend those governance rights to the entire Bridge Financing syndicate — a result that would be disproportionate and potentially unworkable.
We also note that the interaction between the MFN provision and the anti-dilution protections held by the Series A, Series B, and Series C preferred stockholders requires careful analysis. Depending on the specific anti-dilution formulation in the Company's charter (whether broad-based weighted-average or otherwise), the retroactive modification of the Bridge Note terms under the MFN could theoretically trigger anti-dilution adjustments that further complicate the Company's capitalization. A separate memorandum addressing this interaction in detail is being prepared and will be circulated to the Company upon completion.
V. Proposed Allocation Among Purchasers
The following table sets forth the proposed allocation of the $60,000,000 Bridge Financing among the four Purchasers, together with each Purchaser's percentage of the total round and its status as an existing or new investor in the Company:
The key contact persons for each Purchaser are as follows:
• Ridgeline Ventures Fund IV, L.P.: Samuel Okonkwo (deal lead)
• Beacon Hill Capital Partners, LLC: Joanna Falkner (deal lead)
• Northstar Innovation Fund II, L.P.: Wei-Lin Chang (managing partner)
• Halcyon Growth Equity, L.P.: Robert "Rob" Castillo (deal lead)
Ridgeline, as the lead investor committing 50% of the total round, will be expected to have the most significant influence on the negotiation of the term sheet and definitive documents. Ridgeline is represented by Whitfield, Pratt & Soo LLP, a nationally recognized venture capital law firm. The lead partner on the Ridgeline engagement is Graham Whitfield, supported by associate Danielle Kwon. We anticipate that the bulk of our negotiations on the transaction documents will be conducted with Whitfield, Pratt & Soo, and we have had preliminary discussions with Mr. Whitfield regarding the anticipated timeline.
We note that Ridgeline is investing through its Fund IV vehicle, whereas its existing Skybridge investment (from the Series C) was made through Ridgeline Ventures Fund III, L.P. This is a common occurrence in the venture capital industry as firms raise successive funds, and it may require minor adjustments to the Company's stockholder register and investor agreement schedules to reflect the new fund entity. We do not anticipate that this will present any substantive issues.
Northstar Innovation Fund II, L.P. is a new investor to Skybridge and will require additional onboarding steps. Specifically, Northstar will need to execute a joinder to each of the Company's existing investor-side agreements, including the Amended and Restated Investors' Rights Agreement (the "IRA") and the Right of First Refusal and Co-Sale Agreement (the "ROFR/Co-Sale Agreement"). Northstar may also seek enhanced information rights — potentially including monthly financial reporting, attendance at board meetings in an observer capacity, and access to the Company's data room — as a condition to its participation. We recommend that the Company discuss internally what level of information access it is comfortable extending to Northstar and communicate those parameters to us so that we can address them proactively in the term sheet negotiations.
Additionally, as a new investor, Northstar may require a more extensive due diligence process than the existing investors, who are already familiar with the Company's business, financials, and legal profile. We should anticipate that Northstar's internal investment committee process may require additional time, which could affect the closing timeline if Northstar's participation is included in the Initial Closing. This is one reason we recommend that the Company be prepared for a split closing structure, as discussed in Section VI.B below.
VI. Closing Mechanics and Funding Structure
A. Anticipated Closing Timeline
Based on our current assessment and discussions with the Company and investor counsel, we anticipate the following timeline for the Bridge Financing:
This timeline is aggressive but achievable, provided that (a) the term sheet negotiation proceeds efficiently, (b) Kelvantis is responsive to the consent request, (c) no material issues arise in due diligence, and (d) the Company is able to secure the necessary board and stockholder approvals in the anticipated timeframe. Given the Company's approximately 3.9-month pre-bridge runway, we believe this timeline is appropriate and necessary. We will work to compress the timeline wherever possible.
B. Split Closing Possibility
Given the participation of four investors — including Northstar, a new investor that may require additional internal approvals and a more extended diligence process — the Company should be prepared for a split closing structure. Under this approach:
• An Initial Closing would be held with the investors that are prepared to fund on the target closing date (likely Ridgeline, Beacon Hill, and Halcyon, as existing investors with established familiarity with the Company).
• A Final Closing would be held within a short window — typically 10 to 15 days after the Initial Closing — to accommodate any remaining investors (likely Northstar).
At the Final Closing, Northstar would execute a Joinder Agreement pursuant to which it would become a party to the NPA and related transaction documents on the same terms as the Initial Closing investors, and would fund its $10,000,000 commitment at that time.
The NPA will contain customary provisions governing the split closing mechanics, including representations and bring-down certifications to be delivered at each closing, the establishment of a window during which subsequent closings may occur, and the treatment of notes issued at subsequent closings as having the same terms and conditions as those issued at the Initial Closing (other than the date of issuance and the commencement of interest accrual).
C. Escrow Mechanics
All investor funds will be transmitted via wire transfer to a designated escrow account held by an independent escrow agent. We have identified Granite Trust Company, N.A. as a potential escrow agent for this purpose. Angela Petrov at Granite Trust is our primary contact and has indicated preliminary availability to serve in this capacity.
The escrow arrangement will operate as follows:
• Each Purchaser will wire its committed investment amount to the escrow account on or prior to the applicable closing date.
• The escrow agent will hold the funds in a segregated, interest-bearing account pending satisfaction of all closing conditions.
• Upon confirmation that all closing conditions have been satisfied — including execution of all transaction documents, delivery of required certificates and opinions, and receipt of the Kelvantis consent and waiver — the escrow agent will release the funds to the Company in accordance with written release instructions executed by the Company and the lead investor (or the Purchasers collectively, as the NPA may require).
• In the event the closing conditions are not satisfied by an agreed outside date, the funds will be returned to the Purchasers, without deduction, together with any interest earned in the escrow account.
The escrow agent's fees are expected to be a flat fee of approximately $7,500, to be borne by the Company. These fees will be included in the estimated transaction costs set forth in Section XII below.
VII. Subordination and Kelvantis Consent Requirements
A. Subordination Requirement
The convertible notes issued in the Bridge Financing must be expressly subordinated in right of payment to the Company's existing $15,000,000 venture debt facility with Kelvantis Lending Corp. This subordination is both a commercial necessity — as Kelvantis will almost certainly require it as a condition to consenting to the additional indebtedness — and a legal requirement under the terms of the Kelvantis LSA.
A Subordination Agreement (the "Subordination Agreement") will be required among (a) Kelvantis, as senior lender, (b) the Purchasers of the Bridge Notes, as subordinated noteholders, and (c) Skybridge, as borrower and issuer. The Subordination Agreement will address, at a minimum, the following key provisions:
• Payment Subordination: The Bridge Notes will be subordinated in right of payment to all amounts owing under the Kelvantis Facility, meaning that no payments of principal, interest, or other amounts under the Bridge Notes may be made (other than through equity conversion) while any amounts remain outstanding under the Kelvantis Facility, except as expressly permitted by the Subordination Agreement.
• Payment blockage: Kelvantis will have the right to issue a payment blockage notice to the Purchasers upon the occurrence of a default or event of default under the Kelvantis Facility, during which period the Company will be prohibited from making any payments under the Bridge Notes.
• Enforcement Standstill: The Purchasers will agree to refrain from taking any enforcement action against the Company (including acceleration of the Bridge Notes, commencement of litigation, or exercise of remedies) for a specified standstill period following a default under the Bridge Notes, to allow Kelvantis to exercise its senior remedies without interference.
• Turnover Provisions: If any Purchaser receives any payment on account of the Bridge Notes in contravention of the Subordination Agreement, such Purchaser will be required to turn over such payment to Kelvantis for application against the senior indebtedness.
We will prepare an initial draft of the Subordination Agreement and coordinate with Kelvantis's counsel to negotiate the terms. The Subordination Agreement is expected to be a condition to closing of the Bridge Financing.
B. Kelvantis Consent and Waiver
The Kelvantis LSA contains negative covenants that restrict the Company's ability to incur additional indebtedness without the prior written consent of Kelvantis. The issuance of $60,000,000 in convertible promissory notes would constitute additional indebtedness for purposes of these covenants, and the Company's failure to obtain Kelvantis's consent prior to the issuance of the Bridge Notes would constitute an event of default under the Kelvantis Facility.
Calderwood & Harkness will prepare a lender consent and waiver letter (the "Kelvantis Consent Letter") for Kelvantis's review and execution. The Kelvantis Consent Letter will request that Kelvantis:
(a) consent to the incurrence of the indebtedness represented by the Bridge Notes;
(b) waive any existing or anticipated default under the Kelvantis LSA arising from such incurrence; and
(c) acknowledge the subordination of the Bridge Notes to the Kelvantis Facility and the terms of the Subordination Agreement.
The key contact at Kelvantis is Theodore "Ted" Marsh, Relationship Manager, whose office is located at 350 Park Avenue, 18th Floor, New York, NY 10022. We recommend that the Company initiate contact with Mr. Marsh promptly — ideally in mid-December 2023, following execution of the term sheet — to advise Kelvantis of the contemplated Bridge Financing and to deliver the consent request. Early engagement is critical to avoid the Kelvantis consent becoming a closing bottleneck, as Kelvantis's internal review and approval process may require several weeks.
We note that Kelvantis may impose conditions on its consent, such as (i) a requirement that the Company maintain a minimum cash balance or achieve certain financial milestones, (ii) restrictions on the use of Bridge Financing proceeds, or (iii) an amendment to the Kelvantis LSA to tighten certain covenants in light of the increased indebtedness. We will advise the Company on the acceptability of any such conditions as they are proposed.
A separate memorandum analyzing the negative covenants and other relevant provisions of the Kelvantis LSA in detail is forthcoming.
VIII. Corporate Authorization and Governance Requirements
A. Board of Directors Approval
The issuance of the convertible promissory notes in the Bridge Financing requires authorization by the Board of Directors of Skybridge. Under the Delaware General Corporation Law ("DGCL"), the Board is vested with the authority to manage and direct the business and affairs of the corporation (DGCL § 141(a)), and the issuance of securities — including promissory notes and the shares of preferred stock into which such notes may convert — requires Board authorization under DGCL §§ 152, 153, and 157.
We will prepare a Unanimous Written Consent of the Board of Directors (the "Board Consent") pursuant to DGCL § 141(f), which permits Board action without a meeting if all directors consent in writing. The Board Consent will authorize, among other things:
(a) the Bridge Financing, including the issuance and sale of the Bridge Notes in an aggregate principal amount of up to $60,000,000;
(b) the execution and delivery of the NPA, the Bridge Notes, the Subordination Agreement, and all other transaction documents;
(c) the authorization of the Company's officers (including the CEO and CFO) to execute, deliver, and perform the Company's obligations under the transaction documents;
(d) the reservation of a sufficient number of shares of preferred stock (or common stock, as applicable) for issuance upon conversion of the Bridge Notes; and
(e) such other actions as may be necessary or appropriate in connection with the Bridge Financing.
We anticipate that the Board Consent will be circulated for signature in early to mid-January 2024, following the completion of definitive document negotiation.
B. Stockholder Approval
Depending on the provisions of the Company's Amended and Restated Certificate of Incorporation (the "Charter") and, in particular, any protective provisions held by the existing series of preferred stockholders (Series A, Series B, and Series C), stockholder consent may be required for the issuance of the convertible notes. Protective provisions typically grant preferred stockholders a consent right over certain corporate actions, including the creation or issuance of new securities, the incurrence of indebtedness above a specified threshold, and the alteration of rights and preferences of existing preferred stock.
If stockholder consent is required, it may be obtained through a Written Consent of Stockholders in Lieu of Special Meeting pursuant to DGCL § 228. Under this provision, stockholders holding the requisite number of votes may act by written consent without holding a formal meeting, provided that the written consent sets forth the action taken and is signed by holders of not less than the minimum number of votes that would be required to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted.
Following stockholder action by written consent, the Company is required under DGCL § 228(e) to provide prompt notice to those stockholders who have not consented in writing. We will prepare and distribute this notice in compliance with the statute.
We are currently reviewing the Company's Charter, Amended and Restated Bylaws, and existing investor agreements to determine the precise scope of any stockholder consent requirements applicable to the Bridge Financing. A separate memorandum addressing these authorization and consent requirements in detail is forthcoming.
C. Amendments to Existing Investor Agreements
The Bridge Financing will likely necessitate amendments to the Company's existing investor-side agreements, specifically:
• Amendment No. 1 to the Amended and Restated Investors' Rights Agreement: This amendment will add the Purchasers (and in particular Northstar, as a new investor) as parties to the IRA and extend to them the information rights, registration rights, and other rights provided thereunder.
• Amendment No. 1 to the Right of First Refusal and Co-Sale Agreement: This amendment will add the Purchasers as parties to the ROFR/Co-Sale Agreement and extend to them the right of first refusal and co-sale rights provided thereunder.
The amendments to these agreements will require the consent of the parties thereto in accordance with the amendment provisions of each agreement. We will review the amendment provisions and prepare the necessary amendments and consent solicitations.
We note that Northstar, as a new investor, may negotiate for additional or enhanced rights beyond those provided in the existing IRA and ROFR/Co-Sale Agreement. Any such additional rights should be evaluated carefully by the Company to ensure consistency with the existing governance framework and to avoid creating preferential treatment that could generate friction with existing investors.
IX. Securities Law Considerations
A. Private Placement Exemption
The offering and sale of the Bridge Notes will be conducted as a private placement in reliance on Section 4(a)(2) of the Securities Act of 1933, as amended (the "Securities Act"), and Rule 506(b) of Regulation D promulgated thereunder. Reliance on this exemption requires compliance with the following conditions:
• All Purchasers must qualify as "accredited investors" within the meaning of Rule 501(a) of Regulation D. Based on our preliminary understanding of the four proposed Purchasers — each of which is an institutional investment fund — we expect that all Purchasers will readily qualify as accredited investors under Rule 501(a)(3) (entities with total assets in excess of $5,000,000) or other applicable provisions.
• The Company must not engage in any form of general solicitation or general advertising in connection with the offering, including any public announcement, press release, website posting, or social media communication that could be construed as an offer to sell the Bridge Notes to the general public.
• The Company must take reasonable steps to verify the accredited investor status of each Purchaser, and each Purchaser will be required to make investment representations in the NPA confirming its accredited investor status, its investment intent, and its understanding of the restrictions on resale.
• The Bridge Notes (and the shares of preferred stock issuable upon conversion) will be "restricted securities" within the meaning of Rule 144 under the Securities Act and will bear a restrictive legend to that effect.
B. Form D and Blue Sky Filings
The Company is required to file a Form D with the U.S. Securities and Exchange Commission ("SEC") within 15 calendar days after the first sale of securities in the offering (i.e., within 15 days after the Initial Closing). The Form D is a notice filing that provides basic information about the issuer, the offering, and the investors, and is filed electronically through the SEC's EDGAR system.
In addition to the SEC Form D filing, the Company must make state "blue sky" notice filings in the jurisdictions in which the securities are offered or sold. Based on the locations of the Purchasers and the Company, we anticipate that blue sky filings will be required in the following jurisdictions:
• Delaware (Company's state of incorporation and principal office)
• Massachusetts
• Illinois
• California
• Washington
We will confirm the applicable filing jurisdictions based on the final Purchaser information and will handle the preparation and submission of all required Form D and blue sky filings on the Company's behalf. Filing fees vary by jurisdiction but are generally modest and will be included in our disbursements.
C. Detailed Analysis
A comprehensive securities law memorandum addressing the private placement exemption analysis, Regulation D compliance requirements, restricted securities treatment, and related matters is being prepared separately and will be provided to the Company prior to the Initial Closing. That memorandum will also address any additional securities law considerations arising from the conversion of the Bridge Notes into equity, including the availability of a Section 3(a)(9) exemption for the conversion and the application of integration doctrine.