MEMORANDUM
PRIVILEGED & CONFIDENTIAL — ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT
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, Calderwood & Harkness LLP Nina Reyes, Senior Associate, Calderwood & Harkness LLP
DATE: December 21, 2023
RE: Employee & Benefits Due Diligence — Skybridge Fintech Ltd. ($60,000,000 Convertible Note Bridge Financing)
Matter No.: 1009-00001
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I. Executive Summary
This memorandum summarizes the findings of our employee and benefits due diligence review conducted in connection with the proposed $60,000,000 convertible promissory note bridge financing of Skybridge Fintech Ltd. (the "Company" or "Skybridge"). The financing is to be led by Ridgeline Ventures Fund IV, L.P. ("Ridgeline"), with additional participation from existing investors, and is expected to close on or about January 15, 2024, pursuant to the terms of a Note Purchase Agreement currently under negotiation.
The scope of our review encompassed the Company's employment agreements, offer letters, employee handbook and related policies, equity incentive plan and all amendments thereto, outstanding stock option grants, the most recent Section 409A valuation report, employee benefit plans (including health and welfare plans and the Company's 401(k) defined contribution plan), independent contractor arrangements, and employment-related regulatory compliance across all jurisdictions in which the Company maintains employees. Our review was conducted to identify any material risks, liabilities, or contingencies that could affect the proposed transaction or that should be disclosed in connection with the Company's representations and warranties under the Note Purchase Agreement.
As of the date of this review, the Company maintains a workforce of approximately 310 full-time employees ("FTEs"), headquartered at 1400 Market Street, Suite 2200, Wilmington, Delaware 19801, with employees distributed across multiple states, including Delaware, New York, California, Massachusetts, Texas, Washington, and Illinois. The Company does not maintain any foreign subsidiaries or employ workers outside the United States through a foreign employer of record, though it engages a limited number of international contractors.
Key findings are summarized as follows:
The Company maintains a generally well-organized employment framework with robust employment agreements, comprehensive employee policies, and a properly administered equity incentive plan. Section 409A compliance has been confirmed based on the most recent independent valuation dated September 15, 2023, prepared by Atlas Valuation Services, Inc. Equity plan administration is largely in order, with all reviewed option grants having been made at or above fair market value as determined by the applicable 409A valuation in effect at the time of grant. Certain discrete areas have been flagged for remediation, including a minor gap in Proprietary Information and Inventions Assignment ("PIIA") agreement coverage for a small cohort of pre-2018 employees, potential independent contractor classification risks (particularly with respect to California-based contractors), and enforceability concerns regarding non-compete provisions applicable to any California-based executives. None of the issues identified are of a nature or magnitude that would be expected to impede the closing of the convertible note bridge financing, and all are remediable in the ordinary course of business.
This memorandum should be read in conjunction with the following related diligence memoranda prepared by members of the Calderwood & Harkness transaction team: (i) the IP Ownership & Assignment Analysis, dated December 22, 2023, prepared by Peter Vassiliev and Wendy Schultz, which addresses the Company's intellectual property assignment chain and related ownership matters in greater detail; and (ii) the Material Contracts Diligence Summary, dated December 18, 2023, which addresses the Company's material commercial agreements, customer contracts, and vendor arrangements.
II. Scope and Methodology
Documents Reviewed
In conducting our employee and benefits due diligence review, we reviewed the following categories of documents, each as produced by the Company through its virtual data room (Thackeray Solutions, Workspace "Skybridge — Project Apex") as of December 18, 2023:
1. Executive employment agreements for each of the Company's five named executive officers: Arjun Mehta (CEO & Co-Founder), Elena Vasquez (CTO & Co-Founder), David Lindstrom (CFO), Priya Ramanathan (General Counsel), and Marcus Tillman (VP, Corporate Development);
2. Standard-form offer letter templates used for non-executive employees, together with a sample of approximately twenty (20) executed offer letters selected across departments;
3. The Company's Employee Handbook (most recent version, revised August 2023);
4. The Skybridge Fintech Ltd. 2017 Equity Incentive Plan (the "Plan"), as amended through the Fourth Amendment dated March 15, 2023, together with all board resolutions authorizing the adoption, amendment, and share reserve increases of the Plan;
5. Form of Stock Option Agreement (Incentive Stock Option) and Form of Stock Option Agreement (Non-Qualified Stock Option), together with selected individual option grant packages for both executive and non-executive employees;
6. The Section 409A independent valuation report dated September 15, 2023, prepared by Atlas Valuation Services, Inc. (the "409A Report");
7. Employee benefit plan documents and summary plan descriptions ("SPDs") for the Company's health and welfare plans (medical, dental, vision, life insurance, AD&D, short-term disability, long-term disability, FSA, and HSA) and the Skybridge Fintech Ltd. 401(k) Plan;
8. The most recent Form 5500 filing for the Skybridge Fintech Ltd. 401(k) Plan (plan year ending December 31, 2022);
9. Representative independent contractor agreements and consulting agreements (approximately fifteen (15) agreements reviewed);
10. Separation and severance agreement templates and a sample of executed separation agreements;
11. Non-compete and non-solicitation agreements and provisions (as incorporated in executive employment agreements and the standard PIIA);
12. The Company's standard-form Proprietary Information and Inventions Assignment Agreement (current version and the prior version used before 2018);
13. Summary of I-9 records and internal I-9 audit results;
14. Payroll records summary provided by the Company's payroll processor;
15. Workers' compensation insurance policies and certificates of insurance for all states in which the Company maintains employees;
16. Correspondence with the Equal Employment Opportunity Commission ("EEOC") and state civil rights agencies, if any; and
17. Internal HR compliance memoranda and related correspondence.
Interviews Conducted
In addition to the foregoing document review, we conducted interviews with the following individuals:
• Priya Ramanathan, General Counsel, Skybridge Fintech Ltd., who provided context on the Company's employment practices, pending or threatened claims, and the Company's approach to compliance across multiple jurisdictions;
• Marcus Tillman, VP, Corporate Development, Skybridge Fintech Ltd., who provided background on the Company's organizational structure, headcount trends, and contractor engagement practices; and
• The VP of People Operations (as identified from the Company's internal organizational chart), who addressed day-to-day employment administration, benefits enrollment, PIIA tracking, and I-9 compliance procedures.
Limitations
This review is based solely on the documents produced by the Company as of December 18, 2023, and on representations made by Company management during the interviews described above. Where specific documents were not available or had not been produced as of the review date, we have relied on management representations, which reliance is noted in the relevant sections below. We did not perform an independent audit of payroll records, tax withholding compliance, or benefit plan financial statements, nor did we independently verify the completeness of the Company's personnel files. To the extent additional documents are produced or material facts come to light following the date of this memorandum, we reserve the right to supplement or amend our findings and recommendations.
III. Workforce Overview
A. Employee Headcount and Distribution
As of the date of this review, the Company employs approximately 310 full-time employees. The Company does not employ any part-time employees as a matter of current practice, though the Employee Handbook does not prohibit part-time arrangements. The Company's headcount has grown from approximately 85 employees at the end of 2019 to the current level of approximately 310, reflecting the Company's growth trajectory following its Series B and Series C preferred stock financings in 2020 and 2022, respectively.
The approximate breakdown of employees by functional department is as follows:
Employees are geographically distributed across multiple states, with the largest concentrations in Delaware (where the Company's headquarters is located) and California (where the Company maintains a significant engineering presence). The approximate geographic distribution is as follows:
The Company's workforce is entirely non-unionized. There are no collective bargaining agreements in effect, and no pending or threatened union organizing activity has been identified. Management has confirmed that the Company has not received any communications from any labor organization seeking to represent any group of Company employees, nor has any petition for a representation election been filed with the National Labor Relations Board.
B. Independent Contractors
In addition to its full-time employee workforce, the Company engages approximately 25 to 35 independent contractors at any given time. The majority of these contractors provide services in software development, user interface and user experience design, and data analytics. Contractor engagements are managed through the Company's engineering and product departments and, to a lesser extent, through the marketing department.
We reviewed a representative sample of approximately fifteen (15) independent contractor agreements. The agreements generally follow a consistent template and include provisions addressing scope of services, compensation (hourly or project-based), term and termination, intellectual property assignment, confidentiality obligations, and confirmation of independent contractor status (including acknowledgment that the contractor is not entitled to employee benefits).
Notwithstanding the contractual designation of these individuals as independent contractors, we note that proper worker classification is a factual determination that depends on the totality of the working relationship, not merely the label assigned in the agreement. We analyzed the contractor engagements under the IRS multi-factor test (which considers behavioral control, financial control, and the type of relationship), as well as under applicable state-law equivalents. Of particular significance is California's codification of the ABC test under Assembly Bill 5 ("AB 5"), which establishes a presumption that a worker is an employee unless the hiring entity demonstrates that the worker (A) is free from the control and direction of the hiring entity in connection with the performance of the work, (B) performs work that is outside the usual course of the hiring entity's business, and (C) is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed. Given that the Company's core business involves software and financial technology, prong B of the ABC test presents a heightened classification risk for software development contractors, as their work may be deemed within the usual course of the Company's business.
We identified several contractors — particularly those engaged on a long-term, full-time basis (i.e., engagements exceeding twelve months with weekly hourly commitments of 35 hours or more) — whose engagement characteristics may warrant further review and potential reclassification as employees. While no formal reclassification demand or enforcement action has been asserted against the Company, the risk of misclassification liability (including back taxes, unpaid benefits, and penalties) is a matter that should be monitored on an ongoing basis.
Recommendation: The Company should conduct periodic independent contractor classification audits, with particular focus on long-term engagements and California-based contractors. We recommend that such audits be conducted at least annually and that any contractors whose status is determined to be questionable be transitioned to employee status or have their engagement terms restructured to more clearly satisfy the applicable classification tests.
C. Foreign Employees / International Operations
Based on our review, the Company does not currently maintain any foreign subsidiaries, branch offices, or an established foreign employer of record. The Company does not directly employ any individuals outside the United States. However, we note that the Company engages a limited number of international independent contractors — primarily in Canada and the United Kingdom — for discrete software development projects. These engagements are governed by the Company's standard independent contractor agreement, adapted with provisions addressing applicable foreign law considerations. As of the review date, the international contractor population represents fewer than five individuals.
Given the limited scope of the Company's international contractor engagements, we did not identify any material foreign employment law compliance issues. However, should the Company expand its international operations or increase the number or scope of international contractor engagements, it should consider establishing a foreign employer of record or subsidiary structure to mitigate the risk of creating a permanent establishment for tax purposes or running afoul of local employment laws that may extend protections to contractors who are deemed to be de facto employees under the laws of their home jurisdiction.
IV. Employment Agreements and Offer Letters
A. Executive Employment Agreements
We reviewed the employment agreements for each of the Company's five named executive officers. The key terms and observations for each are summarized below.
1. Arjun Mehta, CEO & Co-Founder
Mr. Mehta's employment is governed by an at-will employment agreement dated April 3, 2017, as amended on June 12, 2020, and further amended on November 8, 2022. The agreement includes the following material provisions:
• At-Will Status: The agreement expressly provides that Mr. Mehta's employment is at will and may be terminated by either party at any time, with or without cause, subject to the severance provisions described below.
• Confidentiality: Mr. Mehta is bound by comprehensive confidentiality obligations that survive the termination of employment and extend to all proprietary, financial, technical, and business information of the Company.
• Non-Competition: The agreement includes a post-termination non-compete provision restricting Mr. Mehta from engaging in a competing business for a period of twelve (12) months following the termination of employment. The geographic scope of the non-compete is limited to the United States and any other jurisdiction in which the Company derives material revenue as of the termination date. As noted below, the enforceability of this provision may be limited depending on Mr. Mehta's state of residence or primary work location at the time of enforcement.
• Non-Solicitation: Mr. Mehta is subject to a non-solicitation provision restricting him from soliciting employees, contractors, customers, or business partners of the Company for a period of eighteen (18) months following the termination of employment.
• PIIA: The agreement incorporates by reference the Company's standard Proprietary Information and Inventions Assignment Agreement, which Mr. Mehta has separately executed.
• Severance: Upon a termination of Mr. Mehta's employment by the Company without "Cause" (as defined in the agreement) or by Mr. Mehta for "Good Reason" (as defined), Mr. Mehta is entitled to receive (i) continued payment of his then-current base salary for a period of twelve (12) months following the termination date, (ii) continued COBRA coverage at the Company's expense for up to twelve (12) months, and (iii) accelerated vesting of any equity awards that would have vested during the twelve (12) month period following the termination date, in each case subject to Mr. Mehta's execution and non-revocation of a general release of claims in the form provided by the Company.
• Change of Control Acceleration: Mr. Mehta's agreement contains a double-trigger acceleration provision. In the event of a "Change of Control" (as defined) followed by Mr. Mehta's termination without Cause or resignation for Good Reason within twelve (12) months of the Change of Control, one hundred percent (100%) of Mr. Mehta's then-unvested equity awards will accelerate and become fully vested and exercisable.
2. Elena Vasquez, CTO & Co-Founder
Ms. Vasquez's employment is governed by an at-will employment agreement dated April 3, 2017, as amended on June 12, 2020, and further amended on November 8, 2022. The agreement is substantially similar in structure and terms to Mr. Mehta's agreement, with the following notable provisions:
• At-Will Status: Confirmed.
• Confidentiality: Comprehensive confidentiality obligations consistent with Mr. Mehta's agreement.
• IP Assignment: In addition to the standard PIIA incorporated by reference, Ms. Vasquez's employment agreement contains a supplemental intellectual property assignment provision specifically addressing her role in the development of the Company's core financial technology platform. This provision is critical for ensuring the Company's clear ownership of the foundational technology upon which its products are built. The IP Ownership & Assignment Analysis memorandum prepared by Peter Vassiliev and Wendy Schultz (dated December 22, 2023) addresses this provision and the broader IP assignment chain in greater detail.
• Non-Competition: Twelve (12) month post-termination non-compete, substantially similar to Mr. Mehta's provision.
• Severance: Twelve (12) months of continued base salary and COBRA coverage upon a qualifying termination, subject to a general release of claims.
• Change of Control Acceleration: Double-trigger acceleration provision, consistent with Mr. Mehta's agreement.
3. David Lindstrom, CFO
Mr. Lindstrom's employment is governed by an at-will employment agreement dated March 1, 2021, as amended on November 8, 2022. Key provisions include:
• At-Will Status: Confirmed.
• Confidentiality: Standard confidentiality obligations.
• Non-Solicitation: Twelve (12) month post-termination non-solicitation provision applicable to employees, customers, and prospective customers. Notably, Mr. Lindstrom's agreement does not include a post-termination non-compete provision.
• PIIA: Incorporated by reference; separately executed.
• Severance: Nine (9) months of continued base salary and COBRA coverage upon a termination without Cause or resignation for Good Reason, subject to a general release of claims.
• Change of Control Acceleration: Double-trigger acceleration provision, with fifty percent (50%) of unvested equity awards accelerating upon a qualifying termination within twelve (12) months of a Change of Control.
4. Priya Ramanathan, General Counsel
Ms. Ramanathan's employment is governed by an at-will employment agreement dated September 15, 2021. The agreement contains standard confidentiality, non-solicitation, and PIIA provisions. Severance entitlements upon a qualifying termination consist of six (6) months of continued base salary and COBRA coverage, subject to a general release of claims. The agreement does not contain a separate change of control acceleration provision; accordingly, Ms. Ramanathan's equity awards are governed by the standard change of control provisions set forth in the Plan (discussed in Section V below).
5. Marcus Tillman, VP, Corporate Development
Mr. Tillman's employment is governed by an at-will employment agreement dated January 10, 2022. The agreement contains standard confidentiality, non-solicitation, and PIIA provisions. Severance entitlements upon a qualifying termination consist of six (6) months of continued base salary, subject to a general release of claims. As with Ms. Ramanathan, Mr. Tillman's equity awards are governed by the standard change of control provisions in the Plan.
Observations on Executive Agreements
All five executive employment agreements were reviewed and found to contain appropriate PIIA, confidentiality, and restrictive covenant provisions. Each agreement clearly establishes at-will employment status and includes a requirement that the executive execute the Company's standard-form PIIA. The severance provisions in each agreement are conditioned on the executive's execution and non-revocation of a general release of claims, which is consistent with market practice and mitigates the risk of post-termination litigation by departed executives.
We note, however, that the enforceability of post-termination non-compete provisions varies materially by state. California, in particular, generally prohibits non-compete agreements under Business and Professions Code Section 16600, as further reinforced by recent legislative amendments. If any of the Company's executives subject to non-compete restrictions are based in or primarily work from California, those provisions may be unenforceable as a matter of California law, irrespective of any choice-of-law provision in the agreement designating the law of another state. Based on our review, Mr. Mehta and Ms. Vasquez are currently based in Delaware, and Mr. Lindstrom is based in New York; however, to the extent any executive relocates to California or spends a material portion of their working time in California, the enforceability of non-compete provisions should be reassessed.
B. Standard Offer Letters
We reviewed the Company's current standard-form offer letter template, together with a sample of approximately twenty (20) executed offer letters selected across multiple departments and hiring periods. The offer letters consistently include the following terms:
• Position title and reporting relationship;
• Annual base salary and eligibility for performance-based bonus compensation;
• Eligibility for participation in the Company's employee benefit plans, subject to the terms and conditions of the applicable plan documents;
• Clear at-will employment acknowledgment, stating that the offer letter does not constitute a contract for a definite period of employment and that either party may terminate the employment relationship at any time, with or without cause;
• Reference to the Company's Employee Handbook as governing workplace policies and procedures;
• Requirement that the employee execute the Company's standard Proprietary Information and Inventions Assignment Agreement as a condition of employment; and
• Requirement that the employee provide proof of eligibility to work in the United States in compliance with federal immigration law.
Finding: The standard offer letter template is consistent and well-maintained. No material deviations from the template were identified in the sample of executed offer letters reviewed. The at-will language is clear and unambiguous, and the offer letters do not contain any provisions that could be construed as creating an implied contract for a definite term of employment.
C. Proprietary Information and Inventions Assignment (PIIA) Agreements
The Company uses a standard-form Proprietary Information and Inventions Assignment Agreement for all employees, which each employee is required to execute as a condition of employment. We reviewed both the current version of the PIIA (in use since approximately mid-2018) and the prior version (used from the Company's founding in 2017 through approximately mid-2018).
Coverage: Based on a review of the Company's HR records, PIIA agreements are on file for substantially all current employees. The Company estimates that approximately 98% of current employees have executed the current version of the PIIA or the prior version thereof. Management has represented that the remaining employees — estimated at fewer than ten individuals, all of whom are pre-2018 hires — executed the prior version of the PIIA but have not been asked to execute an updated agreement.
Content of the Current PIIA: The current PIIA includes the following key provisions:
• Assignment of all work product, inventions, developments, discoveries, improvements, and other intellectual property conceived, created, or developed by the employee during the term of employment, whether or not during working hours, to the extent related to the Company's business or arising from the use of the Company's resources;
• Comprehensive confidentiality obligations with respect to the Company's proprietary and trade secret information, surviving the termination of employment;
• Return-of-property provisions requiring the employee to return all Company property, documents, and materials (including electronic files and copies) upon the termination of employment;
• A notice provision in compliance with the Defend Trade Secrets Act of 2016 ("DTSA"), 18 U.S.C. § 1833(b), informing the employee of the immunity provisions under federal law for certain disclosures of trade secrets to government officials or in connection with legal proceedings; and
• Provisions acknowledging that the restrictions imposed by the PIIA are reasonable and necessary for the protection of the Company's legitimate business interests.
Prior Version of the PIIA: The prior version of the PIIA, used from the Company's founding through approximately mid-2018, is substantively similar to the current version in all material respects, with one notable exception: the prior version does not include the federal DTSA notice provision. While the absence of this notice does not invalidate the PIIA or the Company's trade secret protections, it does mean that the Company may not be able to avail itself of the exemplary damages and attorneys' fees remedies available under the DTSA in the event of a misappropriation claim against an employee who executed only the prior version, unless the employee received the DTSA notice through other means.
Gap Identified: A small number of early-stage employees — estimated at fewer than ten (10) individuals, all of whom are pre-2018 hires — may have executed only the prior version of the PIIA, which did not include the DTSA notice. We recommend that the Company obtain updated acknowledgments or amended PIIAs from these individuals to incorporate the DTSA notice provision. This is a low-risk, straightforward remediation item.
Cross-Reference: The IP Ownership & Assignment Analysis memorandum dated December 22, 2023, prepared by Peter Vassiliev and Wendy Schultz, addresses the Company's intellectual property assignment chain in greater detail, including an analysis of the assignment provisions in the PIIA and the supplemental IP assignment provisions in Ms. Vasquez's employment agreement.
D. Separation and Severance Agreements
We reviewed the Company's standard-form separation agreement template, which is used in connection with involuntary terminations and mutually agreed separations. The separation agreement template includes the following key provisions:
• A general release of all claims by the departing employee in favor of the Company, its officers, directors, and affiliates, including claims under Title VII, the ADA, the ADEA, the FLSA, and applicable state and local employment laws;
• An ADEA/OWBPA-compliant consideration and revocation period (21 days to consider the agreement, 7 days to revoke) for employees aged 40 and over;
• Confidentiality provisions restricting the departing employee from disclosing the terms of the separation;
• Reaffirmation of the employee's obligations under the PIIA, including ongoing confidentiality and intellectual property assignment obligations;
• Non-disparagement covenants (mutual); and
• Cooperation provisions requiring the departing employee to reasonably cooperate with the Company in connection with any litigation, regulatory proceeding, or other matter arising from the employee's employment.
We reviewed a sample of executed separation agreements and did not identify any material deviations from the template or any terms that would impose unusual or disproportionate obligations on the Company. Management has confirmed that there are no material pending separation disputes, and no former employee has asserted or threatened to assert a claim challenging the validity or enforceability of any separation agreement executed within the past three years.
V. Equity Incentive Plan and Stock Option Grants
A. Plan Overview
The Company's equity compensation program is governed by the Skybridge Fintech Ltd. 2017 Equity Incentive Plan (the "Plan"), originally adopted by the Board of Directors on April 3, 2017, and approved by the Company's stockholders on the same date. The Plan has been amended on four occasions: the First Amendment dated March 20, 2019 (share reserve increase), the Second Amendment dated September 8, 2020 (share reserve increase and addition of RSU award type), the Third Amendment dated February 14, 2022 (share reserve increase and administrative updates), and the Fourth Amendment dated March 15, 2023 (share reserve increase). Each amendment was duly authorized by the Board of Directors and approved by the requisite stockholder vote.
The Plan authorizes the following types of equity awards:
• Incentive Stock Options ("ISOs"): Stock options intended to qualify under Section 422 of the Internal Revenue Code, available only to employees of the Company;
• Non-Qualified Stock Options ("NQOs"): Stock options not intended to qualify as ISOs, available to employees, directors, and consultants;
• Restricted Stock Awards ("RSAs"): Awards of common stock subject to vesting and forfeiture restrictions; and
• Restricted Stock Units ("RSUs"): Awards representing the right to receive shares of common stock upon vesting, added to the Plan by the Second Amendment.
Share Reserve: As of the date of this review, following the Fourth Amendment, the Plan authorizes a total share pool of 12,000,000 shares of common stock. Based on the Company's records, the share pool is allocated as follows:
Administration: The Plan is administered by the Board of Directors. The Board has the authority to delegate administration to a Compensation Committee, though as of the date of this review, the Board has not formally constituted a separate Compensation Committee and has instead exercised administrative authority directly. We note that the formation of a Compensation Committee may be advisable as the Company continues to grow and may be required in connection with a future initial public offering.
Standard Vesting Schedule: The standard vesting schedule for stock option grants under the Plan is a four-year vesting schedule with a one-year cliff. Under this schedule, twenty-five percent (25%) of the shares subject to the option vest on the first anniversary of the vesting commencement date, and the remaining seventy-five percent (75%) vest in equal monthly installments over the subsequent thirty-six (36) months, subject to the optionee's continued service to the Company through each applicable vesting date.
Termination Provisions: Upon a termination of the optionee's service to the Company, all unvested options are immediately forfeited and cancelled. Vested options remain exercisable for a period of ninety (90) days following the termination date (or, in the case of termination due to the optionee's death or disability, for a period of twelve (12) months). In the event of a termination for Cause (as defined in the Plan), all options — whether vested or unvested — are immediately forfeited and cancelled.
B. Outstanding Option Grants
As of the date of this review, there are approximately 8,450,000 shares of common stock subject to outstanding, unexercised stock options under the Plan. The weighted-average exercise price of these outstanding options is approximately $5.18 per share, reflecting the range of exercise prices established at the time of each grant based on the applicable 409A fair market value.
The outstanding options are broken down by award type as follows:
We reviewed the stock option agreements for a representative sample of grants, including all grants to named executive officers, and confirmed that the terms of the individual option agreements are consistent with the terms of the Plan. We also reviewed the board resolutions authorizing each tranche of option grants and confirmed that each grant was properly authorized by the Board of Directors (or, in certain instances, by the CEO acting pursuant to delegated authority for grants below a specified threshold to non-executive employees, as authorized by the Board).
Section 422 Compliance for ISOs: For options designated as ISOs, we reviewed compliance with the requirements of Section 422 of the Internal Revenue Code, including:
• The $100,000 annual vesting limit: The aggregate fair market value (determined as of the grant date) of shares with respect to which ISOs first become exercisable by an optionee during any calendar year may not exceed $100,000. Based on our review, the Company has appropriately monitored this limit, and in instances where the limit would be exceeded, the excess portion of the option has been designated as an NQO.
• The employment requirement: ISOs may only be granted to employees of the Company (not consultants or non-employee directors). All reviewed ISO grants were made to individuals who were employees of the Company at the time of grant.
• The exercise price requirement: The exercise price of an ISO must be at least equal to the fair market value of the underlying stock on the date of grant (or 110% of FMV for 10% stockholders). All reviewed ISO grants were made at exercise prices at or above the FMV per share as determined by the most recent 409A valuation in effect at the time of grant.
Observation: All reviewed option grants appear to have been granted at or above the fair market value per share as determined by the most recent 409A valuation at the time of grant. No options were identified that appear to have been granted at a discount to FMV, and no evidence of backdating or repricing was identified.
C. Fully Diluted Share Count
For purposes of the convertible note bridge financing, the Company's fully diluted capitalization — used in calculating the conversion price under the $750,000,000 valuation cap — is approximately 48,500,000 shares. Based on this figure, the cap-implied conversion price is approximately $15.46 per share ($750,000,000 ÷ 48,500,000 = ~$15.46).
The fully diluted share count is composed of the following:
Note: The share count used for purposes of the valuation cap calculation may differ slightly from the total shown above due to rounding and the treatment of certain categories (e.g., options available for grant) as agreed between the Company and Ridgeline in the Note Purchase Agreement. The figures above are based on the Company's capitalization table as of December 15, 2023, as provided by the Company's finance team.
D. Early Exercise and Section 83(b) Elections
The Plan permits early exercise of unvested stock options at the discretion of the Board. Under this feature, an optionee may exercise unvested options prior to vesting, with the resulting shares of common stock subject to the Company's repurchase right at the original exercise price to the extent the shares remain unvested at the time of a termination of service.
For optionees who elect to early-exercise unvested options, the Company's option agreement includes a requirement that the optionee file a Section 83(b) election with the Internal Revenue Service within thirty (30) days of the exercise date. The filing of a timely Section 83(b) election is critical for the optionee, as it allows the optionee to recognize ordinary income (if any) at the time of exercise rather than at the time of vesting, potentially resulting in favorable long-term capital gains treatment upon a subsequent disposition of the shares.
We reviewed the Company's procedures for tracking early exercises and Section 83(b) elections. The Company maintains a log of all early exercises and requests copies of Section 83(b) election filings from employees who early-exercise. However, we note that the Company's records indicate that for approximately three (3) early exercises conducted in 2018 and 2019, the Company's files do not contain copies of the corresponding Section 83(b) elections filed by the optionees. While the filing of a Section 83(b) election is ultimately the responsibility of the individual optionee and does not create liability for the Company, the absence of these records introduces uncertainty as to whether the elections were timely filed and may be relevant in connection with any future tax-related inquiries.
Recommendation: The Company should make reasonable efforts to obtain copies of the missing Section 83(b) election filings from the affected individuals, or, if the elections were not timely filed, ensure that the affected individuals are aware of the tax implications.
VI. Section 409A Valuation and Compliance
A. Most Recent 409A Valuation
The Company's most recent Section 409A valuation was prepared by Atlas Valuation Services, Inc. (contact: Martin Khoury, Managing Director). The valuation report is dated September 15, 2023 (the "409A Report"), and concludes that the fair market value ("FMV") of the Company's common stock as of September 15, 2023, is $8.42 per share.
The 409A Report employs the following valuation methodologies:
• Income Approach (Discounted Cash Flow Analysis): Atlas projected the Company's future cash flows based on management's financial projections, applying a discount rate reflecting the Company's weighted-average cost of capital, adjusted for the risk profile of a growth-stage fintech company. The resulting enterprise value was allocated among the Company's equity classes using an option pricing model.
• Market Approach (Comparable Company Analysis): Atlas identified a set of publicly traded comparable companies in the financial technology sector and applied relevant valuation multiples (revenue multiples and, where applicable, EBITDA multiples) to the Company's financial metrics to derive an indicative enterprise value range.
• Backsolve Method (Based on Series C Valuation): Atlas utilized the implied enterprise value from the Company's most recent equity financing round (the Series C preferred stock financing completed in October 2022 at a pre-money valuation of $480,000,000) as a reference point, adjusting for the passage of time, changes in the Company's financial performance, and movements in comparable company valuations.
• Option Pricing Model (Allocation): The enterprise value determined through the income and market approaches was allocated among the Company's various equity classes (common stock, Series A Preferred Stock, Series B Preferred Stock, and Series C Preferred Stock) using an option pricing model that accounts for the differing economic rights of each class, including liquidation preferences, participation rights, and conversion features.
Key Assumptions:
• discount for Lack of Marketability ("DLOM"): Atlas applied a DLOM of approximately 25% to the common stock value, reflecting the fact that the Company's common stock is not publicly traded and is subject to transfer restrictions. This discount was derived using the Finnerty put option model, calibrated based on the Company's estimated time to a liquidity event.
• Enterprise Value Range: The 409A Report established an enterprise value range of approximately $500,000,000 to $580,000,000, with a concluded enterprise value of approximately $540,000,000 as of the valuation date.
• Volatility: Atlas assumed an equity volatility of approximately 55%, derived from the historical and implied volatilities of the comparable company set.
• Time to Liquidity Event: Atlas assumed an expected time to a liquidity event (either an IPO or an acquisition) of approximately 2.5 to 3.5 years from the valuation date.
Relevance to Current Transaction: The FMV of $8.42 per common share, as determined by the 409A Report, is substantially below the cap-implied conversion price of approximately $15.46 per share under the convertible note bridge financing. This differential is consistent with the application of the DLOM and the difference in economic rights between common stock and preferred stock (including the liquidation preferences, anti-dilution protections, and other rights attaching to the preferred stock). Following the closing of the convertible note bridge financing, the Company should obtain an updated 409A valuation, as the financing may have a material impact on the Company's enterprise value and the FMV of its common stock. Any new stock option grants made after the closing should be priced based on the updated valuation to ensure continued Section 409A compliance.
B. 409A Compliance Assessment
We reviewed the Company's compliance with Section 409A of the Internal Revenue Code with respect to its stock option grants and other compensation arrangements. Section 409A imposes stringent requirements on deferred compensation arrangements, including a requirement that stock options be granted with an exercise price at least equal to the FMV of the underlying stock on the date of grant. Options granted below FMV are treated as deferred compensation subject to Section 409A's documentary and operational requirements, and the failure to comply can result in significant adverse tax consequences for the optionee, including a 20% additional tax and interest on underpayments.
Post-September 15, 2023 Option Grants: We reviewed all stock option grants made after the date of the 409A Report (September 15, 2023) and confirmed that all such grants were made at exercise prices at or above $8.42 per share, consistent with the FMV established by the 409A Report.
Pre-September 15, 2023 Option Grants: We also reviewed option grants made during the period between the prior 409A valuation (dated October 3, 2022, with a concluded FMV of $6.75 per share) and the September 15, 2023 valuation. All such grants were made at exercise prices at or above the then-applicable FMV of $6.75 per share.
Deferred Compensation Arrangements: We reviewed the Company's compensation arrangements to determine whether any arrangements other than stock options could constitute deferred compensation subject to Section 409A. The Company's annual performance bonus plan provides for bonuses that are determined and paid within the "short-term deferral" period (i.e., by March 15 of the calendar year following the calendar year in which the bonus is earned) and therefore is exempt from Section 409A. The severance provisions in the executive employment agreements are structured to qualify for either the short-term deferral exception or the separation pay exception under Treasury Regulation § 1.409A-1(b)(9), and we did not identify any documentary or operational compliance issues with respect to these provisions. The Company does not maintain a supplemental executive retirement plan ("SERP") or any other nonqualified deferred compensation plan.
Section 409A Penalties: Based on our review, no evidence of any stock options granted below FMV or other Section 409A violations has been identified. The Company's 409A compliance posture appears sound.
Recommendation: The Company should obtain an updated 409A valuation from Atlas Valuation Services, Inc. promptly following the closing of the $60,000,000 convertible note bridge financing and before granting any additional stock options. The infusion of $60,000,000 in new capital, together with any changes in the Company's financial performance or market conditions, may materially affect the enterprise value of the Company and the FMV of its common stock. Granting options between the closing date and the completion of the updated valuation would create a risk of inadvertent below-FMV grants and potential Section 409A non-compliance.
VII. Employee Benefit Plans
A. Health and Welfare Plans
The Company sponsors a comprehensive suite of health and welfare benefit plans for its full-time employees. The plans and their key features are summarized below.
Medical Insurance: The Company's group medical insurance plan is provided through Meridian Health Insurance Co. The Company offers two plan options — a PPO plan and a high-deductible health plan ("HDHP") — to eligible employees and their dependents. As an applicable large employer ("ALE") under the Affordable Care Act ("ACA") — the Company's workforce of approximately 310 FTEs exceeds the 50-FTE threshold — the Company is subject to the employer shared responsibility provisions of Section 4980H of the Internal Revenue Code. We reviewed the Company's Forms 1094-C and 1095-C filings for the 2022 plan year and confirmed that the filings were timely made and that the Company offered minimum essential coverage that met the minimum value and affordability requirements to substantially all full-time employees. No Section 4980H penalty assessments have been received by the Company.
Dental and Vision Insurance: The Company offers group dental and vision insurance through Meridian Health Insurance Co. as supplemental benefits available to all eligible employees.
Life Insurance and AD&D: The Company provides employer-paid group term life insurance and accidental death and dismemberment ("AD&D") coverage to all eligible employees, with a benefit equal to one times (1x) the employee's annual base salary, subject to a maximum benefit of $500,000. Employees may purchase supplemental voluntary life insurance at their own expense.
Short-Term and Long-Term Disability Insurance: The Company provides employer-paid short-term disability ("STD") and long-term disability ("LTD") insurance to all eligible employees. The STD plan provides a benefit equal to sixty percent (60%) of the employee's weekly base salary for up to twelve (12) weeks. The LTD plan provides a benefit equal to sixty percent (60%) of the employee's monthly base salary, subject to a maximum monthly benefit, following the expiration of the STD benefit period.
Flexible Spending Accounts and Health Savings Accounts: The Company offers a healthcare flexible spending account ("FSA") and a dependent care FSA to eligible employees. Employees enrolled in the HDHP are eligible to contribute to a health savings account ("HSA"), and the Company makes an annual employer contribution to each enrolled employee's HSA.
COBRA Compliance: The Company maintains COBRA administration procedures for the continuation of group health coverage following a qualifying event (e.g., termination of employment, reduction in hours). We reviewed the Company's COBRA notice procedures, including the general notice provided at enrollment and the election notice provided following a qualifying event, and did not identify any material deficiencies. No known COBRA violations have been reported by the Company. We recommend that the Company ensure its COBRA administration procedures are fully documented and consistently followed across all qualifying events.
B. Retirement Plans
401(k) Plan: The Company sponsors the Skybridge Fintech Ltd. 401(k) Plan, a tax-qualified defined contribution plan under Section 401(a) of the Internal Revenue Code. The plan is open to all eligible employees who have attained age 21 and completed at least three (3) months of service.
Employer Match: The Company provides a discretionary employer matching contribution equal to fifty percent (50%) of the first six percent (6%) of compensation that a participant defers to the plan (i.e., a maximum employer match of 3% of compensation). The employer match vests over a three-year graded vesting schedule (one-third vests after each year of service).
Plan Administration and Recordkeeper: The plan is administered by the Company, acting through its VP of People Operations as plan administrator. Recordkeeping, custodial, and participant services are provided by Pinnacle Retirement Services, Inc.
Form 5500 Filings: We reviewed the most recent Form 5500 filing for the plan (plan year ending December 31, 2022). The filing was timely made, and no material findings, qualifications, or adverse opinions were noted in the independent auditor's report attached to the filing. The plan's assets as of December 31, 2022, were approximately $8.2 million.
Non-Discrimination Testing: We reviewed the results of the most recent annual non-discrimination testing (ADP/ACP tests) for the plan year ending December 31, 2022. The plan passed both the ADP and ACP tests for the applicable testing year. No corrective distributions were required. The Company has represented that no corrective distributions have been required for any prior plan year.
No Defined Benefit or Pension Plans: The Company does not sponsor, maintain, or contribute to any defined benefit plan, pension plan, or multiemployer plan.
C. Other Benefits
In addition to the health, welfare, and retirement plans described above, the Company provides the following benefits to eligible employees:
• Paid Time Off ("PTO") / Vacation Policy: The Company provides a flexible PTO policy under which full-time employees accrue PTO based on length of service, with accrual rates ranging from fifteen (15) to twenty-five (25) days per year. The Company's PTO policy complies with applicable state-law requirements regarding accrual, carryover, and payout of unused PTO upon termination.
• Parental Leave Policy: The Company provides twelve (12) weeks of paid parental leave to eligible employees following the birth, adoption, or foster placement of a child, in addition to any leave available under the FMLA or applicable state family leave laws.
• Tuition Reimbursement / Professional Development: The Company offers an annual professional development stipend of up to $3,000 per employee for job-related courses, certifications, and conferences.
• Commuter Benefits: The Company offers pre-tax commuter benefits for transit and parking expenses in accordance with Section 132(f) of the Internal Revenue Code.
• Employee Wellness Programs: The Company provides a monthly wellness stipend and access to an employee assistance program ("EAP") offering mental health, financial counseling, and legal referral services.
D. ERISA Compliance
We reviewed the Company's health and welfare plans and 401(k) plan for compliance with the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). Our findings are as follows:
• Summary Plan Descriptions: The Company has prepared and distributed summary plan descriptions to participants for each ERISA-covered plan, including the 401(k) plan and the group health plan. The SPDs reviewed are consistent with the underlying plan documents.