Attachments: pinnacle-counter-term-sheet-redline.docx; term-sheet-issues-list.docx
Christine and Sandeep,
I hope you are both well. As you know, we received Quillen Technologies' draft term sheet on April 4 via Gregory Navarro at Fenwick, Torres & Keane LLP. Our team has now completed its review, and I am attaching two documents for Pinnacle's consideration:
1. **Redline Markup of Quillen's Draft Term Sheet** — reflecting Pinnacle's proposed counter-positions on the key economic and governance terms; and 2. **Internal Issues Memorandum** — summarizing the principal open negotiation points, our recommended strategies, and our assessment of likely areas of pushback from the company side.
Given our target of delivering the counter to Quillen/Ostrander Solutions on **April 11**, we would appreciate Pinnacle's sign-off by end of day tomorrow (Saturday) or early April 11 so that we can finalize and transmit.
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**Summary of Key Changes in the Counter-Term-Sheet**
Below is a concise overview of the principal revisions we are proposing relative to Quillen's draft:
1. **Liquidation Preference.** We have revised Quillen's proposed participating preferred with a 3x cap to **1x non-participating preferred**. This is the single most significant economic change in the counter. Non-participating preferred is more founder-friendly in moderate exit scenarios but preserves Pinnacle's downside protection through a straight 1x preference. Importantly, it is far more consistent with current market practice for a Series A at this valuation level ($57.5M pre-money / $80.0M post-money). The 3x participating cap in the company's draft is well outside market norms and would likely raise concerns with Blackthorn and potential downstream investors.
2. **Protective Provisions / Consent Rights.** We have added Pinnacle-specific consent rights on (a) any incurrence of indebtedness exceeding $500,000 and (b) any acquisition, merger, or liquidation of the Company. These go beyond the standard NVCA protective provisions included in Quillen's draft and reflect Pinnacle's position as lead investor with $14.0 million at stake — 62.2% of the $22.5M round.
3. **Board Composition.** We have specified a **5-seat board** structured as follows: - 2 seats elected by holders of Common Stock (founder designees); - 2 seats elected by holders of Series A Preferred (1 Pinnacle designee, 1 Blackthorn designee); and - 1 independent director mutually agreed upon by Common and Preferred holders. Christine Aldridge would serve as Pinnacle's initial designee, and Diana Hershfield (Blackthorn Growth Fund III LP) would serve as Blackthorn's initial designee. The company's draft was less specific on seat allocation, and we believe it is important to lock this structure down at the term sheet stage.
4. **Founder Vesting.** We have added a requirement that existing founder shares — Dr. Amara Osei's 3,200,000 shares and Julian Voss's 2,800,000 shares — be subject to a **4-year vesting schedule with a 1-year cliff**, with a **25% vesting credit** for time already served since incorporation in July 2023. At the targeted closing date of June 15, 2026, approximately 35 months will have elapsed, so the 25% credit equates to roughly 8.75 months of vesting credit applied. This is a standard investor protection designed to ensure continued founder alignment post-investment.
5. **Information Rights.** We have tightened the reporting obligations to require: (a) monthly financial statements within **30 days** of month-end, (b) annual audited financial statements within **120 days** of fiscal year-end, and (c) delivery of the annual budget/operating plan by **December 15** of each year. These timelines are more rigorous than the company's draft proposed and are appropriate given the stage and burn rate.
6. **Option Pool Expansion.** We have confirmed the increase of the equity incentive plan pool from 2,000,000 to **3,000,000 shares** (adding 1,000,000 new shares), with dilution borne entirely by pre-Series A stockholders (founders and seed investors), not the Series A investors. This results in 1,800,000 unissued options post-closing (800,000 existing unissued + 1,000,000 new).
7. **Drag-Along.** We have clarified that the drag-along provision requires approval of a **majority of Common Stock and a majority of Preferred Stock**, voting together.
8. **Legal Fee Reimbursement.** We have confirmed the Company's obligation to reimburse Pinnacle's legal fees up to **$75,000** at closing.
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**Items Accepted As-Is from Quillen's Draft**
Several terms in the company's draft are acceptable and have been left unchanged, including:
- Round size of $22.5M; price per share of $5.00; pre-money valuation of $57.5M / post-money of $80.0M - Anti-dilution: broad-based weighted-average - Dividends: 8% non-cumulative, payable when and if declared - Pro rata rights and Right of First Offer for all Series A investors - ROFR and co-sale provisions (Company and then investors have ROFR on founder transfers) - 45-day exclusivity period commencing upon term sheet signing (targeting April 18, 2026, with expiration June 2, 2026) - Registration rights (demand after earlier of 5 years or IPO; S-3; piggyback) - Standard closing conditions, including satisfactory completion of legal, IP, financial, and technical due diligence, executed definitive documents, and filing of the Amended and Restated Certificate of Incorporation with the Delaware Secretary of State
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**Issues Memorandum**
I would direct you both to the attached issues list for a deeper discussion of each open point, including our recommended negotiation strategy and our assessment of where Quillen/Ostrander Solutions are likely to push back. Two items I want to flag in particular:
- **Liquidation preference** (non-participating vs. participating with 3x cap) is the item most likely to generate significant pushback. The issues memo includes analysis of current market data from Bramwell Health IT and Grayson & Pemberton LLP's quarterly survey, as well as recommended fallback positions should this become a sticking point. - **Founder vesting credit percentage** may also be a point of discussion. The founders may argue for a higher credit given that they are approximately 35 months into operations at the anticipated closing. The memo addresses the range of positions we have seen in comparable transactions.
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**Co-Investor Coordination**
As you know, Blackthorn Growth Fund III LP ($6.0M co-investor) is being advised by Whitfield & Pryor LLP in New York. I would suggest that once Pinnacle approves the counter, we share it with Diana Hershfield and Whitfield & Pryor for alignment before delivering it to Quillen's side. Given the board seat allocation and protective provisions, we want to ensure Blackthorn is fully on board before the counter goes out.
Separately, Kevin Ashby at Stonebridge Ventures LLC ($2.5M) has indicated a willingness to follow Pinnacle's lead on term sheet terms. Please confirm whether you would like us to loop in Stonebridge at this stage as well, or whether you prefer to share the final counter with them after Blackthorn alignment.
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**Convertible Note Conversion**
For completeness, the counter-term-sheet does not alter the note conversion mechanics, which are dictated by the existing note terms. The $1.5M aggregate principal plus estimated $202,500 in accrued interest will convert at **$2.00/share** (the valuation cap-derived price, which is more favorable to the note holders than the 20% discount price of $4.00), resulting in approximately **851,250 shares** of Series A Preferred issued on conversion. These shares are allocated among:
- Harborview Angel Syndicate LLC — $750,000 - Caldwell Family Office LLC — $500,000 - Dr. Lawrence Hu — $250,000
These conversion shares are in addition to the 4,500,000 new-money Series A shares.
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**Timeline**
A reminder of the key dates driving this process:
| Milestone
I want to underscore the urgency here. Quillen has approximately **$1.1 million in cash on hand** with a monthly burn rate of roughly **$420,000** — that is approximately **2.6 months of runway** as of March 31, 2026. Additionally, the convertible notes' extended maturity date is **June 30, 2026**. This dynamic gives Pinnacle meaningful leverage on timing and terms, but it also means that material delays risk the company's operational continuity, which is in no one's interest.
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**Action Items**
1. Please review both attachments and confirm your approval — or provide any additional edits or comments — by **end of day Saturday, April 11**, or first thing Monday at the latest, so that we can finalize and transmit the counter-term-sheet to Gregory Navarro at Ostrander Solutions. 2. If it would be helpful, I am happy to set up a call over the weekend to walk through any items in more detail. Leila and I are both available. 3. Once the term sheet is agreed and exclusivity begins, we will immediately circulate the due diligence request list to company counsel to kick off the diligence process. 4. Separately, Leila Nazari and Robert Jansen are concurrently finalizing the **QSBS eligibility analysis under Section 1202**, which we will circulate to you under separate cover.
Thank you both, and please do not hesitate to reach out with any questions.
Best regards,
**Rachel Bernstein** Partner Calderwood & Harkness LLP 555 Mission Street, Suite 3100 San Francisco, CA 94105 T: (415) 555-7200
C&H Matter No. 1002-00002
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