PRIVILEGED AND CONFIDENTIAL ATTORNEY WORK PRODUCT
CALDERWOOD & HARKNESS LLP INTERNAL MEMORANDUM
I. EXECUTIVE SUMMARY
The purpose of this memorandum is to identify, analyze, and recommend negotiation strategies for the seven principal open issues remaining between (a) the counter-term-sheet prepared and delivered on behalf of Pinnacle Venture Fund II LP ("Pinnacle" or the "Fund") on the date hereof, April 11, 2026, and (b) the original draft term sheet received from Quillen Technologies, Inc. (the "Company" or "Quillen"), transmitted through the Company's outside counsel, Fenwick, Torres & Keane LLP (lead partner Gregory Navarro; associate Sophie Marchetti), on April 4, 2026 (the "Company Term Sheet").
Transaction Overview. The proposed transaction involves a $22,500,000 Series A Preferred Stock financing of Quillen Technologies, Inc., a Delaware C-corporation incorporated on July 12, 2023 (EIN 93-4817265), headquartered at 88 Garrison Street, Floor 4, Boston, MA 02116. Quillen is an enterprise SaaS company focused on AI-assisted compliance monitoring solutions. The Company's founders are Dr. Amara Osei (Chief Executive Officer) and Julian Voss (Chief Technology Officer).
Investor Syndicate. Pinnacle is the lead investor with a proposed allocation of $14,000,000 (representing 2,800,000 shares of Series A Preferred Stock at $5.00 per share). The co-investors participating in the round are:
• Blackthorn Growth Fund III LP — $6,000,000 allocation (1,200,000 shares at $5.00 per share), outside counsel Whitfield & Pryor LLP, contact Diana Hershfield; and
• Stonebridge Ventures LLC — $2,500,000 allocation (500,000 shares at $5.00 per share), contact Kevin Ashby.
Valuation. The agreed pre-money valuation is $57,500,000 and the post-money valuation is $80,000,000, calculated on a fully diluted basis inclusive of the expanded option pool. The per-share price of the Series A Preferred Stock is $5.00, derived from a pre-money fully diluted share count of 11,500,000 shares.
Capitalization Context. The Company's pre-money capitalization, on a fully diluted basis, consists of approximately 11,500,000 shares, comprising 8,000,000 shares of Common Stock held by the founders (Dr. Amara Osei: 3,200,000 shares; Julian Voss: 2,800,000 shares; other Common holders: 2,000,000 shares), 2,500,000 shares of Series Seed Preferred Stock (Harborview Angel Syndicate LLC: 1,500,000 shares; Ridgepoint Seed Partners LP: 1,000,000 shares), and 3,000,000 shares authorized under the 2023 Equity Incentive Plan (of which approximately 1,200,000 are currently granted and outstanding, and 800,000 remain unissued). In addition, convertible notes with an aggregate principal amount of $1,500,000 will convert into approximately 851,250 shares of Series A Preferred Stock at the Series A closing, bringing the total Series A Preferred share count to approximately 5,351,250 shares post-conversion and the post-closing fully diluted share count to approximately 16,251,250 shares.
Timing Urgency. Prompt resolution of the open issues identified in this memorandum is critical for several reasons:
First, the parties have targeted commencement of the 45-day exclusivity period on April 18, 2026, expiring on June 2, 2026. The final term sheet must be executed before exclusivity can commence.
Second, the Company has a limited cash runway. As of March 31, 2026, Quillen reported approximately $1.1 million in cash on hand against a monthly burn rate of approximately $420,000, yielding approximately 2.6 months of remaining runway (i.e., through approximately mid-June 2026). The target signing and closing date is June 15, 2026, and any material delay beyond that date places the Company at risk of operational distress.
Third, the Company's outstanding convertible promissory notes (aggregate principal: $1,500,000) have a maturity date of June 30, 2026, following a prior extension. The note holders—Harborview Angel Syndicate LLC ($750,000), Caldwell Family Office LLC ($500,000), and Dr. Lawrence Hu ($250,000)—have the right to demand repayment upon maturity. Failure to close the Series A before June 30, 2026 would trigger note maturity and potentially an event of default, which the Company cannot service given its current cash position.
Structure of This Memorandum. For each of the seven open issues, we present: (a) a description of the Company's draft position as set forth in the Company Term Sheet; (b) Pinnacle's counter-position as reflected in the counter-term-sheet delivered concurrently herewith; (c) an analysis of prevailing market practice; and (d) our recommended negotiation strategy, including acceptable fallback positions. Section III provides a summary priority ranking of all issues to guide the negotiation call. Section IV sets forth the proposed timeline and next steps.
II. ISSUE-BY-ISSUE ANALYSIS
Issue 1: Liquidation Preference — 1x Non-Participating vs. Participating Preferred with 3x Cap
This is the most economically significant open issue in the term sheet negotiation and represents Pinnacle's highest-priority point.
A. Company Draft Position
The Company Term Sheet provides that the Series A Preferred Stock shall carry a participating preferred liquidation preference with a 3x participation cap. Under this structure, upon any Liquidation Event (as defined therein to include any merger, acquisition, sale of substantially all assets, or voluntary or involuntary dissolution of the Company), holders of Series A Preferred Stock would receive distributions in the following order:
(i) First, each holder of Series A Preferred Stock receives an amount equal to the 1x liquidation preference — i.e., $5.00 per share (the original issue price), plus any declared but unpaid dividends thereon;
(ii) Second, after payment of the 1x liquidation preference to all Series A Preferred holders (and after payment of any liquidation preferences to holders of Series Seed Preferred Stock, which carry a 1x non-participating preference), the remaining proceeds are distributed pro rata among holders of Series A Preferred Stock (on an as-converted basis) and holders of Common Stock, until the aggregate distributions to each share of Series A Preferred Stock (including the 1x preference received in step (i)) equal 3x the original issue price — i.e., $15.00 per share; and
(iii) Third, upon reaching the 3x cap, the Series A Preferred Stock is deemed automatically converted to Common Stock, and all further distributions are made pro rata among all holders of Common Stock (including the shares resulting from such conversion).
The Company's proposed participating preferred structure applies uniformly to all Series A investors and to the approximately 851,250 shares of Series A Preferred Stock issued upon conversion of the outstanding convertible notes at closing. The total Series A Preferred share count subject to this structure would therefore be approximately 5,351,250 shares.
Under the Company's proposed structure, in a modest exit scenario, the participating feature provides a meaningful "double dip" benefit to the preferred holders, while the 3x cap limits the aggregate return advantage. For example, in a $120 million exit (1.5x the post-money valuation), Series A holders under the participating structure would receive their $5.00/share preference plus pro rata participation on the remaining proceeds, significantly exceeding what they would receive under a straight conversion to Common Stock. The Company appears to view the participating feature as a reasonable trade-off for the $57.5 million pre-money valuation, which it considers to be at the high end of market comparables for a company at Quillen's stage and revenue profile.
B. Pinnacle Counter-Position
Pinnacle's counter-term-sheet proposes a 1x non-participating preferred liquidation preference. Under this formulation, upon a Liquidation Event, each holder of Series A Preferred Stock would receive the greater of:
(a) an amount equal to the 1x liquidation preference of $5.00 per share (plus any declared but unpaid dividends); or
(b) the amount such holder would receive if the Series A Preferred Stock were converted to Common Stock immediately prior to such Liquidation Event and all proceeds were distributed pro rata among holders of Common Stock (on an as-converted, fully diluted basis);
but not both. Under the non-participating structure, holders of Series A Preferred Stock must elect between their preference and their conversion value; there is no cumulative "double dip."
Pinnacle's position is rooted in the view that the agreed pre-money valuation of $57,500,000 already reflects a fair assessment of the Company's value and risk profile at this stage, and that providing the Company's proposed participating preference would effectively over-compensate Series A holders relative to the negotiated price. At a $57.5 million pre-money / $80 million post-money valuation, the Series A investors are purchasing approximately 28.1% of the fully diluted post-closing equity, and the non-participating preference provides adequate downside protection (full return of capital in a low-exit scenario) while ensuring that in a high-exit scenario, the interests of preferred and common holders are fully aligned.
C. Market Practice Analysis
Non-participating preferred is the prevailing standard in institutional Series A preferred stock financings, particularly at the valuation levels present in this transaction. Relevant market data points include:
• According to the most recent Grayson & Pemberton LLP and Pryor & Firth LLP venture financing reports, approximately 65–70% of Series A financings in 2025 used non-participating preferred, with the proportion increasing to over 80% for rounds with pre-money valuations above $50 million.
• The NVCA model term sheet and model Certificate of Incorporation default to non-participating preferred, reflecting the prevailing institutional investor preference.
• Participating preferred with a cap is more commonly observed in (i) later-stage growth equity rounds where the valuation has been significantly compressed or the investment carries elevated risk, (ii) bridge or extension rounds, or (iii) transactions in which the investor is accepting a higher valuation than the Company's fundamentals might otherwise support, and the participation feature serves as a valuation adjustment mechanism.
• Quillen's current financial profile—$3.8 million ARR, $3.2 million LTM revenue, approximately 38 full-time employees—is consistent with a typical Series A enterprise SaaS company. The $57.5 million pre-money valuation implies an ARR multiple of approximately 15.1x, which is within the market range for high-growth enterprise SaaS companies but not at the extreme upper end. This valuation does not, in our assessment, warrant the additional downside protection of a participating preferred structure.
D. Recommended Negotiation Strategy
This is Pinnacle's highest-priority issue. We recommend holding firm on 1x non-participating preferred.
In the event the Company insists on some form of enhanced economic participation, we recommend the following tiered fallback strategy:
First fallback: Offer a non-participating preferred structure with an enhanced broad-based weighted-average anti-dilution ratchet (rather than the standard broad-based weighted-average already contemplated). This provides additional downside protection without the structural distortion of a participating preference.
Second fallback: Offer a "kickout" provision whereby any participation feature (if conceded) would automatically terminate upon the occurrence of (i) a Qualified IPO (to be defined as an underwritten public offering with gross proceeds of at least $50 million and a per-share price of at least 3x the original issue price) or (ii) a Qualified Financing (to be defined as a subsequent preferred stock financing at a pre-money valuation of at least $150 million). This would limit the duration of any participation feature to early-exit scenarios.
Third fallback (not recommended): If no other resolution is possible, agree to participating preferred with a 2x cap (rather than the Company's proposed 3x cap), subject to the kickout provisions described above.
We emphasize to the team that non-participating preferred more closely aligns the economic incentives of preferred and common holders, which benefits the founders in numerous practical ways—most importantly, it avoids the "zone of misalignment" between the preference amount and the cap amount where founders' returns are disproportionately reduced. This alignment argument resonates strongly with founder-friendly company counsel and can be leveraged effectively in negotiations.
We also note that both Blackthorn Growth Fund III LP (through Diana Hershfield at Whitfield & Pryor LLP) and Stonebridge Ventures LLC (through Kevin Ashby) have informally indicated that they support Pinnacle's position on non-participating preferred. This unanimity among the investor syndicate strengthens Pinnacle's negotiating position considerably and should be communicated to company counsel at the appropriate time.
Issue 2: Protective Provisions — Scope of Pinnacle Consent Rights
A. Company Draft Position
The Company Term Sheet includes a set of protective provisions modeled on the NVCA standard form, requiring the prior written consent of the holders of a majority of the outstanding shares of Series A Preferred Stock for the following specified actions:
(i) Any amendment, alteration, or repeal of any provision of the Company's Certificate of Incorporation or Bylaws that adversely affects the rights, preferences, privileges, or powers of the Series A Preferred Stock;
(ii) Any increase or decrease in the authorized number of shares of any class or series of capital stock of the Company;
(iii) Any creation or authorization of any new class or series of capital stock having rights, preferences, or privileges senior to or on parity with the Series A Preferred Stock;
(iv) Any declaration or payment of any dividend or other distribution on any shares of Common Stock or any other junior securities (other than dividends payable solely in additional shares of Common Stock); and
(v) Any increase or decrease in the authorized size of the Board of Directors.
Notably, the Company Term Sheet is silent on two categories of actions that are standard in NVCA model protective provisions:
(a) Incurrence of indebtedness — The Company Term Sheet does not require preferred holder consent for the incurrence of indebtedness, guarantees, or other credit obligations of any amount; and
(b) Fundamental transactions — The Company Term Sheet does not require preferred holder consent for any merger, consolidation, acquisition of the Company, sale of all or substantially all of the Company's assets, or any voluntary liquidation, dissolution, or winding up of the Company.
B. Pinnacle Counter-Position
Pinnacle's counter-term-sheet proposes to retain all five of the standard protective provisions included in the Company Term Sheet and to add the following two additional consent requirements:
(a) Debt consent provision: The prior written consent of the holders of a majority of the outstanding shares of Series A Preferred Stock shall be required for the Company to incur, assume, or guarantee any indebtedness (other than trade payables and similar obligations incurred in the ordinary course of business consistent with past practice) in excess of $500,000 in the aggregate at any time outstanding.
(b) Fundamental transaction consent provision: The prior written consent of the holders of a majority of the outstanding shares of Series A Preferred Stock shall be required for any merger, consolidation, or reorganization of the Company, any acquisition of the Company (whether by stock purchase, tender offer, or otherwise), any sale, lease, license, or other disposition of all or substantially all of the assets of the Company, or any voluntary liquidation, dissolution, or winding up of the Company.
With respect to the debt consent provision, we note that Pinnacle, as the holder of 2,800,000 of the 5,351,250 total outstanding shares of Series A Preferred Stock (including note-conversion shares), would hold approximately 52.3% of the Series A Preferred Stock—meaning that Pinnacle alone would have the ability to approve or block any such action. This effective veto right is appropriate for a lead investor contributing $14,000,000 of the $22,500,000 round.
C. Market Practice Analysis
Debt consent provision. A protective provision requiring preferred holder consent for the incurrence of indebtedness above a specified threshold is standard in NVCA model documents and in the overwhelming majority of institutional Series A financings. The appropriate threshold varies depending on the stage, revenue profile, and capital needs of the company:
• For early-stage enterprise SaaS companies with ARR in the $3–5 million range (comparable to Quillen), a debt consent threshold of $250,000 to $1,000,000 is the typical market range.
• A $500,000 threshold is reasonable given Quillen's current revenue scale and burn rate. At $420,000 per month in operating expenditures, a $500,000 credit facility would represent approximately 1.2 months of operating expenses—a modest working capital cushion that the Company should not need to access unilaterally without investor input.
• We anticipate that the Company may counter with a higher threshold in the range of $750,000 to $1,000,000, and we discuss our recommended response below.
Fundamental transaction consent provision. The NVCA model Certificate of Incorporation includes consent of the preferred stockholders as a standard protective provision for mergers, acquisitions, sales of substantially all assets, and dissolutions. The absence of this provision from the Company Term Sheet is a notable and non-standard omission. In our experience, virtually every institutional Series A financing includes this protection, and its absence here may reflect either (i) aggressive drafting by company counsel or (ii) an inadvertent oversight.
D. Recommended Negotiation Strategy
The fundamental transaction consent is a "must-have" item. Pinnacle cannot accept a term sheet that permits the founders and Board to execute a sale of the Company, a merger, or a dissolution without the affirmative consent of the preferred stockholders. This is a baseline governance protection that no sophisticated institutional investor should forego, and its absence from the Company Term Sheet should be addressed firmly and unequivocally. We recommend presenting this point not as a "new ask" by Pinnacle but rather as the correction of a gap in the Company's draft relative to market-standard NVCA terms. If company counsel resists, it will be a strong signal regarding the Company's negotiation posture more broadly.
The debt consent threshold is an important but negotiable point. We recommend holding at $500,000 as our opening position. If the Company counters with $750,000, that is an acceptable compromise. We would resist a threshold above $750,000, as a $1,000,000 threshold would allow the Company to incur debt obligations representing nearly 2.4 months of its current burn rate without investor consent—a level of latitude that we believe is excessive for a company at this stage.
Enforceability. We recommend confirming in the term sheet that all protective provisions will be set forth in the Amended and Restated Certificate of Incorporation of the Company (to be filed with the Delaware Secretary of State at or prior to the closing) rather than solely in a stockholders' agreement or investors' rights agreement. Protective provisions embedded in the charter are enforceable as a matter of Delaware corporate law under the DGCL (specifically, Section 151 regarding the rights, preferences, and limitations of preferred stock), providing a stronger enforcement mechanism than contractual covenants in a side agreement. This is a standard structural point, but it is worth confirming explicitly given the Company's omission of the fundamental transaction consent.
Issue 3: Founder Vesting — 25% Credit for Time Served (~8.75 Months Vesting Credit)
A. Company Draft Position
The Company Term Sheet provides that the existing founder shares—Dr. Amara Osei's 3,200,000 shares of Common Stock and Julian Voss's 2,800,000 shares of Common Stock, totaling 6,000,000 shares—shall be subjected to a new four-year reverse vesting schedule, with a one-year cliff, effective as of the closing date of the Series A financing.
Critically, the Company proposes a vesting credit of 50% for the founders' time of service since the Company's date of incorporation (July 12, 2023). As of the anticipated closing date of June 15, 2026, the founders will have served approximately 35 months (from July 2023 to June 2026). A 50% credit applied to 35 months yields a vesting credit of approximately 17.5 months out of the 48-month vesting schedule, meaning that approximately 36.5% of each founder's shares would be deemed fully vested at closing.
Under this structure:
• Dr. Osei would have approximately 1,167,000 shares vested at closing (36.5% × 3,200,000).
• Mr. Voss would have approximately 1,021,000 shares vested at closing (36.5% × 2,800,000).
• The one-year cliff would be measured from the closing date but would be largely symbolic, since the credited vesting (17.5 months) already places the founders well past the 12-month cliff milestone.
• The remaining shares would vest monthly over the balance of the 48-month schedule (i.e., 30.5 remaining months of vesting), with approximately 2.1% of total shares vesting per month.
The Company's rationale for the 50% credit is that the founders have been working full-time on the Company for nearly three years, have built the Company from inception through a seed round and significant product and revenue milestones (including achieving $3.8 million in ARR), and that failing to provide adequate credit for this service would be punitive and misaligned with the founders' contributions.
B. Pinnacle Counter-Position
Pinnacle agrees that the existing founder shares should be subjected to a four-year reverse vesting schedule with a one-year cliff from the closing date. However, Pinnacle proposes a vesting credit of only 25% for time served since incorporation.
A 25% credit applied to 35 months of service yields a vesting credit of approximately 8.75 months out of the 48-month schedule, meaning that approximately 18.2% of each founder's shares would be deemed vested at closing. Under this structure:
• Dr. Osei would have approximately 583,000 shares vested at closing (18.2% × 3,200,000).
• Mr. Voss would have approximately 510,000 shares vested at closing (18.2% × 2,800,000).
• The one-year cliff from the closing date would remain meaningful—founders would need to continue serving for an additional 3.25 months after closing before any additional shares vest beyond the initial credit.
• The remaining shares (approximately 81.8%) would vest monthly over the balance of the schedule (approximately 39.25 remaining months), with approximately 2.1% of total shares vesting per month.
Pinnacle's rationale for the 25% credit is that it appropriately balances recognition of the founders' prior contributions with the need to ensure that the founders remain substantially incentivized to continue building the Company during the period that is most relevant to the Series A investors—namely, the next three to four years. In Pinnacle's experience, the bulk of value creation in a Series A-stage enterprise SaaS company occurs after the institutional financing, not before, and the vesting schedule should reflect that reality.
C. Market Practice Analysis
Vesting credits for time served in Series A transactions vary considerably depending on the company's age, the founders' level of contribution, and the overall negotiation dynamics. The typical range is as follows:
• 0% credit (full restart): Most common in very early-stage companies (less than 12 months since incorporation) or where the founders have not yet demonstrated significant value creation. Increasingly rare in Series A rounds for companies that are 2+ years old.
• 25% credit: A commonly accepted middle ground for companies that are approximately 2–3 years old at the time of the Series A. This level of credit ensures that the one-year cliff remains meaningful while acknowledging prior service.
• 33% credit: Another frequently observed data point, particularly for companies with strong pre-Series A traction (as is the case with Quillen's $3.8 million ARR).
• 50% credit: Typically seen in transactions where the company is more mature (3+ years post-incorporation with significant revenue), where the founders have strong negotiating leverage, or where the pre-money valuation is high enough that the investors are comfortable with a reduced vesting tail.
At 35 months since incorporation, a 25% credit for Quillen's founders is within the market norm, though the Company will likely argue that Quillen's revenue traction and operational maturity warrant a higher credit. We believe a credit in the 25–33% range is defensible, with 25% being the appropriate starting position.
We note separately that Priya Chandrasekar, the Company's Vice President of Product (holding 400,000 shares of Common Stock, having joined in January 2025), is subject to a separate vesting arrangement under her employment agreement and equity grant. Her vesting is not a point of negotiation in the term sheet and will be addressed in the ordinary course during the definitive document phase.
D. Recommended Negotiation Strategy
We expect the founders and their counsel to push back vigorously toward a higher vesting credit, likely in the range of 35–50%. Our recommended approach is as follows:
Opening position: Hold firm at 25% credit (8.75 months).
Acceptable fallback: A 33% credit (approximately 11.7 months, resulting in approximately 24.3% of shares vested at closing) would be an acceptable compromise. At this level, the one-year cliff from closing still has approximately 0.3 months of practical significance—tight, but not entirely meaningless.
Resistance point: Any credit above 35% should be resisted, and any credit at or above 40% would effectively eliminate the practical significance of the one-year cliff and should be firmly rejected.
Cliff significance. We emphasize that the meaningfulness of the one-year cliff is a central issue in this negotiation. The purpose of the cliff is to provide a period during which, if a founder departs or is terminated for cause shortly after the Series A closing, the Company can recapture a significant portion of the founder's shares. If the vesting credit is set at 50% (17.5 months), the founders are already well past the 12-month cliff at closing, and the cliff serves no protective function. At 25% (8.75 months), the founders are 3.25 months short of the cliff, preserving its intended effect.
Acceleration. The Company Term Sheet is silent on acceleration provisions. We recommend that Pinnacle's counter-term-sheet expressly provide that there shall be no single-trigger acceleration on a change of control (i.e., vesting does not automatically accelerate upon a sale of the Company). If the Company requests acceleration as a concession, we recommend offering double-trigger acceleration, under which vesting accelerates only if (i) a change of control occurs and (ii) the founder's employment is terminated without cause or the founder resigns for good reason within 12 months following the change of control. Double-trigger acceleration is the prevailing market standard and is widely accepted by institutional investors. This can be offered as a "give" in exchange for holding firm on the 25% vesting credit.
Issue 4: Option Pool Expansion — Dilution Allocation to Pre-Series A Stockholders
A. Company Draft Position
The Company Term Sheet proposes to increase the number of shares authorized for issuance under the Company's 2023 Equity Incentive Plan (the "Plan") from the current 2,000,000 shares to 2,500,000 shares, representing an increase of 500,000 shares. Of the currently authorized 2,000,000 shares, approximately 1,200,000 have been granted and are outstanding (in the form of stock options and restricted stock awards to employees and consultants), leaving approximately 800,000 shares currently unissued and available for future grants.
Under the Company's proposal, the post-closing option pool would consist of approximately 1,300,000 unissued shares (800,000 currently unissued + 500,000 newly authorized).
Importantly, the Company proposes that the dilution resulting from the option pool expansion be shared pro rata among all stockholders, including the new Series A investors. Under this formulation, the 500,000 new shares would dilute both pre-money stockholders and new-money investors proportionally, effectively treating the option pool expansion as a post-money event.
B. Pinnacle Counter-Position
Pinnacle proposes a more substantial increase: the total authorized shares under the Plan should be increased to 3,000,000 shares, representing an increase of 1,000,000 shares from the current 2,000,000. This would result in approximately 1,800,000 unissued shares available for future grants post-closing (800,000 currently unissued + 1,000,000 newly authorized).
Critically, Pinnacle insists that all dilution from the option pool expansion must be borne exclusively by the pre-Series A stockholders. This means the dilution falls on:
• The founders and other Common Stock holders, who collectively hold 8,000,000 shares of Common Stock; and
• The Series Seed Preferred holders—Harborview Angel Syndicate LLC (1,500,000 shares) and Ridgepoint Seed Partners LP (1,000,000 shares)—who collectively hold 2,500,000 shares of Series Seed Preferred Stock.
Pinnacle's position is grounded in the fundamental economics of the transaction: the pre-money valuation of $57,500,000 was agreed upon on a fully diluted basis that already incorporates the full 3,000,000-share option pool. The per-share price of $5.00 is derived as follows:
$57,500,000 ÷ 11,500,000 pre-money fully diluted shares = $5.00 per share
The 11,500,000 pre-money fully diluted share count includes:
If the option pool were set at only 2,500,000 shares (as the Company proposes), the pre-money fully diluted share count would be 11,000,000, and the resulting per-share price at a $57.5 million pre-money valuation would be approximately $5.23 per share—a higher price that would give the Series A investors fewer shares for the same investment amount. Alternatively, if the share price is held at $5.00, a pool of only 2,500,000 shares implies a pre-money valuation of only $55,000,000 (11,000,000 × $5.00), which is below the agreed valuation. Either way, the Company's smaller pool proposal distorts the agreed-upon economics of the transaction.
C. Market Practice Analysis
It is standard and well-established market practice in venture capital financings for the option pool increase to be allocated on a pre-money basis, meaning the dilution is carved out of the pre-money capitalization and borne entirely by existing stockholders before the Series A price per share is calculated. This is the approach reflected in the NVCA model term sheet and is used in the overwhelming majority of institutional venture capital transactions. The rationale is straightforward: the option pool is a tool for the Company to recruit and retain the talent necessary to build the business in the post-financing period, and its cost should be borne by the existing capitalization rather than by the incoming investors whose capital is funding the Company's growth.
Regarding the size of the pool:
• A total option pool representing approximately 18.5% of the pre-money fully diluted capitalization (3,000,000 ÷ ~16,251,250 post-closing fully diluted shares) is within the typical 15–20% range for a Series A enterprise SaaS company.
• The Company's proposed pool of 2,500,000 shares (with only 1,300,000 unissued) would represent approximately 15.4% of post-closing fully diluted shares, which is at the lower end of the range and may be insufficient to support 18–24 months of post-Series A hiring.
• For a company with 38 FTEs expecting to scale significantly post-Series A (a reasonable expectation given the $14 million lead investment and $22.5 million total raise), 1,800,000 unissued options provides a meaningfully more adequate runway for talent acquisition than 1,300,000.
D. Recommended Negotiation Strategy
This is a significant economic point and is ranked among Pinnacle's "critical" issues. Our recommended approach:
Primary position: Hold firm at 3,000,000 total authorized shares (1,000,000 share increase), with all dilution allocated to pre-money stockholders. Emphasize that this pool size is standard, that the $5.00 per share price was calculated assuming this pool, and that a smaller pool fundamentally changes the economic bargain.
Framing: Rather than framing this as a demand that dilutes the founders, we recommend framing the larger pool as beneficial to the Company and its ability to recruit the senior talent needed to achieve the next stage of growth. Offer to work collaboratively with the Company to prepare a detailed hiring plan and option budget demonstrating that 1,800,000 unissued options are necessary to support the Company's anticipated hiring over the next 18–24 months. This budget should account for VP-level hires (typically 0.5–1.0% of fully diluted equity each), senior engineering hires, and a potential advisory board.
Fallback: If the Company will not agree to 3,000,000 shares, we would accept a total pool of 2,750,000 shares (750,000 share increase, yielding approximately 1,550,000 unissued shares post-closing), but only if the pre-money valuation is correspondingly adjusted to reflect the smaller pool. Specifically, with 2,750,000 option pool shares, the pre-money fully diluted share count would be 11,250,000, and the per-share price at a $57.5 million pre-money valuation would be approximately $5.11. If the Company wishes to maintain the $5.00 price per share, the pre-money valuation would need to be reduced to $56,250,000 (11,250,000 × $5.00). This adjustment ensures that Pinnacle is not economically disadvantaged by the smaller pool.
Resistance point: Any total pool below 2,750,000 shares should be resisted unless accompanied by a corresponding valuation adjustment.
Issue 5: Information Rights Enhancements
A. Company Draft Position
The Company Term Sheet provides for the following information rights to be granted to holders of Series A Preferred Stock (subject to customary confidentiality restrictions):
(i) Quarterly unaudited financial statements (balance sheet, income statement, and statement of cash flows), delivered within 45 days of the end of each fiscal quarter; and
(ii) Annual audited financial statements, delivered within 180 days of the end of each fiscal year.
The Company Term Sheet does not include any provision for (a) monthly financial reporting, (b) delivery of an annual operating budget or business plan by a specified date, or (c) any enhanced reporting obligations specific to the lead investor.
B. Pinnacle Counter-Position
Pinnacle's counter-term-sheet proposes a significantly enhanced information rights package, consisting of the following:
(i) Monthly unaudited financial statements (balance sheet, income statement, and statement of cash flows), delivered within 30 days of the end of each calendar month;
(ii) Quarterly unaudited financial statements, consistent with the Company's proposal, delivered within 45 days of the end of each fiscal quarter;
(iii) Annual audited financial statements, delivered within 120 days of the end of each fiscal year (a reduction from the Company's proposed 180-day period). The annual audit shall be performed by Pemberton & Associates CPAs LLP (engagement partner Diane Stratton) or such other nationally recognized or regionally prominent accounting firm as may be approved by the Board of Directors;
(iv) Annual operating budget and business plan, delivered no later than December 15 of each year for the following fiscal year; and
(v) A separate side letter between the Company and Pinnacle (as lead investor) providing for enhanced quarterly reporting, including a KPI dashboard covering key performance metrics (ARR, monthly recurring revenue, gross and net churn rates, customer count, average contract value, customer acquisition cost, LTV/CAC ratio, and such other metrics as may be reasonably requested by Pinnacle), as well as on-site inspection rights upon reasonable prior written notice (not more than once per fiscal quarter).
C. Market Practice Analysis
Pinnacle's proposed information rights are consistent with prevailing market practice for institutional Series A financings:
• Monthly financials within 30 days are standard in NVCA model documents and are included in the vast majority of institutional Series A investors' rights agreements. The ability to monitor the Company's financial performance on a monthly basis is a baseline requirement for active venture capital investors and is essential for portfolio monitoring and fund-level reporting to limited partners.
• Annual audited financials within 120 days are the standard market expectation. The Company's proposed 180-day deadline is unusually long and, in our experience, is more commonly associated with seed-stage financings where the company may not yet have established a relationship with an audit firm. For a company raising $22.5 million in institutional capital, a 120-day audit deadline is both reasonable and necessary. Many lead investors in later-stage rounds require 90-day delivery.
• Annual budget delivery by mid-December is a standard and widely accepted provision. This timing allows investors to review and provide input on the Company's operating plan before the commencement of the new fiscal year.
• Side letters with enhanced reporting and inspection rights are common for lead investors in Series A rounds and are not unusual or aggressive. These rights are typically limited to investors holding above a specified ownership threshold (e.g., Major Investors, often defined as holders of at least 1,000,000 shares of Preferred Stock or $5 million invested).
D. Recommended Negotiation Strategy
Monthly financials and the 120-day audit deadline are important for Pinnacle's portfolio monitoring and LP reporting obligations. These should be presented as non-negotiable baseline requirements for the Investors' Rights Agreement (the "IRA") and applicable to all Major Investors (to be defined).
The annual budget deadline of December 15 is reasonable and should be readily obtainable. This is a straightforward operational commitment that the Company should be prepared to accept.
The enhanced KPI reporting and on-site inspection rights, which are proposed to be included in a separate Pinnacle side letter (rather than the IRA), may face mild resistance from the Company. Company counsel may argue that these rights create an unequal information environment among investors or impose undue administrative burden on the Company's finance team. We recommend presenting these rights as specific to Pinnacle in its capacity as lead investor—reflecting Pinnacle's proportionally larger economic exposure ($14 million of $22.5 million) and its board representation—and not available to all investors under the IRA.
Compromise, if necessary: If the Company resists including monthly financials in the IRA for all investors, we can offer the following compromise: monthly financial statements would be included in the Pinnacle side letter (rather than the IRA), while the IRA would retain quarterly financial statements within 45 days for all Major Investors. This preserves Pinnacle's access to monthly data while reducing the Company's perceived reporting burden. We note, however, that this compromise is not our preferred outcome—monthly financials in the IRA for all Major Investors is the market standard and should be the primary goal.
Issue 6: Drag-Along Threshold
A. Company Draft Position
The Company Term Sheet provides that drag-along rights shall be triggered upon the approval of:
(a) Holders of a majority of the outstanding shares of Common Stock; and
(b) The Board of Directors, including the affirmative vote of at least one director designated by the holders of Series A Preferred Stock (the "Series A Director").
The Company's formulation does not require a separate vote or consent of the holders of any series of Preferred Stock.
Under the Company's current capitalization, the founders—Dr. Osei and Mr. Voss—hold 100% of the outstanding Common Stock (8,000,000 of 8,000,000 shares). Even post-closing, the founders will continue to hold a majority of Common Stock on an as-issued basis (though not on a fully diluted, as-converted basis). The Company's proposed drag-along structure would therefore permit the founders, together with a sympathetic Board (which includes at least one Series A Director), to force a sale of the Company and compel all stockholders—including the Series A and Series Seed Preferred holders—to participate in that sale, without any independent vote or consent of the Preferred stockholders.
This is a significant governance gap. If, for example, the founders negotiated a sale at a price that fully recovers the founders' economic interest but provides only a modest return (or even a loss) to the Preferred investors, the drag-along as drafted could compel the Preferred holders to participate in that transaction over their objection, so long as one Series A Director on the Board concurs.
B. Pinnacle Counter-Position
Pinnacle's counter-term-sheet proposes that drag-along rights shall be triggered only upon the approval of:
(a) Holders of a majority of the outstanding shares of Common Stock; AND
(b) Holders of a majority of the outstanding shares of Preferred Stock (Series Seed Preferred and Series A Preferred, voting together as a single class on an as-converted basis).
This dual-approval mechanism ensures that a drag-along transaction cannot proceed without the affirmative consent of both the common stockholder base (predominantly the founders) and the investor base (the Preferred stockholders). The requirement for Preferred approval provides a critical check on the founders' ability to unilaterally compel a sale of the Company.
Under the post-closing capitalization (assuming full conversion of the convertible notes and the Series A closing), the Preferred Stock will consist of:
A majority of the total Preferred Stock (voting together as a single class) would require the affirmative vote of holders of at least 3,925,626 shares. Pinnacle alone holds 2,800,000 shares—short of a majority of total Preferred, but when combined with Blackthorn (1,200,000), the two lead investors together hold 4,000,000 shares, exceeding the majority threshold. This structure ensures that no drag-along can proceed without the support of at least the two largest institutional investors.
C. Market Practice Analysis
The NVCA model Voting Agreement provides for drag-along rights to be triggered upon the approval of (i) the Board of Directors, (ii) holders of a majority of the Common Stock, and (iii) holders of a majority of the Preferred Stock (or, in some formulations, specified percentages of each series of Preferred). Requiring both Common and Preferred approval is the standard market practice. The Company's omission of a Preferred vote is non-standard and disadvantageous to the investor group.
The rationale for the dual-approval requirement is clear: the Common and Preferred stockholders may have divergent economic interests in certain exit scenarios (particularly in exits near or below the aggregate liquidation preference amount), and the drag-along mechanism—which compels involuntary participation in a sale—should not be exercisable by one constituency over the objection of the other.
D. Recommended Negotiation Strategy
This is a fundamental governance protection and is ranked among Pinnacle's "critical" must-have issues. Our recommended approach:
Primary position: Insist on the dual-approval mechanism requiring the affirmative vote of both (a) holders of a majority of the outstanding Common Stock and (b) holders of a majority of the outstanding Preferred Stock (Series Seed and Series A, voting together as a single class).
Supporting argument: Pinnacle, Blackthorn, and Stonebridge collectively represent $22.5 million of invested capital—capital that is critical to the Company's continued operations and growth. These investors should not be subject to a forced sale without their collective consent. The dual-approval structure is the standard NVCA formulation and reflects the basic governance principle that stockholders who have different economic rights and different investment theses should each have a voice in the most consequential corporate decision—a sale of the Company.
Acceptable compromise: If the Company pushes for a lower threshold on the Preferred side—for example, requiring only the approval of a majority of the Series A Preferred Stock (excluding the Series Seed)—this is acceptable from Pinnacle's perspective. Pinnacle holds approximately 52.3% of the Series A Preferred Stock and would therefore have an effective veto over any drag-along transaction. However, we note that excluding the Series Seed holders from the drag-along vote could create friction with Harborview Angel Syndicate LLC and Ridgepoint Seed Partners LP, and we recommend including the Series Seed in the voting class as a matter of good investor relations.
Alternative compromise: Drag-along requires approval of (a) holders of a majority of the outstanding Common Stock, (b) holders of a majority of the outstanding Series A Preferred Stock, and (c) the Board of Directors (including the affirmative vote of at least one Series A Director). This three-pronged approach provides multiple layers of protection and may be more palatable to the Company than a pure Common-plus-Preferred dual-vote, as it retains the Board approval element from the Company's original proposal.
Issue 7: Legal Fee Reimbursement Cap
A. Company Draft Position
The Company Term Sheet provides that the Company shall reimburse Pinnacle Venture Fund II LP for its reasonable legal fees and out-of-pocket expenses incurred in connection with the negotiation, documentation, and closing of the Series A financing, subject to a cap of $50,000.
B. Pinnacle Counter-Position
Pinnacle's counter-term-sheet proposes that the reimbursement cap be increased to $75,000. This higher cap reflects the actual anticipated scope of legal work required to complete the Series A financing, which includes the following work streams:
• Term sheet negotiation and revision (ongoing);
• Legal due diligence, including review of the Company's corporate governance documents, material contracts, intellectual property portfolio, employment agreements, and regulatory compliance;
• Tax analysis, including QSBS (Qualified Small Business Stock) eligibility assessment under Section 1202 of the Internal Revenue Code and fund structure considerations for Pinnacle's limited partners;
• Privacy and data security review, including assessment of the Company's compliance with applicable data protection laws (particularly relevant given Quillen's enterprise SaaS compliance-monitoring product);
• intellectual property diligence, including review of patent applications, trade secret protocols, open-source software usage, and assignment of invention agreements;
• Drafting and negotiation of the definitive transaction documents, including the Series A Preferred Stock Purchase Agreement, the Amended and Restated Certificate of Incorporation, the Investors' Rights Agreement, the Right of First Refusal and Co-Sale Agreement, the Voting Agreement, the Pinnacle side letter, and any ancillary documents; and
• Closing mechanics, including review of closing conditions, preparation of closing deliverables, and filing of the Amended and Restated Certificate of Incorporation with the Delaware Secretary of State.
Calderwood & Harkness LLP's estimated fees for the engagement are in the range of $60,000 to $75,000, based on the following billing rates:
Any fees incurred in excess of the $75,000 cap would be borne directly by Pinnacle and would not be reimbursable by the Company. Pinnacle has acknowledged and accepted this arrangement.
C. Market Practice Analysis
Legal fee reimbursement caps in Series A preferred stock financings typically range from $25,000 to $100,000, with $50,000 to $75,000 representing the most common range. The appropriate cap depends on the size and complexity of the round, the scope of due diligence required, and the geographic market:
• For smaller Series A rounds ($5–10 million), caps of $25,000–$50,000 are common.
• For larger institutional rounds ($15–25 million) involving a lead investor conducting substantial due diligence across multiple work streams (IP, tax, privacy, regulatory, cap table), caps of $50,000–$100,000 are standard.
• Quillen's round ($22.5 million with a lead investor allocation of $14 million) falls squarely in the category where a $75,000 cap is reasonable and within market norms.
D. Recommended Negotiation Strategy
This is the lowest-priority open issue and is classified as "desirable" rather than "critical" or "important." Our recommended approach:
Primary position: Request $75,000, presenting the cap as a straightforward adjustment reflecting actual anticipated legal costs. The $25,000 differential between the Company's $50,000 cap and Pinnacle's $75,000 request is modest in the context of a $22.5 million financing—representing approximately 0.11% of the total round size.