1002-00002 · Pinnacle Venture Fund II LP · Transaction Analysis

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PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT COMMUNICATION

MEMORANDUM

TO: Rachel Bernstein, Partner, Calderwood & Harkness LLP Christine Aldridge, Partner, Pinnacle Venture Fund II LP

FROM: Leila Nazari, Lead Associate, Calderwood & Harkness LLP Robert Jansen, Associate, Calderwood & Harkness LLP

DATE: April 14, 2026

RE: Qualified Small Business Stock Eligibility Analysis Under IRC § 1202 — Series A Preferred Stock of Quillen Technologies, Inc.

MATTER NO.: 1002-00002

BILLING CODE: 78412.001

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I. Executive Summary

The purpose of this memorandum is to analyze whether shares of Series A Preferred Stock of Quillen Technologies, Inc. ("Quillen" or the "Company"), to be acquired by Pinnacle Venture Fund II LP ("Pinnacle" or the "Fund") in the proposed $22.5 million Series A financing, qualify as "qualified small business stock" ("QSBS") under Section 1202 of the Internal Revenue Code of 1986, as amended (the "Code"). This analysis has been prepared at the request of Pinnacle in connection with its evaluation of the tax-advantaged characteristics of its proposed $14.0 million investment in the Company.

The significance of QSBS qualification is substantial. If the requirements of Section 1202 are met, individual taxpayers — and, in the case of Pinnacle as a pass-through entity for federal income tax purposes, its underlying partners — may exclude from federal gross income up to the greater of (i) $10 million or (ii) ten times the taxpayer's adjusted basis in the stock, on gain recognized from the sale or exchange of QSBS held for more than five years. For stock acquired after September 27, 2010, the exclusion is 100% of the eligible gain, and the excluded gain is also exempt from the alternative minimum tax. In a successful exit scenario, this exclusion could eliminate federal income tax on hundreds of millions of dollars of aggregate gain flowing through to Pinnacle's limited partners.

Preliminary Conclusion. Based on the information currently available to us — including our review of the Company's organizational documents, the draft Series A term sheet dated March 29, 2026, Quillen's unaudited financial statements for the fiscal year ended December 31, 2025 and the quarter ended March 31, 2026, the Company's capitalization table, the convertible note purchase agreements, and discussions with Company counsel at Fenwick, Torres & Keane LLP — the Series A Preferred Stock to be acquired by Pinnacle appears likely to satisfy the QSBS requirements at the time of issuance. Our conclusion is subject to certain confirmations noted herein, principally relating to (a) verification that the Company's aggregate gross assets on a tax-adjusted basis do not exceed $50 million at any time before and immediately after the issuance, and (b) the Company's ongoing compliance with the active business requirement during substantially all of the holding period.

We further note that QSBS qualification is determined at the partner level for pass-through entities such as Pinnacle. Certain structural considerations specific to Pinnacle's limited partnership structure — including the look-through rules under Section 1202(g), the per-issuer exclusion limit at the individual limited partner level, and the continuous partnership interest holding requirement — are discussed in detail in Section V of this memorandum.

This analysis is preliminary. Final confirmation of QSBS eligibility should be obtained upon completion of financial due diligence (due diligence period: April 18 – May 23, 2026), review of the Company's federal income tax returns for the 2023 and 2024 tax years, and receipt of the tax-basis gross asset schedule requested from the Company's auditor. We recommend that certain representations, covenants, and confirmations be incorporated into the definitive transaction documents, as described in Section VII below.

II. Background — Transaction Overview

A. The Company

Quillen Technologies, Inc. is a Delaware C-corporation incorporated on July 12, 2023 (Delaware Secretary of State File Number 7384219; Employer Identification Number 93-4817265). The Company is headquartered at 88 Garrison Street, Floor 4, Boston, Massachusetts 02116. The Company's sole operating subsidiary, if any, has not been identified in the materials reviewed to date; based on our understanding, Quillen operates through a single corporate entity without subsidiaries.

Quillen develops and commercializes "Mosaic," an AI-driven portfolio analytics and risk-attribution platform sold on a Software-as-a-Service ("SaaS") subscription basis to institutional asset managers, pension consultants, and endowments. The Mosaic platform leverages proprietary machine learning algorithms to provide clients with real-time portfolio decomposition, factor attribution, and risk forecasting capabilities. The Company's customers pay recurring annual or multi-year subscription fees for access to the platform, and the Company does not provide bespoke investment advisory, consulting, or financial services to its clients.

As of the first quarter of 2026, the Company's annualized recurring revenue ("ARR") is approximately $3.8 million. Last-twelve-month ("LTM") recognized revenue is approximately $3.2 million. The Company employs 38 full-time equivalent employees ("FTEs"), distributed as follows: 24 in engineering and product development, 6 in sales and marketing, 5 in general and administrative functions, and 3 in executive management. The Company's current monthly operating expense burn rate is approximately $420,000.

B. The Proposed Series A Financing

The proposed Series A financing contemplates the issuance by Quillen of 4,500,000 shares of Series A Preferred Stock at a price per share of $5.00, for aggregate new-money consideration of $22,500,000. The pre-money valuation of the Company is $57,500,000, and the post-money valuation (inclusive of the Series A proceeds) is $80,000,000. The target closing date for the financing is June 15, 2026.

The Series A investors and their respective allocations are as follows:

In addition to the new-money issuance, an aggregate of $1,500,000 in principal amount of outstanding convertible promissory notes, together with estimated accrued interest of approximately $202,500, will convert into 851,250 shares of Series A Preferred Stock at a conversion price of $2.00 per share (derived from the $25,000,000 valuation cap specified in the convertible notes). The converting note holders are as follows:

The convertible notes were issued in March 2024, bear simple interest at a rate of 6% per annum, and mature on March 15, 2026 (subject to automatic conversion upon a qualified financing). The notes will automatically convert upon the Series A closing.

Following the Series A closing, the total shares of Series A Preferred Stock outstanding will be 5,351,250 (4,500,000 new-money shares plus 851,250 conversion shares).

C. Pinnacle Venture Fund II LP

Pinnacle Venture Fund II LP is a Delaware limited partnership (Employer Identification Number 88-3529104) with Pinnacle Capital Management LLC, a Delaware limited liability company (Employer Identification Number 88-3471082), serving as its general partner. Pinnacle is headquartered at 450 Pacific Heights Boulevard, Suite 1200, San Francisco, California 94115. Fund II is a $385 million fund of 2025 vintage, focused on early-stage and growth-stage technology investments. The Fund's limited partner base consists of a mix of institutional investors, high-net-worth individuals, family offices, and certain fund-of-funds vehicles. The Fund has a stated fund life of ten years, with provisions for two one-year extensions at the discretion of the general partner.

Christine Aldridge, a partner of Pinnacle Capital Management LLC and an addressee of this memorandum, serves as the deal lead for the Quillen investment. Sandeep Rajan is the Managing Partner and principal of Pinnacle Capital Management LLC.

III. Legal Framework — IRC § 1202 Requirements

A. Overview of Section 1202

Section 1202 of the Code, enacted as part of the Revenue Reconciliation Act of 1993 and subsequently amended on multiple occasions, provides a powerful incentive for investment in qualified small businesses. Under Section 1202(a), a non-corporate taxpayer may exclude from gross income a percentage of the gain realized on the sale or exchange of QSBS that has been held for more than five years.

For stock acquired after September 27, 2010 (the relevant period for the proposed Quillen investment), the exclusion percentage is 100% of the eligible gain, as provided by the Creating Small Business Jobs Act of 2010 and made permanent by the Protecting Americans from Tax Hikes Act of 2015. Prior to September 28, 2010, the exclusion percentage was lower — 50% for stock acquired before February 18, 2009, and 75% for stock acquired between February 18, 2009 and September 27, 2010. Because Pinnacle's stock will be acquired in June 2026, the 100% exclusion applies.

The maximum amount of gain that a taxpayer may exclude with respect to QSBS of any single issuer is the greater of:

(i) $10,000,000 (reduced by the aggregate amount of gain excluded under Section 1202 by the taxpayer on prior dispositions of stock issued by the same corporation), or

(ii) ten times the taxpayer's adjusted basis in the QSBS disposed of during the taxable year.

Importantly, for stock acquired after September 27, 2010, the excluded gain is also exempt from the alternative minimum tax preference that formerly applied under Section 1202(a)(4), and it is not subject to the 28% alternative capital gains rate that historically applied to certain QSBS gains. The excluded gain is also exempt from the 3.8% net investment income tax under Section 1411 (to the extent the gain is excluded from gross income).

B. Five Statutory Requirements

For stock to qualify as QSBS under Section 1202, five principal requirements must be satisfied. These requirements collectively ensure that the exclusion benefit is limited to direct investments in small, active domestic businesses. We enumerate them here and analyze each in detail in Section IV:

1. Qualified Small Business (C-Corporation) Requirement. The stock must be stock of a "qualified small business," which is defined under Section 1202(d)(1) as a domestic C-corporation. Certain types of entities — including S-corporations, regulated investment companies ("RICs"), real estate investment trusts ("REITs"), real estate mortgage investment conduits ("REMICs"), cooperatives, and foreign corporations — are excluded.

2. Original Issuance Requirement. The stock must be acquired by the taxpayer at its "original issuance" (directly or through an underwriter) in exchange for money, property (other than stock), or as compensation for services rendered to the corporation. Section 1202(c)(1). Stock acquired in the secondary market from an existing shareholder does not qualify.

3. Gross Assets Test. The corporation must satisfy the "gross assets test" set forth in Section 1202(d)(1) — that is, the aggregate gross assets of the corporation must not have exceeded $50 million at all times after August 10, 1993, and both before and immediately after the issuance of the stock in question. Aggregate gross assets are measured on a tax-adjusted basis, not at fair market value.

4. Active Business Requirement. The corporation must satisfy the "active business requirement" of Section 1202(e) during substantially all of the taxpayer's holding period. This requirement has two components: (a) at least 80% (by value) of the corporation's assets must be used in the active conduct of one or more "qualified trades or businesses," and (b) the corporation's trade or business must not be one of the enumerated excluded service businesses.

5. Holding Period Requirement. The taxpayer must hold the QSBS for more than five years from the date of original issuance. Section 1202(a). If the stock is disposed of before the five-year mark, the exclusion is unavailable (though a tax-free rollover under Section 1045 may be available for stock held at least six months).

Each of these requirements is analyzed in turn below with specific application to the facts of the proposed Quillen Series A financing and Pinnacle's investment.

IV. Analysis of Each QSBS Requirement

A. Domestic C-Corporation Requirement (IRC § 1202(d)(1))

Section 1202(d)(1) defines a "qualified small business" as a domestic corporation that is a C-corporation. This definitional requirement excludes several categories of entities, including S-corporations, RICs, REITs, REMICs, cooperatives, and foreign corporations.

Quillen Technologies, Inc. is organized as a corporation under the General Corporation Law of the State of Delaware. The Company was incorporated on July 12, 2023, as evidenced by its Certificate of Incorporation filed with the Delaware Secretary of State (File Number 7384219). As a Delaware corporation that has not elected to be treated as an S-corporation under Subchapter S of the Code, Quillen is taxed as a C-corporation under Subchapter C of the Code.

Based on our review of the Company's initial Certificate of Incorporation, the Amended and Restated Certificate of Incorporation adopted in connection with the Series Seed financing (October 2023), and the draft Amended and Restated Certificate of Incorporation to be filed in connection with the Series A closing, we confirm the following:

• Quillen has not elected S-corporation status under Section 1362 of the Code at any time since its incorporation.

• Quillen is not a regulated investment company within the meaning of Section 851 of the Code.

• Quillen is not a real estate investment trust within the meaning of Section 856 of the Code.

• Quillen is not a real estate mortgage investment conduit within the meaning of Section 860D of the Code.

• Quillen is not a cooperative organization described in Section 1381 of the Code.

• Quillen is a domestic corporation organized under the laws of a state of the United States (Delaware) and is not a foreign corporation within the meaning of Section 7701(a)(5) of the Code.

• Quillen does not appear to be a personal holding company within the meaning of Section 542 of the Code, based on the diversified ownership reflected in the current capitalization table and the nature of the Company's income (SaaS subscription revenue rather than passive investment income).

We have confirmed the foregoing based on the corporate documents provided by Company counsel and the Company's representations in the draft term sheet. We recommend that the Stock Purchase Agreement include an express representation by the Company that it is, and at all times since incorporation has been, a domestic C-corporation and that it has not elected S-corporation status.

Conclusion: The domestic C-corporation requirement under Section 1202(d)(1) appears to be satisfied.

B. Original Issuance Requirement (IRC § 1202(c)(1))

1. General Rule

Section 1202(c)(1) requires that QSBS be "acquired by the taxpayer at its original issuance (directly or through an underwriter) in exchange for money or other property (not including stock), or as compensation for services provided to such corporation (or any predecessor thereof)." This requirement ensures that the QSBS exclusion benefits only direct investors in small businesses, not secondary-market purchasers.

The term "original issuance" is not further defined in the Code or Treasury Regulations; however, its meaning is generally understood to encompass any issuance of previously unissued shares by the corporation directly to the taxpayer. Shares purchased from an existing shareholder in a secondary transaction do not constitute stock acquired at original issuance, and thus do not qualify as QSBS in the hands of the purchaser (though tacking rules under Section 1202(h) may apply in certain limited circumstances, such as gifts and transfers at death).

2. Application to Pinnacle's Shares

Pinnacle will acquire 2,800,000 shares of Series A Preferred Stock directly from Quillen Technologies, Inc. in exchange for $14,000,000 in cash. The shares will be newly issued by the Company and will not have been previously issued to or held by any other shareholder. This transaction constitutes a classic original issuance for purposes of Section 1202(c)(1).

The consideration to be paid by Pinnacle is money (cash), which is one of the three enumerated forms of qualifying consideration under Section 1202(c)(1). There is no component of the purchase price payable in stock or other non-qualifying consideration.

3. Convertible Note Conversion Shares

The 851,250 shares of Series A Preferred Stock to be issued upon conversion of the outstanding convertible promissory notes also constitute original issuance shares for purposes of Section 1202. The conversion of a debt instrument into equity of the issuing corporation represents an exchange of "property (not including stock)" — namely, the surrender of the note holder's rights under the promissory note — for newly issued shares. The IRS has generally treated the conversion of convertible debt into stock as an original issuance. See Rev. Rul. 2003-97, 2003-2 C.B. 380 (addressing the treatment of convertible instruments in the context of Section 1202).

An important nuance applies to the holding period of the conversion shares: for QSBS purposes, the holding period of the shares begins at the time of conversion (i.e., the closing date of the Series A financing), not at the date of issuance of the underlying convertible notes. This is because the QSBS holding period under Section 1202 tracks the period during which the taxpayer held the stock, not the period during which the taxpayer held a predecessor debt instrument. Accordingly, the converting note holders — Harborview Angel Syndicate LLC, Caldwell Family Office LLC, and Dr. Lawrence Hu — would need to hold their conversion shares for more than five years from the closing date to satisfy the holding period requirement. This distinction is relevant to those note holders but does not affect Pinnacle's QSBS analysis.

4. Treatment of Preferred Stock

Section 1202 applies to "stock" of a qualified small business and does not, on its face, distinguish between common stock and preferred stock. However, if preferred stock constitutes "nonqualified preferred stock" as defined in Section 351(g)(2) of the Code, it may raise issues under Section 1202. Nonqualified preferred stock generally includes stock that (a) the holder has the right to require the issuer or a related person to redeem at a determinable price, (b) the issuer or a related person is required to redeem, (c) the issuer or a related person has the right to redeem and, as of the issue date, it is more likely than not that the right will be exercised, or (d) the dividend rate on the stock varies in whole or in part with reference to interest rates, commodity prices, or similar indices.

We have reviewed the principal terms of the Series A Preferred Stock as set forth in the draft term sheet dated March 29, 2026 and the draft Amended and Restated Certificate of Incorporation. The key economic terms are as follows:

• Liquidation Preference: 1x non-participating liquidation preference.

• Dividends: 8% non-cumulative dividends, payable when, as, and if declared by the Board of Directors.

• Conversion: Each share of Series A Preferred Stock is convertible into common stock at the option of the holder at any time, initially on a one-for-one basis (subject to customary anti-dilution adjustments). Mandatory conversion occurs upon an initial public offering meeting specified price and size thresholds.

• Redemption: No mandatory redemption. No put rights. The Company has no right to redeem the Series A Preferred Stock without the consent of the holders.

• Voting: Votes with common stock on an as-converted basis, plus protective provisions.

The Series A Preferred Stock does not contain mandatory redemption features, put rights at a fixed or determinable price, or variable dividend provisions tied to interest rates or commodity prices. Accordingly, the Series A Preferred Stock does not appear to constitute "nonqualified preferred stock" under Section 351(g)(2), and its classification as preferred stock should not preclude QSBS eligibility.

Conclusion: The original issuance requirement under Section 1202(c)(1) appears to be satisfied with respect to Pinnacle's directly acquired shares of Series A Preferred Stock, as well as the conversion shares to be issued to the converting note holders.

C. Gross Assets Test (IRC § 1202(d)(1))

1. Statutory Framework

Under Section 1202(d)(1), a corporation is a "qualified small business" only if, at all times after August 10, 1993, and before and immediately after the issuance of the stock in question, the aggregate gross assets of the corporation did not exceed $50,000,000. This is commonly referred to as the "gross assets test" or the "$50 million test."

Section 1202(d)(2) defines "aggregate gross assets" as the amount of cash and the aggregate adjusted bases (as determined for purposes of computing taxable income) of other property held by the corporation. Special rules apply to assets contributed to the corporation: under Section 1202(d)(2)(B), contributed property is taken into account at the contributor's adjusted basis, which prevents taxpayers from inflating the corporation's asset base through contributions of appreciated property. Similarly, assets developed or built internally by the corporation — such as software or intellectual property — are carried at their adjusted tax basis, which is generally equal to cost (i.e., the capitalized development expenditures, reduced by any amortization or depreciation).

A critically important distinction must be drawn: the $50 million threshold is measured on a tax-adjusted basis, not at fair market value. A corporation may have a fair market value (as reflected in its equity valuation) that substantially exceeds $50 million while nonetheless satisfying the gross assets test because its tax-basis assets are well below that threshold. This distinction is particularly pronounced in the case of technology companies, whose most valuable assets — proprietary software, algorithms, customer relationships, brand recognition — typically have a very low adjusted tax basis relative to their fair market value.

2. Pre-Closing Analysis

As of March 31, 2026, based on the unaudited financial information provided by the Company, Quillen's asset base on a book-value basis consists principally of the following:

• Cash and cash equivalents: Approximately $1.1 million.

• Accounts receivable: Estimated at approximately $350,000 (reflecting the Company's SaaS subscription billing cycle).

• Prepaid expenses and other current assets: Estimated at approximately $200,000.

• Property and equipment (net): Minimal — the Company operates from leased office space in Boston and its physical assets consist primarily of computer equipment and office furniture. Estimated net book value of approximately $180,000.

• Capitalized software development costs: To the extent the Company has capitalized any portion of its Mosaic platform development costs under ASC 350-40 (for book purposes), these would be carried at their adjusted basis (cost less accumulated amortization) for purposes of Section 1202. Based on discussions with Company counsel, the Company has expensed the majority of its development costs; any capitalized amounts are believed to be modest (estimated under $500,000).

• Other intangible assets: No goodwill or purchased intangibles. The Company has not completed any acquisitions.

In aggregate, the Company's total gross assets on a tax-adjusted basis are estimated to be well under $10 million as of the pre-closing date. The Company has raised a total of $4.5 million in external capital prior to the Series A (consisting of $3.0 million in Series Seed equity financing closed in October 2023 and $1.5 million in convertible notes issued in March 2024). Given the Company's monthly burn rate of approximately $420,000, the substantial majority of this capital has been consumed by operating expenses — salaries, cloud infrastructure costs, office rent, professional fees, and other operating expenditures — over the approximately 30 months since the Company's incorporation. The remaining cash balance of $1.1 million is consistent with this analysis.

3. Immediately-After-Issuance Analysis

Upon the closing of the Series A financing, Quillen will receive $22,500,000 in new cash from the Series A investors. This cash will be reflected as an increase in the Company's aggregate gross assets. The conversion of the outstanding convertible notes into equity does not contribute additional cash to the Company — the conversion merely extinguishes a liability (the notes payable) and creates additional equity (the conversion shares). Accordingly, the note conversion does not increase the Company's aggregate gross assets for purposes of the $50 million test.

The immediately-after-issuance calculation is therefore as follows (on an estimated basis):

Even under conservative assumptions that include potential additional assets not identified in the available financial information, total aggregate gross assets immediately after the Series A closing are expected to be in the range of $25 million to $32 million — well under the $50 million threshold. We note that the $80 million post-money fair market value is a market-based equity valuation that reflects the present value of expected future cash flows, growth potential, and comparable company multiples; it is not equivalent to, and substantially exceeds, the tax-basis asset value of the Company.

4. Verification Recommendation

Notwithstanding our preliminary conclusion that the gross assets test is likely satisfied, we strongly recommend that the Company's independent auditor (Pemberton & Associates CPAs LLP, engagement partner Diane Stratton) or the Company's tax preparer be requested to provide a schedule of aggregate gross assets on a tax-adjusted basis as of the most recent available period-end (ideally December 31, 2025, or March 31, 2026, if interim data is available). This schedule should confirm that aggregate gross assets have not exceeded $50 million at any time since the Company's incorporation on July 12, 2023. We will include this request in the due diligence request list to be transmitted to Company counsel at Fenwick, Torres & Keane LLP.

5. Future Financing Rounds

An important caveat: if Quillen raises additional capital in subsequent financing rounds (e.g., a Series B), the aggregate gross assets must not exceed $50 million at the time of any subsequent original issuance for new stock issued in that round to qualify as QSBS. However, Pinnacle's existing QSBS status with respect to the Series A shares would not be retroactively affected if the Company later exceeds the $50 million threshold. The qualification of QSBS is determined at the time of issuance, and a subsequent breach of the gross assets test does not taint previously issued QSBS. This is an important structural protection for early-stage investors.

That said, Pinnacle should be aware that if the Company conducts a large subsequent financing that causes its aggregate gross assets to exceed $50 million, any shares issued in that subsequent round would not qualify as QSBS. This has potential implications for anti-dilution adjustments, pay-to-play provisions, or other mechanisms that might result in the issuance of additional shares to Pinnacle in connection with a future round.

Conclusion: Based on available information, the gross assets test under Section 1202(d)(1) appears likely to be satisfied, pending confirmation through receipt of the Company's tax-basis gross asset schedule.

D. Active Business Requirement (IRC § 1202(e))

1. General Rule

The active business requirement under Section 1202(e) has two components. First, during "substantially all" of the taxpayer's holding period for the QSBS, at least 80% (by value) of the corporation's assets must be used in the "active conduct" of one or more "qualified trades or businesses." Section 1202(e)(1). The IRS has interpreted "substantially all" in this context to mean at least 80% of the relevant holding period. See, e.g., H.R. Rep. No. 103-111, at 625 (1993) (Conference Report).

Second, the corporation's trade or business must be a "qualified trade or business," which is defined by exclusion under Section 1202(e)(3). A qualified trade or business is any trade or business other than:

(A) Any trade or business involving the performance of services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners;

(B) Any banking, insurance, financing, leasing, investing, or similar business;

(D) Any business involving the production or extraction of oil, gas, or other natural resources for which percentage depletion is allowable; and

(E) Any business of operating a hotel, motel, restaurant, or similar business.

The exclusions set forth in Section 1202(e)(3)(A) are substantively identical to the list of "specified service trades or businesses" under Section 199A(d)(2) (the qualified business income deduction), which in turn draws from the definition of personal service corporations in Section 448(d)(2). While comprehensive guidance on the scope of these exclusions in the Section 1202 context is limited, the existing case law and administrative guidance under Sections 199A and 448 provide useful analogies.

2. Application to Quillen's Business

Quillen develops, markets, and licenses the Mosaic SaaS platform — an AI-driven portfolio analytics and risk-attribution tool — to institutional asset managers, pension consultants, and endowments. The Company's business model is that of a technology product company: it creates and maintains a software platform and licenses access to that platform on a recurring subscription basis. The Company does not provide investment advisory services, manage assets on behalf of its customers, act as a broker-dealer, or hold itself out as a provider of financial consulting or advisory services. The Company is not registered as an investment adviser under the Investment Advisers Act of 1940 (a separate analysis of the Company's regulatory status is being prepared in a companion regulatory compliance memorandum).

The distinction between a technology/software business and the excluded service businesses enumerated in Section 1202(e)(3) is critical to the QSBS analysis. We address the two most relevant exclusions — "financial services" and "consulting" — in turn.

Financial Services Exclusion. The "financial services" exclusion under Section 1202(e)(3)(A) encompasses businesses involving "the performance of services in the field of financial services" as well as, under Section 1202(e)(3)(B), "any banking, insurance, financing, leasing, investing, or similar business." Quillen does not engage in any of these activities. The Company does not provide banking services, issue insurance policies, extend financing or credit, lease assets, or manage investment portfolios. Although the Company's customers are participants in the financial services industry (institutional asset managers, pension consultants, and endowments), Quillen itself is a technology vendor that sells software tools to those participants. The fact that a company's product is used by financial services firms does not transform the company itself into a financial services business. By analogy, a company that sells accounting software to accounting firms is not thereby engaged in the practice of accounting. This distinction is well-supported by the legislative history of Section 1202, which focuses on the nature of the services performed by the corporation itself, not the industry in which its customers operate.

Consulting Exclusion. The "consulting" exclusion under Section 1202(e)(3)(A) targets businesses whose principal offering is bespoke advice rendered by individuals with specialized expertise. Quillen does not provide consulting services. Its sole product is the Mosaic software platform, and its revenue is derived exclusively from SaaS subscription fees. The Company does not charge advisory fees, asset-based fees, hourly consulting rates, or engagement fees. The fact that the Mosaic platform generates analytics outputs that clients use in their investment decision-making processes does not transform the Company's business into a consulting business, any more than a spreadsheet software company is engaged in "consulting" because its users use spreadsheets to make business decisions. The regulations under Section 199A, which address an analogous exclusion for "consulting" businesses, confirm that a business that develops and sells a product is not a consulting business merely because the product provides analytical or informational value to its users. See Treas. Reg. § 1.199A-5(b)(2)(vii).

Revenue Model Confirmation. The Company's revenue composition is as follows: 100% of revenue is derived from SaaS subscription fees. The Company has no revenue from advisory fees, asset-based fees, consulting engagement fees, or any other service-based revenue stream. This pure-product revenue model is a strong indicator that the Company is a technology product company, not a service business.

Employee Profile. The Company's 38 FTEs are distributed as follows: 24 in engineering and product development (63%), 6 in sales and marketing (16%), 5 in general and administrative functions (13%), and 3 in executive management (8%). This workforce composition is consistent with a technology product company, where the predominant focus is on engineering, software development, and product improvement rather than client-facing service delivery.

80% Active-Asset Test. Substantially all of the Company's assets are used in the development and licensing of the Mosaic platform. The Company's principal assets consist of its proprietary software and related intellectual property, cash for operational use, computer equipment, and a small amount of accounts receivable from customers. The Company does not hold significant passive investments, real estate held for investment, or other assets unrelated to its active business operations. Accordingly, the 80% asset-use test appears to be satisfied.

Working Capital Safe Harbor. An important consideration arises from the influx of $22.5 million in Series A cash at closing. Under Section 1202(e)(6), assets held as part of the corporation's "reasonably required working capital needs" are treated as assets used in the active conduct of a qualified trade or business, provided two conditions are met: (i) the corporation has a specific, written plan for the expenditure of such working capital, and (ii) the working capital is actually spent within two years of the date it is received. This safe harbor is particularly relevant for early-stage companies that raise significant venture capital financing and hold the proceeds in cash or short-term investments while deploying the capital over time to fund operations.

Quillen's planned use of the Series A proceeds — which, based on the draft term sheet and discussions with management, includes hiring additional engineering and sales personnel, expanding the Mosaic platform's feature set, investing in go-to-market activities, and funding general corporate operations — is consistent with the working capital safe harbor. The Company's current burn rate of approximately $420,000 per month suggests that the $22.5 million in Series A proceeds would fund approximately 53 months of operations at current burn levels (though the burn rate is expected to increase as the Company scales). The two-year spending window under Section 1202(e)(6) should be achievable for a meaningful portion of the proceeds.

Recommendation. We recommend obtaining a written representation from the Company — either in the Stock Purchase Agreement or in a separate QSBS side letter — regarding the Company's intended use of the Series A proceeds, in sufficient detail to support reliance on the working capital safe harbor. We also recommend that the Stock Purchase Agreement include an affirmative covenant obligating the Company to use commercially reasonable efforts to maintain QSBS eligibility, including compliance with the active business requirement and the working capital deployment plan. Such covenants are increasingly standard in venture capital financing documents and have been accepted by the Company's counsel in preliminary discussions.

3. Conclusion on Active Business Requirement

Quillen's SaaS technology business constitutes an "active trade or business" within the meaning of Section 1202(e)(1), and the Company's business is not one of the excluded service businesses enumerated in Section 1202(e)(3). The Company's revenue model (100% SaaS subscription), workforce composition (predominantly engineering), and asset utilization (substantially all assets devoted to the Mosaic platform) are all consistent with QSBS eligibility. The working capital safe harbor under Section 1202(e)(6) should apply to the Company's cash holdings post-closing, provided the Company maintains a plan for deployment of the proceeds and spends them within the two-year window.

Conclusion: The active business requirement under Section 1202(e) appears to be satisfied.

E. Holding Period Requirement (IRC § 1202(a))

Section 1202(a) requires that the taxpayer hold the QSBS for more than five years in order to claim the gain exclusion. This is a prospective requirement that will be determined based on Pinnacle's actual holding period for the shares.

Pinnacle's holding period for the 2,800,000 shares of Series A Preferred Stock would begin on the closing date of the Series A financing (target: June 15, 2026) and must extend beyond June 15, 2031, for the five-year holding period to be satisfied. If the stock is sold, exchanged, or otherwise disposed of before that date, the Section 1202 exclusion will be unavailable with respect to the disposed shares.

However, if a premature disposition occurs after a holding period of at least six months, Section 1045 of the Code may provide an alternative benefit. Section 1045 permits a non-corporate taxpayer to elect to defer recognition of gain from the sale of QSBS held for at least six months if the taxpayer purchases replacement QSBS within 60 days of the sale. The deferred gain reduces the taxpayer's basis in the replacement QSBS. This rollover mechanism could provide planning flexibility in the event of an early exit — for example, if Quillen is acquired by a strategic buyer before June 2031.

Holding Period in the Context of Fund Life. Pinnacle Venture Fund II LP is a 2025 vintage fund with a stated fund life of ten years (plus two potential one-year extensions), which would extend through at least 2035 and potentially 2037. The five-year QSBS holding requirement (ending no earlier than June 2031) is well within the fund's expected life. However, venture capital fund economics and return expectations may create pressure for an earlier exit if an attractive acquisition opportunity arises. Pinnacle's fund documents and investment committee should consider the QSBS holding period as a factor in exit timing decisions for the Quillen investment.

Conclusion: The holding period requirement is prospective and will be satisfied if Pinnacle holds the shares for more than five years from the closing date.

V. Pass-Through Entity Considerations — Pinnacle Fund Structure

A. Look-Through Rules for Partnerships (IRC § 1202(g))

Pinnacle Venture Fund II LP is a Delaware limited partnership that is treated as a partnership for federal income tax purposes. As a pass-through entity, Pinnacle is not itself a taxpayer for income tax purposes; rather, items of income, gain, deduction, and credit flow through to the Fund's partners and are reported on their individual or entity-level tax returns.

Section 1202(g)(1) addresses the treatment of QSBS held by pass-through entities. Under this provision, if QSBS is held by a pass-through entity (which includes a partnership, an S-corporation, a regulated investment company, or a common trust fund), the exclusion under Section 1202(a) is applied at the level of the individual partner, shareholder, or beneficiary — not at the entity level. This "look-through" treatment has several important implications:

(i) Benefits Flow to Individual Partners. The QSBS exclusion benefits flow through to Pinnacle's limited partners ("LPs") and general partner interests that are ultimately owned by individuals. Each individual who is an ultimate owner of a partnership interest in Pinnacle at the time the Fund acquires the QSBS, and who maintains that partnership interest continuously through the date of disposition, is eligible for the Section 1202 exclusion with respect to his or her pro rata share of the Fund's gain from the sale of the QSBS.

(ii) Continuous Ownership Requirement. A critical condition for the look-through benefit is that the individual must have been a partner in the pass-through entity at the time the entity acquired the QSBS and must have held the partnership interest continuously through the date of sale. Section 1202(g)(2)(A). If a limited partner sells, transfers, or otherwise disposes of his or her partnership interest after the Fund acquires the QSBS but before the Fund sells the QSBS, that limited partner's successor will not be eligible for the QSBS exclusion with respect to the Quillen stock (absent a qualifying transfer under Section 1202(h), such as a transfer by gift or at death).

(iii) Corporate Partners Are Ineligible. C-corporations are not eligible for the Section 1202 exclusion. Accordingly, any LP of Pinnacle that is itself a C-corporation will not benefit from QSBS treatment. The exclusion is available only to non-corporate taxpayers — individuals, trusts, and estates. If an LP is itself a pass-through entity (such as a family limited partnership or LLC), further look-through analysis is required to determine whether the ultimate individual owners are eligible.

B. Per-Issuer Limit at the Partner Level

The $10 million exclusion limit (or the alternative 10x basis limit) under Section 1202(a) is applied on a per-issuer, per-taxpayer basis. In the context of a partnership, this means that each individual LP of Pinnacle has his or her own separate $10 million limit with respect to gain attributable to the Quillen stock. This is a significant advantage of the partnership structure for a large fund like Pinnacle, which has numerous individual LPs.

To illustrate: if Pinnacle sells its Quillen stock at a gain of $100 million, and there are 50 individual LPs each allocated an equal share of that gain ($2 million each), each LP would have more than sufficient headroom under the $10 million per-issuer limit to exclude his or her entire share of the gain. By contrast, if a single individual had invested $14 million directly, that individual's exclusion would be capped at $10 million (or 10x adjusted basis, i.e., $140 million, whichever is greater).

The alternative 10x basis limit is computed based on each individual partner's allocable share of the partnership's adjusted basis in the QSBS. Given Pinnacle's aggregate basis in the Quillen stock of $14,000,000, each LP's allocable basis would be a fraction of that amount, determined by the LP's partnership interest percentage. For an LP with a 2% partnership interest, the allocable basis would be $280,000, yielding a 10x basis limit of $2,800,000 — which would be superseded by the $10 million fixed limit in most scenarios.

C. Sandeep Rajan and Christine Aldridge — GP-Level Interests

Sandeep Rajan (Managing Partner and GP Principal) and Christine Aldridge (Partner and Deal Lead for the Quillen investment) hold interests in the Quillen investment through Pinnacle Capital Management LLC (EIN 88-3471082), which serves as the general partner of Pinnacle Venture Fund II LP. As general partner, Pinnacle Capital Management LLC is allocated carried interest (typically 20% of net profits) and a management fee (typically 2% of committed capital), in addition to any co-investment allocation.

For QSBS purposes, Mr. Rajan's and Ms. Aldridge's benefits would flow through two levels of pass-through entities: first through Pinnacle Capital Management LLC (the general partner entity), and then through Pinnacle Venture Fund II LP (the fund). The look-through rules of Section 1202(g) apply at each level. Provided that (i) Pinnacle Capital Management LLC is treated as a partnership or disregarded entity for federal income tax purposes (and has not elected to be taxed as a corporation), (ii) Mr. Rajan and Ms. Aldridge were interest holders in the GP entity at the time the Fund acquired the QSBS, and (iii) they maintain their interests continuously through the date of sale, they should each be eligible for the Section 1202 exclusion with respect to their allocable share of the Fund's gain from the sale of the Quillen stock.

We recommend confirming that Pinnacle Capital Management LLC has not elected to be treated as a corporation for federal income tax purposes (e.g., by filing IRS Form 8832 checking the box for association taxable as a corporation). If it is treated as a partnership (in the case of multiple members) or a disregarded entity (if it has a single member), the look-through rules should apply as described above.

D. Recommendation

Given the importance of the look-through rules and the continuous partnership interest holding requirement, we recommend the following actions at the fund level:

1. LP Notification. Pinnacle should consider providing its LPs with a notice regarding the QSBS eligibility of the Quillen investment, including a summary of the requirements for maintaining eligibility at the LP level. In particular, LPs should be informed that the QSBS exclusion may be lost if they transfer their partnership interests before the Fund disposes of the Quillen stock.

2. LP-Level Pass-Through Analysis. If any LP of Pinnacle is itself a pass-through entity (e.g., a family limited partnership, LLC, or trust), further look-through analysis may be needed to determine whether the ultimate individual beneficial owners satisfy the requirements for QSBS treatment.

3. Recordkeeping. Pinnacle should maintain detailed records documenting the QSBS qualification of the Quillen investment, including the original issuance documentation, purchase price, date of acquisition, and ongoing compliance with Section 1202 requirements. These records will be essential for supporting the QSBS exclusion on each LP's individual tax return upon a future disposition.

VI. Key Risks and Limitations

A. Gross Assets Test — Verification Pending

As discussed in Section IV.C, the most significant open item in our QSBS analysis is confirmation that Quillen's aggregate gross assets on a tax-adjusted basis do not exceed $50 million at any time before and immediately after the Series A closing. While our preliminary estimate indicates that aggregate gross assets will be approximately $25–$32 million immediately after issuance — well under the $50 million threshold — this estimate is based on unaudited financial information and our understanding of the Company's asset profile. We have not yet received a formal tax-basis gross asset schedule from the Company or its auditor.

We consider the risk of failing the gross assets test to be low, given the Company's early stage, limited tangible assets, and the fact that internally developed intellectual property (the Mosaic platform) is carried at cost basis, which is likely a small fraction of its fair market value. However, confirmation through the receipt of the tax-basis asset schedule is essential to complete our analysis, and we cannot provide a final conclusion on QSBS eligibility until this item is resolved.

B. Ongoing Active Business Compliance

QSBS status can be lost retroactively if the Company ceases to meet the active business requirement during "substantially all" (at least 80%) of the taxpayer's holding period. This risk would arise if, for example, the Company pivots to a non-qualifying business (such as financial advisory or consulting services), if more than 20% of the value of its assets is held as passive investments or non-business assets for an extended period, or if the Company ceases active operations.

A particular concern in the near term is the significant influx of cash from the Series A financing. The $22.5 million in new cash, combined with the Company's existing cash and other assets, will represent a substantial portion of the Company's total asset base. If this cash is held as passive investments (e.g., in a money market fund or brokerage account) for an extended period without being deployed in the active business, it could jeopardize the 80% active-asset test.

The two-year working capital safe harbor under Section 1202(e)(6) mitigates this risk, provided the Company has a specific, written plan for the expenditure of the cash and actually deploys it within two years. We recommend that the Stock Purchase Agreement include a covenant obligating the Company to maintain a written use-of-proceeds plan and to use commercially reasonable efforts to deploy the Series A proceeds in the active conduct of its business within the two-year window.

C. Redemption and Stock Repurchase Restrictions

Section 1202(c)(3) imposes two anti-abuse rules relating to stock redemptions by the issuing corporation, designed to prevent manipulation of the QSBS rules through repurchase-and-reissue transactions:

(i) Two-Year Pre-Issuance Test. Under Section 1202(c)(3)(A), QSBS treatment is denied if, during the two-year period beginning one year before the date of issuance, the corporation purchased (directly or indirectly) any of its stock from any shareholder, and the aggregate amount paid for all such purchases exceeds 5% of the aggregate value of all of the corporation's stock as of the beginning of such two-year period.

(ii) One-Year Pre-Issuance Targeted Test. Under Section 1202(c)(3)(B), QSBS treatment is denied with respect to a particular taxpayer if, during the one-year period beginning one year before the date of issuance, the corporation made any "significant" purchase of stock from the taxpayer or a person related to the taxpayer (within the meaning of Sections 267(b) or 707(b)).

Based on the information currently available, Quillen has not redeemed or repurchased any shares of its stock since its incorporation on July 12, 2023. The Company's capitalization table, which we have reviewed in draft form, does not reflect any treasury shares or retired shares. We recommend confirming this fact through a specific representation in the Stock Purchase Agreement and through review of the Company's corporate minutes and stock transfer records during due diligence.

D. Section 1045 Rollover as Interim Protection

If Pinnacle or its LPs anticipate a potential exit event prior to the five-year mark — for example, a strategic acquisition of Quillen by a larger technology company — Section 1045 of the Code may provide an alternative tax-deferral mechanism. Under Section 1045, a non-corporate taxpayer who holds QSBS for at least six months may elect to roll over gain from the sale of such stock tax-free into replacement QSBS acquired within 60 days of the sale. The deferred gain reduces the taxpayer's basis in the replacement QSBS, effectively deferring (but not eliminating) the tax on the gain.

For Pinnacle's LPs, a Section 1045 rollover would require each individual LP to identify and acquire replacement QSBS within the 60-day window, which may present practical challenges. The rollover is available only for QSBS acquired by the LP through the look-through rules of Section 1202(g), and the replacement QSBS must meet all of the Section 1202 requirements. While Section 1045 is not a substitute for the full Section 1202 exclusion, it provides meaningful interim protection against an unexpected early exit.

We recommend that Pinnacle's investment committee consider the Section 1045 rollover as a planning tool in the context of exit timing decisions for the Quillen investment.

E. State Tax Considerations

Section 1202 applies exclusively for federal income tax purposes. State conformity with the QSBS exclusion varies significantly across jurisdictions, and the state tax implications of the Quillen investment should be evaluated in the context of Pinnacle's LP base.

• California does not conform to the federal QSBS exclusion under Section 1202. Cal. Rev. & Tax. Code § 18152.5 (repealed, effective for tax years beginning after January 1, 2013). Accordingly, gain from the sale of QSBS is fully taxable for California income tax purposes, at ordinary income or capital gains rates as applicable. This is a significant limitation for Pinnacle and for any California-resident LPs, given that Pinnacle is headquartered in San Francisco, California. California's top individual income tax rate is currently 13.3%, which applies to net capital gains. For LPs with substantial allocable gain from a Quillen exit, the California tax liability could be material notwithstanding full federal QSBS exclusion.

• Massachusetts, where Quillen is headquartered, generally conforms to the federal QSBS exclusion. Massachusetts residents who are LPs of Pinnacle would generally benefit from both federal and state QSBS treatment on their allocable gain.

• Delaware, the state of incorporation of both Quillen and Pinnacle, does not impose individual income tax on investment gains for non-residents. Delaware-resident LPs would benefit from the federal exclusion; non-residents of Delaware generally would not have Delaware-source income from the sale of the stock.

• Other states vary in their conformity. Some states (e.g., New York, New Jersey, Connecticut) have their own rules regarding QSBS exclusions, ranging from full conformity to partial conformity to no conformity. A detailed state-by-state analysis is beyond the scope of this memorandum.

Recommendation. Pinnacle's tax advisors should evaluate the state-level QSBS treatment for the Fund's LP base, particularly for California-resident LPs. This analysis should be incorporated into the LP notification described in Section V.D above.

VII. Structuring Recommendations to Preserve QSBS Eligibility

Based on our analysis, we recommend the following actions to maximize the likelihood of preserving QSBS eligibility for Pinnacle's investment in Quillen:

A. Transaction Document Provisions

1. Company QSBS Representation. The Series A Preferred Stock Purchase Agreement should include a representation by the Company that it qualifies as a "qualified small business" under Section 1202 of the Code, that its aggregate gross assets (as defined in Section 1202(d)(2)) have not exceeded $50,000,000 at any time since its incorporation, and that the Company is not engaged in any trade or business that would cause it to be excluded from the definition of a "qualified trade or business" under Section 1202(e)(3). This representation should survive the closing and be incorporated into the disclosure schedules.

2. QSBS Affirmative Covenant. The Stock Purchase Agreement (or the Investors' Rights Agreement, as appropriate) should include an affirmative covenant requiring the Company to use commercially reasonable efforts to maintain QSBS eligibility during the period in which the investors hold the QSBS. This covenant should specifically address:

(a) compliance with the active business requirement, including the 80% active-asset test;

(b) maintenance of a written plan for the expenditure of working capital, consistent with the safe harbor under Section 1202(e)(6);

(c) restrictions on stock redemptions or repurchases that could violate the anti-abuse rules under Section 1202(c)(3); and

(d) prompt notification to the investors if the Company becomes aware of any event or circumstance that could reasonably be expected to cause a loss of QSBS eligibility.

3. Certificate of Incorporation Review. The Amended and Restated Certificate of Incorporation to be filed in connection with the Series A closing should be reviewed to ensure that it does not contain provisions that would cause the Series A Preferred Stock to be treated as "nonqualified preferred stock" under Section 351(g)(2). Specifically, the certificate should not contain mandatory redemption features, put rights at a fixed or determinable price, or variable dividend provisions tied to interest rates or commodity prices. Based on our preliminary review of the draft certificate, we do not believe any such provisions are present, but we will confirm upon receipt of the final form.

B. Due Diligence Confirmations

1. Tax-Basis Gross Asset Schedule. Request from Quillen, through its counsel at Fenwick, Torres & Keane LLP, a schedule of aggregate gross assets on a tax-adjusted basis (as defined in Section 1202(d)(2)) as of the most recent period-end (December 31, 2025, or March 31, 2026). This schedule should be prepared or certified by the Company's auditor (Pemberton & Associates CPAs LLP, engagement partner Diane Stratton) or its tax preparer. The schedule should confirm that aggregate gross assets have not exceeded $50,000,000 at any time since the Company's incorporation on July 12, 2023.

2. Stock Redemption Confirmation. Confirm through review of the Company's corporate minutes, stock transfer ledger, and board resolutions that no stock redemptions or repurchases have occurred since incorporation. Obtain a specific representation from the Company in the Stock Purchase Agreement.

3. Federal Income Tax Return Review. Request and review the Company's federal income tax returns (Forms 1120) for the taxable years ended December 31, 2023 and December 31, 2024 (if filed as of the date of closing). Review for any facts inconsistent with QSBS eligibility, including significant investment assets on the balance sheet, non-qualifying business activities, or any indication that the Company elected S-corporation status.

4. S-Corporation Status Confirmation. Confirm that Quillen has not elected S-corporation status under Section 1362 of the Code at any time since incorporation. Request a copy of any IRS determination letter or other correspondence regarding the Company's tax status, if available.

C. Fund-Level Actions

1. Record Maintenance. Pinnacle should maintain comprehensive records documenting the original issuance of the QSBS, including the Stock Purchase Agreement, closing certificates, proof of payment, the purchase price per share ($5.00), the aggregate purchase price ($14,000,000), the number of shares acquired (2,800,000), and the date of acquisition (expected June 15, 2026). These records will be essential for substantiating the QSBS exclusion upon a future disposition.

2. LP Notification. As discussed in Section V.D, Pinnacle should provide its limited partners with a notification regarding the QSBS eligibility of the Quillen investment. The notification should address:

(a) the potential tax benefits of QSBS treatment under Section 1202;

(b) the five-year holding period requirement and its implications for exit timing;

(c) the continuous partnership interest holding requirement under Section 1202(g)(2)(A), and the consequences of transferring a partnership interest before the Fund disposes of the QSBS;

(d) the $10 million per-issuer exclusion limit at the individual LP level;

(e) t

PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT COMMUNICATION
MEMORANDUM
TO: Rachel Bernstein, Partner, Calderwood & Harkness LLP Christine Aldridge, Partner, Pinnacle Venture Fund II LP
FROM: Leila Nazari, Lead Associate, Calderwood & Harkness LLP Robert Jansen, Associate, Calderwood & Harkness LLP
DATE: April 14, 2026
RE: Qualified Small Business Stock Eligibility Analysis Under IRC § 1202 — Series A Preferred Stock of Quillen Technologies, Inc.
MATTER NO.: 1002-00002
BILLING CODE: 78412.001
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I. Executive Summary
The purpose of this memorandum is to analyze whether shares of Series A Preferred Stock of Quillen Technologies, Inc. ("Quillen" or the "Company"), to be acquired by Pinnacle Venture Fund II LP ("Pinnacle" or the "Fund") in the proposed $22.5 million Series A financing, qualify as "qualified small business stock" ("QSBS") under Section 1202 of the Internal Revenue Code of 1986, as amended (the "Code"). This analysis has been prepared at the request of Pinnacle in connection with its evaluation of the tax-advantaged characteristics of its proposed $14.0 million investment in the Company.
The significance of QSBS qualification is substantial. If the requirements of Section 1202 are met, individual taxpayers — and, in the case of Pinnacle as a pass-through entity for federal income tax purposes, its underlying partners — may exclude from federal gross income up to the greater of (i) $10 million or (ii) ten times the taxpayer's adjusted basis in the stock, on gain recognized from the sale or exchange of QSBS held for more than five years. For stock acquired after September 27, 2010, the exclusion is 100% of the eligible gain, and the excluded gain is also exempt from the alternative minimum tax. In a successful exit scenario, this exclusion could eliminate federal income tax on hundreds of millions of dollars of aggregate gain flowing through to Pinnacle's limited partners.
Preliminary Conclusion. Based on the information currently available to us — including our review of the Company's organizational documents, the draft Series A term sheet dated March 29, 2026, Quillen's unaudited financial statements for the fiscal year ended December 31, 2025 and the quarter ended March 31, 2026, the Company's capitalization table, the convertible note purchase agreements, and discussions with Company counsel at Fenwick, Torres & Keane LLP — the Series A Preferred Stock to be acquired by Pinnacle appears likely to satisfy the QSBS requirements at the time of issuance. Our conclusion is subject to certain confirmations noted herein, principally relating to (a) verification that the Company's aggregate gross assets on a tax-adjusted basis do not exceed $50 million at any time before and immediately after the issuance, and (b) the Company's ongoing compliance with the active business requirement during substantially all of the holding period.
We further note that QSBS qualification is determined at the partner level for pass-through entities such as Pinnacle. Certain structural considerations specific to Pinnacle's limited partnership structure — including the look-through rules under Section 1202(g), the per-issuer exclusion limit at the individual limited partner level, and the continuous partnership interest holding requirement — are discussed in detail in Section V of this memorandum.
This analysis is preliminary. Final confirmation of QSBS eligibility should be obtained upon completion of financial due diligence (due diligence period: April 18 – May 23, 2026), review of the Company's federal income tax returns for the 2023 and 2024 tax years, and receipt of the tax-basis gross asset schedule requested from the Company's auditor. We recommend that certain representations, covenants, and confirmations be incorporated into the definitive transaction documents, as described in Section VII below.
II. Background — Transaction Overview
A. The Company
Quillen Technologies, Inc. is a Delaware C-corporation incorporated on July 12, 2023 (Delaware Secretary of State File Number 7384219; Employer Identification Number 93-4817265). The Company is headquartered at 88 Garrison Street, Floor 4, Boston, Massachusetts 02116. The Company's sole operating subsidiary, if any, has not been identified in the materials reviewed to date; based on our understanding, Quillen operates through a single corporate entity without subsidiaries.
Quillen develops and commercializes "Mosaic," an AI-driven portfolio analytics and risk-attribution platform sold on a Software-as-a-Service ("SaaS") subscription basis to institutional asset managers, pension consultants, and endowments. The Mosaic platform leverages proprietary machine learning algorithms to provide clients with real-time portfolio decomposition, factor attribution, and risk forecasting capabilities. The Company's customers pay recurring annual or multi-year subscription fees for access to the platform, and the Company does not provide bespoke investment advisory, consulting, or financial services to its clients.
As of the first quarter of 2026, the Company's annualized recurring revenue ("ARR") is approximately $3.8 million. Last-twelve-month ("LTM") recognized revenue is approximately $3.2 million. The Company employs 38 full-time equivalent employees ("FTEs"), distributed as follows: 24 in engineering and product development, 6 in sales and marketing, 5 in general and administrative functions, and 3 in executive management. The Company's current monthly operating expense burn rate is approximately $420,000.
B. The Proposed Series A Financing
The proposed Series A financing contemplates the issuance by Quillen of 4,500,000 shares of Series A Preferred Stock at a price per share of $5.00, for aggregate new-money consideration of $22,500,000. The pre-money valuation of the Company is $57,500,000, and the post-money valuation (inclusive of the Series A proceeds) is $80,000,000. The target closing date for the financing is June 15, 2026.
The Series A investors and their respective allocations are as follows:
In addition to the new-money issuance, an aggregate of $1,500,000 in principal amount of outstanding convertible promissory notes, together with estimated accrued interest of approximately $202,500, will convert into 851,250 shares of Series A Preferred Stock at a conversion price of $2.00 per share (derived from the $25,000,000 valuation cap specified in the convertible notes). The converting note holders are as follows:
The convertible notes were issued in March 2024, bear simple interest at a rate of 6% per annum, and mature on March 15, 2026 (subject to automatic conversion upon a qualified financing). The notes will automatically convert upon the Series A closing.
Following the Series A closing, the total shares of Series A Preferred Stock outstanding will be 5,351,250 (4,500,000 new-money shares plus 851,250 conversion shares).
C. Pinnacle Venture Fund II LP
Pinnacle Venture Fund II LP is a Delaware limited partnership (Employer Identification Number 88-3529104) with Pinnacle Capital Management LLC, a Delaware limited liability company (Employer Identification Number 88-3471082), serving as its general partner. Pinnacle is headquartered at 450 Pacific Heights Boulevard, Suite 1200, San Francisco, California 94115. Fund II is a $385 million fund of 2025 vintage, focused on early-stage and growth-stage technology investments. The Fund's limited partner base consists of a mix of institutional investors, high-net-worth individuals, family offices, and certain fund-of-funds vehicles. The Fund has a stated fund life of ten years, with provisions for two one-year extensions at the discretion of the general partner.
Christine Aldridge, a partner of Pinnacle Capital Management LLC and an addressee of this memorandum, serves as the deal lead for the Quillen investment. Sandeep Rajan is the Managing Partner and principal of Pinnacle Capital Management LLC.
III. Legal Framework — IRC § 1202 Requirements
A. Overview of Section 1202
Section 1202 of the Code, enacted as part of the Revenue Reconciliation Act of 1993 and subsequently amended on multiple occasions, provides a powerful incentive for investment in qualified small businesses. Under Section 1202(a), a non-corporate taxpayer may exclude from gross income a percentage of the gain realized on the sale or exchange of QSBS that has been held for more than five years.
For stock acquired after September 27, 2010 (the relevant period for the proposed Quillen investment), the exclusion percentage is 100% of the eligible gain, as provided by the Creating Small Business Jobs Act of 2010 and made permanent by the Protecting Americans from Tax Hikes Act of 2015. Prior to September 28, 2010, the exclusion percentage was lower — 50% for stock acquired before February 18, 2009, and 75% for stock acquired between February 18, 2009 and September 27, 2010. Because Pinnacle's stock will be acquired in June 2026, the 100% exclusion applies.
The maximum amount of gain that a taxpayer may exclude with respect to QSBS of any single issuer is the greater of:
(i) $10,000,000 (reduced by the aggregate amount of gain excluded under Section 1202 by the taxpayer on prior dispositions of stock issued by the same corporation), or
(ii) ten times the taxpayer's adjusted basis in the QSBS disposed of during the taxable year.
Importantly, for stock acquired after September 27, 2010, the excluded gain is also exempt from the alternative minimum tax preference that formerly applied under Section 1202(a)(4), and it is not subject to the 28% alternative capital gains rate that historically applied to certain QSBS gains. The excluded gain is also exempt from the 3.8% net investment income tax under Section 1411 (to the extent the gain is excluded from gross income).
B. Five Statutory Requirements
For stock to qualify as QSBS under Section 1202, five principal requirements must be satisfied. These requirements collectively ensure that the exclusion benefit is limited to direct investments in small, active domestic businesses. We enumerate them here and analyze each in detail in Section IV:
1. Qualified Small Business (C-Corporation) Requirement. The stock must be stock of a "qualified small business," which is defined under Section 1202(d)(1) as a domestic C-corporation. Certain types of entities — including S-corporations, regulated investment companies ("RICs"), real estate investment trusts ("REITs"), real estate mortgage investment conduits ("REMICs"), cooperatives, and foreign corporations — are excluded.
2. Original Issuance Requirement. The stock must be acquired by the taxpayer at its "original issuance" (directly or through an underwriter) in exchange for money, property (other than stock), or as compensation for services rendered to the corporation. Section 1202(c)(1). Stock acquired in the secondary market from an existing shareholder does not qualify.
3. Gross Assets Test. The corporation must satisfy the "gross assets test" set forth in Section 1202(d)(1) — that is, the aggregate gross assets of the corporation must not have exceeded $50 million at all times after August 10, 1993, and both before and immediately after the issuance of the stock in question. Aggregate gross assets are measured on a tax-adjusted basis, not at fair market value.
4. Active Business Requirement. The corporation must satisfy the "active business requirement" of Section 1202(e) during substantially all of the taxpayer's holding period. This requirement has two components: (a) at least 80% (by value) of the corporation's assets must be used in the active conduct of one or more "qualified trades or businesses," and (b) the corporation's trade or business must not be one of the enumerated excluded service businesses.
5. Holding Period Requirement. The taxpayer must hold the QSBS for more than five years from the date of original issuance. Section 1202(a). If the stock is disposed of before the five-year mark, the exclusion is unavailable (though a tax-free rollover under Section 1045 may be available for stock held at least six months).
Each of these requirements is analyzed in turn below with specific application to the facts of the proposed Quillen Series A financing and Pinnacle's investment.
IV. Analysis of Each QSBS Requirement
A. Domestic C-Corporation Requirement (IRC § 1202(d)(1))
Section 1202(d)(1) defines a "qualified small business" as a domestic corporation that is a C-corporation. This definitional requirement excludes several categories of entities, including S-corporations, RICs, REITs, REMICs, cooperatives, and foreign corporations.
Quillen Technologies, Inc. is organized as a corporation under the General Corporation Law of the State of Delaware. The Company was incorporated on July 12, 2023, as evidenced by its Certificate of Incorporation filed with the Delaware Secretary of State (File Number 7384219). As a Delaware corporation that has not elected to be treated as an S-corporation under Subchapter S of the Code, Quillen is taxed as a C-corporation under Subchapter C of the Code.
Based on our review of the Company's initial Certificate of Incorporation, the Amended and Restated Certificate of Incorporation adopted in connection with the Series Seed financing (October 2023), and the draft Amended and Restated Certificate of Incorporation to be filed in connection with the Series A closing, we confirm the following:
• Quillen has not elected S-corporation status under Section 1362 of the Code at any time since its incorporation.
• Quillen is not a regulated investment company within the meaning of Section 851 of the Code.
• Quillen is not a real estate investment trust within the meaning of Section 856 of the Code.
• Quillen is not a real estate mortgage investment conduit within the meaning of Section 860D of the Code.
• Quillen is not a cooperative organization described in Section 1381 of the Code.
• Quillen is a domestic corporation organized under the laws of a state of the United States (Delaware) and is not a foreign corporation within the meaning of Section 7701(a)(5) of the Code.
• Quillen does not appear to be a personal holding company within the meaning of Section 542 of the Code, based on the diversified ownership reflected in the current capitalization table and the nature of the Company's income (SaaS subscription revenue rather than passive investment income).
We have confirmed the foregoing based on the corporate documents provided by Company counsel and the Company's representations in the draft term sheet. We recommend that the Stock Purchase Agreement include an express representation by the Company that it is, and at all times since incorporation has been, a domestic C-corporation and that it has not elected S-corporation status.
Conclusion: The domestic C-corporation requirement under Section 1202(d)(1) appears to be satisfied.
B. Original Issuance Requirement (IRC § 1202(c)(1))
1. General Rule
Section 1202(c)(1) requires that QSBS be "acquired by the taxpayer at its original issuance (directly or through an underwriter) in exchange for money or other property (not including stock), or as compensation for services provided to such corporation (or any predecessor thereof)." This requirement ensures that the QSBS exclusion benefits only direct investors in small businesses, not secondary-market purchasers.
The term "original issuance" is not further defined in the Code or Treasury Regulations; however, its meaning is generally understood to encompass any issuance of previously unissued shares by the corporation directly to the taxpayer. Shares purchased from an existing shareholder in a secondary transaction do not constitute stock acquired at original issuance, and thus do not qualify as QSBS in the hands of the purchaser (though tacking rules under Section 1202(h) may apply in certain limited circumstances, such as gifts and transfers at death).
2. Application to Pinnacle's Shares
Pinnacle will acquire 2,800,000 shares of Series A Preferred Stock directly from Quillen Technologies, Inc. in exchange for $14,000,000 in cash. The shares will be newly issued by the Company and will not have been previously issued to or held by any other shareholder. This transaction constitutes a classic original issuance for purposes of Section 1202(c)(1).
The consideration to be paid by Pinnacle is money (cash), which is one of the three enumerated forms of qualifying consideration under Section 1202(c)(1). There is no component of the purchase price payable in stock or other non-qualifying consideration.
3. Convertible Note Conversion Shares
The 851,250 shares of Series A Preferred Stock to be issued upon conversion of the outstanding convertible promissory notes also constitute original issuance shares for purposes of Section 1202. The conversion of a debt instrument into equity of the issuing corporation represents an exchange of "property (not including stock)" — namely, the surrender of the note holder's rights under the promissory note — for newly issued shares. The IRS has generally treated the conversion of convertible debt into stock as an original issuance. See Rev. Rul. 2003-97, 2003-2 C.B. 380 (addressing the treatment of convertible instruments in the context of Section 1202).
An important nuance applies to the holding period of the conversion shares: for QSBS purposes, the holding period of the shares begins at the time of conversion (i.e., the closing date of the Series A financing), not at the date of issuance of the underlying convertible notes. This is because the QSBS holding period under Section 1202 tracks the period during which the taxpayer held the stock, not the period during which the taxpayer held a predecessor debt instrument. Accordingly, the converting note holders — Harborview Angel Syndicate LLC, Caldwell Family Office LLC, and Dr. Lawrence Hu — would need to hold their conversion shares for more than five years from the closing date to satisfy the holding period requirement. This distinction is relevant to those note holders but does not affect Pinnacle's QSBS analysis.
4. Treatment of Preferred Stock
Section 1202 applies to "stock" of a qualified small business and does not, on its face, distinguish between common stock and preferred stock. However, if preferred stock constitutes "nonqualified preferred stock" as defined in Section 351(g)(2) of the Code, it may raise issues under Section 1202. Nonqualified preferred stock generally includes stock that (a) the holder has the right to require the issuer or a related person to redeem at a determinable price, (b) the issuer or a related person is required to redeem, (c) the issuer or a related person has the right to redeem and, as of the issue date, it is more likely than not that the right will be exercised, or (d) the dividend rate on the stock varies in whole or in part with reference to interest rates, commodity prices, or similar indices.
We have reviewed the principal terms of the Series A Preferred Stock as set forth in the draft term sheet dated March 29, 2026 and the draft Amended and Restated Certificate of Incorporation. The key economic terms are as follows:
• Liquidation Preference: 1x non-participating liquidation preference.
• Dividends: 8% non-cumulative dividends, payable when, as, and if declared by the Board of Directors.
• Conversion: Each share of Series A Preferred Stock is convertible into common stock at the option of the holder at any time, initially on a one-for-one basis (subject to customary anti-dilution adjustments). Mandatory conversion occurs upon an initial public offering meeting specified price and size thresholds.
• Redemption: No mandatory redemption. No put rights. The Company has no right to redeem the Series A Preferred Stock without the consent of the holders.
• Voting: Votes with common stock on an as-converted basis, plus protective provisions.
The Series A Preferred Stock does not contain mandatory redemption features, put rights at a fixed or determinable price, or variable dividend provisions tied to interest rates or commodity prices. Accordingly, the Series A Preferred Stock does not appear to constitute "nonqualified preferred stock" under Section 351(g)(2), and its classification as preferred stock should not preclude QSBS eligibility.
Conclusion: The original issuance requirement under Section 1202(c)(1) appears to be satisfied with respect to Pinnacle's directly acquired shares of Series A Preferred Stock, as well as the conversion shares to be issued to the converting note holders.
C. Gross Assets Test (IRC § 1202(d)(1))
1. Statutory Framework
Under Section 1202(d)(1), a corporation is a "qualified small business" only if, at all times after August 10, 1993, and before and immediately after the issuance of the stock in question, the aggregate gross assets of the corporation did not exceed $50,000,000. This is commonly referred to as the "gross assets test" or the "$50 million test."
Section 1202(d)(2) defines "aggregate gross assets" as the amount of cash and the aggregate adjusted bases (as determined for purposes of computing taxable income) of other property held by the corporation. Special rules apply to assets contributed to the corporation: under Section 1202(d)(2)(B), contributed property is taken into account at the contributor's adjusted basis, which prevents taxpayers from inflating the corporation's asset base through contributions of appreciated property. Similarly, assets developed or built internally by the corporation — such as software or intellectual property — are carried at their adjusted tax basis, which is generally equal to cost (i.e., the capitalized development expenditures, reduced by any amortization or depreciation).
A critically important distinction must be drawn: the $50 million threshold is measured on a tax-adjusted basis, not at fair market value. A corporation may have a fair market value (as reflected in its equity valuation) that substantially exceeds $50 million while nonetheless satisfying the gross assets test because its tax-basis assets are well below that threshold. This distinction is particularly pronounced in the case of technology companies, whose most valuable assets — proprietary software, algorithms, customer relationships, brand recognition — typically have a very low adjusted tax basis relative to their fair market value.
2. Pre-Closing Analysis
As of March 31, 2026, based on the unaudited financial information provided by the Company, Quillen's asset base on a book-value basis consists principally of the following:
• Cash and cash equivalents: Approximately $1.1 million.
• Accounts receivable: Estimated at approximately $350,000 (reflecting the Company's SaaS subscription billing cycle).
• Prepaid expenses and other current assets: Estimated at approximately $200,000.
• Property and equipment (net): Minimal — the Company operates from leased office space in Boston and its physical assets consist primarily of computer equipment and office furniture. Estimated net book value of approximately $180,000.
• Capitalized software development costs: To the extent the Company has capitalized any portion of its Mosaic platform development costs under ASC 350-40 (for book purposes), these would be carried at their adjusted basis (cost less accumulated amortization) for purposes of Section 1202. Based on discussions with Company counsel, the Company has expensed the majority of its development costs; any capitalized amounts are believed to be modest (estimated under $500,000).
• Other intangible assets: No goodwill or purchased intangibles. The Company has not completed any acquisitions.
In aggregate, the Company's total gross assets on a tax-adjusted basis are estimated to be well under $10 million as of the pre-closing date. The Company has raised a total of $4.5 million in external capital prior to the Series A (consisting of $3.0 million in Series Seed equity financing closed in October 2023 and $1.5 million in convertible notes issued in March 2024). Given the Company's monthly burn rate of approximately $420,000, the substantial majority of this capital has been consumed by operating expenses — salaries, cloud infrastructure costs, office rent, professional fees, and other operating expenditures — over the approximately 30 months since the Company's incorporation. The remaining cash balance of $1.1 million is consistent with this analysis.
3. Immediately-After-Issuance Analysis
Upon the closing of the Series A financing, Quillen will receive $22,500,000 in new cash from the Series A investors. This cash will be reflected as an increase in the Company's aggregate gross assets. The conversion of the outstanding convertible notes into equity does not contribute additional cash to the Company — the conversion merely extinguishes a liability (the notes payable) and creates additional equity (the conversion shares). Accordingly, the note conversion does not increase the Company's aggregate gross assets for purposes of the $50 million test.
The immediately-after-issuance calculation is therefore as follows (on an estimated basis):
Even under conservative assumptions that include potential additional assets not identified in the available financial information, total aggregate gross assets immediately after the Series A closing are expected to be in the range of $25 million to $32 million — well under the $50 million threshold. We note that the $80 million post-money fair market value is a market-based equity valuation that reflects the present value of expected future cash flows, growth potential, and comparable company multiples; it is not equivalent to, and substantially exceeds, the tax-basis asset value of the Company.
4. Verification Recommendation
Notwithstanding our preliminary conclusion that the gross assets test is likely satisfied, we strongly recommend that the Company's independent auditor (Pemberton & Associates CPAs LLP, engagement partner Diane Stratton) or the Company's tax preparer be requested to provide a schedule of aggregate gross assets on a tax-adjusted basis as of the most recent available period-end (ideally December 31, 2025, or March 31, 2026, if interim data is available). This schedule should confirm that aggregate gross assets have not exceeded $50 million at any time since the Company's incorporation on July 12, 2023. We will include this request in the due diligence request list to be transmitted to Company counsel at Fenwick, Torres & Keane LLP.
5. Future Financing Rounds
An important caveat: if Quillen raises additional capital in subsequent financing rounds (e.g., a Series B), the aggregate gross assets must not exceed $50 million at the time of any subsequent original issuance for new stock issued in that round to qualify as QSBS. However, Pinnacle's existing QSBS status with respect to the Series A shares would not be retroactively affected if the Company later exceeds the $50 million threshold. The qualification of QSBS is determined at the time of issuance, and a subsequent breach of the gross assets test does not taint previously issued QSBS. This is an important structural protection for early-stage investors.
That said, Pinnacle should be aware that if the Company conducts a large subsequent financing that causes its aggregate gross assets to exceed $50 million, any shares issued in that subsequent round would not qualify as QSBS. This has potential implications for anti-dilution adjustments, pay-to-play provisions, or other mechanisms that might result in the issuance of additional shares to Pinnacle in connection with a future round.
Conclusion: Based on available information, the gross assets test under Section 1202(d)(1) appears likely to be satisfied, pending confirmation through receipt of the Company's tax-basis gross asset schedule.
D. Active Business Requirement (IRC § 1202(e))
1. General Rule
The active business requirement under Section 1202(e) has two components. First, during "substantially all" of the taxpayer's holding period for the QSBS, at least 80% (by value) of the corporation's assets must be used in the "active conduct" of one or more "qualified trades or businesses." Section 1202(e)(1). The IRS has interpreted "substantially all" in this context to mean at least 80% of the relevant holding period. See, e.g., H.R. Rep. No. 103-111, at 625 (1993) (Conference Report).
Second, the corporation's trade or business must be a "qualified trade or business," which is defined by exclusion under Section 1202(e)(3). A qualified trade or business is any trade or business other than:
(A) Any trade or business involving the performance of services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners;
(B) Any banking, insurance, financing, leasing, investing, or similar business;
(C) Any farming business (including the business of raising or harvesting trees);
(D) Any business involving the production or extraction of oil, gas, or other natural resources for which percentage depletion is allowable; and
(E) Any business of operating a hotel, motel, restaurant, or similar business.
The exclusions set forth in Section 1202(e)(3)(A) are substantively identical to the list of "specified service trades or businesses" under Section 199A(d)(2) (the qualified business income deduction), which in turn draws from the definition of personal service corporations in Section 448(d)(2). While comprehensive guidance on the scope of these exclusions in the Section 1202 context is limited, the existing case law and administrative guidance under Sections 199A and 448 provide useful analogies.
2. Application to Quillen's Business
Quillen develops, markets, and licenses the Mosaic SaaS platform — an AI-driven portfolio analytics and risk-attribution tool — to institutional asset managers, pension consultants, and endowments. The Company's business model is that of a technology product company: it creates and maintains a software platform and licenses access to that platform on a recurring subscription basis. The Company does not provide investment advisory services, manage assets on behalf of its customers, act as a broker-dealer, or hold itself out as a provider of financial consulting or advisory services. The Company is not registered as an investment adviser under the Investment Advisers Act of 1940 (a separate analysis of the Company's regulatory status is being prepared in a companion regulatory compliance memorandum).
The distinction between a technology/software business and the excluded service businesses enumerated in Section 1202(e)(3) is critical to the QSBS analysis. We address the two most relevant exclusions — "financial services" and "consulting" — in turn.
Financial Services Exclusion. The "financial services" exclusion under Section 1202(e)(3)(A) encompasses businesses involving "the performance of services in the field of financial services" as well as, under Section 1202(e)(3)(B), "any banking, insurance, financing, leasing, investing, or similar business." Quillen does not engage in any of these activities. The Company does not provide banking services, issue insurance policies, extend financing or credit, lease assets, or manage investment portfolios. Although the Company's customers are participants in the financial services industry (institutional asset managers, pension consultants, and endowments), Quillen itself is a technology vendor that sells software tools to those participants. The fact that a company's product is used by financial services firms does not transform the company itself into a financial services business. By analogy, a company that sells accounting software to accounting firms is not thereby engaged in the practice of accounting. This distinction is well-supported by the legislative history of Section 1202, which focuses on the nature of the services performed by the corporation itself, not the industry in which its customers operate.
Consulting Exclusion. The "consulting" exclusion under Section 1202(e)(3)(A) targets businesses whose principal offering is bespoke advice rendered by individuals with specialized expertise. Quillen does not provide consulting services. Its sole product is the Mosaic software platform, and its revenue is derived exclusively from SaaS subscription fees. The Company does not charge advisory fees, asset-based fees, hourly consulting rates, or engagement fees. The fact that the Mosaic platform generates analytics outputs that clients use in their investment decision-making processes does not transform the Company's business into a consulting business, any more than a spreadsheet software company is engaged in "consulting" because its users use spreadsheets to make business decisions. The regulations under Section 199A, which address an analogous exclusion for "consulting" businesses, confirm that a business that develops and sells a product is not a consulting business merely because the product provides analytical or informational value to its users. See Treas. Reg. § 1.199A-5(b)(2)(vii).
Revenue Model Confirmation. The Company's revenue composition is as follows: 100% of revenue is derived from SaaS subscription fees. The Company has no revenue from advisory fees, asset-based fees, consulting engagement fees, or any other service-based revenue stream. This pure-product revenue model is a strong indicator that the Company is a technology product company, not a service business.
Employee Profile. The Company's 38 FTEs are distributed as follows: 24 in engineering and product development (63%), 6 in sales and marketing (16%), 5 in general and administrative functions (13%), and 3 in executive management (8%). This workforce composition is consistent with a technology product company, where the predominant focus is on engineering, software development, and product improvement rather than client-facing service delivery.
80% Active-Asset Test. Substantially all of the Company's assets are used in the development and licensing of the Mosaic platform. The Company's principal assets consist of its proprietary software and related intellectual property, cash for operational use, computer equipment, and a small amount of accounts receivable from customers. The Company does not hold significant passive investments, real estate held for investment, or other assets unrelated to its active business operations. Accordingly, the 80% asset-use test appears to be satisfied.
Working Capital Safe Harbor. An important consideration arises from the influx of $22.5 million in Series A cash at closing. Under Section 1202(e)(6), assets held as part of the corporation's "reasonably required working capital needs" are treated as assets used in the active conduct of a qualified trade or business, provided two conditions are met: (i) the corporation has a specific, written plan for the expenditure of such working capital, and (ii) the working capital is actually spent within two years of the date it is received. This safe harbor is particularly relevant for early-stage companies that raise significant venture capital financing and hold the proceeds in cash or short-term investments while deploying the capital over time to fund operations.
Quillen's planned use of the Series A proceeds — which, based on the draft term sheet and discussions with management, includes hiring additional engineering and sales personnel, expanding the Mosaic platform's feature set, investing in go-to-market activities, and funding general corporate operations — is consistent with the working capital safe harbor. The Company's current burn rate of approximately $420,000 per month suggests that the $22.5 million in Series A proceeds would fund approximately 53 months of operations at current burn levels (though the burn rate is expected to increase as the Company scales). The two-year spending window under Section 1202(e)(6) should be achievable for a meaningful portion of the proceeds.
Recommendation. We recommend obtaining a written representation from the Company — either in the Stock Purchase Agreement or in a separate QSBS side letter — regarding the Company's intended use of the Series A proceeds, in sufficient detail to support reliance on the working capital safe harbor. We also recommend that the Stock Purchase Agreement include an affirmative covenant obligating the Company to use commercially reasonable efforts to maintain QSBS eligibility, including compliance with the active business requirement and the working capital deployment plan. Such covenants are increasingly standard in venture capital financing documents and have been accepted by the Company's counsel in preliminary discussions.
3. Conclusion on Active Business Requirement
Quillen's SaaS technology business constitutes an "active trade or business" within the meaning of Section 1202(e)(1), and the Company's business is not one of the excluded service businesses enumerated in Section 1202(e)(3). The Company's revenue model (100% SaaS subscription), workforce composition (predominantly engineering), and asset utilization (substantially all assets devoted to the Mosaic platform) are all consistent with QSBS eligibility. The working capital safe harbor under Section 1202(e)(6) should apply to the Company's cash holdings post-closing, provided the Company maintains a plan for deployment of the proceeds and spends them within the two-year window.
Conclusion: The active business requirement under Section 1202(e) appears to be satisfied.
E. Holding Period Requirement (IRC § 1202(a))
Section 1202(a) requires that the taxpayer hold the QSBS for more than five years in order to claim the gain exclusion. This is a prospective requirement that will be determined based on Pinnacle's actual holding period for the shares.
Pinnacle's holding period for the 2,800,000 shares of Series A Preferred Stock would begin on the closing date of the Series A financing (target: June 15, 2026) and must extend beyond June 15, 2031, for the five-year holding period to be satisfied. If the stock is sold, exchanged, or otherwise disposed of before that date, the Section 1202 exclusion will be unavailable with respect to the disposed shares.
However, if a premature disposition occurs after a holding period of at least six months, Section 1045 of the Code may provide an alternative benefit. Section 1045 permits a non-corporate taxpayer to elect to defer recognition of gain from the sale of QSBS held for at least six months if the taxpayer purchases replacement QSBS within 60 days of the sale. The deferred gain reduces the taxpayer's basis in the replacement QSBS. This rollover mechanism could provide planning flexibility in the event of an early exit — for example, if Quillen is acquired by a strategic buyer before June 2031.
Holding Period in the Context of Fund Life. Pinnacle Venture Fund II LP is a 2025 vintage fund with a stated fund life of ten years (plus two potential one-year extensions), which would extend through at least 2035 and potentially 2037. The five-year QSBS holding requirement (ending no earlier than June 2031) is well within the fund's expected life. However, venture capital fund economics and return expectations may create pressure for an earlier exit if an attractive acquisition opportunity arises. Pinnacle's fund documents and investment committee should consider the QSBS holding period as a factor in exit timing decisions for the Quillen investment.
Conclusion: The holding period requirement is prospective and will be satisfied if Pinnacle holds the shares for more than five years from the closing date.
V. Pass-Through Entity Considerations — Pinnacle Fund Structure
A. Look-Through Rules for Partnerships (IRC § 1202(g))
Pinnacle Venture Fund II LP is a Delaware limited partnership that is treated as a partnership for federal income tax purposes. As a pass-through entity, Pinnacle is not itself a taxpayer for income tax purposes; rather, items of income, gain, deduction, and credit flow through to the Fund's partners and are reported on their individual or entity-level tax returns.
Section 1202(g)(1) addresses the treatment of QSBS held by pass-through entities. Under this provision, if QSBS is held by a pass-through entity (which includes a partnership, an S-corporation, a regulated investment company, or a common trust fund), the exclusion under Section 1202(a) is applied at the level of the individual partner, shareholder, or beneficiary — not at the entity level. This "look-through" treatment has several important implications:
(i) Benefits Flow to Individual Partners. The QSBS exclusion benefits flow through to Pinnacle's limited partners ("LPs") and general partner interests that are ultimately owned by individuals. Each individual who is an ultimate owner of a partnership interest in Pinnacle at the time the Fund acquires the QSBS, and who maintains that partnership interest continuously through the date of disposition, is eligible for the Section 1202 exclusion with respect to his or her pro rata share of the Fund's gain from the sale of the QSBS.
(ii) Continuous Ownership Requirement. A critical condition for the look-through benefit is that the individual must have been a partner in the pass-through entity at the time the entity acquired the QSBS and must have held the partnership interest continuously through the date of sale. Section 1202(g)(2)(A). If a limited partner sells, transfers, or otherwise disposes of his or her partnership interest after the Fund acquires the QSBS but before the Fund sells the QSBS, that limited partner's successor will not be eligible for the QSBS exclusion with respect to the Quillen stock (absent a qualifying transfer under Section 1202(h), such as a transfer by gift or at death).
(iii) Corporate Partners Are Ineligible. C-corporations are not eligible for the Section 1202 exclusion. Accordingly, any LP of Pinnacle that is itself a C-corporation will not benefit from QSBS treatment. The exclusion is available only to non-corporate taxpayers — individuals, trusts, and estates. If an LP is itself a pass-through entity (such as a family limited partnership or LLC), further look-through analysis is required to determine whether the ultimate individual owners are eligible.
B. Per-Issuer Limit at the Partner Level
The $10 million exclusion limit (or the alternative 10x basis limit) under Section 1202(a) is applied on a per-issuer, per-taxpayer basis. In the context of a partnership, this means that each individual LP of Pinnacle has his or her own separate $10 million limit with respect to gain attributable to the Quillen stock. This is a significant advantage of the partnership structure for a large fund like Pinnacle, which has numerous individual LPs.
To illustrate: if Pinnacle sells its Quillen stock at a gain of $100 million, and there are 50 individual LPs each allocated an equal share of that gain ($2 million each), each LP would have more than sufficient headroom under the $10 million per-issuer limit to exclude his or her entire share of the gain. By contrast, if a single individual had invested $14 million directly, that individual's exclusion would be capped at $10 million (or 10x adjusted basis, i.e., $140 million, whichever is greater).
The alternative 10x basis limit is computed based on each individual partner's allocable share of the partnership's adjusted basis in the QSBS. Given Pinnacle's aggregate basis in the Quillen stock of $14,000,000, each LP's allocable basis would be a fraction of that amount, determined by the LP's partnership interest percentage. For an LP with a 2% partnership interest, the allocable basis would be $280,000, yielding a 10x basis limit of $2,800,000 — which would be superseded by the $10 million fixed limit in most scenarios.
C. Sandeep Rajan and Christine Aldridge — GP-Level Interests
Sandeep Rajan (Managing Partner and GP Principal) and Christine Aldridge (Partner and Deal Lead for the Quillen investment) hold interests in the Quillen investment through Pinnacle Capital Management LLC (EIN 88-3471082), which serves as the general partner of Pinnacle Venture Fund II LP. As general partner, Pinnacle Capital Management LLC is allocated carried interest (typically 20% of net profits) and a management fee (typically 2% of committed capital), in addition to any co-investment allocation.
For QSBS purposes, Mr. Rajan's and Ms. Aldridge's benefits would flow through two levels of pass-through entities: first through Pinnacle Capital Management LLC (the general partner entity), and then through Pinnacle Venture Fund II LP (the fund). The look-through rules of Section 1202(g) apply at each level. Provided that (i) Pinnacle Capital Management LLC is treated as a partnership or disregarded entity for federal income tax purposes (and has not elected to be taxed as a corporation), (ii) Mr. Rajan and Ms. Aldridge were interest holders in the GP entity at the time the Fund acquired the QSBS, and (iii) they maintain their interests continuously through the date of sale, they should each be eligible for the Section 1202 exclusion with respect to their allocable share of the Fund's gain from the sale of the Quillen stock.
We recommend confirming that Pinnacle Capital Management LLC has not elected to be treated as a corporation for federal income tax purposes (e.g., by filing IRS Form 8832 checking the box for association taxable as a corporation). If it is treated as a partnership (in the case of multiple members) or a disregarded entity (if it has a single member), the look-through rules should apply as described above.
D. Recommendation
Given the importance of the look-through rules and the continuous partnership interest holding requirement, we recommend the following actions at the fund level:
1. LP Notification. Pinnacle should consider providing its LPs with a notice regarding the QSBS eligibility of the Quillen investment, including a summary of the requirements for maintaining eligibility at the LP level. In particular, LPs should be informed that the QSBS exclusion may be lost if they transfer their partnership interests before the Fund disposes of the Quillen stock.
2. LP-Level Pass-Through Analysis. If any LP of Pinnacle is itself a pass-through entity (e.g., a family limited partnership, LLC, or trust), further look-through analysis may be needed to determine whether the ultimate individual beneficial owners satisfy the requirements for QSBS treatment.
3. Recordkeeping. Pinnacle should maintain detailed records documenting the QSBS qualification of the Quillen investment, including the original issuance documentation, purchase price, date of acquisition, and ongoing compliance with Section 1202 requirements. These records will be essential for supporting the QSBS exclusion on each LP's individual tax return upon a future disposition.
VI. Key Risks and Limitations
A. Gross Assets Test — Verification Pending
As discussed in Section IV.C, the most significant open item in our QSBS analysis is confirmation that Quillen's aggregate gross assets on a tax-adjusted basis do not exceed $50 million at any time before and immediately after the Series A closing. While our preliminary estimate indicates that aggregate gross assets will be approximately $25–$32 million immediately after issuance — well under the $50 million threshold — this estimate is based on unaudited financial information and our understanding of the Company's asset profile. We have not yet received a formal tax-basis gross asset schedule from the Company or its auditor.
We consider the risk of failing the gross assets test to be low, given the Company's early stage, limited tangible assets, and the fact that internally developed intellectual property (the Mosaic platform) is carried at cost basis, which is likely a small fraction of its fair market value. However, confirmation through the receipt of the tax-basis asset schedule is essential to complete our analysis, and we cannot provide a final conclusion on QSBS eligibility until this item is resolved.
B. Ongoing Active Business Compliance
QSBS status can be lost retroactively if the Company ceases to meet the active business requirement during "substantially all" (at least 80%) of the taxpayer's holding period. This risk would arise if, for example, the Company pivots to a non-qualifying business (such as financial advisory or consulting services), if more than 20% of the value of its assets is held as passive investments or non-business assets for an extended period, or if the Company ceases active operations.
A particular concern in the near term is the significant influx of cash from the Series A financing. The $22.5 million in new cash, combined with the Company's existing cash and other assets, will represent a substantial portion of the Company's total asset base. If this cash is held as passive investments (e.g., in a money market fund or brokerage account) for an extended period without being deployed in the active business, it could jeopardize the 80% active-asset test.
The two-year working capital safe harbor under Section 1202(e)(6) mitigates this risk, provided the Company has a specific, written plan for the expenditure of the cash and actually deploys it within two years. We recommend that the Stock Purchase Agreement include a covenant obligating the Company to maintain a written use-of-proceeds plan and to use commercially reasonable efforts to deploy the Series A proceeds in the active conduct of its business within the two-year window.
C. Redemption and Stock Repurchase Restrictions
Section 1202(c)(3) imposes two anti-abuse rules relating to stock redemptions by the issuing corporation, designed to prevent manipulation of the QSBS rules through repurchase-and-reissue transactions:
(i) Two-Year Pre-Issuance Test. Under Section 1202(c)(3)(A), QSBS treatment is denied if, during the two-year period beginning one year before the date of issuance, the corporation purchased (directly or indirectly) any of its stock from any shareholder, and the aggregate amount paid for all such purchases exceeds 5% of the aggregate value of all of the corporation's stock as of the beginning of such two-year period.
(ii) One-Year Pre-Issuance Targeted Test. Under Section 1202(c)(3)(B), QSBS treatment is denied with respect to a particular taxpayer if, during the one-year period beginning one year before the date of issuance, the corporation made any "significant" purchase of stock from the taxpayer or a person related to the taxpayer (within the meaning of Sections 267(b) or 707(b)).
Based on the information currently available, Quillen has not redeemed or repurchased any shares of its stock since its incorporation on July 12, 2023. The Company's capitalization table, which we have reviewed in draft form, does not reflect any treasury shares or retired shares. We recommend confirming this fact through a specific representation in the Stock Purchase Agreement and through review of the Company's corporate minutes and stock transfer records during due diligence.
D. Section 1045 Rollover as Interim Protection
If Pinnacle or its LPs anticipate a potential exit event prior to the five-year mark — for example, a strategic acquisition of Quillen by a larger technology company — Section 1045 of the Code may provide an alternative tax-deferral mechanism. Under Section 1045, a non-corporate taxpayer who holds QSBS for at least six months may elect to roll over gain from the sale of such stock tax-free into replacement QSBS acquired within 60 days of the sale. The deferred gain reduces the taxpayer's basis in the replacement QSBS, effectively deferring (but not eliminating) the tax on the gain.
For Pinnacle's LPs, a Section 1045 rollover would require each individual LP to identify and acquire replacement QSBS within the 60-day window, which may present practical challenges. The rollover is available only for QSBS acquired by the LP through the look-through rules of Section 1202(g), and the replacement QSBS must meet all of the Section 1202 requirements. While Section 1045 is not a substitute for the full Section 1202 exclusion, it provides meaningful interim protection against an unexpected early exit.
We recommend that Pinnacle's investment committee consider the Section 1045 rollover as a planning tool in the context of exit timing decisions for the Quillen investment.
E. State Tax Considerations
Section 1202 applies exclusively for federal income tax purposes. State conformity with the QSBS exclusion varies significantly across jurisdictions, and the state tax implications of the Quillen investment should be evaluated in the context of Pinnacle's LP base.
• California does not conform to the federal QSBS exclusion under Section 1202. Cal. Rev. & Tax. Code § 18152.5 (repealed, effective for tax years beginning after January 1, 2013). Accordingly, gain from the sale of QSBS is fully taxable for California income tax purposes, at ordinary income or capital gains rates as applicable. This is a significant limitation for Pinnacle and for any California-resident LPs, given that Pinnacle is headquartered in San Francisco, California. California's top individual income tax rate is currently 13.3%, which applies to net capital gains. For LPs with substantial allocable gain from a Quillen exit, the California tax liability could be material notwithstanding full federal QSBS exclusion.
• Massachusetts, where Quillen is headquartered, generally conforms to the federal QSBS exclusion. Massachusetts residents who are LPs of Pinnacle would generally benefit from both federal and state QSBS treatment on their allocable gain.
• Delaware, the state of incorporation of both Quillen and Pinnacle, does not impose individual income tax on investment gains for non-residents. Delaware-resident LPs would benefit from the federal exclusion; non-residents of Delaware generally would not have Delaware-source income from the sale of the stock.
• Other states vary in their conformity. Some states (e.g., New York, New Jersey, Connecticut) have their own rules regarding QSBS exclusions, ranging from full conformity to partial conformity to no conformity. A detailed state-by-state analysis is beyond the scope of this memorandum.
Recommendation. Pinnacle's tax advisors should evaluate the state-level QSBS treatment for the Fund's LP base, particularly for California-resident LPs. This analysis should be incorporated into the LP notification described in Section V.D above.
VII. Structuring Recommendations to Preserve QSBS Eligibility
Based on our analysis, we recommend the following actions to maximize the likelihood of preserving QSBS eligibility for Pinnacle's investment in Quillen:
A. Transaction Document Provisions
1. Company QSBS Representation. The Series A Preferred Stock Purchase Agreement should include a representation by the Company that it qualifies as a "qualified small business" under Section 1202 of the Code, that its aggregate gross assets (as defined in Section 1202(d)(2)) have not exceeded $50,000,000 at any time since its incorporation, and that the Company is not engaged in any trade or business that would cause it to be excluded from the definition of a "qualified trade or business" under Section 1202(e)(3). This representation should survive the closing and be incorporated into the disclosure schedules.
2. QSBS Affirmative Covenant. The Stock Purchase Agreement (or the Investors' Rights Agreement, as appropriate) should include an affirmative covenant requiring the Company to use commercially reasonable efforts to maintain QSBS eligibility during the period in which the investors hold the QSBS. This covenant should specifically address:
(a) compliance with the active business requirement, including the 80% active-asset test;
(b) maintenance of a written plan for the expenditure of working capital, consistent with the safe harbor under Section 1202(e)(6);
(c) restrictions on stock redemptions or repurchases that could violate the anti-abuse rules under Section 1202(c)(3); and
(d) prompt notification to the investors if the Company becomes aware of any event or circumstance that could reasonably be expected to cause a loss of QSBS eligibility.
3. Certificate of Incorporation Review. The Amended and Restated Certificate of Incorporation to be filed in connection with the Series A closing should be reviewed to ensure that it does not contain provisions that would cause the Series A Preferred Stock to be treated as "nonqualified preferred stock" under Section 351(g)(2). Specifically, the certificate should not contain mandatory redemption features, put rights at a fixed or determinable price, or variable dividend provisions tied to interest rates or commodity prices. Based on our preliminary review of the draft certificate, we do not believe any such provisions are present, but we will confirm upon receipt of the final form.
B. Due Diligence Confirmations
1. Tax-Basis Gross Asset Schedule. Request from Quillen, through its counsel at Fenwick, Torres & Keane LLP, a schedule of aggregate gross assets on a tax-adjusted basis (as defined in Section 1202(d)(2)) as of the most recent period-end (December 31, 2025, or March 31, 2026). This schedule should be prepared or certified by the Company's auditor (Pemberton & Associates CPAs LLP, engagement partner Diane Stratton) or its tax preparer. The schedule should confirm that aggregate gross assets have not exceeded $50,000,000 at any time since the Company's incorporation on July 12, 2023.
2. Stock Redemption Confirmation. Confirm through review of the Company's corporate minutes, stock transfer ledger, and board resolutions that no stock redemptions or repurchases have occurred since incorporation. Obtain a specific representation from the Company in the Stock Purchase Agreement.
3. Federal Income Tax Return Review. Request and review the Company's federal income tax returns (Forms 1120) for the taxable years ended December 31, 2023 and December 31, 2024 (if filed as of the date of closing). Review for any facts inconsistent with QSBS eligibility, including significant investment assets on the balance sheet, non-qualifying business activities, or any indication that the Company elected S-corporation status.
4. S-Corporation Status Confirmation. Confirm that Quillen has not elected S-corporation status under Section 1362 of the Code at any time since incorporation. Request a copy of any IRS determination letter or other correspondence regarding the Company's tax status, if available.
C. Fund-Level Actions
1. Record Maintenance. Pinnacle should maintain comprehensive records documenting the original issuance of the QSBS, including the Stock Purchase Agreement, closing certificates, proof of payment, the purchase price per share ($5.00), the aggregate purchase price ($14,000,000), the number of shares acquired (2,800,000), and the date of acquisition (expected June 15, 2026). These records will be essential for substantiating the QSBS exclusion upon a future disposition.
2. LP Notification. As discussed in Section V.D, Pinnacle should provide its limited partners with a notification regarding the QSBS eligibility of the Quillen investment. The notification should address:
(a) the potential tax benefits of QSBS treatment under Section 1202;
(b) the five-year holding period requirement and its implications for exit timing;
(c) the continuous partnership interest holding requirement under Section 1202(g)(2)(A), and the consequences of transferring a partnership interest before the Fund disposes of the QSBS;
(d) the $10 million per-issuer exclusion limit at the individual LP level;
(e) t

PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT COMMUNICATION

MEMORANDUM

MATTER NO.: 1002-00002

BILLING CODE: 78412.001

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