MEMORANDUM
PRIVILEGED & CONFIDENTIAL — ATTORNEY-CLIENT COMMUNICATION / ATTORNEY WORK PRODUCT
To: Harrison Wexford, Responsible Partner, M&A, Calderwood & Harkness LLP Marcus Trejo, Partner, Head of Growth Equity, Pinnacle Capital Management LLC
From: Andrew Fitzpatrick, Lead Associate, M&A, Calderwood & Harkness LLP
Date: August 12, 2022
Re: Analysis of Drag-Along and Tag-Along Rights Dispute — Proposed Series D Preferred Stock Investment in Verdana Software, Inc.
Matter No.: 1002-00004 Client No.: PIN-0042
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I. Executive Summary
This memorandum analyzes the current impasse over drag-along rights arising in connection with Pinnacle Venture Fund II LP's proposed $60,000,000 Series D Preferred Stock investment in Verdana Software, Inc. ("Verdana" or the "Company"). The dispute centers on a fundamental disagreement between Pinnacle and Verdana's co-founders regarding the terms under which a sale of the Company may be compelled through a contractual drag-along mechanism, as set forth in the draft Amended and Restated Voting Agreement prepared by this firm and circulated on June 20, 2022 (the "C&H Voting Agreement Draft").
On August 10, 2022, founders Raj Anand (CEO & Co-Founder) and Lena Kovac (CTO & Co-Founder), through their counsel Jonathan Hale at Langford Price & Associates LLP, formally objected to Pinnacle's proposed drag-along provision as drafted. The founders' objection was communicated via written correspondence to this firm and constitutes a material unresolved issue that, if not resolved, will prevent the transaction from closing.
The core tension in this dispute can be summarized as follows: Pinnacle's proposed drag-along is triggered by the approval of holders of a majority of the then-outstanding preferred stock, voting together as a single class on an as-converted basis, with no minimum enterprise value threshold. The founders, by contrast, insist on a $500,000,000 enterprise value floor below which no drag-along sale can be compelled — effectively preserving a founder veto for any transaction that values the Company below that threshold. Pinnacle's position reflects the customary growth equity investor's need for a reliable exit mechanism that does not depend on the continued cooperation of the founding team; the founders' position reflects their view that, given the Company's strong growth trajectory and the structure of the liquidation preference stack, a forced sale below $500,000,000 could result in a deeply inequitable outcome for common stockholders.
The existing investor base is divided on this issue. Ridgeline Ventures Fund III LP (the Series A investor) and Brindoval Capital Group LLC (the Series C investor) have indicated support for the founder-friendly threshold, while Northgate Growth Partners Fund II LP (the Series B investor) has aligned with Pinnacle's position. This division is significant because, under the current draft's majority-of-preferred trigger, Pinnacle and Northgate acting together would hold a majority of the outstanding preferred stock post-close, giving them effective control of the drag-along mechanism without the support of any other investor or the founders.
It should be noted that the tag-along (co-sale) rights provisions are largely agreed upon by all parties and are not the subject of material dispute. The present analysis accordingly focuses primarily on the drag-along mechanism, though we address the tag-along provisions in Part VI for completeness.
This memorandum provides: (i) a detailed review of the background and transaction context; (ii) an analysis of Pinnacle's proposed drag-along provision and its practical implications; (iii) a summary of the founders' counter-position and stated rationale; (iv) a mapping of existing investor positions and voting dynamics; (v) an overview of the agreed-upon tag-along terms; (vi) a legal analysis under Delaware law addressing enforceability, fiduciary duty considerations, and charter-level interactions; (vii) a market precedent review benchmarking the competing proposals against comparable growth-stage venture capital transactions; (viii) an identification and analysis of key risks to Pinnacle under various scenarios; and (ix) a set of recommended compromise structures designed to bridge the gap between the parties' positions, together with our recommended primary and fallback negotiating positions.
II. Background and Transaction Context
A. The Proposed Investment
Pinnacle Venture Fund II LP ("Pinnacle" or the "Fund"), an $850,000,000 fund of 2020 vintage organized as a Delaware limited partnership with its general partner Pinnacle Capital Management LLC located at 2400 Sand Hill Road, Suite 310, Menlo Park, California 94025, proposes to invest $60,000,000 in newly issued shares of Series D Preferred Stock of Verdana Software, Inc. (a Delaware C-corporation with its principal offices at 1175 NW Couch Street, Suite 800, Portland, Oregon 97209, founded in 2016).
Verdana's core product is an AI-powered supply chain optimization SaaS platform marketed under the name "Verdana SCX." The platform is sold to mid-market and enterprise manufacturers and logistics companies, and provides customers with demand forecasting, inventory optimization, route planning, and real-time supply chain visibility capabilities. Verdana has established a meaningful market position in the manufacturing and logistics vertical, competing against both legacy enterprise resource planning solutions and a growing set of point-solution competitors.
The Company's key operating and financial metrics, as reported for Q1 2022, support the growth equity investment thesis. Specifically:
• Annual Recurring Revenue (ARR): $47.3 million as of Q1 2022
• Year-over-Year ARR Growth: 63.7%
• Net Revenue Retention (NRR): 128%
• Gross Margin: 74.2%
• EBITDA (trailing twelve months): Negative $11.6 million
• Cash on Balance Sheet: $22.4 million as of March 31, 2022
• Headcount: Approximately 310 full-time employees
• Customer Base: Approximately 185 customers
These metrics position Verdana as a high-growth, capital-efficient SaaS business with strong unit economics, though the negative EBITDA and finite cash position underscore the Company's ongoing need for external capital to fund growth.
The pre-money valuation for the proposed investment remains a separately contested issue. Verdana has proposed a pre-money valuation of $320,000,000, equating to an implied per-share price of $4.00 on the Company's current fully diluted share count of 80,000,000 shares. Pinnacle has been signaling a counter-valuation of $260,000,000 pre-money, which would imply a per-share price of $3.25. As of the date of this memorandum, Pinnacle's formal counter-proposal on valuation has not yet been transmitted — we understand from the deal team that a formal written counter at the $260,000,000 level is anticipated to be submitted on or around September 19, 2022. For purposes of this analysis, we model both pricing scenarios and their implications for preferred stock voting dynamics and the drag-along trigger.
At the proposed investment amount of $60,000,000, Pinnacle is targeting ownership of approximately 18.75% of the Company on a fully diluted post-money basis. The precise ownership percentage will depend on the resolution of the valuation dispute, as well as the resolution of the separate question regarding the proposed ESOP expansion discussed below.
B. Current Capitalization (Pre-Investment)
The Company's pre-investment capitalization, on a fully diluted basis, is as follows:
The investment history of each preferred series is summarized below:
• Series A (Ridgeline Ventures Fund III LP): Led by Priya Dasgupta, Partner. Invested $9,600,000 at a price per share of $0.80 in 2018. Aggregate liquidation preference: $9,600,000 at 1.0x non-participating.
• Series B (Northgate Growth Partners Fund II LP): Led by Elliott Margolis, Managing Director. Invested $32,000,000 at a price per share of $2.00 in 2019. Aggregate liquidation preference: $32,000,000 at 1.0x non-participating.
• Series C (Brindoval Capital Group LLC): Led by Diana Chen, Principal. Invested $36,000,000 at a price per share of $3.00 in 2021. Aggregate liquidation preference: $36,000,000 at 1.0x non-participating.
The total aggregate liquidation preference across all existing preferred series is $77,600,000. With the proposed Series D investment of $60,000,000, the aggregate preference stack will increase to $137,600,000 at a 1.0x preference, or $167,600,000 if Pinnacle's proposed 1.5x preference for the Series D is adopted (which is itself a separately contested term).
Verdana has separately proposed expanding the employee stock option pool (ESOP) by 5,000,000 shares immediately prior to the closing of the Series D investment, bringing the total ESOP pool from 12,000,000 shares to 17,000,000 shares. This pre-close ESOP expansion is a separate point of contention in the negotiation, as it would dilute all existing holders on a pre-money basis and effectively shift the cost of the expanded pool to the pre-existing stockholder base (including the preferred holders). We do not address the ESOP expansion dispute in this memorandum but note it as one of several interconnected negotiation points.
C. Current Board Composition and Proposed Post-Close Board
The Company's current board of directors consists of five members:
1. Raj Anand — Founder designee (CEO & Co-Founder)
2. Lena Kovac — Founder designee (CTO & Co-Founder)
3. Priya Dasgupta — Ridgeline Ventures designee (Series A)
4. Elliott Margolis — Northgate Growth Partners designee (Series B)
5. Diana Chen — Brindoval Capital Group designee (Series C)
Pinnacle has proposed that the post-close board be expanded to seven members, consisting of:
1. Raj Anand — Founder designee
2. Lena Kovac — Founder designee
3. Priya Dasgupta (or successor) — Ridgeline Ventures designee
4. Elliott Margolis (or successor) — Northgate Growth Partners designee
5. Diana Chen (or successor) — Brindoval Capital Group designee
6. Marcus Trejo (or his designee) — Pinnacle designee
7. Mutually agreed independent director — to be nominated by the board and approved by both the founders and Pinnacle
Board composition discussions are ongoing and trending toward resolution. We understand from informal communications that the parties are close to agreement on the seven-member structure described above, and we anticipate that the board composition terms will be formally confirmed in the coming weeks. The board composition issue, while important, is not the focus of this memorandum.
D. Relevant Transaction Documents
The drag-along and tag-along provisions at issue are contained in two primary transaction documents, both of which were prepared by this firm and circulated in initial draft form on June 20, 2022:
• Amended and Restated Voting Agreement (C&H draft dated June 20, 2022) — contains the drag-along provision, board composition rights, and related voting undertakings. This is the document at the center of the current dispute.
• Amended and Restated Right of First Refusal and Co-Sale Agreement (C&H draft dated June 20, 2022) — contains the tag-along (co-sale) rights, the right of first refusal, and customary transfer restrictions.
The Company is represented by Langford Price & Associates LLP, with Jonathan Hale serving as lead partner and Rebecca Thornton as the primary associate. Sandra Mikkelsen serves as Verdana's General Counsel. The founders' formal objection to the drag-along provision was communicated by Mr. Hale via letter dated August 10, 2022, addressed to the undersigned with a copy to Mr. Wexford.
In addition to the Voting Agreement and Co-Sale Agreement, the full transaction document package includes the Amended and Restated Certificate of Incorporation (C&H draft dated June 8, 2022), the Series D Preferred Stock Purchase Agreement, and the Amended and Restated Investors' Rights Agreement, each of which contains provisions that interact with the drag-along mechanism. We address the most relevant of these interactions in Part VII below.
III. Pinnacle's Proposed Drag-Along Provision
A. Summary of Drafted Terms
As drafted in the C&H Voting Agreement Draft dated June 20, 2022, the drag-along provision operates as follows:
Trigger Event. The drag-along is triggered upon the approval of a "Sale of the Company" by holders of a majority of the then-outstanding shares of Preferred Stock, voting together as a single class on an as-converted-to-common-stock basis (the "Requisite Preferred Holders"). The definition of "Sale of the Company" in the draft is intentionally broad and includes:
(i) any merger, consolidation, or other business combination of the Company with or into any other entity, following which the stockholders of the Company immediately prior to such transaction hold less than 50% of the voting power of the surviving or resulting entity;
(ii) any sale, lease, transfer, exclusive license, or other disposition of all or substantially all of the assets of the Company;
(iii) any transaction or series of related transactions that results in a "change of control" of the Company, defined as any transaction following which a single person, entity, or affiliated group acquires the power, directly or indirectly, to direct or cause the direction of the management and policies of the Company; or
(iv) any other transaction that the Board of Directors determines, in its reasonable judgment, to be functionally equivalent to any of the foregoing.
Obligations of Dragged Stockholders. Upon approval of a Sale of the Company by the Requisite Preferred Holders, all stockholders party to the Voting Agreement (including the founders and all holders of Common Stock who are signatories) are contractually obligated to:
(a) vote all shares of capital stock of the Company held by such stockholder in favor of the approved Sale of the Company at any meeting of stockholders called for such purpose, or execute and deliver a written consent in lieu of such meeting;
(b) refrain from exercising any dissenters' or appraisal rights under applicable law in connection with the approved Sale of the Company;
(c) execute and deliver all agreements, instruments, and documents reasonably required to consummate the approved Sale of the Company, including any merger agreement, purchase agreement, or similar agreement; and
(d) take all other actions reasonably necessary to consummate the approved Sale of the Company, including tendering shares into any tender or exchange offer.
No Minimum Price or Enterprise Value Threshold. As drafted, the drag-along provision contains no minimum price, enterprise value floor, or other valuation threshold. The obligation to support the Sale of the Company is triggered solely by the approval of the Requisite Preferred Holders, irrespective of the price or valuation at which the transaction would occur.
No Founder Consent or Founder Veto. The draft does not include any separate consent right or veto right for the founders (or for holders of Common Stock generally) in connection with a drag-along sale. Once the majority-preferred trigger is satisfied, the founders are obligated to support the transaction.
Application to IPO Transactions. The draft also extends the drag-along mechanism to cover a "Qualified IPO," defined as an initial public offering of the Company's common stock on a nationally recognized securities exchange at a per-share offering price of not less than a specified amount (currently bracketed pending valuation resolution) and resulting in gross proceeds to the Company of not less than a specified amount (also bracketed). While the IPO drag-along is included in the draft, it is secondary in the current dispute — the founders' primary objection relates to the compelled-sale mechanism, not the IPO mechanism.
Pinnacle's Stated Rationale. Pinnacle's position, as articulated by Mr. Trejo and communicated to this firm, is that as a minority growth equity investor targeting approximately 18.75% ownership on a fully diluted basis, the Fund requires an exit mechanism that provides reliable liquidity irrespective of whether the founding team cooperates with a sale process. Pinnacle views the majority-preferred drag-along trigger as standard venture capital practice, consistent with the NVCA model form and with the drag-along provisions that Pinnacle has negotiated in its other portfolio investments. Pinnacle emphasizes that the Fund cannot accept a position where the founders — who, post-investment, will hold approximately 28%–29.5% of the fully diluted capitalization — can unilaterally block a sale transaction that is supported by the majority of preferred investors.
Post-Close Preferred Stock Voting Power Analysis. The practical implications of the majority-preferred trigger depend on the resolution of the valuation dispute, which determines the number of Series D Preferred shares to be issued:
Scenario 1 — $4.00/share (Verdana's position; $320M pre-money):
• Series D shares issued: 15,000,000 ($60M ÷ $4.00)
• Total preferred shares outstanding: 12,000,000 (A) + 16,000,000 (B) + 12,000,000 (C) + 15,000,000 (D) = 55,000,000
• Majority threshold: 27,500,001 shares
• Pinnacle alone: 15,000,000 shares — cannot trigger alone
• Pinnacle + Northgate: 15,000,000 + 16,000,000 = 31,000,000 shares — exceeds majority threshold
• Ridgeline + Brindoval: 12,000,000 + 12,000,000 = 24,000,000 shares — insufficient to block
Scenario 2 — $3.25/share (Pinnacle's position; $260M pre-money):
• Series D shares issued: 18,461,538 ($60M ÷ $3.25)
• Total preferred shares outstanding: 12,000,000 (A) + 16,000,000 (B) + 12,000,000 (C) + 18,461,538 (D) = 58,461,538
• Majority threshold: 29,230,770 shares
• Pinnacle alone: 18,461,538 shares — cannot trigger alone
• Pinnacle + Northgate: 18,461,538 + 16,000,000 = 34,461,538 shares — exceeds majority threshold
• Ridgeline + Brindoval: 12,000,000 + 12,000,000 = 24,000,000 shares — insufficient to block
The critical takeaway from this analysis is that under either pricing scenario, Pinnacle and Northgate acting in concert would collectively hold a majority of the outstanding preferred stock. This means that the Pinnacle-Northgate coalition could, under the current draft, force a drag-along sale over the objections of the founders, Ridgeline, and Brindoval. It is precisely this dynamic that has prompted the founders' demand for an enterprise value floor and that underlies the support for such a floor from Ridgeline and Brindoval.
B. Application to IPO Transactions
As noted above, the C&H Voting Agreement Draft extends the drag-along mechanism to cover Qualified IPO transactions. Under this provision, if the Requisite Preferred Holders approve an IPO meeting specified criteria, all stockholders would be obligated to take actions necessary to effectuate the offering, including entering into customary lock-up agreements and executing any required registration-related documents. While the founders have expressed some concern about the IPO drag-along, their formal objection has been directed at the compelled-sale drag-along, and we understand the IPO drag-along to be a lower-priority issue at this stage.
Separately, Pinnacle has proposed redemption rights exercisable beginning five years following the closing date of the Series D investment. These redemption rights, while a distinct contractual mechanism addressed in the Amended and Restated Certificate of Incorporation, serve as an alternative liquidity backstop for Pinnacle in the event that neither a sale nor an IPO occurs within the Fund's investment horizon. The interaction between the redemption rights and the drag-along provision is relevant insofar as a time-sunset on the drag-along floor (as discussed in our recommendations below) can be structured to dovetail with the redemption timeline, providing Pinnacle with a comprehensive liquidity framework.
IV. Founders' Counter-Position
A. The $500,000,000 Enterprise Value Floor
On August 10, 2022, counsel for the founders — Jonathan Hale of Langford Price & Associates LLP — formally communicated to this firm that Raj Anand and Lena Kovac will not accept the drag-along provision as currently drafted in the C&H Voting Agreement Draft. The founders' counter-proposal is straightforward: the drag-along cannot be triggered unless the proposed Sale of the Company values the Company at an enterprise value of at least $500,000,000.
Under the founders' proposal, any transaction that values the Company below $500,000,000 in enterprise value would not be subject to the drag-along mechanism, regardless of the level of preferred stockholder approval. In practical terms, this means that for transactions below the $500,000,000 threshold, the founders would retain an effective veto — since any Sale of the Company requires stockholder approval under the DGCL, and the founders collectively hold approximately 28%–35% of the outstanding voting power (depending on pre- or post-investment basis and the resolution of the ESOP question), the founders could block any below-threshold sale by simply voting against it.
The founders' post-investment ownership position is as follows:
• Pre-investment: 28,000,000 common shares out of 80,000,000 fully diluted shares = 35.0%
• Post-investment at $4.00/share (95,000,000 fully diluted): 28,000,000 out of 95,000,000 = 29.5%
• Post-investment at $3.25/share (98,461,538 fully diluted): 28,000,000 out of 98,461,538 = 28.4%
These ownership percentages, while significant, are insufficient to independently block a statutory merger under DGCL Section 251(c), which requires approval of holders of a majority of the outstanding stock entitled to vote. However, when combined with shares held by supportive preferred holders (particularly Ridgeline and Brindoval), the founders could assemble a blocking coalition under the current charter framework. The drag-along provision, as Pinnacle has drafted it, is designed precisely to eliminate this blocking ability by contractually binding all parties to vote in favor of an approved sale.
Founders' Stated Rationale. Mr. Hale's August 10, 2022 letter and subsequent oral communications set forth several justifications for the $500,000,000 floor:
Growth trajectory and intrinsic value. The founders contend that Verdana is a high-growth SaaS business with strong unit economics — including 128% net revenue retention, 74.2% gross margins, and 63.7% year-over-year ARR growth — and that the Company should not be subject to a forced sale at a distressed or undervalued price. The founders believe that the current growth trajectory supports a path to $500,000,000 or greater in enterprise value within a reasonable time horizon, and that being forced to sell below this level would deprive them and other common stockholders of the value they have created and are continuing to create.
Reasonableness of the threshold relative to post-money valuation. A $500,000,000 enterprise value floor represents approximately 1.32 times the proposed post-money valuation of $380,000,000 under Verdana's valuation position ($320M pre-money + $60M investment), or approximately 1.56 times the $320,000,000 post-money valuation implied by Pinnacle's counter-position ($260M pre-money + $60M investment). The founders characterize this as a reasonable premium expectation for a high-growth company, noting that if the Company continues to execute on its current trajectory, a $500,000,000 enterprise value should be attainable within two to three years.
Founder sacrifice and below-market compensation. The founders state that they have taken below-market salaries and made significant personal sacrifices in building Verdana from inception, and that a forced sale below $500,000,000 could destroy substantial founder value. This argument resonates with the broader principle that founder incentive alignment is critical to the Company's continued growth and value creation.
Liquidation preference waterfall analysis. Perhaps the founders' most compelling argument relates to the structure of the liquidation preference stack and its impact on the allocation of proceeds in a sub-$500,000,000 sale. The aggregate liquidation preferences across all preferred series, including the proposed Series D, would be:
• Series A (Ridgeline): $9,600,000 at 1.0x
• Series B (Northgate): $32,000,000 at 1.0x
• Series C (Brindoval): $36,000,000 at 1.0x
• Series D (Pinnacle) at 1.0x: $60,000,000
• Series D (Pinnacle) at 1.5x: $90,000,000
• Total at 1.0x for all series: $137,600,000
• Total at 1.5x for Series D: $167,600,000
In a liquidation event (including a sale of the Company treated as a deemed liquidation), these preference amounts are distributed to preferred holders before any proceeds are allocated to common stockholders. Under the 1.0x preference scenario, $137,600,000 must be distributed to preferred holders before the founders receive any proceeds on their common stock. Under the 1.5x Series D preference scenario, that figure rises to $167,600,000.
The founders argue — correctly, from a mathematical standpoint — that in a sub-$500,000,000 sale, the liquidation preference waterfall could consume a disproportionate share of total proceeds, leaving common stockholders, including the founders, with minimal or inadequate compensation. This analysis is set forth in greater detail in Appendix C. At an enterprise value of $320,000,000, for example, the founders' aggregate proceeds on their 28,000,000 common shares (under a 1.0x preference for all series) would be approximately $60,200,000 — roughly $2.15 per share, or approximately 54% of the $4.00/share price at which the Series D investment is proposed. At lower enterprise values, the founder payoff deteriorates rapidly, and below approximately $168,000,000 (under the 1.5x Series D scenario), the founders would receive nothing.
B. Founders' Position on Tag-Along Rights
The founders have not objected to the tag-along and co-sale provisions as drafted in the C&H Right of First Refusal and Co-Sale Agreement. These provisions grant each preferred holder the right to participate pro rata in any proposed transfer by a founder of shares representing more than 1% of total outstanding shares. The founders view these provisions as reasonable and customary, and Mr. Hale's August 10 letter did not contest any aspect of the co-sale terms.
This issue is accordingly not in dispute and will not be further analyzed in this memorandum, except as addressed for completeness in Part VI below.
V. Existing Investor Positions
The existing preferred investors are divided on the drag-along dispute, with each series holder's position reflecting its particular investment basis, economic incentives, and relationship with the founders. We summarize each investor's position below, followed by a consolidated voting analysis.
A. Ridgeline Ventures Fund III LP (Series A) — Supports Founder Threshold
Board Representative: Priya Dasgupta, Partner at Ridgeline Ventures.
Position: Ridgeline supports the founders' proposed $500,000,000 enterprise value floor on the drag-along mechanism.
Rationale. Ms. Dasgupta has communicated Ridgeline's position to this firm through multiple conversations over the past several weeks. Ridgeline's reasoning rests on several pillars. First, as the earliest institutional investor, Ridgeline invested at $0.80 per share, acquiring 12,000,000 shares for an aggregate investment of $9,600,000. Ridgeline's aggregate liquidation preference is only $9,600,000 — a fraction of the Company's current enterprise value. Consequently, Ridgeline's economic upside is overwhelmingly concentrated in its conversion right (the right to convert its preferred shares into common stock on a one-for-one basis and participate pro rata in the remaining proceeds after the preference stack is satisfied), not in its liquidation preference. This aligns Ridgeline's interests more closely with the common stockholders (including the founders) than with the later-stage preferred investors whose preferences represent a larger absolute dollar amount.
Second, Ridgeline believes that founder alignment is critical to the Company's continued value creation. Ms. Dasgupta has expressed the view that imposing an unconstrained drag-along mechanism could undermine the founders' motivation and engagement at a critical stage in the Company's growth, particularly if the founders perceive that they are being placed at risk of a forced sale that primarily benefits the preferred holders. Third, Ridgeline believes the Company's growth trajectory fully supports a path to $500,000,000 or greater in enterprise value, and that a forced sale below that level could destroy significant long-term value for all stakeholders.
Ridgeline holds 12,000,000 preferred shares, representing 15.0% of the pre-investment fully diluted capitalization.
B. Northgate Growth Partners Fund II LP (Series B) — Supports Pinnacle
Board Representative: Elliott Margolis, Managing Director at Northgate Growth Partners.
Position: Northgate sides with Pinnacle and favors the drag-along as currently drafted, with no minimum enterprise value floor and a simple majority-of-preferred trigger.
Rationale. Mr. Margolis has communicated Northgate's position clearly and directly. Northgate invested $32,000,000 at $2.00 per share, acquiring 16,000,000 shares. It is the largest single preferred stockholder, holding 20.0% of the pre-investment fully diluted capitalization. Northgate's aggregate liquidation preference of $32,000,000 represents a meaningful absolute exposure, and Mr. Margolis has expressed concern about being locked into an illiquid position with no reliable exit mechanism.
Northgate's concerns are heightened by several Company-specific risk factors. The Company is currently cash-burning at a rate of approximately $11.6 million per year (as measured by trailing twelve-month EBITDA), and its cash position as of March 31, 2022 ($22.4 million) provides approximately twenty-three months of operating runway absent additional capital or a material change in the Company's cost structure. Mr. Margolis has noted that in a downside scenario — particularly one involving the loss of one or more key customers — the Company could face a situation where a strategic sale or additional financing becomes a necessity within the next two to three years, and that the founders' proposed $500,000,000 floor could prevent such a sale even if it represents the best available outcome for all stakeholders.
Northgate has also observed that the Pinnacle-Northgate alignment on the drag-along issue is, in Northgate's view, a feature rather than a bug: it ensures that the two largest preferred holders (by share count) can collectively drive liquidity outcomes without the need for unanimous investor consent, which Northgate views as impractical and prone to holdout behavior.
However, Mr. Margolis has communicated a degree of flexibility in private conversations. Specifically, Northgate has indicated a willingness to accept a lower enterprise value floor — on the order of $400,000,000 — as a compromise, though it views the founders' $500,000,000 threshold as excessive and inconsistent with market norms. This willingness to compromise is significant and should inform our negotiating strategy, as discussed in Part X.
Northgate holds 16,000,000 preferred shares, representing 20.0% of the pre-investment fully diluted capitalization.
C. Brindoval Capital Group LLC (Series C) — Supports Founder Threshold
Board Representative: Diana Chen, Principal at Brindoval Capital Group.
Position: Brindoval supports the founders' proposed $500,000,000 enterprise value floor, or a number close to it.
Rationale. Brindoval invested most recently among the existing preferred holders, paying $3.00 per share in 2021 for 12,000,000 shares at an aggregate investment of $36,000,000. The Series C implied a pre-money valuation of $204,000,000 (68,000,000 shares outstanding at the time × $3.00/share) and a post-money valuation of $240,000,000. Brindoval's aggregate liquidation preference is $36,000,000. Importantly, Brindoval's effective entry valuation — on a fully diluted basis including the current ESOP — was approximately $240,000,000 (80,000,000 shares × $3.00/share), meaning that a sub-$500,000,000 sale would represent only modest upside relative to Brindoval's invested capital, after accounting for the preference stack. Ms. Chen has articulated the view that the Company's growth trajectory supports a path to $500,000,000 or more in enterprise value within two to three years, and that imposing an exit mechanism that could compel a sale below that level is inconsistent with the investment thesis that informed Brindoval's Series C participation.
Brindoval has also adopted a mediating posture in the broader negotiation. We understand that Brindoval has been exploring potential compromise frameworks on valuation and has privately discussed a $290,000,000 pre-money "bridge" proposal with both the Company and Pinnacle, though this proposal has not yet been formally communicated. Ms. Chen's general approach has been to seek consensus positions that preserve the transaction while protecting the interests of all stakeholders, and we anticipate that Brindoval may play a constructive role in facilitating a compromise on the drag-along issue as well.
Brindoval holds 12,000,000 preferred shares, representing 15.0% of the pre-investment fully diluted capitalization.
D. Summary Voting Analysis
The following table summarizes the preferred stockholder positions on the drag-along dispute and their respective voting power:
This analysis reveals the central dynamic of the dispute: under either pricing scenario, the Pinnacle-Northgate coalition commands a majority of the outstanding preferred stock, while the Ridgeline-Brindoval coalition does not. If the drag-along trigger is set at a simple majority of preferred stock with no enterprise value floor, Pinnacle and Northgate can control the mechanism independently of any other stockholder. If a floor is imposed, the drag-along cannot be triggered for transactions below the floor regardless of the Pinnacle-Northgate majority. If a supermajority trigger is adopted (as discussed in our recommendations), the Pinnacle-Northgate coalition would need to obtain the support of at least one additional investor to trigger the mechanism.
The practical consequence of the no-floor proposal is stark: Pinnacle and Northgate, acting together, could force a sale of the Company at any price — including a price below Brindoval's effective entry valuation, below the founders' reasonable expectations, and below a level at which the liquidation preference waterfall would leave common stockholders with minimal proceeds. It is this specific risk that motivates the founders' demand for a floor and that has generated support for the floor among Ridgeline and Brindoval.
VI. Tag-Along (Co-Sale) Rights — Current Status
A. Terms as Drafted
The tag-along and co-sale provisions are contained in the draft Amended and Restated Right of First Refusal and Co-Sale Agreement, prepared by this firm and circulated on June 20, 2022. The key terms of the co-sale provision are as follows:
Trigger. The co-sale right is triggered by any proposed transfer by a "Key Holder" (defined to include each of Raj Anand and Lena Kovac, and any transferee who acquires shares of Common Stock from a Key Holder subject to the agreement) of shares of the Company's capital stock representing more than 1% of the total outstanding shares. This threshold is designed to permit de minimis transfers (e.g., estate planning gifts, small charitable donations, or transfers in connection with personal financial transactions) without triggering the co-sale mechanism, while ensuring that any material divestiture by a founder is subject to the rights of the preferred holders.
Right of First Refusal (ROFR). Before any co-sale right is exercised, each Investor (as defined in the agreement, encompassing all preferred stockholders) has a right of first refusal to purchase all or any portion of the shares proposed to be transferred by the Key Holder, at the same price per share and on the same terms and conditions as set forth in the proposed transfer notice. If the ROFR is exercised in full, the proposed transfer to the third-party buyer is terminated, and the Key Holder is obligated to sell to the exercising Investors instead.
Co-Sale Right. To the extent that the ROFR is not exercised in full, each Investor has the right to participate in the proposed transfer on a pro rata basis, calculated based on each Investor's percentage ownership of the Company's capital stock on a fully diluted, as-converted basis. The participating Investor sells its pro rata portion of its shares to the proposed third-party buyer on the same terms and conditions as the Key Holder, and the Key Holder's transfer is correspondingly reduced.
Permitted Transfers. Customary permitted transfers are exempt from both the ROFR and the co-sale right. These include transfers to a Key Holder's immediate family members, transfers to a trust or family limited partnership established for the benefit of the Key Holder or the Key Holder's family, and transfers to affiliates. Any such permitted transferee is required to become a party to the agreement and to be bound by the same restrictions as the original Key Holder.
Notice Procedures. The agreement includes detailed notice procedures requiring the Key Holder to deliver a written notice (the "Proposed Transfer Notice") to the Company and each Investor at least 30 days prior to the proposed transfer, specifying the identity of the proposed transferee, the number of shares proposed to be transferred, the proposed purchase price per share, and all other material terms of the proposed transfer. Each Investor has 15 days following receipt of the Proposed Transfer Notice to exercise its ROFR, and an additional 10 days following the expiration of the ROFR period to exercise its co-sale right.
B. Status of Negotiations
The tag-along and co-sale provisions as described above are substantively agreed between all parties. Langford Price's markup of the Co-Sale Agreement, received on July 18, 2022, did not contest the co-sale provisions in any material respect. The minor comments reflected in the Langford Price markup related to technical drafting matters (clarification of the definition of "Affiliates," conforming cross-references to the Voting Agreement, and minor adjustments to the notice period) and have been addressed in a revised draft circulated by this firm on July 29, 2022.
The co-sale right is independent of the drag-along dispute and will be included in the final transaction documents regardless of the resolution of the drag-along mechanism. No further analysis of the co-sale provisions is required at this time.
VII. Delaware Law Analysis
A. Enforceability of Drag-Along Provisions Under Delaware Law
Delaware courts have generally upheld drag-along provisions in stockholders' agreements and voting agreements as valid and enforceable contractual obligations. The principle underlying this body of law is straightforward: stockholders are free to contract among themselves regarding the manner in which they will vote their shares, and such agreements are enforceable to the same extent as any other contract.
DGCL Section 218 — Voting Agreements. Section 218(c) of the Delaware General Corporation Law expressly authorizes stockholders to enter into written agreements regarding the voting of their shares. A voting agreement that includes drag-along obligations — requiring stockholders to vote in favor of a transaction approved by a specified majority — falls squarely within the scope of Section 218(c). Such agreements are enforceable as contracts and are specifically exempt from the requirements governing voting trusts under Section 218(a) and (b). Importantly, Section 218(c) does not impose any substantive limitations on the terms that stockholders may agree to in a voting agreement, meaning that a drag-along provision with or without a price floor is permissible under the statute.
DGCL Section 251(c) — Statutory Merger Approval. Section 251(c) requires that a merger agreement be approved by the board of directors of each constituent corporation and by a majority of the outstanding stock of each such corporation entitled to vote thereon. A drag-along provision does not — and cannot — override these statutory requirements. Rather, the drag-along operates at the contractual level: it obligates stockholders to vote in favor of a transaction once the board has approved it, but it does not dispense with the need for board approval in the first instance. This distinction is important because it means that the board retains an independent gatekeeping function: even if the Requisite Preferred Holders approve a Sale of the Company and trigger the drag-along, the board must separately evaluate and approve the transaction, including in the exercise of its fiduciary duties. The board cannot be contractually compelled to approve a sale; it can only be contractually obligated to submit an approved sale to a stockholder vote.
Key Delaware Chancery Precedent. The Delaware Court of Chancery has addressed the enforceability of drag-along provisions in several decisions. In Halpin v. Riverstone National, Inc., C.A. No. 9796-VCG (Del. Ch. 2015), the Court enforced a drag-along provision in a stockholders' agreement, holding that the provision constituted a binding contractual obligation and that the dragged stockholders were obligated to vote in favor of the approved transaction. The Court rejected the argument that the drag-along was unenforceable as an unreasonable restraint on stockholder voting rights, noting that the plaintiff had voluntarily entered into the agreement and received consideration in the form of the investment that gave rise to the agreement.
Similarly, in In re Delphi Financial Group S'holder Litig., C.A. No. 7144-VCG (Del. Ch. 2012), the Court addressed the interaction between drag-along mechanics and fiduciary duties in the context of a controlling stockholder's exercise of contractual rights. While the Court upheld the validity of the contractual arrangements, it emphasized that controlling stockholders owe fiduciary duties to minority holders, and that the exercise of contractual rights does not extinguish those duties. This principle is directly relevant to the present analysis, as discussed below.
Fiduciary Duty Considerations. Under Delaware law, controlling stockholders owe fiduciary duties — including the duties of care and loyalty — to minority stockholders. A drag-along exercise that results in a sale at an unfair price could be challenged under the entire fairness standard of review if the dragging stockholders constitute controlling stockholders within the meaning of Delaware law.
In the present context, the question is whether Pinnacle and Northgate, acting in concert to trigger the drag-along, would be deemed "controlling stockholders" for purposes of fiduciary duty analysis. Under Delaware law, a stockholder may be deemed a controlling stockholder either by virtue of holding a majority of the outstanding voting power or by exercising actual control over the corporation's business and affairs. Post-investment, the Pinnacle-Northgate coalition would hold approximately 56%–59% of the outstanding preferred stock but only approximately 31%–35% of the total outstanding shares on a fully diluted basis (including common stock and ESOP). Whether this level of ownership and influence constitutes "control" would depend on the specific facts and circumstances, including the investors' board representation, contractual rights, and actual involvement in the Company's management and decision-making.
If the Pinnacle-Northgate coalition were deemed to constitute controlling stockholders, any exercise of the drag-along at a price that disadvantages the common stockholders — particularly in light of the liquidation preference waterfall — could be subject to review under the entire fairness standard, which requires the controlling stockholder to demonstrate that the transaction was the product of both fair dealing and fair price. This is a substantial litigation risk. A drag-along exercise at a below-market price could expose Pinnacle to claims for breach of fiduciary duty, even though the drag-along provision itself is contractually valid. This risk is mitigated by the inclusion of a contractual enterprise value floor, which functions as an ex ante fairness safeguard and reduces the likelihood that a drag-along sale would be conducted at a price that triggers entire fairness scrutiny.
B. Minimum Price Thresholds in Drag-Along Provisions
Delaware law does not require that a drag-along provision include a minimum price or enterprise value threshold. As noted above, drag-along provisions are enforceable as contractual obligations regardless of whether they incorporate a price floor. However, the absence of a price floor increases the risk that the exercise of the drag-along at a low price will be challenged by the dragged stockholders on fiduciary duty or contractual grounds.
A contractual enterprise value floor provides several benefits from a legal risk management perspective:
(a) It establishes an objective standard against which the fairness of any drag-along sale can be measured, reducing ambiguity and the potential for post hoc litigation.
(b) It reduces the risk of fiduciary duty challenges by ensuring that the drag-along cannot be exercised at a price that is manifestly unfair to common stockholders.
(c) It aligns the interests of the dragging preferred holders with those of the common stockholders by ensuring that the drag-along is only exercisable in transactions that deliver a minimum return to all stakeholders.
(d) It may reduce the potential for the exercise of appraisal rights under DGCL Section 262, as stockholders are less likely to seek appraisal in a transaction that exceeds a contractually agreed-upon valuation floor.
Conversely, a drag-along provision without a price floor is enforceable but carries heightened litigation risk, particularly in scenarios where the price is arguably unfair to common stockholders relative to preferred holders due to the operation of the liquidation preference waterfall. In such scenarios, the dragged common stockholders may argue that the drag-along was exercised in bad faith or in breach of the implied covenant of good faith and fair dealing, even if the exercise technically complied with the literal terms of the provision.
We note that Delaware courts have not yet squarely held that a drag-along exercise at a low price constitutes a breach of fiduciary duty, but the jurisprudential trend — particularly in Delphi and its progeny — suggests increasing judicial willingness to scrutinize such transactions, especially where the dragging holders stand to benefit disproportionately due to preferential economic rights.
C. Interaction with Certificate of Incorporation
The drag-along mechanism in the Voting Agreement must be analyzed in conjunction with the protective provisions contained in the Amended and Restated Certificate of Incorporation (C&H draft dated June 8, 2022). The draft charter includes customary protective provisions requiring the approval of specified preferred series (or of specified percentages of the preferred stock) for a Sale of the Company and other fundamental transactions.
Specifically, the draft charter includes a protective provision requiring the consent of holders of a majority of the Series D Preferred Stock, voting as a separate series, for any Sale of the Company. This consent right operates independently of the drag-along trigger in the Voting Agreement. Its practical effect is to give Pinnacle (as the sole holder of the Series D) an independent veto over any proposed sale, irrespective of the drag-along mechanism. In other words, even if the drag-along is triggered by a majority of the preferred stock voting together as a single class, the sale cannot proceed without Pinnacle's separate Series D consent.
It is important to ensure consistency between the charter-level protective provisions and the contractual drag-along mechanics. If the charter requires Series D consent for a sale and the Voting Agreement triggers the drag-along on a majority-preferred vote (which may not include the Series D holder), a potential conflict arises. In the current structure, this conflict is unlikely to manifest in practice — since Pinnacle will invariably be part of any majority-preferred coalition — but care should be taken to draft the charter and the Voting Agreement in a consistent and harmonious manner to avoid any argument that the two instruments are in conflict.
Additionally, the charter-level protective provisions may need to be updated to reflect any compromise on the drag-along mechanism. For example, if a supermajority trigger is adopted in the Voting Agreement, the corresponding charter provisions should be reviewed to ensure that they do not inadvertently create a lower threshold that could be used to circumvent the supermajority requirement.
VIII. Market Precedent Analysis
A. Prevalence of Drag-Along Provisions in Growth-Stage VC Deals
Drag-along rights are a near-universal feature of venture-backed company voting agreements. According to the most recent survey data from the National Venture Capital Association (NVCA), more than 95% of venture-backed company financing transactions in the Series C and later stages include a drag-along provision in some form. The drag-along serves a critical function in the venture capital ecosystem by ensuring that early-stage minority investors (who may individually or collectively hold insufficient voting power to approve a sale under the relevant charter) have a mechanism to compel a liquidity event when supported by a specified majority of the investor base.
The NVCA model Voting Agreement includes a drag-along provision with bracketed options for the triggering mechanism, reflecting the fact that the specific trigger is among the most heavily negotiated terms in venture-backed transactions. The NVCA model contemplates a trigger requiring the approval of: (i) the board of directors (including at least one investor-designated director), and (ii) holders of a specified percentage (typically a majority, though sometimes a supermajority) of the outstanding preferred stock, voting together as a single class, and/or holders of a specified percentage of the outstanding common stock. The NVCA model acknowledges that the trigger is a "key negotiation point" and that the specific formulation will depend on the relative bargaining positions of the parties and the specific circumstances of the deal.
In practice, the drag-along trigger is one of the most fiercely negotiated provisions in any venture-backed financing, particularly at the growth stage where the stakes are higher, the investor base is more fragmented, and the potential for conflicting interests among stockholder groups is most acute.
B. Founder Veto / Minimum Price Thresholds — Market Data
Founder-friendly drag-along thresholds — including minimum enterprise value floors, minimum multiples of invested capital, and time-based sunset mechanisms — have become increasingly common in growth-stage venture rounds (Series C and later), particularly in deals where the founders retain significant equity positions. In the present case, the founders hold 35.0% of the pre-investment fully diluted capitalization and approximately 28%–30% post-investment, which places them in a relatively strong bargaining position compared to many growth-stage companies where founder dilution has progressed further.
Based on our review of market data, including the Aldgate & Whitmore LLP annual survey of Silicon Valley venture capital transactions, the Grayson & Pemberton LLP Venture Financing Reports, and proprietary deal databases maintained by this firm, we observe the following patterns in comparable growth-stage transactions:
Fixed Enterprise Value Floor. A fixed EV floor, of the type proposed by the founders here, is present in a meaningful minority of growth-stage transactions. In high-growth B2B SaaS deals at the Series D stage or later, with strong operating metrics (greater than 60% year-over-year ARR growth and greater than 120% NRR), our review indicates that founder veto thresholds tied to a fixed EV floor are present in an estimated 40–50% of transactions. However, the specific threshold amount varies widely and is typically set at a level that represents a reasonable premium over the post-money valuation — most commonly in the range of 1.2x to 2.0x the post-money valuation.
Multiple-of-Invested-Capital Floor. An alternative structure ties the drag-along floor to a multiple of the aggregate invested capital across all preferred rounds. For example, a floor set at 2.0x the aggregate invested capital would require an enterprise value of at least $275,200,000 (2.0x × $137,600,000 aggregate preference at 1.0x) before the drag-along could be triggered. This approach has the advantage of being objective and calculable, but it may produce a floor that is lower than the founders' expectations in a high-growth context.
Multiple-of-Last-Round-Valuation Floor. Some transactions tie the floor to a multiple of the most recent financing round's post-money valuation. For example, a floor set at 1.5x the Series D post-money valuation would yield a threshold of $480,000,000 to $570,000,000 depending on the valuation resolution (1.5x × $320M to $380M). This approach has the advantage of anchoring the floor to a recent market-tested valuation, but it can be controversial in situations where the most recent round's valuation is itself contested.
Time-Based Sunset. A time-based sunset is a common feature of founder veto mechanisms. Under this structure, the founder veto (or the EV floor) is effective for a specified period — typically three to five years following the closing of the financing — after which it lapses and the drag-along reverts to a standard majority-preferred trigger with no floor. This approach balances the founders' near-term interest in protection against a forced sale with the investors' longer-term interest in having a reliable exit mechanism. Time-based sunsets are present in the majority of deals that include a founder-friendly drag-along threshold.
C. Comparable Deal Terms
Our review of comparable growth equity transactions in the enterprise SaaS sector reveals several illustrative precedents for how drag-along disputes of this nature have been resolved:
1.5x Post-Money Floor. In a Series D financing for a supply chain analytics SaaS company with comparable metrics (approximately $40M ARR, 55% YoY growth, 115% NRR), the parties adopted a drag-along EV floor set at 1.5x the post-money valuation, with a four-year sunset. The floor was approximately $525M against a $350M post-money. This precedent supports a floor in the range proposed by the founders, though the Company in that transaction had somewhat weaker growth metrics than Verdana.
Time-Sunset on Founder Veto. In a Series C financing for a workforce management SaaS company, the drag-along included a founder-consent requirement for the first three years post-investment, after which the requirement lapsed and the standard majority-preferred trigger applied. This structure gave the founders a definitive veto during the near-term growth period while providing the investors with an unencumbered exit mechanism after year three. The company in question had comparable founder ownership levels (approximately 30% post-investment).