1002-00004 · Pinnacle Venture Fund II LP · Term Sheet

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PRIVILEGED & CONFIDENTIAL — ATTORNEY WORK PRODUCT

CALDERWOOD & HARKNESS LLP 101 Montgomery Street, Suite 3500 San Francisco, California 94104 Telephone: (415) 555-7200 Facsimile: (415) 555-7201

May 5, 2022

MEMORANDUM

TO: Harrison Wexford, Responsible Partner, Mergers & Acquisitions, Calderwood & Harkness LLP Marcus Trejo, Partner, Head of Growth Equity, Pinnacle Capital Management LLC

FROM: Andrew Fitzpatrick, Lead Associate, M&A Naomi Petersen, Working Associate, M&A

RE: Comparison of Term Sheets — Proposed $60,000,000 Series D Preferred Stock Investment by Pinnacle Venture Fund II LP in Verdana Software, Inc.

MATTER NO.: 1002-00004

CLIENT NO.: PIN-0042

This memorandum is a privileged and confidential attorney work product prepared by Calderwood & Harkness LLP for the sole use of Pinnacle Capital Management LLC and its affiliates. This memorandum is protected by the attorney-client privilege and the work product doctrine. Any distribution, copying, or disclosure of this memorandum or its contents to any third party without the express written consent of Calderwood & Harkness LLP is strictly prohibited.

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I. Executive Summary

The purpose of this memorandum is to present a comprehensive comparison and analysis of the non-binding term sheet delivered by Pinnacle Venture Fund II LP ("Pinnacle" or the "Investor") to Verdana Software, Inc. ("Verdana" or the "Company") on April 22, 2022 (the "Pinnacle Term Sheet") against the counter-term sheet delivered by Verdana to Pinnacle on May 3, 2022 via its placement agent, Hargrove Securities LLC (Nathan Callister, Managing Director) (the "Verdana Counter-Term Sheet" and, together with the Pinnacle Term Sheet, the "Term Sheets"). This memorandum identifies and analyzes the areas of agreement and divergence between the two Term Sheets and provides our recommendations for the negotiation strategy going forward.

Transaction Overview. The proposed transaction involves a $60,000,000 minority growth equity investment by Pinnacle through the purchase of newly issued shares of Series D Preferred Stock in Verdana Software, Inc., a Delaware C-corporation headquartered at 1175 NW Couch Street, Suite 800, Portland, Oregon 97209. Verdana is a growth-stage enterprise software company specializing in AI-driven supply chain optimization SaaS through its proprietary platform known as "Verdana SCX." The investment would represent Pinnacle's initial entry into Verdana's capital structure and would establish Pinnacle as the Company's largest single-round investor by dollar amount deployed.

Summary of Key Findings. Following our detailed review and side-by-side comparison of the two Term Sheets, we have identified that the Pinnacle Term Sheet and the Verdana Counter-Term Sheet diverge materially on five core commercial issues:

1. Pre-Money Valuation — A $60,000,000 gap exists between Pinnacle's proposed $260,000,000 pre-money valuation and Verdana's proposed $320,000,000 pre-money valuation, which directly drives the price per share, the number of shares issued, and Pinnacle's post-close ownership percentage.

2. Liquidation Preference Multiple — Pinnacle proposes a 1.5x non-participating liquidation preference ($90,000,000 senior return), while Verdana proposes a 1.0x non-participating liquidation preference ($60,000,000 senior return), consistent with the terms of the Company's existing Series A, B, and C preferred stock.

3. Anti-Dilution Mechanism — Pinnacle proposes full-ratchet anti-dilution protection, whereas Verdana proposes broad-based weighted average anti-dilution protection, which is the mechanism applicable to all prior preferred stock series.

4. Option Pool Treatment and Expansion — Verdana proposes expanding the existing employee stock option pool ("ESOP") by 5,000,000 shares prior to closing, which would dilute Pinnacle's post-close ownership from approximately 15.79% to 15.00% (at Verdana's proposed pre-money valuation), with the economic burden of such dilution falling entirely on the incoming investor.

5. Drag-Along Provision Structure — Pinnacle proposes a drag-along triggered by a majority vote of preferred stockholders voting as a single class, whereas Verdana proposes a dual-trigger drag-along requiring approval by both a majority of preferred stock and a majority of common stock, with a minimum enterprise value floor of $500,000,000 below which no drag-along sale may be compelled.

In addition to these five primary areas of divergence, the Term Sheets differ to a lesser degree on certain protective provisions (including the debt consent threshold and budget deviation consent rights), redemption rights, pay-to-play provisions, board composition, co-sale thresholds, registration rights, information rights, and expense reimbursement caps. Each of these secondary divergences is addressed in detail in Sections III and IV below.

Involvement of Verdana's Advisors. We note that the Verdana Counter-Term Sheet was prepared with the involvement and guidance of Verdana's outside counsel, Langford Price & Associates LLP (Jonathan Hale, Lead Partner; Rebecca Thornton, Associate), as well as Verdana's Chief Financial Officer, Thomas Brightwell. The sophistication and specificity of the counter-proposals — particularly with respect to the option pool mechanics, the drag-along structure, and the protective provision carve-outs — indicate that Verdana has received thorough legal and financial advice and that the positions set forth in the Verdana Counter-Term Sheet should be understood as considered and deliberate rather than preliminary or placeholder positions.

Recommendation Summary. Calderwood & Harkness LLP recommends that Pinnacle prioritize the negotiation of the pre-money valuation and ownership issues (including the interrelated option pool expansion question) first, as these have the greatest aggregate economic impact on the transaction. The anti-dilution mechanism and liquidation preference multiple should be addressed concurrently, as they represent meaningful downside protection considerations and may present opportunities for concessions that can be traded against movement on valuation. The drag-along provision and founder veto should be resolved as part of the broader governance framework. Specific recommendations for each issue are set forth in Section IV of this memorandum.

II. Background

A. The Parties

Investor. Pinnacle Venture Fund II LP (the "Fund") is a Delaware limited partnership. The Fund's general partner is Pinnacle Capital Management LLC, a Delaware limited liability company (the "GP" or "Pinnacle Capital"). Pinnacle Capital is headquartered at 2400 Sand Hill Road, Suite 310, Menlo Park, California 94025. Pinnacle Venture Fund II LP is an $850,000,000 fund (2020 vintage) focused on growth-stage venture capital investments in enterprise SaaS, fintech, and AI/ML companies. The Fund's typical check sizes range from $30,000,000 to $100,000,000 in Series B through Series E financings. The Fund currently maintains a portfolio of 22 active companies. Pinnacle Capital's predecessor fund, Pinnacle Venture Fund I LP, has returned 3.2x net MOIC (multiple on invested capital) to its limited partners. Marcus Trejo, Partner and Head of Growth Equity at Pinnacle Capital Management LLC, is the deal lead for the proposed Verdana investment and is expected to serve as Pinnacle's designee to the Company's Board of Directors following the closing.

Target. Verdana Software, Inc. (the "Company") is a Delaware C-corporation, originally incorporated on March 14, 2016. The Company's principal offices are located at 1175 NW Couch Street, Suite 800, Portland, Oregon 97209. Verdana develops, markets, and sells an AI-driven supply chain optimization platform known as "Verdana SCX," delivered as a cloud-based software-as-a-service ("SaaS") solution to enterprise customers in the manufacturing, logistics, retail, and consumer packaged goods sectors. The Company's current officers and key personnel include:

• Raj Anand — Chief Executive Officer & Co-Founder

• Lena Kovac — Chief Technology Officer & Co-Founder

• Thomas Brightwell — Chief Financial Officer (hired 2021)

• Sandra Mikkelsen — General Counsel

Verdana's Placement Agent. Hargrove Securities LLC is a Delaware limited liability company and a FINRA-registered broker-dealer with offices at 600 Lexington Avenue, 22nd Floor, New York, New York 10022. Hargrove Securities has been engaged by Verdana to run a limited process for the Company's growth equity round. Nathan Callister, Managing Director at Hargrove Securities, is the lead banker on the engagement. Pursuant to the engagement letter between Verdana and Hargrove Securities, Hargrove Securities is entitled to a placement fee equal to 1.5% of the total capital raised in the round. On a $60,000,000 raise, this equates to a placement fee of $900,000, payable by the Company at closing. Both Term Sheets confirm that the placement fee is solely the obligation of the Company and is not to be deducted from the investment proceeds.

Verdana's Counsel. Langford Price & Associates LLP is a law firm with offices at 1000 SW Broadway, Suite 1600, Portland, Oregon 97205. The lead partner on the Verdana engagement is Jonathan Hale, with associate-level support from Rebecca Thornton. Langford Price has represented Verdana since the Company's Series B financing in 2019 and is expected to serve as Company's counsel through the closing of the proposed transaction.

B. Verdana's Key Financial Metrics (as Reported to Pinnacle)

The following financial and operating metrics have been provided to Pinnacle by Verdana and/or Hargrove Securities in connection with the process. These figures have not yet been independently verified through diligence and are presented as reported. All financial data is subject to confirmation during the diligence process contemplated in Section VI below.

Additionally, we note that Verdana has an existing $10,000,000 revolving credit facility with Pacific Summit Bank, N.A. (the "Credit Facility"). As of March 31, 2022, $6,200,000 of the Credit Facility had been drawn. The terms, covenants, and conditions of the Credit Facility are relevant to the proposed transaction, as discussed further in Sections III and IV below regarding lender consent requirements.

At the reported Q1 2022 ARR of $47,300,000 and with $22,400,000 in cash (net of $6,200,000 in drawn debt), the Company's implied net cash burn rate and cash runway should be independently verified during diligence. On a high-level basis, the TTM EBITDA loss of $11,600,000 suggests an approximate monthly cash burn of $970,000, which would imply a cash runway of approximately 23 months absent the proposed investment (and excluding any additional draws on the Credit Facility). However, this analysis does not account for capital expenditures, working capital fluctuations, or changes in the Company's growth trajectory, and should be refined during financial diligence.

C. Existing Capitalization (Pre-Investment)

The following table sets forth Verdana's existing capitalization on a fully diluted basis as of the date hereof, based on information provided by the Company and its counsel. All shares are presented on an as-converted-to-common-stock basis for purposes of calculating fully diluted ownership percentages.

The existing Series A, Series B, and Series C Preferred Stock all carry a 1.0x non-participating liquidation preference with broad-based weighted average anti-dilution protection. The aggregate liquidation preferences of the existing preferred stock series are as follows: Series A — $9,600,000; Series B — $32,000,000; Series C — $36,000,000; total — $77,600,000. The liquidation waterfall is structured with pari passu treatment among the three existing preferred series (each at 1.0x), followed by distribution to common stockholders.

Current Board of Directors. The Company's Board of Directors currently consists of five (5) members, as follows:

1. Raj Anand — Founder Designee (CEO & Co-Founder)

2. Lena Kovac — Founder Designee (CTO & Co-Founder)

3. Priya Dasgupta — Ridgeline Ventures Designee (Partner, Ridgeline Ventures)

4. Elliott Margolis — Northgate Growth Partners Designee (Managing Director, Northgate Growth Partners)

5. Diana Chen — Brindoval Capital Group Designee (Principal, Brindoval Capital Group)

There is currently no independent director on the Board. The Board has not established a formal audit committee, compensation committee, or nominating and governance committee, though we understand that the Company's General Counsel, Sandra Mikkelsen, has recommended the formation of such committees in connection with the proposed financing.

D. Transaction Timeline to Date

The following table summarizes the key milestones in the transaction process to date:

No exclusivity agreement has been executed as of the date of this memorandum. Both Term Sheets contemplate an exclusivity period, though the parties differ on the duration and structure (discussed in Section III below). The parties have not yet commenced formal legal, financial, or commercial due diligence.

III. Side-by-Side Comparison of Key Terms

The following table provides a detailed side-by-side comparison of the material terms set forth in the Pinnacle Term Sheet and the Verdana Counter-Term Sheet. Each row identifies the relevant provision, summarizes the position of each party, and notes the status of the issue (agreed, divergent, or requiring further discussion). This table is reproduced in landscape format in Appendix A for ease of reference.

IV. Analysis and Recommendations

This Section sets forth our detailed analysis of each material area of divergence between the Term Sheets, together with our specific recommendations for Pinnacle's negotiation strategy. The issues are organized in approximate order of economic significance.

A. Pre-Money Valuation and Ownership (Primary Commercial Issue)

The $60,000,000 gap between Pinnacle's proposed $260,000,000 pre-money valuation and Verdana's proposed $320,000,000 pre-money valuation represents the most significant impasse between the parties and the issue with the greatest aggregate economic impact on the transaction. All other economic terms — including the price per share, the number of shares issued to Pinnacle, Pinnacle's post-close ownership percentage, and the implied dilution to existing stockholders — are direct derivatives of the pre-money valuation.

Pinnacle's Position. At Pinnacle's proposed pre-money valuation of $260,000,000, the price per share would be $3.25 ($260,000,000 ÷ 80,000,000 pre-existing fully diluted shares). At this price, Pinnacle's $60,000,000 investment would purchase 18,461,538 shares of Series D Preferred Stock, and Pinnacle would hold approximately 18.75% of the Company's fully diluted post-close capitalization (18,461,538 ÷ 98,461,538 total shares). This ownership level is consistent with Pinnacle's stated target for the investment and provides meaningful economic exposure to the Company's growth trajectory.

Verdana's Position. At Verdana's proposed pre-money valuation of $320,000,000, the price per share would be $4.00 ($320,000,000 ÷ 80,000,000 pre-existing fully diluted shares). At this price, Pinnacle's $60,000,000 investment would purchase only 15,000,000 shares of Series D Preferred Stock, and Pinnacle would hold approximately 15.79% of the Company's fully diluted post-close capitalization (15,000,000 ÷ 95,000,000 total shares) — or, if Verdana's proposed ESOP expansion is implemented, only 15.00% (15,000,000 ÷ 100,000,000 total shares). This ownership level falls well below Pinnacle's 18.75% target, representing a 375 basis point shortfall (or a 296 basis point shortfall without the ESOP expansion).

Implied ARR Multiples. The two proposed pre-money valuations imply the following multiples of the Company's Q1 2022 ARR of $47,300,000:

• Pinnacle's $260,000,000 pre-money = approximately 5.5x Q1 2022 ARR

• Verdana's $320,000,000 pre-money = approximately 6.8x Q1 2022 ARR

Market comparables for B2B SaaS companies with approximately 64% year-over-year revenue growth, approximately 128% net revenue retention, and approximately 74% gross margin generally support ARR multiples in the 5x–8x range in the current market environment. Public market comparable companies in the supply chain and enterprise AI SaaS sectors (including Fenmore Group, Pemberton & Co., and Cobalt Ridge Corporation) have recently traded at ARR multiples ranging from 4.5x to 9.0x, depending on growth rate, margin profile, and market conditions. Accordingly, both Pinnacle's and Verdana's positions have defensible justification based on market data, though Pinnacle's position may be at the lower end of the observable range and Verdana's position is closer to the median.

It is important to note, however, that public market multiples provide only a rough approximation for private growth equity valuations, which typically incorporate an illiquidity discount and a minority discount that can reduce implied multiples by 15%–30% relative to public comparables. Additionally, the current macroeconomic environment — characterized by rising interest rates, declining public SaaS multiples from 2021 peaks, and increased investor caution — may favor Pinnacle's more conservative valuation approach.

Recommendation. We recommend that Pinnacle explore a middle-ground position. Specifically, Pinnacle could propose a pre-money valuation in the $280,000,000 to $290,000,000 range, which would yield the following indicative economics:

• At $280,000,000 pre-money: $3.50/share; 17,142,857 shares issued; 17.66% post-close ownership (of 97,142,857 total shares); implied ~5.9x ARR multiple

• At $290,000,000 pre-money: $3.625/share; 16,551,724 shares issued; 17.14% post-close ownership (of 96,551,724 total shares); implied ~6.1x ARR multiple

Either of these compromise positions would bring Pinnacle's ownership meaningfully closer to its 18.75% target while remaining within the defensible range of market comparables. The final valuation negotiation should be informed by the results of commercial and legal diligence (which has not yet commenced) and should take into account any findings that may affect the Company's risk profile or growth prospects. In particular, verification of the reported ARR figure, customer concentration analysis, and churn data will be critical inputs to the valuation discussion.

We further recommend that the valuation negotiation be conducted in tandem with the option pool discussion (Section IV.B below), as the two issues are economically interrelated and should be resolved as a package.

B. Option Pool Expansion

Verdana's proposal to expand the ESOP by 5,000,000 shares (from 12,000,000 shares to 17,000,000 shares) prior to closing is economically disadvantageous to Pinnacle. The mechanics of Verdana's proposal are structured such that the 5,000,000 new ESOP shares are added to the fully diluted share count after pricing has been determined, meaning the dilutive impact of the expansion falls entirely on the incoming investor rather than on the existing stockholders.

Economic Impact. At Verdana's proposed $4.00 per share price, the ESOP expansion reduces Pinnacle's post-close ownership from 15.79% (15,000,000 ÷ 95,000,000 total shares, without ESOP expansion) to 15.00% (15,000,000 ÷ 100,000,000 total shares, with ESOP expansion). This 79 basis point dilution represents approximately $3,000,000 in implied equity value at the Verdana-proposed post-money valuation of $380,000,000 (0.79% × $380,000,000 ≈ $3,002,000). This is a non-trivial economic transfer from Pinnacle to the Company's existing stockholders and future ESOP recipients.

Market Practice. Standard market practice in growth equity transactions is to include any pre-close option pool expansion in the pre-money capitalization count. Under this approach, the dilution associated with the option pool increase is shared proportionately among all pre-existing stockholders (founders, existing preferred holders, and existing ESOP holders) rather than being borne exclusively by the incoming investor. This is the prevailing convention recognized by the National Venture Capital Association (NVCA) and is reflected in the NVCA model term sheet and related commentary.

Verdana's proposed structure — applying the pre-money valuation to the original 80,000,000 share count for pricing purposes while simultaneously increasing the total share count to 85,000,000 pre-investment — is a recognized negotiation tactic that has the effect of making the pre-money valuation appear higher than it is on an economic basis. If the 5,000,000 additional ESOP shares were included in the pre-money base, Verdana's $320,000,000 pre-money valuation would imply a price per share of only $3.76 ($320,000,000 ÷ 85,000,000 shares), not $4.00.

Recommendation. Pinnacle should insist that any ESOP expansion be included in the pre-money capitalization count. If Verdana desires a 17,000,000 share ESOP, the pre-money fully diluted share count should be adjusted to 85,000,000 shares, and the price per share should be recalculated accordingly. Under this approach, at Verdana's proposed $320,000,000 pre-money valuation, the price per share would be $3.76 and Pinnacle would acquire 15,957,447 shares ($60,000,000 ÷ $3.76/share), representing 15.81% of 100,957,447 total post-close shares. Alternatively, if the pre-money valuation is reduced proportionally to $299,600,000 (applying the $4.00 per share price to 85,000,000 shares would imply $340,000,000, but the dilution adjustment would warrant a reduction), the economics can be restructured to maintain Pinnacle's target ownership.

We note that the Company may have legitimate operational reasons for expanding the option pool — attracting and retaining key talent is critical for a growth-stage SaaS company with 310 employees — but the allocation of the associated dilution is an economic term that should be negotiated on its merits.

C. Liquidation Preference (1.5x vs. 1.0x)

Pinnacle's proposed 1.5x non-participating liquidation preference would guarantee a $90,000,000 return (i.e., 1.5 times the $60,000,000 investment amount) before any distributions to common stockholders in a liquidation, dissolution, or deemed liquidation event (including a merger or sale of substantially all assets). Verdana's proposed 1.0x non-participating liquidation preference would guarantee a return of only the $60,000,000 investment amount — a $30,000,000 difference in downside protection.

Structural Consistency. All existing preferred stock series (Series A, Series B, and Series C) carry 1.0x non-participating liquidation preferences. Granting a 1.5x preference to Series D would create a structural inconsistency in the Company's capital structure and would give Pinnacle a disproportionate preference multiple relative to earlier investors who took on earlier-stage risk at lower valuations. This inconsistency is likely to face resistance not only from Verdana's management team but also from the existing preferred holders — Ridgeline Ventures, Northgate Growth Partners, and Brindoval Capital Group — who may object to the creation of a structurally senior preference for a later-stage investor.

Practical Significance. In a non-participating preference structure, the holder elects at the time of a liquidation event either (a) to receive the preference amount or (b) to convert to common stock and participate pro rata in the distribution. The preference acts as a "floor" return — it protects the investor in downside scenarios where the aggregate proceeds are insufficient to deliver a return in excess of the preference amount on an as-converted basis. The practical significance of the difference between 1.0x and 1.5x depends on the exit valuation:

• At exit valuations below $320,000,000 (Pinnacle's proposed post-money) or $380,000,000 (Verdana's proposed post-money), the higher preference provides meaningful additional downside protection.

• At exit valuations significantly above $500,000,000, the holder would almost certainly elect to convert to common and participate pro rata, rendering the preference multiple economically irrelevant.

• The "crossover point" — the exit valuation at which the holder is indifferent between taking the preference and converting — depends on the holder's ownership percentage and the total preference stack.

Recommendation. We recommend that Pinnacle consider accepting a 1.0x non-participating preference if Pinnacle achieves a favorable resolution on the valuation and anti-dilution issues. The $30,000,000 difference between 1.0x and 1.5x is material in isolation, but in the context of a high-growth SaaS company with 64% year-over-year ARR growth and a target exit well in excess of the post-money valuation, the preference multiple is unlikely to be the binding constraint on Pinnacle's returns. Alternatively, Pinnacle could propose a 1.25x non-participating preference as a compromise, which would yield a $75,000,000 preference amount — a midpoint between the two positions. This compromise has the advantage of being defensible to existing preferred holders as a modest premium for the largest single-round investment while not creating a dramatic structural imbalance.

D. Anti-Dilution (Full-Ratchet vs. Broad-Based Weighted Average)

The anti-dilution mechanism is a critical downside protection provision that adjusts the Series D conversion price (and thus the number of common shares issuable upon conversion) in the event the Company issues equity securities at a price below the Series D original issuance price (a "down round").

Full-Ratchet Anti-Dilution (Pinnacle's position): In a down-round scenario, the Series D conversion price is reduced to the price at which the new (lower-priced) securities are issued, regardless of the number of shares issued in the down round. This provides maximum protection to Pinnacle but can be highly dilutive to founders, existing preferred holders, and ESOP participants. For example, if the Company were to issue even a single share at $2.00 in a subsequent round, the Series D conversion price would be reduced from $3.25 (or $4.00, depending on the agreed price) to $2.00, effectively increasing Pinnacle's share count by approximately 62.5% (at the $3.25 price) or 100% (at the $4.00 price).

Broad-Based Weighted Average Anti-Dilution (Verdana's position): The conversion price is adjusted based on a formula that takes into account both the price and the number of shares issued in the down round relative to the Company's total capitalization. This mechanism results in a more moderate adjustment that is proportionate to the actual dilutive impact of the down-round issuance. The standard broad-based weighted average formula is:

CP2 = CP1 × (A + B) ÷ (A + C)

Where:

• CP2 = adjusted conversion price

• CP1 = original conversion price

• A = total shares outstanding immediately prior to the new issuance (on a fully diluted basis)

• B = aggregate consideration received in the new issuance ÷ CP1

• C = number of shares issued in the new issuance

Existing Precedent. All existing preferred stock series (Series A, Series B, and Series C) utilize broad-based weighted average anti-dilution. Insistence on full-ratchet for Series D would represent a departure from the established anti-dilution framework and is likely to provoke unified resistance from the existing investor group (Ridgeline, Northgate, and Brindoval), all of whom would bear disproportionate dilution in a down-round scenario under a full-ratchet mechanism.

Recommendation. We recommend that Pinnacle consider accepting broad-based weighted average anti-dilution as the baseline mechanism, consistent with the existing preferred series, but negotiate for one or both of the following enhanced protections:

(a) Time-Limited Full-Ratchet: A "carve-out" provision under which full-ratchet anti-dilution would apply if a down round occurs within 18 to 24 months of the closing of the Series D financing, with broad-based weighted average anti-dilution applying to any down round thereafter. This hybrid approach protects Pinnacle during the period of greatest uncertainty following the investment while reverting to the standard mechanism over time.

(b) Conditional Acceptance: Accept broad-based weighted average anti-dilution if paired with a favorable outcome on the valuation negotiation (i.e., a pre-money valuation closer to $260,000,000 than $320,000,000). A lower entry price inherently provides greater downside protection and reduces the likelihood and severity of a down-round adjustment.

E. Drag-Along Rights and Founder Veto

The drag-along provision is a governance mechanism designed to ensure that a sale or other exit transaction supported by the requisite stockholder vote can be consummated without the need for unanimous stockholder consent. The two Term Sheets present materially different structures for the drag-along provision.

Pinnacle's Proposal. Pinnacle proposes a drag-along provision that would require all stockholders to consent to a sale or IPO supported by holders of a majority of the then-outstanding preferred stock, voting as a single class. This is a relatively standard provision in venture capital transactions and ensures that the preferred stockholders — who collectively bear the greatest financial risk — have the ability to compel an exit if a majority determines that a sale is in the best interests of the stockholders.

Verdana's Counter-Proposal. Verdana proposes a drag-along provision with two significant modifications:

(a) Dual Trigger: The drag-along would be triggered only upon the approval of both (i) a majority of the preferred stock (voting as a single class) and (ii) a majority of the common stock (voting as a separate class). This effectively gives the founders (who hold 28,000,000 of the 28,000,000 shares of outstanding common stock, or 100% of the common) a veto over any drag-along sale.

(b) Enterprise Value Floor: The Verdana Counter-Term Sheet includes the founders' insistence on a minimum enterprise value floor of $500,000,000, below which no drag-along sale may be compelled regardless of the stockholder vote.

Analysis of the $500,000,000 Floor. The $500,000,000 enterprise value floor is approximately 1.56x the Pinnacle-proposed post-money valuation ($320,000,000) or 1.32x the Verdana-proposed post-money valuation ($380,000,000). This floor could prevent an exit in scenarios where a sale at an enterprise value between $350,000,000 and $499,000,000 would still deliver attractive returns to Pinnacle and the other preferred stockholders. For illustrative purposes:

• At a $400,000,000 enterprise value, Pinnacle's 1.0x preference return would be $60,000,000 (1.0x MOIC). Alternatively, if Pinnacle converted to common and participated pro rata at 18.75% ownership (Pinnacle's proposed level), the return would be approximately $75,000,000 (1.25x MOIC). Under either scenario, Pinnacle would receive a positive return, but the $500,000,000 floor would prevent the drag-along from being exercised at this valuation.

• At a $450,000,000 enterprise value with 18.75% ownership, Pinnacle's pro rata return on an as-converted basis would be approximately $84,375,000 (1.41x MOIC), yet the drag-along could still not be triggered.

Existing Investor Dynamics. The Verdana Counter-Term Sheet indicates that Ridgeline Ventures and Brindoval Capital Group support the founders' position on the enterprise value threshold, while Northgate Growth Partners sides with Pinnacle in opposing the floor. This dynamic suggests that any negotiation on the drag-along structure will require engagement not only with the founders and the Company but also with the existing investor group.

Recommendation. The $500,000,000 enterprise value floor is problematic if it blocks liquidity in realistic exit scenarios. We recommend that Pinnacle propose one of the following alternatives:

(a) Reduced Floor: A compromise enterprise value floor in the range of $400,000,000 (approximately 1.25x the Pinnacle-proposed post-money, or approximately 1.05x the Verdana-proposed post-money), which would still provide meaningful protection to the founders against a "fire sale" while preserving Pinnacle's ability to compel an exit at a reasonable premium to the investment valuation.

(b) Post-Money Floor: Set the enterprise value floor at the post-money valuation of the round (i.e., $320,000,000 at Pinnacle's proposed valuation or $380,000,000 at Verdana's proposed valuation), ensuring that no drag-along sale occurs at a value below the implied worth of the Company at the time of Pinnacle's investment.

(c) Structural Alternative: Eliminate the enterprise value floor entirely but restructure the drag-along trigger to require approval of both (i) a majority of the preferred stock (voting as a single class) and (ii) a majority of the Board of Directors (including Pinnacle's designee), rather than requiring a separate common stockholder vote. This approach addresses Pinnacle's concern about exit flexibility while giving the founders Board-level (rather than stockholder-level) input into the exit decision.

F. Protective Provisions — Debt and Budget Consent Rights

The Term Sheets are substantively agreed on the majority of the protective provisions (items (c) through (i) in the Pinnacle Term Sheet), but diverge on two specific consent rights:

Debt Consent Threshold. Pinnacle proposes that the issuance of new debt exceeding $5,000,000 require Series D holder consent. Verdana proposes a threshold of $15,000,000. Given that Verdana already has an existing $10,000,000 revolving credit facility with Pacific Summit Bank, of which $6,200,000 was drawn as of March 31, 2022, a $5,000,000 threshold would effectively require Pinnacle's consent for any significant new debt incurrence — including an increase in the existing credit facility or any new term loan. Verdana's $15,000,000 threshold would permit the Company to incur up to $15,000,000 in new debt without investor consent, which could effectively double the Company's total indebtedness without Pinnacle's knowledge or approval.

Budget Deviation Consent. Pinnacle proposes that any annual budget deviating more than 15% from the board-approved operating plan require Series D holder consent. Verdana proposes the complete deletion of this provision, arguing that operational flexibility requires board-level but not investor-veto-level oversight of budgetary decisions. Verdana's position is that the Board already has fiduciary oversight over the budget and that a separate investor consent right is duplicative and operationally burdensome.

Recommendation. We recommend the following compromise positions:

(a) Debt Consent: Propose a $10,000,000 threshold as a compromise. This level is consistent with the size of the Company's existing credit facility and would require Pinnacle's consent only for material new debt issuances that could significantly alter the Company's capital structure or risk profile.

(b) Budget Deviation: Retain the budget deviation consent right but increase the threshold from 15% to 20%, or limit the scope of the consent right to capital expenditure budgets only (excluding operating expense budgets). This approach preserves Pinnacle's ability to monitor material deviations from the Company's financial plan while addressing Verdana's concern about day-to-day operational flexibility.

G. Redemption Rights

Pinnacle's proposed redemption right would be exercisable by Pinnacle at any time after five (5) years from the closing, at a redemption price equal to the greater of (a) the original purchase price per share plus any accrued but unpaid dividends, or (b) the fair market value per share. This provision gives Pinnacle a contractual exit mechanism in the event that no IPO, merger, or other liquidity event has occurred within five years of the investment.

Verdana has rejected redemption rights entirely. The Verdana Counter-Term Sheet notes that no prior series of preferred stock includes redemption rights and argues that mandatory redemption obligations could create balance-sheet liabilities and destabilize the Company's financial position. This position is consistent with founder/company-friendly norms in venture capital transactions, where redemption rights are increasingly disfavored — particularly by companies that are pre-profitability and lack the cash generation capacity to fund a mandatory redemption at scale.

Practical Considerations. From a practical standpoint, redemption rights are rarely exercised in venture capital transactions. The logistics of requiring a company to redeem $60,000,000 or more of preferred stock — potentially at fair market value — are complex and could force the Company into a sale or financing that is not in the best interests of all stockholders. However, redemption rights serve an important function as a negotiation lever and as a mechanism that incentivizes the Company and its management to pursue a liquidity event within a reasonable time frame.

Recommendation. We recommend that Pinnacle keep the redemption right on the table as a tradeable concession. Specifically, Pinnacle could offer to withdraw the redemption right in exchange for meaningful concessions on valuation, anti-dilution, or the drag-along structure. If Pinnacle elects to retain the redemption right, consider proposing a "soft" redemption — i.e., a provision that triggers a process (such as engagement of a financial advisor to explore strategic alternatives) rather than an immediate cash redemption obligation — which may be more palatable to Verdana while still providing Pinnacle with leverage.

H. Other Minor Divergences

The following issues represent areas of divergence between the Term Sheets that are of lesser economic significance but should be addressed in the negotiation process:

Co-Sale Threshold (1% vs. 5%). Pinnacle's proposed 1% threshold for triggering co-sale (tag-along) rights on founder share transfers is aggressive and would capture relatively small transactions. Verdana's proposed 5% threshold is more permissive and would allow the founders to transfer up to approximately 1,400,000 shares (at the current 28,000,000 common share count) without triggering co-sale rights. We recommend proposing 2% as a compromise, which would balance Pinnacle's interest in maintaining oversight of founder liquidity against the founders' reasonable desire for personal financial flexibility.

Registration Rights (2 Demands vs. 1). Verdana proposes limiting the number of demand registrations from two to one and adding a minimum aggregate offering amount of $10,000,000. We recommend that Pinnacle maintain its position on two demand registrations, which is standard for an institutional investor deploying $60,000,000 of capital. A single demand registration may be insufficient if the first registration is delayed or downsized due to market conditions. The $10,000,000 minimum offering amount is reasonable and can be accepted.

Annual Audit Delivery (90 Days vs. 120 Days). Verdana proposes extending the deadline for delivery of annual audited financial statements from 90 days to 120 days following the end of the fiscal year. This extension is not unusual for a private growth-stage company, particularly one engaged with a regional audit firm (Whitfield & Greer LLP, Portland). We recommend accepting 120 days if Verdana's auditor confirms that the timeline is driven by the firm's capacity constraints and not by concerns regarding the complexity of the Company's financial reporting.

Expense Reimbursement Cap ($100,000 vs. $50,000). Pinnacle proposes a cap of $100,000 on the reimbursement of legal fees and expenses, while Verdana proposes $50,000. Based on current C&H billing rates and the expected scope of work for this transaction — which will include not only the negotiation and drafting of definitive transaction documents but also comprehensive legal due diligence, review of the Company's intellectual property portfolio, commercial contracts, employment agreements, and regulatory compliance — we anticipate that Pinnacle's actual reimbursable legal costs will exceed $50,000 but may not reach $100,000. We recommend proposing $75,000 as a compromise, which reflects a realistic estimate of the likely reimbursable costs.

I. Pacific Summit Bank Lender Consent

The Verdana Counter-Term Sheet disputes the need for Pacific Summit Bank consent as a closing condition for the proposed transaction. Verdana's management team and its counsel, Langford Price & Associates LLP, have asserted that the terms of the existing $10,000,000 revolving credit facility may not require lender consent for the issuance of new preferred equity.

However, based on our preliminary review of the term sheet descriptions of the Credit Facility provided in the data room summary materials, we believe there is a meaningful possibility that the negative covenants contained in the Credit Facility — and in particular the covenants restricting the creation of new senior or pari passu equity interests and the incurrence of obligations that could affect the lender's collateral priority — may be triggered by the issuance of Series D Preferred Stock. The issuance of preferred equity with a liquidation preference that is senior to common stock could implicate change-of-control, equity issuance, or lien-related covenants.

We have not yet had access to the full Credit Facility documentation, including the credit agreement, security agreement, and any amendments or waivers. A detailed review of these documents is essential to determine whether lender consent is, in fact, required.

Recommendation. We strongly recommend that Pinnacle retain the Pacific Summit Bank lender consent as a condition to closing until comprehensive diligence on the Credit Facility documents has been completed. This issue should not be conceded at the term sheet stage, as a failure to obtain required lender consent could constitute an event of default under the Credit Facility, trigger acceleration of outstanding borrowings, and create material financial risk for the Company immediately following closing. Upon access to the full data room, C&H will prioritize review of the Credit Facility (and specifically the negative covenants set forth in Section 9.1 thereof, as referenced in the term sheet summary) and will advise Pinnacle promptly on whether consent is required.

V. Summary of Open Issues and Priority Ranking

The following table summarizes all material open issues between the Term Sheets, ranked by priority and materiality, together with a brief description of the nature and magnitude of each divergence.

We recommend addressing the Critical and High priority items (ranks 1 through 5) as a package in the initial principal-level negotiation. The Medium priority items (ranks 6 through 10 and 15) can be addressed in a second round of discussion or deferred to definitive document drafting. The Low priority items (ranks 11 through 14) are expected to be resolvable through standard negotiation and compromise.

VI. Recommended Next Steps

Based on our analysis, we recommend the following sequence of actions:

1. Principal-Level Commercial Discussion. Schedule a call or meeting between Marcus Trejo (Pinnacle), Nathan Callister (Hargrove Securities), Raj Anand (Verdana CEO), and Thomas Brightwell (Verdana CFO) to discuss the valuation gap and option pool treatment before formalizing a written counter-proposal. The purpose of this discussion is to gauge Verdana's flexibility on pricing and to identify potential trade-offs between the valuation, ownership, and economic protection terms (including liquidation preference and anti-dilution). We recommend that this call be scheduled during the week of May 9, 2022, subject to the parties' availability.

2. Exclusivity Agreement. Finalize and execute the exclusivity agreement. Verdana's proposed 60-day exclusivity period, structured as a standalone exclusivity agreement (rather than embedded in the term sheet), appears acceptable and is consistent with market practice for growth equity transactions of this size. We recommend targeting execution of the exclusivity agreement by the week of May 9, 2022, concurrently with or immediately following the principal-level commercial discussion.

3. Commencement of Diligence. Upon execution of the exclusivity agreement, Calderwood & Harkness LLP will commence comprehensive legal, financial, and commercial due diligence on Verdana. C&H will prepare and transmit a detailed diligence request list to Langford Price & Associates LLP within five (5) business days of the execution of the exclusivity agreement. Priority diligence areas will include: (a) corporate organizational documents and capitalization records; (b) material commercial contracts; (c) intellectual property portfolio and freedom-to-operate analysis; (d) employment and benefits matters; (e) regulatory compliance; (f) pending or threatened litigation; (g) tax matters; and (h) the Pacific Summit Bank credit facility documentation.

4. Defer Definitive Document Drafting. We recommend deferring detailed drafting of the definitive transaction documents (including the Stock Purchase Agreement, Amended and Restated Certificate of Incorporation, Amended and Restated Investors' Rights Agreement, Amended and Restated Voting Agreement, and Right of First Refusal and Co-Sale Agreement) until the parties have narrowed the valuation and economic-term gaps through the principal-level commercial discussion. This approach will avoid the incurrence of legal fees on provisions that may change materially as a result of the ongoing negotiations.

5. Capitalization Table and Waterfall Analysis. Calderwood & Harkness LLP will prepare a separate capitalization table analysis and liquidation waterfall model under multiple valuation scenarios ($260,000,000, $290,000,000, and $320,000,000 pre-money), with and without the proposed ESOP expansion, to support Pinnacle's negotiation position. This analysis will model Pinnacle's returns at various exit enterprise values and will illustrate the relative impact of the liquidation preference multiple (1.0x vs. 1.25x vs. 1.5x) and anti-dilution mechanism (full-ratchet vs. broad-based weighted average) under downside scenarios. We expect to deliver this analysis by May 10, 2022.

6. Pacific Summit Bank Credit Facility Review. Calderwood & Harkness LLP will prioritize the review of the Pacific Summit Bank credit facility documents promptly upon access to the data room. As discussed in Section IV.I, a determination of whether lender consent is required for the issuance of Series D Preferred Stock is essential before this closing condition can be resolved. We will provide a separate memorandum on this issue upon completion of our review.

VII. Appendices

Appendix A: Side-by-Side Term Comparison Table (Full)

The complete side-by-side comparison table set forth in Section III above is reproduced below for ease of reference. In the event this memorandum is printed, this Appendix may be printed in landscape format for improved readability.

Appendix B: Ownership and Dilution Sensitivity Analysis (Summary)

The following table presents Pinnacle's post-close ownership under four illustrative scenarios, varying the pre-money valuation and option pool treatment. A detailed liquidation waterfall analysis under each scenario will be prepared separately and delivered to the deal team by May 10, 2022.

Notes:

• Scenario 1 reflects Pinnacle's proposed terms and represents Pinnacle's target ownership of approximately 18.75%.

• Scenario 2 reflects Verdana's proposed pre-money valuation without the ESOP expansion and yields a Pinnacle ownership of 15.79%.

• Scenario 3 reflects Verdana's proposed pre-money valuation with the proposed 5,000,000 share ESOP expansion, reducing Pinnacle's ownership to 15.00% — a decrease of 375 basis points from Pinnacle's target and 79 basis points from Scenario 2.

• Scenario 4 illustrates a potential compromise at a $290,000,000 pre-money valuation with no ESOP expansion, yielding Pinnacle ownership of 17.14% — 161 basis points below Pinnacle's target but 214 basis points above Verdana's Scenario 3 position.

A detailed waterfall analysis modeling Pinnacle's return at exit enterprise values of $250,000,000, $320,000,000, $380,000,000, $500,000,000, $750,000,000, and $1,000,000,000 — under each of the four scenarios above and at 1.0x, 1.25x, and 1.5x liquidation preferences — will follow in a separate workbook.

Appendix C: Existing Capitalization Table (Pre-Investment)

The following table sets forth Verdana Software, Inc.'s existing capitalization on a fully diluted, as-converted basis, prior to the proposed Series D investment. All information is based on representations made by the Company and its counsel and is subject to verification during diligence.

Key Terms of Existing Preferred Stock:

• Liquidation Preference: All existing series (A, B, and C) carry a 1.0x non-participating liquidation preference, with pari passu treatment among the three series. The aggregate liquidation preference stack is $77,600,000 (Series A: $9,600,000 + Series B: $32,000,000 + Series C: $36,000,000).

• Anti-Dilution: All existing series utilize broad-based weighted average anti-dilution protection. No existing series has full-ratchet anti-dilution.

• Conversion: Each share of preferred stock is convertible into one share of common stock at the election of the holder, subject to adjustment for anti-dilution and stock splits. All preferred stock converts automatically upon the closing of a qualified IPO (minimum $50,000,000 in gross proceeds at a price per share of at least 3x the applicable original issue price, based on our understanding of the existing Certificate of Incorporation).

• Dividends: Existing preferred stock is entitled to dividends when and if declared by the Board, in preference to common stock. We understand that no dividends have been declared or paid to date.

• Redemption: No existing series of preferred stock includes redemption rights.

• Voting: Each share of preferred stock votes on an as-converted basis with the common stock on all matters submitted to a stockholder vote, except as required by law or the Certificate of Incorporation.

•

This memorandum has been prepared for the exclusive use of the addressees identified above and is intended to facilitate the evaluation and negotiation of the proposed transaction. The analysis and recommendations set forth herein are based on our review of the Pinnacle Term Sheet and the Verdana Counter-Term Sheet and are subject to revision as additional information becomes available through the diligence process. This memorandum does not constitute legal advice and should not be relied upon by any person or entity other than the addressees.

We are available to discuss the contents of this memorandum at your convenience.

CALDERWOOD & HARKNESS LLP

By: ________

Andrew Fitzpatrick Lead Associate, Mergers & Acquisitions

By: ________

Naomi Petersen Working Associate, Mergers & Acquisitions

PRIVILEGED & CONFIDENTIAL — ATTORNEY WORK PRODUCT Calderwood & Harkness LLP	Matter No. 1002-00004	Client No. PIN-0042 This document is protected by the attorney-client privilege and the work product doctrine. Unauthorized distribution is prohibited.
Metric	Value	Notes
Annual Recurring Revenue (ARR), Q1 2022	$47,300,000	Up from $28,900,000 in Q1 2021
Year-over-Year ARR Growth	~63.7%	Q1 2022 vs. Q1 2021
Net Revenue Retention (NRR)	128%	Indicates strong upsell/expansion revenue
Gross Margin	74.2%	Consistent with enterprise SaaS benchmarks
EBITDA (TTM as of March 2022)	–$11,600,000	Company remains in cash-burn phase
Cash on Balance Sheet (March 31, 2022)	$22,400,000	Unaudited management figure
Employees	~310	Full-time equivalent headcount
Customers	~185	Enterprise accounts
Stockholder / Class	Shares	% Ownership (Fully Diluted)	Investment Amount	Price Per Share
Founders (Raj Anand & Lena Kovac) — Common Stock	28,000,000	35.0%	N/A	N/A
Series A Preferred (Ridgeline Ventures Fund III LP, 2018)	12,000,000	15.0%	$9,600,000	$0.80
Series B Preferred (Northgate Growth Partners Fund II LP, 2019)	16,000,000	20.0%	$32,000,000	$2.00
Series C Preferred (Brindoval Capital Group LLC, 2021)	12,000,000	15.0%	$36,000,000	$3.00
ESOP (issued and unissued)	12,000,000	15.0%	N/A	N/A
Total Fully Diluted	80,000,000	100.0%	$77,600,000
Date	Event
April 19, 2022	Matter opened; Pinnacle Capital Management LLC engages Calderwood & Harkness LLP as transaction counsel
April 22, 2022	Pinnacle delivers non-binding term sheet (the "Pinnacle Term Sheet") to Verdana
May 3, 2022	Verdana delivers counter-term sheet (the "Verdana Counter-Term Sheet") to Pinnacle via Hargrove Securities LLC
May 5, 2022	Date of this memorandum
TBD (target: week of May 9, 2022)	Parties negotiating toward execution of an exclusivity agreement
#	Term / Provision	Pinnacle Term Sheet (April 22, 2022)	Verdana Counter-Term Sheet (May 3, 2022)	Status
1	Investment Amount	$60,000,000	$60,000,000	Agreed

2	Security	Series D Preferred Stock	Series D Preferred Stock	Agreed
3	Pre-Money Valuation	$260,000,000	$320,000,000	Material Divergence — $60M gap
4	Price Per Share	$3.25/share ($260,000,000 ÷ 80,000,000 pre-existing fully diluted shares)	$4.00/share ($320,000,000 ÷ 80,000,000 pre-existing fully diluted shares)	Material Divergence (derivative of valuation)
5	Shares Issued to Pinnacle	18,461,538 shares ($60,000,000 ÷ $3.25/share)	15,000,000 shares ($60,000,000 ÷ $4.00/share)	Material Divergence
6	Post-Money Valuation	$320,000,000 ($260M + $60M)	$380,000,000 ($320M + $60M)	Material Divergence
7	Pinnacle's Post-Close Ownership (Fully Diluted)	18.75% (18,461,538 ÷ 98,461,538 total shares)	15.79% without ESOP expansion (15,000,000 ÷ 95,000,000); 15.00% with proposed ESOP expansion (15,000,000 ÷ 100,000,000)	Material Divergence
8	Option Pool / ESOP Expansion	No pre-close expansion; existing 12,000,000 ESOP shares included in the 80,000,000 pre-money fully diluted count	Proposes expanding ESOP by 5,000,000 shares (from 12,000,000 to 17,000,000 shares) pre-close; pricing applies $320M pre-money against original 80,000,000 share count; post-money fully diluted = 100,000,000 shares	Material Divergence — Verdana effectively seeks to have the option pool increase borne entirely by the incoming investor rather than existing holders
9	Liquidation Preference	1.5x non-participating ($60M × 1.5 = $90,000,000 senior return before common participates)	1.0x non-participating ($60M × 1.0 = $60,000,000 senior return), consistent with Series A, B, and C	Material Divergence
10	Anti-Dilution Protection	Full-ratchet anti-dilution	Broad-based weighted average anti-dilution (consistent with Series A, B, and C)	Material Divergence
11	Dividends	8% cumulative, non-compounding, accruing from issuance, payable when and if declared ($4,800,000 per year on $60,000,000)	8% cumulative, non-compounding, accruing from issuance, payable when and if declared	Agreed
12	Board Composition (Post-Close)	7 members: 2 Founders, 1 Ridgeline designee, 1 Northgate designee, 1 Brindoval designee, 1 Pinnacle designee (Marcus Trejo or designee), 1 independent director mutually agreed	7 members: 2 Founders, 1 existing investor designee (rotating or selected by majority of preferred), 1 Pinnacle designee, 1 CEO (ex officio, non-voting), 2 independent directors	Divergence — Verdana consolidates three existing investor seats into one, adds second independent director, and includes non-voting CEO seat; likely to face resistance from Ridgeline, Northgate, and/or Brindoval
13	Protective Provisions / Consent Rights	Consent rights over: (a) new debt > $5M; (b) annual budgets deviating > 15% from board-approved plan; (c) issuance of equity senior to or pari passu with Series D; (d) amendments to Certificate of Incorporation adversely affecting Series D; (e) any acquisition, merger, or sale of substantially all assets; (f) changes to authorized share capital; (g) declaration or payment of dividends on junior stock; (h) redemption or repurchase of equity (other than from departing service providers); (i) increase or decrease in Board size	Accepts items (c)–(i) in principle (subject to drafting); objects to (a) debt consent at $5M threshold — proposes $15M instead; objects to (b) budget deviation consent — proposes deletion entirely	Divergence on debt consent threshold ($5M vs. $15M) and budget deviation consent (included vs. excluded)
14	Drag-Along Rights	All stockholders must consent to a sale or IPO supported by holders of a majority of the then-outstanding preferred stock (voting as a single class)	Drag-along triggered only by approval of (a) a majority of the preferred stock (voting as a single class) AND (b) a majority of the common stock (voting as a separate class); founders insist on minimum enterprise value floor of $500,000,000 below which no drag-along sale may be compelled	Material Divergence — founder veto and $500M EV floor are significant restrictions on exit flexibility
15	Tag-Along / Co-Sale Rights	Tag-along right on any founder share transfer exceeding 1% of outstanding shares	Tag-along right on any founder share transfer exceeding 5% of outstanding shares	Minor Divergence — threshold percentage (1% vs. 5%)
16	Right of First Refusal (ROFR)	Pro rata participation right on all future equity issuances (subject to customary exclusions)	Pro rata participation right on future equity issuances (consistent with existing Investors' Rights Agreement)	Substantially Agreed — subject to alignment of exclusions
17	Registration Rights	Demand registration after the earlier of IPO or 5 years from closing; 2 demand registrations; unlimited piggyback registrations; S-3 registration rights once eligible	Generally consistent; proposes limiting demand registrations to 1 (not 2) and adding a minimum aggregate offering amount of $10,000,000 for demand registrations	Minor Divergence
18	Information Rights	Quarterly unaudited financials within 45 days of quarter-end; annual audited financials within 90 days of fiscal year-end; monthly management reports	Quarterly unaudited financials within 45 days; annual audited financials within 120 days (not 90); monthly management reports. Verdana's auditor is Whitfield & Greer LLP (Portland).	Minor Divergence — annual audit delivery timeline (90 vs. 120 days)
19	Redemption Rights	Exercisable by Pinnacle at any time after 5 years from closing at the greater of (a) original purchase price plus accrued but unpaid dividends, or (b) fair market value	Rejects redemption rights entirely; notes no prior series includes redemption rights; argues mandatory redemption could create balance-sheet liabilities and destabilize the Company's financial position	Material Divergence
20	Pay-to-Play	Mandatory pay-to-play for all preferred holders in future financing rounds; non-participating holders' preferred shares automatically convert to common stock	Rejects mandatory pay-to-play; proposes optional pay-to-play (loss of anti-dilution protection only, not conversion to common)	Divergence
21	Management Rights Letter	Requires management rights letter granting Pinnacle consultation rights, access to facilities, books and records, sufficient to qualify the investment under the Investment Advisers Act and ERISA	Agrees in principle	Agreed in principle
22	Indemnification of Board Designee	Requires indemnification agreement for Pinnacle's board designee (Marcus Trejo or designee), including advancement of expenses and D&O insurance	Agrees in

PRIVILEGED & CONFIDENTIAL — ATTORNEY WORK PRODUCT
CALDERWOOD & HARKNESS LLP 101 Montgomery Street, Suite 3500 San Francisco, California 94104 Telephone: (415) 555-7200 Facsimile: (415) 555-7201
May 5, 2022
MEMORANDUM
TO: Harrison Wexford, Responsible Partner, Mergers & Acquisitions, Calderwood & Harkness LLP Marcus Trejo, Partner, Head of Growth Equity, Pinnacle Capital Management LLC
FROM: Andrew Fitzpatrick, Lead Associate, M&A Naomi Petersen, Working Associate, M&A
RE: Comparison of Term Sheets — Proposed $60,000,000 Series D Preferred Stock Investment by Pinnacle Venture Fund II LP in Verdana Software, Inc.
MATTER NO.: 1002-00004
CLIENT NO.: PIN-0042
This memorandum is a privileged and confidential attorney work product prepared by Calderwood & Harkness LLP for the sole use of Pinnacle Capital Management LLC and its affiliates. This memorandum is protected by the attorney-client privilege and the work product doctrine. Any distribution, copying, or disclosure of this memorandum or its contents to any third party without the express written consent of Calderwood & Harkness LLP is strictly prohibited.
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I. Executive Summary
The purpose of this memorandum is to present a comprehensive comparison and analysis of the non-binding term sheet delivered by Pinnacle Venture Fund II LP ("Pinnacle" or the "Investor") to Verdana Software, Inc. ("Verdana" or the "Company") on April 22, 2022 (the "Pinnacle Term Sheet") against the counter-term sheet delivered by Verdana to Pinnacle on May 3, 2022 via its placement agent, Hargrove Securities LLC (Nathan Callister, Managing Director) (the "Verdana Counter-Term Sheet" and, together with the Pinnacle Term Sheet, the "Term Sheets"). This memorandum identifies and analyzes the areas of agreement and divergence between the two Term Sheets and provides our recommendations for the negotiation strategy going forward.
Transaction Overview. The proposed transaction involves a $60,000,000 minority growth equity investment by Pinnacle through the purchase of newly issued shares of Series D Preferred Stock in Verdana Software, Inc., a Delaware C-corporation headquartered at 1175 NW Couch Street, Suite 800, Portland, Oregon 97209. Verdana is a growth-stage enterprise software company specializing in AI-driven supply chain optimization SaaS through its proprietary platform known as "Verdana SCX." The investment would represent Pinnacle's initial entry into Verdana's capital structure and would establish Pinnacle as the Company's largest single-round investor by dollar amount deployed.
Summary of Key Findings. Following our detailed review and side-by-side comparison of the two Term Sheets, we have identified that the Pinnacle Term Sheet and the Verdana Counter-Term Sheet diverge materially on five core commercial issues:
1. Pre-Money Valuation — A $60,000,000 gap exists between Pinnacle's proposed $260,000,000 pre-money valuation and Verdana's proposed $320,000,000 pre-money valuation, which directly drives the price per share, the number of shares issued, and Pinnacle's post-close ownership percentage.
2. Liquidation Preference Multiple — Pinnacle proposes a 1.5x non-participating liquidation preference ($90,000,000 senior return), while Verdana proposes a 1.0x non-participating liquidation preference ($60,000,000 senior return), consistent with the terms of the Company's existing Series A, B, and C preferred stock.
3. Anti-Dilution Mechanism — Pinnacle proposes full-ratchet anti-dilution protection, whereas Verdana proposes broad-based weighted average anti-dilution protection, which is the mechanism applicable to all prior preferred stock series.
4. Option Pool Treatment and Expansion — Verdana proposes expanding the existing employee stock option pool ("ESOP") by 5,000,000 shares prior to closing, which would dilute Pinnacle's post-close ownership from approximately 15.79% to 15.00% (at Verdana's proposed pre-money valuation), with the economic burden of such dilution falling entirely on the incoming investor.
5. Drag-Along Provision Structure — Pinnacle proposes a drag-along triggered by a majority vote of preferred stockholders voting as a single class, whereas Verdana proposes a dual-trigger drag-along requiring approval by both a majority of preferred stock and a majority of common stock, with a minimum enterprise value floor of $500,000,000 below which no drag-along sale may be compelled.
In addition to these five primary areas of divergence, the Term Sheets differ to a lesser degree on certain protective provisions (including the debt consent threshold and budget deviation consent rights), redemption rights, pay-to-play provisions, board composition, co-sale thresholds, registration rights, information rights, and expense reimbursement caps. Each of these secondary divergences is addressed in detail in Sections III and IV below.
Involvement of Verdana's Advisors. We note that the Verdana Counter-Term Sheet was prepared with the involvement and guidance of Verdana's outside counsel, Langford Price & Associates LLP (Jonathan Hale, Lead Partner; Rebecca Thornton, Associate), as well as Verdana's Chief Financial Officer, Thomas Brightwell. The sophistication and specificity of the counter-proposals — particularly with respect to the option pool mechanics, the drag-along structure, and the protective provision carve-outs — indicate that Verdana has received thorough legal and financial advice and that the positions set forth in the Verdana Counter-Term Sheet should be understood as considered and deliberate rather than preliminary or placeholder positions.
Recommendation Summary. Calderwood & Harkness LLP recommends that Pinnacle prioritize the negotiation of the pre-money valuation and ownership issues (including the interrelated option pool expansion question) first, as these have the greatest aggregate economic impact on the transaction. The anti-dilution mechanism and liquidation preference multiple should be addressed concurrently, as they represent meaningful downside protection considerations and may present opportunities for concessions that can be traded against movement on valuation. The drag-along provision and founder veto should be resolved as part of the broader governance framework. Specific recommendations for each issue are set forth in Section IV of this memorandum.
II. Background
A. The Parties
Investor. Pinnacle Venture Fund II LP (the "Fund") is a Delaware limited partnership. The Fund's general partner is Pinnacle Capital Management LLC, a Delaware limited liability company (the "GP" or "Pinnacle Capital"). Pinnacle Capital is headquartered at 2400 Sand Hill Road, Suite 310, Menlo Park, California 94025. Pinnacle Venture Fund II LP is an $850,000,000 fund (2020 vintage) focused on growth-stage venture capital investments in enterprise SaaS, fintech, and AI/ML companies. The Fund's typical check sizes range from $30,000,000 to $100,000,000 in Series B through Series E financings. The Fund currently maintains a portfolio of 22 active companies. Pinnacle Capital's predecessor fund, Pinnacle Venture Fund I LP, has returned 3.2x net MOIC (multiple on invested capital) to its limited partners. Marcus Trejo, Partner and Head of Growth Equity at Pinnacle Capital Management LLC, is the deal lead for the proposed Verdana investment and is expected to serve as Pinnacle's designee to the Company's Board of Directors following the closing.
Target. Verdana Software, Inc. (the "Company") is a Delaware C-corporation, originally incorporated on March 14, 2016. The Company's principal offices are located at 1175 NW Couch Street, Suite 800, Portland, Oregon 97209. Verdana develops, markets, and sells an AI-driven supply chain optimization platform known as "Verdana SCX," delivered as a cloud-based software-as-a-service ("SaaS") solution to enterprise customers in the manufacturing, logistics, retail, and consumer packaged goods sectors. The Company's current officers and key personnel include:
• Raj Anand — Chief Executive Officer & Co-Founder
• Lena Kovac — Chief Technology Officer & Co-Founder
• Thomas Brightwell — Chief Financial Officer (hired 2021)
• Sandra Mikkelsen — General Counsel
Verdana's Placement Agent. Hargrove Securities LLC is a Delaware limited liability company and a FINRA-registered broker-dealer with offices at 600 Lexington Avenue, 22nd Floor, New York, New York 10022. Hargrove Securities has been engaged by Verdana to run a limited process for the Company's growth equity round. Nathan Callister, Managing Director at Hargrove Securities, is the lead banker on the engagement. Pursuant to the engagement letter between Verdana and Hargrove Securities, Hargrove Securities is entitled to a placement fee equal to 1.5% of the total capital raised in the round. On a $60,000,000 raise, this equates to a placement fee of $900,000, payable by the Company at closing. Both Term Sheets confirm that the placement fee is solely the obligation of the Company and is not to be deducted from the investment proceeds.
Verdana's Counsel. Langford Price & Associates LLP is a law firm with offices at 1000 SW Broadway, Suite 1600, Portland, Oregon 97205. The lead partner on the Verdana engagement is Jonathan Hale, with associate-level support from Rebecca Thornton. Langford Price has represented Verdana since the Company's Series B financing in 2019 and is expected to serve as Company's counsel through the closing of the proposed transaction.
B. Verdana's Key Financial Metrics (as Reported to Pinnacle)
The following financial and operating metrics have been provided to Pinnacle by Verdana and/or Hargrove Securities in connection with the process. These figures have not yet been independently verified through diligence and are presented as reported. All financial data is subject to confirmation during the diligence process contemplated in Section VI below.
Additionally, we note that Verdana has an existing $10,000,000 revolving credit facility with Pacific Summit Bank, N.A. (the "Credit Facility"). As of March 31, 2022, $6,200,000 of the Credit Facility had been drawn. The terms, covenants, and conditions of the Credit Facility are relevant to the proposed transaction, as discussed further in Sections III and IV below regarding lender consent requirements.
At the reported Q1 2022 ARR of $47,300,000 and with $22,400,000 in cash (net of $6,200,000 in drawn debt), the Company's implied net cash burn rate and cash runway should be independently verified during diligence. On a high-level basis, the TTM EBITDA loss of $11,600,000 suggests an approximate monthly cash burn of $970,000, which would imply a cash runway of approximately 23 months absent the proposed investment (and excluding any additional draws on the Credit Facility). However, this analysis does not account for capital expenditures, working capital fluctuations, or changes in the Company's growth trajectory, and should be refined during financial diligence.
C. Existing Capitalization (Pre-Investment)
The following table sets forth Verdana's existing capitalization on a fully diluted basis as of the date hereof, based on information provided by the Company and its counsel. All shares are presented on an as-converted-to-common-stock basis for purposes of calculating fully diluted ownership percentages.
The existing Series A, Series B, and Series C Preferred Stock all carry a 1.0x non-participating liquidation preference with broad-based weighted average anti-dilution protection. The aggregate liquidation preferences of the existing preferred stock series are as follows: Series A — $9,600,000; Series B — $32,000,000; Series C — $36,000,000; total — $77,600,000. The liquidation waterfall is structured with pari passu treatment among the three existing preferred series (each at 1.0x), followed by distribution to common stockholders.
Current Board of Directors. The Company's Board of Directors currently consists of five (5) members, as follows:
1. Raj Anand — Founder Designee (CEO & Co-Founder)
2. Lena Kovac — Founder Designee (CTO & Co-Founder)
3. Priya Dasgupta — Ridgeline Ventures Designee (Partner, Ridgeline Ventures)
4. Elliott Margolis — Northgate Growth Partners Designee (Managing Director, Northgate Growth Partners)
5. Diana Chen — Brindoval Capital Group Designee (Principal, Brindoval Capital Group)
There is currently no independent director on the Board. The Board has not established a formal audit committee, compensation committee, or nominating and governance committee, though we understand that the Company's General Counsel, Sandra Mikkelsen, has recommended the formation of such committees in connection with the proposed financing.
D. Transaction Timeline to Date
The following table summarizes the key milestones in the transaction process to date:
No exclusivity agreement has been executed as of the date of this memorandum. Both Term Sheets contemplate an exclusivity period, though the parties differ on the duration and structure (discussed in Section III below). The parties have not yet commenced formal legal, financial, or commercial due diligence.
III. Side-by-Side Comparison of Key Terms
The following table provides a detailed side-by-side comparison of the material terms set forth in the Pinnacle Term Sheet and the Verdana Counter-Term Sheet. Each row identifies the relevant provision, summarizes the position of each party, and notes the status of the issue (agreed, divergent, or requiring further discussion). This table is reproduced in landscape format in Appendix A for ease of reference.
IV. Analysis and Recommendations
This Section sets forth our detailed analysis of each material area of divergence between the Term Sheets, together with our specific recommendations for Pinnacle's negotiation strategy. The issues are organized in approximate order of economic significance.
A. Pre-Money Valuation and Ownership (Primary Commercial Issue)
The $60,000,000 gap between Pinnacle's proposed $260,000,000 pre-money valuation and Verdana's proposed $320,000,000 pre-money valuation represents the most significant impasse between the parties and the issue with the greatest aggregate economic impact on the transaction. All other economic terms — including the price per share, the number of shares issued to Pinnacle, Pinnacle's post-close ownership percentage, and the implied dilution to existing stockholders — are direct derivatives of the pre-money valuation.
Pinnacle's Position. At Pinnacle's proposed pre-money valuation of $260,000,000, the price per share would be $3.25 ($260,000,000 ÷ 80,000,000 pre-existing fully diluted shares). At this price, Pinnacle's $60,000,000 investment would purchase 18,461,538 shares of Series D Preferred Stock, and Pinnacle would hold approximately 18.75% of the Company's fully diluted post-close capitalization (18,461,538 ÷ 98,461,538 total shares). This ownership level is consistent with Pinnacle's stated target for the investment and provides meaningful economic exposure to the Company's growth trajectory.
Verdana's Position. At Verdana's proposed pre-money valuation of $320,000,000, the price per share would be $4.00 ($320,000,000 ÷ 80,000,000 pre-existing fully diluted shares). At this price, Pinnacle's $60,000,000 investment would purchase only 15,000,000 shares of Series D Preferred Stock, and Pinnacle would hold approximately 15.79% of the Company's fully diluted post-close capitalization (15,000,000 ÷ 95,000,000 total shares) — or, if Verdana's proposed ESOP expansion is implemented, only 15.00% (15,000,000 ÷ 100,000,000 total shares). This ownership level falls well below Pinnacle's 18.75% target, representing a 375 basis point shortfall (or a 296 basis point shortfall without the ESOP expansion).
Implied ARR Multiples. The two proposed pre-money valuations imply the following multiples of the Company's Q1 2022 ARR of $47,300,000:
• Pinnacle's $260,000,000 pre-money = approximately 5.5x Q1 2022 ARR
• Verdana's $320,000,000 pre-money = approximately 6.8x Q1 2022 ARR
Market comparables for B2B SaaS companies with approximately 64% year-over-year revenue growth, approximately 128% net revenue retention, and approximately 74% gross margin generally support ARR multiples in the 5x–8x range in the current market environment. Public market comparable companies in the supply chain and enterprise AI SaaS sectors (including Fenmore Group, Pemberton & Co., and Cobalt Ridge Corporation) have recently traded at ARR multiples ranging from 4.5x to 9.0x, depending on growth rate, margin profile, and market conditions. Accordingly, both Pinnacle's and Verdana's positions have defensible justification based on market data, though Pinnacle's position may be at the lower end of the observable range and Verdana's position is closer to the median.
It is important to note, however, that public market multiples provide only a rough approximation for private growth equity valuations, which typically incorporate an illiquidity discount and a minority discount that can reduce implied multiples by 15%–30% relative to public comparables. Additionally, the current macroeconomic environment — characterized by rising interest rates, declining public SaaS multiples from 2021 peaks, and increased investor caution — may favor Pinnacle's more conservative valuation approach.
Recommendation. We recommend that Pinnacle explore a middle-ground position. Specifically, Pinnacle could propose a pre-money valuation in the $280,000,000 to $290,000,000 range, which would yield the following indicative economics:
• At $280,000,000 pre-money: $3.50/share; 17,142,857 shares issued; 17.66% post-close ownership (of 97,142,857 total shares); implied ~5.9x ARR multiple
• At $290,000,000 pre-money: $3.625/share; 16,551,724 shares issued; 17.14% post-close ownership (of 96,551,724 total shares); implied ~6.1x ARR multiple
Either of these compromise positions would bring Pinnacle's ownership meaningfully closer to its 18.75% target while remaining within the defensible range of market comparables. The final valuation negotiation should be informed by the results of commercial and legal diligence (which has not yet commenced) and should take into account any findings that may affect the Company's risk profile or growth prospects. In particular, verification of the reported ARR figure, customer concentration analysis, and churn data will be critical inputs to the valuation discussion.
We further recommend that the valuation negotiation be conducted in tandem with the option pool discussion (Section IV.B below), as the two issues are economically interrelated and should be resolved as a package.
B. Option Pool Expansion
Verdana's proposal to expand the ESOP by 5,000,000 shares (from 12,000,000 shares to 17,000,000 shares) prior to closing is economically disadvantageous to Pinnacle. The mechanics of Verdana's proposal are structured such that the 5,000,000 new ESOP shares are added to the fully diluted share count after pricing has been determined, meaning the dilutive impact of the expansion falls entirely on the incoming investor rather than on the existing stockholders.
Economic Impact. At Verdana's proposed $4.00 per share price, the ESOP expansion reduces Pinnacle's post-close ownership from 15.79% (15,000,000 ÷ 95,000,000 total shares, without ESOP expansion) to 15.00% (15,000,000 ÷ 100,000,000 total shares, with ESOP expansion). This 79 basis point dilution represents approximately $3,000,000 in implied equity value at the Verdana-proposed post-money valuation of $380,000,000 (0.79% × $380,000,000 ≈ $3,002,000). This is a non-trivial economic transfer from Pinnacle to the Company's existing stockholders and future ESOP recipients.
Market Practice. Standard market practice in growth equity transactions is to include any pre-close option pool expansion in the pre-money capitalization count. Under this approach, the dilution associated with the option pool increase is shared proportionately among all pre-existing stockholders (founders, existing preferred holders, and existing ESOP holders) rather than being borne exclusively by the incoming investor. This is the prevailing convention recognized by the National Venture Capital Association (NVCA) and is reflected in the NVCA model term sheet and related commentary.
Verdana's proposed structure — applying the pre-money valuation to the original 80,000,000 share count for pricing purposes while simultaneously increasing the total share count to 85,000,000 pre-investment — is a recognized negotiation tactic that has the effect of making the pre-money valuation appear higher than it is on an economic basis. If the 5,000,000 additional ESOP shares were included in the pre-money base, Verdana's $320,000,000 pre-money valuation would imply a price per share of only $3.76 ($320,000,000 ÷ 85,000,000 shares), not $4.00.
Recommendation. Pinnacle should insist that any ESOP expansion be included in the pre-money capitalization count. If Verdana desires a 17,000,000 share ESOP, the pre-money fully diluted share count should be adjusted to 85,000,000 shares, and the price per share should be recalculated accordingly. Under this approach, at Verdana's proposed $320,000,000 pre-money valuation, the price per share would be $3.76 and Pinnacle would acquire 15,957,447 shares ($60,000,000 ÷ $3.76/share), representing 15.81% of 100,957,447 total post-close shares. Alternatively, if the pre-money valuation is reduced proportionally to $299,600,000 (applying the $4.00 per share price to 85,000,000 shares would imply $340,000,000, but the dilution adjustment would warrant a reduction), the economics can be restructured to maintain Pinnacle's target ownership.
We note that the Company may have legitimate operational reasons for expanding the option pool — attracting and retaining key talent is critical for a growth-stage SaaS company with 310 employees — but the allocation of the associated dilution is an economic term that should be negotiated on its merits.
C. Liquidation Preference (1.5x vs. 1.0x)
Pinnacle's proposed 1.5x non-participating liquidation preference would guarantee a $90,000,000 return (i.e., 1.5 times the $60,000,000 investment amount) before any distributions to common stockholders in a liquidation, dissolution, or deemed liquidation event (including a merger or sale of substantially all assets). Verdana's proposed 1.0x non-participating liquidation preference would guarantee a return of only the $60,000,000 investment amount — a $30,000,000 difference in downside protection.
Structural Consistency. All existing preferred stock series (Series A, Series B, and Series C) carry 1.0x non-participating liquidation preferences. Granting a 1.5x preference to Series D would create a structural inconsistency in the Company's capital structure and would give Pinnacle a disproportionate preference multiple relative to earlier investors who took on earlier-stage risk at lower valuations. This inconsistency is likely to face resistance not only from Verdana's management team but also from the existing preferred holders — Ridgeline Ventures, Northgate Growth Partners, and Brindoval Capital Group — who may object to the creation of a structurally senior preference for a later-stage investor.
Practical Significance. In a non-participating preference structure, the holder elects at the time of a liquidation event either (a) to receive the preference amount or (b) to convert to common stock and participate pro rata in the distribution. The preference acts as a "floor" return — it protects the investor in downside scenarios where the aggregate proceeds are insufficient to deliver a return in excess of the preference amount on an as-converted basis. The practical significance of the difference between 1.0x and 1.5x depends on the exit valuation:
• At exit valuations below $320,000,000 (Pinnacle's proposed post-money) or $380,000,000 (Verdana's proposed post-money), the higher preference provides meaningful additional downside protection.
• At exit valuations significantly above $500,000,000, the holder would almost certainly elect to convert to common and participate pro rata, rendering the preference multiple economically irrelevant.
• The "crossover point" — the exit valuation at which the holder is indifferent between taking the preference and converting — depends on the holder's ownership percentage and the total preference stack.
Recommendation. We recommend that Pinnacle consider accepting a 1.0x non-participating preference if Pinnacle achieves a favorable resolution on the valuation and anti-dilution issues. The $30,000,000 difference between 1.0x and 1.5x is material in isolation, but in the context of a high-growth SaaS company with 64% year-over-year ARR growth and a target exit well in excess of the post-money valuation, the preference multiple is unlikely to be the binding constraint on Pinnacle's returns. Alternatively, Pinnacle could propose a 1.25x non-participating preference as a compromise, which would yield a $75,000,000 preference amount — a midpoint between the two positions. This compromise has the advantage of being defensible to existing preferred holders as a modest premium for the largest single-round investment while not creating a dramatic structural imbalance.
D. Anti-Dilution (Full-Ratchet vs. Broad-Based Weighted Average)
The anti-dilution mechanism is a critical downside protection provision that adjusts the Series D conversion price (and thus the number of common shares issuable upon conversion) in the event the Company issues equity securities at a price below the Series D original issuance price (a "down round").
Full-Ratchet Anti-Dilution (Pinnacle's position): In a down-round scenario, the Series D conversion price is reduced to the price at which the new (lower-priced) securities are issued, regardless of the number of shares issued in the down round. This provides maximum protection to Pinnacle but can be highly dilutive to founders, existing preferred holders, and ESOP participants. For example, if the Company were to issue even a single share at $2.00 in a subsequent round, the Series D conversion price would be reduced from $3.25 (or $4.00, depending on the agreed price) to $2.00, effectively increasing Pinnacle's share count by approximately 62.5% (at the $3.25 price) or 100% (at the $4.00 price).
Broad-Based Weighted Average Anti-Dilution (Verdana's position): The conversion price is adjusted based on a formula that takes into account both the price and the number of shares issued in the down round relative to the Company's total capitalization. This mechanism results in a more moderate adjustment that is proportionate to the actual dilutive impact of the down-round issuance. The standard broad-based weighted average formula is:
CP2 = CP1 × (A + B) ÷ (A + C)
Where:
• CP2 = adjusted conversion price
• CP1 = original conversion price
• A = total shares outstanding immediately prior to the new issuance (on a fully diluted basis)
• B = aggregate consideration received in the new issuance ÷ CP1
• C = number of shares issued in the new issuance
Existing Precedent. All existing preferred stock series (Series A, Series B, and Series C) utilize broad-based weighted average anti-dilution. Insistence on full-ratchet for Series D would represent a departure from the established anti-dilution framework and is likely to provoke unified resistance from the existing investor group (Ridgeline, Northgate, and Brindoval), all of whom would bear disproportionate dilution in a down-round scenario under a full-ratchet mechanism.
Recommendation. We recommend that Pinnacle consider accepting broad-based weighted average anti-dilution as the baseline mechanism, consistent with the existing preferred series, but negotiate for one or both of the following enhanced protections:
(a) Time-Limited Full-Ratchet: A "carve-out" provision under which full-ratchet anti-dilution would apply if a down round occurs within 18 to 24 months of the closing of the Series D financing, with broad-based weighted average anti-dilution applying to any down round thereafter. This hybrid approach protects Pinnacle during the period of greatest uncertainty following the investment while reverting to the standard mechanism over time.
(b) Conditional Acceptance: Accept broad-based weighted average anti-dilution if paired with a favorable outcome on the valuation negotiation (i.e., a pre-money valuation closer to $260,000,000 than $320,000,000). A lower entry price inherently provides greater downside protection and reduces the likelihood and severity of a down-round adjustment.
E. Drag-Along Rights and Founder Veto
The drag-along provision is a governance mechanism designed to ensure that a sale or other exit transaction supported by the requisite stockholder vote can be consummated without the need for unanimous stockholder consent. The two Term Sheets present materially different structures for the drag-along provision.
Pinnacle's Proposal. Pinnacle proposes a drag-along provision that would require all stockholders to consent to a sale or IPO supported by holders of a majority of the then-outstanding preferred stock, voting as a single class. This is a relatively standard provision in venture capital transactions and ensures that the preferred stockholders — who collectively bear the greatest financial risk — have the ability to compel an exit if a majority determines that a sale is in the best interests of the stockholders.
Verdana's Counter-Proposal. Verdana proposes a drag-along provision with two significant modifications:
(a) Dual Trigger: The drag-along would be triggered only upon the approval of both (i) a majority of the preferred stock (voting as a single class) and (ii) a majority of the common stock (voting as a separate class). This effectively gives the founders (who hold 28,000,000 of the 28,000,000 shares of outstanding common stock, or 100% of the common) a veto over any drag-along sale.
(b) Enterprise Value Floor: The Verdana Counter-Term Sheet includes the founders' insistence on a minimum enterprise value floor of $500,000,000, below which no drag-along sale may be compelled regardless of the stockholder vote.
Analysis of the $500,000,000 Floor. The $500,000,000 enterprise value floor is approximately 1.56x the Pinnacle-proposed post-money valuation ($320,000,000) or 1.32x the Verdana-proposed post-money valuation ($380,000,000). This floor could prevent an exit in scenarios where a sale at an enterprise value between $350,000,000 and $499,000,000 would still deliver attractive returns to Pinnacle and the other preferred stockholders. For illustrative purposes:
• At a $400,000,000 enterprise value, Pinnacle's 1.0x preference return would be $60,000,000 (1.0x MOIC). Alternatively, if Pinnacle converted to common and participated pro rata at 18.75% ownership (Pinnacle's proposed level), the return would be approximately $75,000,000 (1.25x MOIC). Under either scenario, Pinnacle would receive a positive return, but the $500,000,000 floor would prevent the drag-along from being exercised at this valuation.
• At a $450,000,000 enterprise value with 18.75% ownership, Pinnacle's pro rata return on an as-converted basis would be approximately $84,375,000 (1.41x MOIC), yet the drag-along could still not be triggered.
Existing Investor Dynamics. The Verdana Counter-Term Sheet indicates that Ridgeline Ventures and Brindoval Capital Group support the founders' position on the enterprise value threshold, while Northgate Growth Partners sides with Pinnacle in opposing the floor. This dynamic suggests that any negotiation on the drag-along structure will require engagement not only with the founders and the Company but also with the existing investor group.
Recommendation. The $500,000,000 enterprise value floor is problematic if it blocks liquidity in realistic exit scenarios. We recommend that Pinnacle propose one of the following alternatives:
(a) Reduced Floor: A compromise enterprise value floor in the range of $400,000,000 (approximately 1.25x the Pinnacle-proposed post-money, or approximately 1.05x the Verdana-proposed post-money), which would still provide meaningful protection to the founders against a "fire sale" while preserving Pinnacle's ability to compel an exit at a reasonable premium to the investment valuation.
(b) Post-Money Floor: Set the enterprise value floor at the post-money valuation of the round (i.e., $320,000,000 at Pinnacle's proposed valuation or $380,000,000 at Verdana's proposed valuation), ensuring that no drag-along sale occurs at a value below the implied worth of the Company at the time of Pinnacle's investment.
(c) Structural Alternative: Eliminate the enterprise value floor entirely but restructure the drag-along trigger to require approval of both (i) a majority of the preferred stock (voting as a single class) and (ii) a majority of the Board of Directors (including Pinnacle's designee), rather than requiring a separate common stockholder vote. This approach addresses Pinnacle's concern about exit flexibility while giving the founders Board-level (rather than stockholder-level) input into the exit decision.
F. Protective Provisions — Debt and Budget Consent Rights
The Term Sheets are substantively agreed on the majority of the protective provisions (items (c) through (i) in the Pinnacle Term Sheet), but diverge on two specific consent rights:
Debt Consent Threshold. Pinnacle proposes that the issuance of new debt exceeding $5,000,000 require Series D holder consent. Verdana proposes a threshold of $15,000,000. Given that Verdana already has an existing $10,000,000 revolving credit facility with Pacific Summit Bank, of which $6,200,000 was drawn as of March 31, 2022, a $5,000,000 threshold would effectively require Pinnacle's consent for any significant new debt incurrence — including an increase in the existing credit facility or any new term loan. Verdana's $15,000,000 threshold would permit the Company to incur up to $15,000,000 in new debt without investor consent, which could effectively double the Company's total indebtedness without Pinnacle's knowledge or approval.
Budget Deviation Consent. Pinnacle proposes that any annual budget deviating more than 15% from the board-approved operating plan require Series D holder consent. Verdana proposes the complete deletion of this provision, arguing that operational flexibility requires board-level but not investor-veto-level oversight of budgetary decisions. Verdana's position is that the Board already has fiduciary oversight over the budget and that a separate investor consent right is duplicative and operationally burdensome.
Recommendation. We recommend the following compromise positions:
(a) Debt Consent: Propose a $10,000,000 threshold as a compromise. This level is consistent with the size of the Company's existing credit facility and would require Pinnacle's consent only for material new debt issuances that could significantly alter the Company's capital structure or risk profile.
(b) Budget Deviation: Retain the budget deviation consent right but increase the threshold from 15% to 20%, or limit the scope of the consent right to capital expenditure budgets only (excluding operating expense budgets). This approach preserves Pinnacle's ability to monitor material deviations from the Company's financial plan while addressing Verdana's concern about day-to-day operational flexibility.
G. Redemption Rights
Pinnacle's proposed redemption right would be exercisable by Pinnacle at any time after five (5) years from the closing, at a redemption price equal to the greater of (a) the original purchase price per share plus any accrued but unpaid dividends, or (b) the fair market value per share. This provision gives Pinnacle a contractual exit mechanism in the event that no IPO, merger, or other liquidity event has occurred within five years of the investment.
Verdana has rejected redemption rights entirely. The Verdana Counter-Term Sheet notes that no prior series of preferred stock includes redemption rights and argues that mandatory redemption obligations could create balance-sheet liabilities and destabilize the Company's financial position. This position is consistent with founder/company-friendly norms in venture capital transactions, where redemption rights are increasingly disfavored — particularly by companies that are pre-profitability and lack the cash generation capacity to fund a mandatory redemption at scale.
Practical Considerations. From a practical standpoint, redemption rights are rarely exercised in venture capital transactions. The logistics of requiring a company to redeem $60,000,000 or more of preferred stock — potentially at fair market value — are complex and could force the Company into a sale or financing that is not in the best interests of all stockholders. However, redemption rights serve an important function as a negotiation lever and as a mechanism that incentivizes the Company and its management to pursue a liquidity event within a reasonable time frame.
Recommendation. We recommend that Pinnacle keep the redemption right on the table as a tradeable concession. Specifically, Pinnacle could offer to withdraw the redemption right in exchange for meaningful concessions on valuation, anti-dilution, or the drag-along structure. If Pinnacle elects to retain the redemption right, consider proposing a "soft" redemption — i.e., a provision that triggers a process (such as engagement of a financial advisor to explore strategic alternatives) rather than an immediate cash redemption obligation — which may be more palatable to Verdana while still providing Pinnacle with leverage.
H. Other Minor Divergences
The following issues represent areas of divergence between the Term Sheets that are of lesser economic significance but should be addressed in the negotiation process:
Co-Sale Threshold (1% vs. 5%). Pinnacle's proposed 1% threshold for triggering co-sale (tag-along) rights on founder share transfers is aggressive and would capture relatively small transactions. Verdana's proposed 5% threshold is more permissive and would allow the founders to transfer up to approximately 1,400,000 shares (at the current 28,000,000 common share count) without triggering co-sale rights. We recommend proposing 2% as a compromise, which would balance Pinnacle's interest in maintaining oversight of founder liquidity against the founders' reasonable desire for personal financial flexibility.
Registration Rights (2 Demands vs. 1). Verdana proposes limiting the number of demand registrations from two to one and adding a minimum aggregate offering amount of $10,000,000. We recommend that Pinnacle maintain its position on two demand registrations, which is standard for an institutional investor deploying $60,000,000 of capital. A single demand registration may be insufficient if the first registration is delayed or downsized due to market conditions. The $10,000,000 minimum offering amount is reasonable and can be accepted.
Annual Audit Delivery (90 Days vs. 120 Days). Verdana proposes extending the deadline for delivery of annual audited financial statements from 90 days to 120 days following the end of the fiscal year. This extension is not unusual for a private growth-stage company, particularly one engaged with a regional audit firm (Whitfield & Greer LLP, Portland). We recommend accepting 120 days if Verdana's auditor confirms that the timeline is driven by the firm's capacity constraints and not by concerns regarding the complexity of the Company's financial reporting.
Expense Reimbursement Cap ($100,000 vs. $50,000). Pinnacle proposes a cap of $100,000 on the reimbursement of legal fees and expenses, while Verdana proposes $50,000. Based on current C&H billing rates and the expected scope of work for this transaction — which will include not only the negotiation and drafting of definitive transaction documents but also comprehensive legal due diligence, review of the Company's intellectual property portfolio, commercial contracts, employment agreements, and regulatory compliance — we anticipate that Pinnacle's actual reimbursable legal costs will exceed $50,000 but may not reach $100,000. We recommend proposing $75,000 as a compromise, which reflects a realistic estimate of the likely reimbursable costs.
I. Pacific Summit Bank Lender Consent
The Verdana Counter-Term Sheet disputes the need for Pacific Summit Bank consent as a closing condition for the proposed transaction. Verdana's management team and its counsel, Langford Price & Associates LLP, have asserted that the terms of the existing $10,000,000 revolving credit facility may not require lender consent for the issuance of new preferred equity.
However, based on our preliminary review of the term sheet descriptions of the Credit Facility provided in the data room summary materials, we believe there is a meaningful possibility that the negative covenants contained in the Credit Facility — and in particular the covenants restricting the creation of new senior or pari passu equity interests and the incurrence of obligations that could affect the lender's collateral priority — may be triggered by the issuance of Series D Preferred Stock. The issuance of preferred equity with a liquidation preference that is senior to common stock could implicate change-of-control, equity issuance, or lien-related covenants.
We have not yet had access to the full Credit Facility documentation, including the credit agreement, security agreement, and any amendments or waivers. A detailed review of these documents is essential to determine whether lender consent is, in fact, required.
Recommendation. We strongly recommend that Pinnacle retain the Pacific Summit Bank lender consent as a condition to closing until comprehensive diligence on the Credit Facility documents has been completed. This issue should not be conceded at the term sheet stage, as a failure to obtain required lender consent could constitute an event of default under the Credit Facility, trigger acceleration of outstanding borrowings, and create material financial risk for the Company immediately following closing. Upon access to the full data room, C&H will prioritize review of the Credit Facility (and specifically the negative covenants set forth in Section 9.1 thereof, as referenced in the term sheet summary) and will advise Pinnacle promptly on whether consent is required.
V. Summary of Open Issues and Priority Ranking
The following table summarizes all material open issues between the Term Sheets, ranked by priority and materiality, together with a brief description of the nature and magnitude of each divergence.
We recommend addressing the Critical and High priority items (ranks 1 through 5) as a package in the initial principal-level negotiation. The Medium priority items (ranks 6 through 10 and 15) can be addressed in a second round of discussion or deferred to definitive document drafting. The Low priority items (ranks 11 through 14) are expected to be resolvable through standard negotiation and compromise.
VI. Recommended Next Steps
Based on our analysis, we recommend the following sequence of actions:
1. Principal-Level Commercial Discussion. Schedule a call or meeting between Marcus Trejo (Pinnacle), Nathan Callister (Hargrove Securities), Raj Anand (Verdana CEO), and Thomas Brightwell (Verdana CFO) to discuss the valuation gap and option pool treatment before formalizing a written counter-proposal. The purpose of this discussion is to gauge Verdana's flexibility on pricing and to identify potential trade-offs between the valuation, ownership, and economic protection terms (including liquidation preference and anti-dilution). We recommend that this call be scheduled during the week of May 9, 2022, subject to the parties' availability.
2. Exclusivity Agreement. Finalize and execute the exclusivity agreement. Verdana's proposed 60-day exclusivity period, structured as a standalone exclusivity agreement (rather than embedded in the term sheet), appears acceptable and is consistent with market practice for growth equity transactions of this size. We recommend targeting execution of the exclusivity agreement by the week of May 9, 2022, concurrently with or immediately following the principal-level commercial discussion.
3. Commencement of Diligence. Upon execution of the exclusivity agreement, Calderwood & Harkness LLP will commence comprehensive legal, financial, and commercial due diligence on Verdana. C&H will prepare and transmit a detailed diligence request list to Langford Price & Associates LLP within five (5) business days of the execution of the exclusivity agreement. Priority diligence areas will include: (a) corporate organizational documents and capitalization records; (b) material commercial contracts; (c) intellectual property portfolio and freedom-to-operate analysis; (d) employment and benefits matters; (e) regulatory compliance; (f) pending or threatened litigation; (g) tax matters; and (h) the Pacific Summit Bank credit facility documentation.
4. Defer Definitive Document Drafting. We recommend deferring detailed drafting of the definitive transaction documents (including the Stock Purchase Agreement, Amended and Restated Certificate of Incorporation, Amended and Restated Investors' Rights Agreement, Amended and Restated Voting Agreement, and Right of First Refusal and Co-Sale Agreement) until the parties have narrowed the valuation and economic-term gaps through the principal-level commercial discussion. This approach will avoid the incurrence of legal fees on provisions that may change materially as a result of the ongoing negotiations.
5. Capitalization Table and Waterfall Analysis. Calderwood & Harkness LLP will prepare a separate capitalization table analysis and liquidation waterfall model under multiple valuation scenarios ($260,000,000, $290,000,000, and $320,000,000 pre-money), with and without the proposed ESOP expansion, to support Pinnacle's negotiation position. This analysis will model Pinnacle's returns at various exit enterprise values and will illustrate the relative impact of the liquidation preference multiple (1.0x vs. 1.25x vs. 1.5x) and anti-dilution mechanism (full-ratchet vs. broad-based weighted average) under downside scenarios. We expect to deliver this analysis by May 10, 2022.
6. Pacific Summit Bank Credit Facility Review. Calderwood & Harkness LLP will prioritize the review of the Pacific Summit Bank credit facility documents promptly upon access to the data room. As discussed in Section IV.I, a determination of whether lender consent is required for the issuance of Series D Preferred Stock is essential before this closing condition can be resolved. We will provide a separate memorandum on this issue upon completion of our review.
VII. Appendices
Appendix A: Side-by-Side Term Comparison Table (Full)
The complete side-by-side comparison table set forth in Section III above is reproduced below for ease of reference. In the event this memorandum is printed, this Appendix may be printed in landscape format for improved readability.
Appendix B: Ownership and Dilution Sensitivity Analysis (Summary)
The following table presents Pinnacle's post-close ownership under four illustrative scenarios, varying the pre-money valuation and option pool treatment. A detailed liquidation waterfall analysis under each scenario will be prepared separately and delivered to the deal team by May 10, 2022.
Notes:
• Scenario 1 reflects Pinnacle's proposed terms and represents Pinnacle's target ownership of approximately 18.75%.
• Scenario 2 reflects Verdana's proposed pre-money valuation without the ESOP expansion and yields a Pinnacle ownership of 15.79%.
• Scenario 3 reflects Verdana's proposed pre-money valuation with the proposed 5,000,000 share ESOP expansion, reducing Pinnacle's ownership to 15.00% — a decrease of 375 basis points from Pinnacle's target and 79 basis points from Scenario 2.
• Scenario 4 illustrates a potential compromise at a $290,000,000 pre-money valuation with no ESOP expansion, yielding Pinnacle ownership of 17.14% — 161 basis points below Pinnacle's target but 214 basis points above Verdana's Scenario 3 position.
A detailed waterfall analysis modeling Pinnacle's return at exit enterprise values of $250,000,000, $320,000,000, $380,000,000, $500,000,000, $750,000,000, and $1,000,000,000 — under each of the four scenarios above and at 1.0x, 1.25x, and 1.5x liquidation preferences — will follow in a separate workbook.
Appendix C: Existing Capitalization Table (Pre-Investment)
The following table sets forth Verdana Software, Inc.'s existing capitalization on a fully diluted, as-converted basis, prior to the proposed Series D investment. All information is based on representations made by the Company and its counsel and is subject to verification during diligence.
Key Terms of Existing Preferred Stock:
• Liquidation Preference: All existing series (A, B, and C) carry a 1.0x non-participating liquidation preference, with pari passu treatment among the three series. The aggregate liquidation preference stack is $77,600,000 (Series A: $9,600,000 + Series B: $32,000,000 + Series C: $36,000,000).
• Anti-Dilution: All existing series utilize broad-based weighted average anti-dilution protection. No existing series has full-ratchet anti-dilution.
• Conversion: Each share of preferred stock is convertible into one share of common stock at the election of the holder, subject to adjustment for anti-dilution and stock splits. All preferred stock converts automatically upon the closing of a qualified IPO (minimum $50,000,000 in gross proceeds at a price per share of at least 3x the applicable original issue price, based on our understanding of the existing Certificate of Incorporation).
• Dividends: Existing preferred stock is entitled to dividends when and if declared by the Board, in preference to common stock. We understand that no dividends have been declared or paid to date.
• Redemption: No existing series of preferred stock includes redemption rights.
• Voting: Each share of preferred stock votes on an as-converted basis with the common stock on all matters submitted to a stockholder vote, except as required by law or the Certificate of Incorporation.
•
This memorandum has been prepared for the exclusive use of the addressees identified above and is intended to facilitate the evaluation and negotiation of the proposed transaction. The analysis and recommendations set forth herein are based on our review of the Pinnacle Term Sheet and the Verdana Counter-Term Sheet and are subject to revision as additional information becomes available through the diligence process. This memorandum does not constitute legal advice and should not be relied upon by any person or entity other than the addressees.
We are available to discuss the contents of this memorandum at your convenience.
CALDERWOOD & HARKNESS LLP
By: ________
Andrew Fitzpatrick Lead Associate, Mergers & Acquisitions
By: ________
Naomi Petersen Working Associate, Mergers & Acquisitions
PRIVILEGED & CONFIDENTIAL — ATTORNEY WORK PRODUCT Calderwood & Harkness LLP | Matter No. 1002-00004 | Client No. PIN-0042 This document is protected by the attorney-client privilege and the work product doctrine. Unauthorized distribution is prohibited.
Metric | Value | Notes
Annual Recurring Revenue (ARR), Q1 2022 | $47,300,000 | Up from $28,900,000 in Q1 2021
Year-over-Year ARR Growth | ~63.7% | Q1 2022 vs. Q1 2021
Net Revenue Retention (NRR) | 128% | Indicates strong upsell/expansion revenue
Gross Margin | 74.2% | Consistent with enterprise SaaS benchmarks
EBITDA (TTM as of March 2022) | –$11,600,000 | Company remains in cash-burn phase
Cash on Balance Sheet (March 31, 2022) | $22,400,000 | Unaudited management figure
Employees | ~310 | Full-time equivalent headcount
Customers | ~185 | Enterprise accounts
Stockholder / Class | Shares | % Ownership (Fully Diluted) | Investment Amount | Price Per Share
Founders (Raj Anand & Lena Kovac) — Common Stock | 28,000,000 | 35.0% | N/A | N/A
Series A Preferred (Ridgeline Ventures Fund III LP, 2018) | 12,000,000 | 15.0% | $9,600,000 | $0.80
Series B Preferred (Northgate Growth Partners Fund II LP, 2019) | 16,000,000 | 20.0% | $32,000,000 | $2.00
Series C Preferred (Brindoval Capital Group LLC, 2021) | 12,000,000 | 15.0% | $36,000,000 | $3.00
ESOP (issued and unissued) | 12,000,000 | 15.0% | N/A | N/A
Total Fully Diluted | 80,000,000 | 100.0% | $77,600,000
Date | Event
April 19, 2022 | Matter opened; Pinnacle Capital Management LLC engages Calderwood & Harkness LLP as transaction counsel
April 22, 2022 | Pinnacle delivers non-binding term sheet (the "Pinnacle Term Sheet") to Verdana
May 3, 2022 | Verdana delivers counter-term sheet (the "Verdana Counter-Term Sheet") to Pinnacle via Hargrove Securities LLC
May 5, 2022 | Date of this memorandum
TBD (target: week of May 9, 2022) | Parties negotiating toward execution of an exclusivity agreement
# | Term / Provision | Pinnacle Term Sheet (April 22, 2022) | Verdana Counter-Term Sheet (May 3, 2022) | Status
1 | Investment Amount | $60,000,000 | $60,000,000 | Agreed
2 | Security | Series D Preferred Stock | Series D Preferred Stock | Agreed
3 | Pre-Money Valuation | $260,000,000 | $320,000,000 | Material Divergence — $60M gap
4 | Price Per Share | $3.25/share ($260,000,000 ÷ 80,000,000 pre-existing fully diluted shares) | $4.00/share ($320,000,000 ÷ 80,000,000 pre-existing fully diluted shares) | Material Divergence (derivative of valuation)
5 | Shares Issued to Pinnacle | 18,461,538 shares ($60,000,000 ÷ $3.25/share) | 15,000,000 shares ($60,000,000 ÷ $4.00/share) | Material Divergence
6 | Post-Money Valuation | $320,000,000 ($260M + $60M) | $380,000,000 ($320M + $60M) | Material Divergence
7 | Pinnacle's Post-Close Ownership (Fully Diluted) | 18.75% (18,461,538 ÷ 98,461,538 total shares) | 15.79% without ESOP expansion (15,000,000 ÷ 95,000,000); 15.00% with proposed ESOP expansion (15,000,000 ÷ 100,000,000) | Material Divergence
8 | Option Pool / ESOP Expansion | No pre-close expansion; existing 12,000,000 ESOP shares included in the 80,000,000 pre-money fully diluted count | Proposes expanding ESOP by 5,000,000 shares (from 12,000,000 to 17,000,000 shares) pre-close; pricing applies $320M pre-money against original 80,000,000 share count; post-money fully diluted = 100,000,000 shares | Material Divergence — Verdana effectively seeks to have the option pool increase borne entirely by the incoming investor rather than existing holders
9 | Liquidation Preference | 1.5x non-participating ($60M × 1.5 = $90,000,000 senior return before common participates) | 1.0x non-participating ($60M × 1.0 = $60,000,000 senior return), consistent with Series A, B, and C | Material Divergence
10 | Anti-Dilution Protection | Full-ratchet anti-dilution | Broad-based weighted average anti-dilution (consistent with Series A, B, and C) | Material Divergence
11 | Dividends | 8% cumulative, non-compounding, accruing from issuance, payable when and if declared ($4,800,000 per year on $60,000,000) | 8% cumulative, non-compounding, accruing from issuance, payable when and if declared | Agreed
12 | Board Composition (Post-Close) | 7 members: 2 Founders, 1 Ridgeline designee, 1 Northgate designee, 1 Brindoval designee, 1 Pinnacle designee (Marcus Trejo or designee), 1 independent director mutually agreed | 7 members: 2 Founders, 1 existing investor designee (rotating or selected by majority of preferred), 1 Pinnacle designee, 1 CEO (ex officio, non-voting), 2 independent directors | Divergence — Verdana consolidates three existing investor seats into one, adds second independent director, and includes non-voting CEO seat; likely to face resistance from Ridgeline, Northgate, and/or Brindoval
13 | Protective Provisions / Consent Rights | Consent rights over: (a) new debt > $5M; (b) annual budgets deviating > 15% from board-approved plan; (c) issuance of equity senior to or pari passu with Series D; (d) amendments to Certificate of Incorporation adversely affecting Series D; (e) any acquisition, merger, or sale of substantially all assets; (f) changes to authorized share capital; (g) declaration or payment of dividends on junior stock; (h) redemption or repurchase of equity (other than from departing service providers); (i) increase or decrease in Board size | Accepts items (c)–(i) in principle (subject to drafting); objects to (a) debt consent at $5M threshold — proposes $15M instead; objects to (b) budget deviation consent — proposes deletion entirely | Divergence on debt consent threshold ($5M vs. $15M) and budget deviation consent (included vs. excluded)
14 | Drag-Along Rights | All stockholders must consent to a sale or IPO supported by holders of a majority of the then-outstanding preferred stock (voting as a single class) | Drag-along triggered only by approval of (a) a majority of the preferred stock (voting as a single class) AND (b) a majority of the common stock (voting as a separate class); founders insist on minimum enterprise value floor of $500,000,000 below which no drag-along sale may be compelled | Material Divergence — founder veto and $500M EV floor are significant restrictions on exit flexibility
15 | Tag-Along / Co-Sale Rights | Tag-along right on any founder share transfer exceeding 1% of outstanding shares | Tag-along right on any founder share transfer exceeding 5% of outstanding shares | Minor Divergence — threshold percentage (1% vs. 5%)
16 | Right of First Refusal (ROFR) | Pro rata participation right on all future equity issuances (subject to customary exclusions) | Pro rata participation right on future equity issuances (consistent with existing Investors' Rights Agreement) | Substantially Agreed — subject to alignment of exclusions
17 | Registration Rights | Demand registration after the earlier of IPO or 5 years from closing; 2 demand registrations; unlimited piggyback registrations; S-3 registration rights once eligible | Generally consistent; proposes limiting demand registrations to 1 (not 2) and adding a minimum aggregate offering amount of $10,000,000 for demand registrations | Minor Divergence
18 | Information Rights | Quarterly unaudited financials within 45 days of quarter-end; annual audited financials within 90 days of fiscal year-end; monthly management reports | Quarterly unaudited financials within 45 days; annual audited financials within 120 days (not 90); monthly management reports. Verdana's auditor is Whitfield & Greer LLP (Portland). | Minor Divergence — annual audit delivery timeline (90 vs. 120 days)
19 | Redemption Rights | Exercisable by Pinnacle at any time after 5 years from closing at the greater of (a) original purchase price plus accrued but unpaid dividends, or (b) fair market value | Rejects redemption rights entirely; notes no prior series includes redemption rights; argues mandatory redemption could create balance-sheet liabilities and destabilize the Company's financial position | Material Divergence
20 | Pay-to-Play | Mandatory pay-to-play for all preferred holders in future financing rounds; non-participating holders' preferred shares automatically convert to common stock | Rejects mandatory pay-to-play; proposes optional pay-to-play (loss of anti-dilution protection only, not conversion to common) | Divergence
21 | Management Rights Letter | Requires management rights letter granting Pinnacle consultation rights, access to facilities, books and records, sufficient to qualify the investment under the Investment Advisers Act and ERISA | Agrees in principle | Agreed in principle
22 | Indemnification of Board Designee | Requires indemnification agreement for Pinnacle's board designee (Marcus Trejo or designee), including advancement of expenses and D&O insurance | Agrees in

PRIVILEGED & CONFIDENTIAL — ATTORNEY WORK PRODUCT

MEMORANDUM

MATTER NO.: 1002-00004

CLIENT NO.: PIN-0042

CALDERWOOD & HARKNESS LLP

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