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

term-sheet-pinnacle-initial.docx DOCUMENT Finance & Banking

24 / 35 ← → ✕

NON-BINDING TERM SHEET

Series D Preferred Stock Financing

April 22, 2022

CONFIDENTIAL — FOR DISCUSSION PURPOSES ONLY

This term sheet summarizes the principal terms of a proposed Series D Preferred Stock financing of Verdana Software, Inc. This term sheet is for discussion purposes only and, except for the provisions entitled "Confidentiality," "Exclusivity," "Fees and Expenses," and "Governing Law," is not intended to be and does not constitute a legally binding obligation of any party. No binding obligation to consummate the proposed investment shall arise unless and until definitive transaction documents are executed and delivered by all parties. No party may rely on this term sheet as the basis for a contract by estoppel or otherwise.

1. Issuer

Verdana Software, Inc., a Delaware C-corporation (the "Company").

Headquarters: 1175 NW Couch Street, Suite 800, Portland, OR 97209

Registered Agent: Cascade Systems, 1209 Orange Street, Wilmington, DE 19801

Delaware Secretary of State File Number: 6274913

Employer Identification Number (EIN): 93-1485726

Founded: 2016

Key Management:

Business Description: The Company develops and markets an AI-powered supply chain optimization software-as-a-service platform branded as "Verdana SCX." Verdana SCX is sold to mid-market and enterprise manufacturers and logistics companies on multi-year subscription contracts. The platform leverages proprietary machine learning algorithms to optimize procurement, inventory management, demand forecasting, and distribution logistics for its customers.

2. Investor

Pinnacle Venture Fund II LP, a Delaware limited partnership (the "Investor" or "Pinnacle").

Address: 2400 Sand Hill Road, Suite 310, Menlo Park, CA 94025

General Partner: Pinnacle Capital Management LLC, a Delaware limited liability company

Employer Identification Number (EIN): 84-3921057

Key Deal Professional: Marcus Trejo, Partner, Head of Growth Equity

Fund Size: $850,000,000 (Fund II, 2020 vintage)

3. Type of Security

Series D Preferred Stock of the Company (the "Series D Preferred Stock"), to be authorized by the filing of an Amended and Restated Certificate of Incorporation with the Secretary of State of the State of Delaware prior to or concurrently with the closing of the financing (the "Closing").

4. Investment Amount

The aggregate investment amount shall be Sixty Million Dollars ($60,000,000) (the "Investment Amount"), to be provided by a single investor, Pinnacle Venture Fund II LP, in a single closing.

5. Pre-Money Valuation

The pre-money valuation of the Company shall be Two Hundred Sixty Million Dollars ($260,000,000) on a fully diluted basis, resulting in a post-money valuation of Three Hundred Twenty Million Dollars ($320,000,000) (i.e., $260,000,000 + $60,000,000 = $320,000,000).

For purposes of determining the pre-money valuation, the fully diluted shares outstanding of the Company immediately prior to the Closing shall be deemed to be 80,000,000 shares, which figure includes all outstanding shares of common stock, all outstanding shares of preferred stock on an as-converted-to-common-stock basis, and all shares issued, reserved, and available for future grant under the Company's existing Employee Stock Option Plan (the "ESOP").

The pre-money valuation expressly includes the existing ESOP pool of 12,000,000 shares. Any expansion of the option pool prior to or in connection with the Closing shall be included in the pre-money capitalization for purposes of calculating the Series D price per share and the Investor's post-closing ownership percentage.

6. Price Per Share

The purchase price per share of Series D Preferred Stock shall be $3.25 (the "Original Issue Price"), calculated as follows:

$260,000,000 (pre-money valuation) ÷ 80,000,000 (fully diluted shares) = $3.25 per share

7. Shares Issued

The number of shares of Series D Preferred Stock to be issued to Pinnacle at the Closing shall be approximately 18,461,538 shares, calculated as follows:

$60,000,000 (aggregate investment) ÷ $3.25 (price per share) = 18,461,538 shares (rounded to the nearest whole share)

8. Post-Closing Ownership

Following the Closing, Pinnacle's ownership of the Company shall be approximately 18.75% of the fully diluted capitalization, calculated as follows:

18,461,538 Series D shares ÷ 98,461,538 total fully diluted shares = approximately 18.75%

The total post-closing fully diluted share count of 98,461,538 shares consists of the 80,000,000 pre-closing fully diluted shares plus the 18,461,538 newly issued Series D shares.

9. Pre-Investment Capitalization Table (Reference)

The following table sets forth the Company's capitalization on a fully diluted basis immediately prior to the proposed investment. The Company represents that the information below is complete and accurate as of the date of this term sheet.

The Company shall deliver to Pinnacle prior to Closing a fully updated capitalization table verified by Company counsel, reflecting all outstanding securities, options, warrants, convertible instruments, and any other rights to acquire capital stock.

10. Option Pool

The Company's existing ESOP consists of 12,000,000 shares of common stock reserved for issuance to employees, directors, consultants, and advisors pursuant to the Company's equity incentive plan.

Any increase to the option pool prior to or in connection with the Closing shall be treated as included in the pre-money capitalization for purposes of calculating the Series D price per share and Pinnacle's post-closing ownership percentage. Pinnacle's position is that no ESOP expansion should dilute the Series D investor. In the event the Company proposes an increase to the option pool (for example, the addition of 5,000,000 shares), such additional shares must be reflected in the pre-money share count, thereby increasing the denominator used to calculate the pre-money price per share and correspondingly reducing the per-share price. The parties shall negotiate in good faith regarding any proposed ESOP expansion and its impact on the economics of this financing.

11. Dividends

Holders of Series D Preferred Stock shall be entitled to receive cumulative dividends at a rate of eight percent (8%) per annum on the Original Issue Price of $3.25 per share (equivalent to $0.26 per share per annum), accruing from the date of issuance of the Series D Preferred Stock. Dividends shall be non-compounding.

Dividends shall be payable when, as, and if declared by the Board of Directors of the Company. Based on the aggregate Investment Amount of $60,000,000, the annual dividend accrual on the Series D Preferred Stock shall be $4,800,000 per year.

Dividends on the Series D Preferred Stock shall be paid prior and in preference to any dividends declared or paid on the Company's common stock or any other class or series of capital stock that is junior to the Series D Preferred Stock. No dividends shall be declared or paid on common stock unless all accrued but unpaid dividends on the Series D Preferred Stock have been paid in full or declared and set aside for payment.

12. Liquidation Preference

In the event of any liquidation, dissolution, or winding up of the Company, whether voluntary or involuntary, or upon the occurrence of any Deemed Liquidation Event (as defined in Section 13 below), the holders of Series D Preferred Stock shall be entitled to receive, prior and in preference to any distribution or payment to holders of common stock or any class or series of preferred stock that is junior to the Series D Preferred Stock, an amount per share equal to one and one-half times (1.5x) the Original Issue Price per share, plus any declared but unpaid dividends thereon (the "Liquidation Preference").

The Liquidation Preference per share of Series D Preferred Stock shall be $4.875 (i.e., $3.25 × 1.5). Based on the aggregate Investment Amount and the number of Series D shares to be issued, the aggregate Liquidation Preference for all Series D shares shall be approximately $90,000,000 (i.e., $60,000,000 × 1.5), plus any declared but unpaid dividends.

Non-Participating. After payment of the Liquidation Preference in full, the holders of Series D Preferred Stock shall not be entitled to participate further in the distribution of remaining proceeds to holders of common stock or other equity securities. Notwithstanding the foregoing, each holder of Series D Preferred Stock may alternatively elect, at its sole option, to convert all of its shares of Series D Preferred Stock into shares of common stock immediately prior to the applicable liquidation event and participate pro rata in the distribution of all proceeds available to holders of common stock. Such election shall be made on a holder-by-holder basis and shall be irrevocable with respect to the applicable liquidation event.

Seniority. The Liquidation Preference of the Series D Preferred Stock shall be senior to the liquidation preferences of the Series A Preferred Stock, Series B Preferred Stock, and Series C Preferred Stock, such that the Series D Liquidation Preference shall be paid in full before any amounts are paid in respect of the liquidation preferences of such other series. Notwithstanding the foregoing, the Company may elect, subject to negotiation and agreement of the parties in the definitive documents, that the Series D Liquidation Preference shall rank pari passu with the Series C Preferred Stock liquidation preference; the relative priority of the Series D and Series C liquidation preferences shall be a matter for further negotiation between the parties in connection with the preparation of the definitive transaction documents.

13. Deemed Liquidation Events

Each of the following events shall be treated as a liquidation event for purposes of the Liquidation Preference (each, a "Deemed Liquidation Event"):

(a) A merger, consolidation, or other business combination of the Company with or into another entity in which the stockholders of the Company immediately prior to such transaction do not retain a majority of the voting power of the surviving or resulting entity immediately following such transaction;

(b) The sale, lease, exclusive license, or other disposition of all or substantially all of the assets of the Company in a single transaction or a series of related transactions; and

(c) Any other transaction or series of related transactions that results in a change of control of the Company, where "change of control" means the acquisition by any person or group of persons (other than existing stockholders) of beneficial ownership of securities representing more than fifty percent (50%) of the combined voting power of the Company's then-outstanding securities.

The treatment of any such Deemed Liquidation Event shall be set forth in the Amended and Restated Certificate of Incorporation and shall apply regardless of whether such event is characterized as a liquidation, dissolution, or winding up of the Company.

14. Conversion

Optional Conversion. Each share of Series D Preferred Stock shall be convertible at any time, at the option of the holder thereof, into shares of common stock of the Company at the then-applicable conversion rate. The initial conversion rate shall be one-to-one (1:1) (i.e., each share of Series D Preferred Stock shall initially be convertible into one share of common stock), subject to adjustment for anti-dilution provisions as described in Section 15 below, stock splits, stock dividends, combinations, recapitalizations, and other similar events.

Mandatory Conversion. All outstanding shares of Series D Preferred Stock shall automatically convert into shares of common stock at the then-applicable conversion rate upon the earliest to occur of the following events:

(a) The closing of a firm-commitment underwritten initial public offering of the Company's common stock pursuant to a registration statement filed under the Securities Act of 1933, as amended, resulting in aggregate gross proceeds to the Company of at least Seventy-Five Million Dollars ($75,000,000) and a per-share offering price of at least three times (3x) the Original Issue Price (i.e., at least $9.75 per share); or

(b) The written consent or affirmative vote of holders of a majority of the then-outstanding shares of Series D Preferred Stock (voting as a separate class).

Upon any conversion of the Series D Preferred Stock, all accrued but unpaid dividends on the converted shares shall either be paid in cash or, at the election of the Company, converted into additional shares of common stock at the then-applicable conversion rate, as shall be determined in the definitive documents.

15. Anti-Dilution Protection

Full-Ratchet Anti-Dilution Adjustment. If at any time after the Closing, the Company issues or sells (or is deemed to have issued or sold) additional shares of common stock or securities convertible into or exercisable for shares of common stock (collectively, "Additional Shares") at an effective per-share price that is lower than the then-applicable Series D conversion price, the Series D conversion price shall be adjusted downward to equal such lower effective per-share price. Such adjustment shall be on a full-ratchet basis, without regard to the number of Additional Shares issued or sold.

Exceptions. The following issuances shall not constitute issuances of Additional Shares and shall not trigger any anti-dilution adjustment:

(a) Shares of common stock issuable upon conversion of any outstanding shares of preferred stock (Series A, Series B, Series C, or Series D);

(b) Shares of common stock reserved for issuance and issuable pursuant to the ESOP, up to the then-approved pool size (including any increase approved by the Board of Directors with the consent of the Series D director);

(c) Shares of common stock or common stock equivalents issued in connection with bona fide equipment leasing transactions, bank borrowings, or strategic partnership transactions, in each case approved by the Board of Directors (including the affirmative vote of the director designated by the holders of Series D Preferred Stock); and

(d) Shares of common stock issued or issuable in connection with a stock split, stock dividend, combination, recapitalization, or similar transaction applicable to all holders of common stock on a pro rata basis.

16. Voting Rights

Each holder of Series D Preferred Stock shall be entitled to the number of votes equal to the number of shares of common stock into which such holder's shares of Series D Preferred Stock are then convertible, and shall vote together with holders of common stock as a single class on all matters submitted to a vote of the stockholders of the Company.

In addition to the foregoing, holders of Series D Preferred Stock shall be entitled to vote as a separate class on any matter that would alter, amend, or waive the rights, preferences, privileges, or restrictions of the Series D Preferred Stock, as more fully described in Section 17 below.

17. Protective Provisions (Series D Consent Rights)

The Company shall not, without the prior written consent of the holders of a majority of the then-outstanding shares of Series D Preferred Stock (for so long as Pinnacle holds at least fifty percent (50%) of the shares of Series D Preferred Stock originally issued to Pinnacle at the Closing), take any of the following actions, whether directly or indirectly, including through any subsidiary:

(a) Amend, alter, or repeal any provision of the Company's Certificate of Incorporation (including the Amended and Restated Certificate of Incorporation to be filed in connection with this financing) or Bylaws in a manner that adversely affects the rights, preferences, privileges, or powers of the Series D Preferred Stock;

(b) Authorize, create, or issue any equity security (including any class or series of preferred stock, any convertible note, warrant, or other security convertible into equity) that is senior to or pari passu with the Series D Preferred Stock with respect to dividends, liquidation preference, redemption, or voting rights;

(d) Declare or pay any dividend or distribution on, or redeem, repurchase, or otherwise acquire, any shares of the Company's capital stock, other than (i) cumulative dividends on the Series D Preferred Stock as described in Section 11, and (ii) repurchases of shares of common stock from employees, consultants, or directors of the Company upon termination of service at cost or at the lower of cost and fair market value pursuant to the terms of the ESOP or applicable stock purchase agreements;

(e) Incur, assume, or guarantee any indebtedness (including capital lease obligations) in excess of Five Million Dollars ($5,000,000) in the aggregate, excluding amounts drawn under the Company's existing revolving credit facility with Pacific Summit Bank, N.A. in an aggregate principal amount of up to Ten Million Dollars ($10,000,000);

(f) Adopt or materially modify the Company's annual operating budget, or permit actual expenditures to deviate more than fifteen percent (15%) from the board-approved annual operating plan, without prior consent of the holders of a majority of the Series D Preferred Stock;

(g) Consummate or agree to consummate any Deemed Liquidation Event, whether by merger, consolidation, asset sale, or otherwise;

(h) Increase the size of the Board of Directors of the Company beyond seven (7) members;

(i) Increase the number of shares reserved for issuance under the ESOP above 12,000,000 shares (or such other amount as may be subsequently approved by the Board of Directors, including the affirmative vote of the director designated by the holders of Series D Preferred Stock) without the prior written consent of the holders of a majority of the Series D Preferred Stock; and

(j) Enter into, amend, or approve any transaction, agreement, or arrangement between the Company and any founder, director, officer, or affiliate of the Company (or any immediate family member thereof) involving aggregate consideration or payments in excess of One Hundred Thousand Dollars ($100,000), including compensation arrangements, consulting agreements, loans, guarantees, and any other related-party transactions.

The foregoing protective provisions shall be set forth in the Amended and Restated Certificate of Incorporation and, to the extent applicable, in the Amended and Restated Investors' Rights Agreement.

18. Board of Directors

Following the Closing, the Board of Directors of the Company shall consist of seven (7) members, composed as follows:

(a) Two (2) directors designated by the Founders (initially Raj Anand and Lena Kovac);

(b) One (1) director designated by Ridgeline Ventures Fund III LP, as the holder of the Series A Preferred Stock (currently Priya Dasgupta);

(c) One (1) director designated by Northgate Growth Partners Fund II LP, as the holder of the Series B Preferred Stock (currently Elliott Margolis);

(d) One (1) director designated by Brindoval Capital Group LLC, as the holder of the Series C Preferred Stock (currently Diana Chen);

(e) One (1) director designated by Pinnacle Venture Fund II LP, as the holder of the Series D Preferred Stock (initially Marcus Trejo, or such other designee as Pinnacle may determine in its sole discretion); and

(f) One (1) independent director, who shall be an individual mutually agreed upon by the Founders and Pinnacle, who is not an employee, officer, or affiliate of the Company, any stockholder, or any of their respective affiliates.

The foregoing Board composition shall be set forth in the Amended and Restated Voting Agreement to be executed by all stockholders at or prior to the Closing.

Board Observation Rights. In the event that Pinnacle's designee is not serving as a member of the Board of Directors for any reason, Pinnacle shall have the right to designate one (1) non-voting observer to attend all meetings of the Board of Directors (including any committees thereof). Such observer shall receive all materials and notices provided to Board members at the same time and in the same manner, and shall be entitled to participate in discussions but shall not be entitled to vote. The Company may exclude the observer from any portion of a Board meeting to the extent the Board determines in good faith that such exclusion is necessary to preserve attorney-client privilege or to avoid a conflict of interest.

19. Information Rights

For so long as Pinnacle holds at least fifty percent (50%) of the shares of Series D Preferred Stock originally purchased by Pinnacle at the Closing, the Company shall deliver to Pinnacle the following information:

(a) Quarterly Financial Statements. Unaudited financial statements of the Company (including a balance sheet, income statement, and statement of cash flows), prepared in accordance with generally accepted accounting principles ("GAAP") consistently applied, within forty-five (45) days after the end of each fiscal quarter;

(b) Annual Audited Financial Statements. Annual audited financial statements of the Company (including a balance sheet, income statement, statement of cash flows, and statement of stockholders' equity), prepared in accordance with GAAP and audited by Whitfield & Greer LLP or another nationally or regionally recognized independent accounting firm reasonably acceptable to Pinnacle, within ninety (90) days after the end of each fiscal year;

(c) Monthly Management Reports. Monthly management reports, including key operating metrics (including without limitation annual recurring revenue ("ARR"), customer counts by segment, net dollar retention, average contract value, new bookings, churn, cash position, and monthly burn rate), within thirty (30) days after the end of each calendar month;

(d) Annual Operating Budget. The Company's annual operating budget and financial projections for the upcoming fiscal year, delivered to Pinnacle at least thirty (30) days prior to the start of each fiscal year; and

(e) Notice of Material Events. Prompt written notice of any material adverse event affecting the Company's business, financial condition, or operations, including without limitation (i) any pending or threatened litigation, arbitration, or governmental investigation involving potential liability in excess of $250,000, (ii) any material regulatory action or inquiry, (iii) any material breach or default under any agreement to which the Company is a party, (iv) the departure or termination of any executive officer, and (v) any event that would reasonably be expected to result in a material adverse change to the Company.

The information rights described above shall be set forth in the Amended and Restated Investors' Rights Agreement.

20. Registration Rights

The definitive transaction documents shall provide for the following registration rights in favor of Pinnacle and, as applicable, other holders of registrable securities:

Demand Registration. Pinnacle shall have the right, on up to two (2) occasions after the earlier of (i) the closing of the Company's initial public offering or (ii) five (5) years from the Closing date, to demand that the Company file a registration statement under the Securities Act of 1933, as amended (the "Securities Act"), on an appropriate form covering the resale of all or a portion of Pinnacle's registrable securities. The Company shall not be obligated to effect a demand registration if the anticipated aggregate offering price, net of underwriting discounts and commissions, is less than $15,000,000.

Piggyback Registration. Pinnacle shall have unlimited piggyback registration rights on any registration of the Company's securities for its own account or for the account of other stockholders (other than a registration on Form S-4, Form S-8, or any successor forms). Piggyback registration rights shall be subject to customary underwriter cutback provisions, provided that in no event shall Pinnacle's shares be cut back below twenty-five percent (25%) of the shares included in such registration.

S-3 Registration. At such time as the Company becomes eligible to use Form S-3 (or any successor form) under the Securities Act, Pinnacle shall have unlimited S-3 demand registration rights, subject to reasonable frequency limitations (no more than two (2) registrations in any twelve (12) month period) and a minimum aggregate offering amount of $5,000,000.

Registration Expenses. The Company shall bear all registration expenses incurred in connection with any demand, piggyback, or S-3 registration, including all filing fees, printing expenses, fees and disbursements of the Company's counsel, and accounting fees. Pinnacle shall be responsible for its own selling expenses, including underwriting discounts, selling commissions, and fees and disbursements of its own counsel.

Lock-Up. In connection with the Company's initial public offering, Pinnacle shall agree to a customary lock-up period of one hundred eighty (180) days following the effective date of the IPO registration statement, during which Pinnacle shall not sell, transfer, or otherwise dispose of any shares of the Company's securities, subject to customary exceptions and provided that all directors, officers, and holders of five percent (5%) or more of the Company's outstanding capital stock are subject to the same lock-up restrictions.

21. Right of First Refusal (Pro Rata Rights)

Pinnacle shall have a pro rata right of first refusal to participate in any future issuance of equity securities by the Company (each, a "New Issuance"), on the same terms and at the same price as such New Issuance, in an amount sufficient to maintain Pinnacle's percentage ownership of the Company's fully diluted capitalization immediately prior to such New Issuance.

The pro rata right shall not apply to issuances of securities (a) upon conversion of outstanding preferred stock, (b) pursuant to the ESOP, (c) in connection with a bona fide acquisition approved by the Board of Directors, (d) pursuant to equipment leasing, bank borrowing, or strategic partnership transactions approved by the Board, or (e) in connection with a firm-commitment underwritten public offering.

This right shall continue for so long as Pinnacle holds at least fifty percent (50%) of the shares of Series D Preferred Stock originally purchased by Pinnacle at the Closing.

22. Right of First Refusal and Co-Sale (Founder Transfers)

Right of First Refusal. In the event that any founder (including Raj Anand and Lena Kovac) proposes to transfer any shares of common stock of the Company to a third party, the Company shall have a right of first refusal to purchase such shares at the price and on the terms offered by the proposed transferee. To the extent the Company does not exercise its right of first refusal in full, the holders of preferred stock (including Pinnacle) shall have a secondary right to purchase such shares on a pro rata basis at the same price and on the same terms.

Co-Sale (Tag-Along) Right. In the event that any founder proposes to transfer shares of common stock representing more than one percent (1%) of the Company's outstanding shares to a third party, and neither the Company nor the preferred holders have exercised their right of first refusal in full, each holder of preferred stock (including Pinnacle) shall have the right to participate in such sale on a pro rata basis, selling a proportionate number of shares on the same terms and conditions as the transferring founder.

The right of first refusal and co-sale rights shall be set forth in the Amended and Restated Right of First Refusal and Co-Sale Agreement.

23. Drag-Along Rights

If the holders of a majority of the then-outstanding shares of preferred stock of the Company (Series A, Series B, Series C, and Series D, voting together as a single class on an as-converted-to-common-stock basis) approve a Sale of the Company (as defined in the definitive documents) or an initial public offering, then all stockholders of the Company (including the founders and all other holders of common stock) shall be required to:

(a) Vote in favor of and not oppose such transaction;

(b) Refrain from exercising any dissenters' rights, appraisal rights, or similar rights available under applicable law;

(c) Execute and deliver all agreements and instruments, and take all other actions, necessary or desirable to consummate such transaction on the terms approved by such majority; and

(d) Agree to the same representations, warranties, covenants, indemnification obligations, and escrow or holdback arrangements as the other selling stockholders (on a pro rata basis), subject to customary limitations.

No minimum enterprise value threshold or founder veto shall apply to the exercise of drag-along rights. The drag-along provisions shall be set forth in the Amended and Restated Voting Agreement.

24. Redemption Rights

At any time on or after the fifth (5th) anniversary of the Closing date, the holders of a majority of the then-outstanding shares of Series D Preferred Stock may elect to require the Company to redeem all (but not less than all) of the outstanding shares of Series D Preferred Stock at a redemption price per share equal to the Original Issue Price ($3.25 per share) plus all accrued but unpaid dividends thereon as of the date of redemption (the "Redemption Price").

The aggregate Redemption Price shall be paid by the Company in three (3) equal annual installments, with the first installment due and payable on the date of the redemption election and the second and third installments due on the first and second anniversaries thereof, respectively.

In the event the Company is unable to effect a redemption, in whole or in part, due to applicable legal restrictions under the Delaware General Corporation Law or insufficient legally available funds, the unpaid portion of the Redemption Price shall accrue interest at a rate of ten percent (10%) per annum (compounding annually) from the date such amount was due until paid in full. During any period in which any portion of the Redemption Price remains unpaid, the Company shall not declare or pay any dividends on, or redeem or repurchase any shares of, common stock or any class or series of capital stock that is junior to the Series D Preferred Stock.

25. Pay-to-Play

Mandatory Pay-to-Play. In the event the Company consummates any subsequent financing round involving the issuance of preferred stock (a "Qualified Financing"), each holder of preferred stock (including holders of Series A, Series B, Series C, and Series D Preferred Stock) shall be required to purchase its pro rata share of the securities offered in such Qualified Financing, determined based on such holder's percentage ownership of the Company's fully diluted capitalization immediately prior to such Qualified Financing.

Any holder of preferred stock that fails to purchase its full pro rata share of the securities offered in a Qualified Financing shall have all of its shares of preferred stock automatically converted into shares of common stock of the Company, effective immediately upon the closing of such Qualified Financing. Such conversion shall be irrevocable and the converted shares shall thereafter have only the rights, preferences, and privileges of common stock.

The pay-to-play provision shall be set forth in the Amended and Restated Investors' Rights Agreement or the Amended and Restated Certificate of Incorporation, as the parties may agree.

26. Management Rights Letter

Concurrently with the Closing, the Company shall deliver to Pinnacle a management rights letter in a form reasonably acceptable to Pinnacle, granting Pinnacle (and its authorized representatives) the following rights:

(a) Consultation and advice rights with respect to the Company's business operations, financial planning, and strategic direction;

(b) Reasonable access to the Company's facilities, books, records, and personnel, upon reasonable notice and during normal business hours; and

(c) Such other rights as may be necessary or appropriate to qualify Pinnacle's investment in the Company as a "venture capital investment" within the meaning of the regulations promulgated under the Investment Advisers Act of 1940, as amended, and applicable regulations of the U.S. Department of Labor under the Employee Retirement Income Security Act of 1974, as amended ("ERISA").

27. Indemnification

The Company shall, concurrently with or promptly following the Closing, enter into an indemnification agreement with Pinnacle's Board designee (and any subsequent designee), in a form reasonably acceptable to Pinnacle, providing for indemnification and advancement of expenses to the fullest extent permitted under the laws of the State of Delaware, including without limitation indemnification against all liabilities, judgments, penalties, fines, settlements, and expenses (including attorneys' fees) arising from such designee's service as a director of the Company.

In addition, the Company shall maintain directors' and officers' liability insurance in an amount not less than $10,000,000 per occurrence (or such greater amount as the Board may approve) with coverage terms and carriers reasonably acceptable to Pinnacle, and shall not reduce or cancel such coverage without the prior written consent of Pinnacle.

28. Conditions to Closing

The obligation of Pinnacle to consummate the investment contemplated by this term sheet shall be subject to the satisfaction or waiver of each of the following conditions:

(a) Due Diligence. Completion of legal, financial, technical, and business due diligence by Pinnacle and its advisors, with results satisfactory to Pinnacle in its sole discretion;

(b) Definitive Documents. Negotiation, execution, and delivery of mutually acceptable definitive transaction documents, including without limitation:

(i) Series D Preferred Stock Purchase Agreement;

(ii) Amended and Restated Certificate of Incorporation of the Company;

(iii) Amended and Restated Investors' Rights Agreement;

(iv) Amended and Restated Right of First Refusal and Co-Sale Agreement;

(v) Amended and Restated Voting Agreement;

(vi) Management Rights Letter;

(vii) Indemnification Agreement for Pinnacle's Board designee;

(viii) Disclosure Schedules to the Series D Preferred Stock Purchase Agreement; and

(ix) Such other customary documents and certificates as Pinnacle may reasonably request;

(i) Approval of the Company's Board of Directors;

(ii) Approval of the Company's stockholders to the extent required under the Delaware General Corporation Law or the Company's existing Certificate of Incorporation (including approval of the Amended and Restated Certificate of Incorporation);

(iii) Consent or waiver from Pacific Summit Bank, N.A. with respect to the Company's existing $10,000,000 revolving credit facility, to the extent the issuance of Series D Preferred Stock triggers any negative covenant, change of control provision, or consent requirement thereunder; and

(iv) FINRA compliance by Hargrove Securities LLC with respect to any required filing or clearance in connection with the placement of the Series D Preferred Stock, if applicable;

(d) No Material Adverse Change. No material adverse change in the business, assets, liabilities, financial condition, results of operations, or prospects of the Company shall have occurred between the date of this term sheet and the Closing;

(e) Legal Opinion. Pinnacle shall have received a legal opinion of the Company's counsel, Langford Price & Associates LLP, in a form reasonably satisfactory to Pinnacle and its counsel, addressing the due authorization and valid issuance of the Series D Preferred Stock, the corporate organization and good standing of the Company, and such other customary matters as Pinnacle may reasonably request; and

(f) Representations and Warranties. The representations and warranties of the Company contained in the definitive transaction documents shall be true and correct in all material respects as of the Closing date.

29. Exclusivity

Upon execution of a separate definitive exclusivity agreement (to be negotiated and executed by the parties), the Company shall agree to negotiate exclusively with Pinnacle for a period of sixty (60) days from the date of such exclusivity agreement (the "Exclusivity Period"), during which the Company shall not, directly or indirectly:

(a) Solicit, initiate, encourage, or facilitate any inquiry, proposal, or offer from any third party regarding any equity or debt financing, sale, merger, acquisition, recapitalization, or similar transaction;

(b) Enter into any term sheet, letter of intent, memorandum of understanding, or definitive agreement with any third party regarding any such transaction; or

The parties acknowledge that the exclusivity obligation described above shall become binding only upon the execution of the separate exclusivity agreement referenced herein and shall not be binding solely by virtue of the execution of this term sheet.

30. Confidentiality

This term sheet and all related discussions, negotiations, correspondence, and information exchanged between the parties (including, without limitation, all financial, technical, and business information of the Company disclosed to Pinnacle) shall be treated as strictly confidential and shall not be disclosed to any third party without the prior written consent of the other party, except that each party may disclose this term sheet and related information to its respective legal, financial, tax, and accounting advisors on a need-to-know basis, provided that such advisors are bound by obligations of confidentiality no less restrictive than those set forth herein.

This confidentiality provision shall be binding on the parties regardless of whether a definitive transaction is completed or the proposed investment is consummated. The obligations of confidentiality set forth in this Section 30 shall survive the expiration or termination of this term sheet for a period of two (2) years.

31. Fees and Expenses

Each party shall bear its own legal, accounting, and advisory fees and expenses incurred in connection with the proposed transaction and the negotiation and preparation of this term sheet and the definitive transaction documents.

Pinnacle's Legal Counsel:

Calderwood & Harkness LLP 101 Montgomery Street, Suite 3500 San Francisco, CA 94104

Attention: Harrison Wexford, Responsible Partner

Company's Legal Counsel:

Langford Price & Associates LLP 1000 SW Broadway, Suite 1600 Portland, OR 97205

Attention: Jonathan Hale, Lead Partner

Company's Financial Advisor:

Hargrove Securities LLC 600 Lexington Avenue, 22nd Floor New York, NY 10022

Attention: Nathan Callister, Managing Director

The Company has engaged Hargrove Securities LLC as its financial advisor and placement agent in connection with this financing. A placement fee equal to 1.5% of capital raised (estimated at $900,000 based on the $60,000,000 Investment Amount) shall be payable by the Company to Hargrove Securities LLC upon the Closing. The placement fee shall be the sole responsibility of the Company, and Pinnacle shall have no obligation to pay any portion of such fee or any other advisory or brokerage fee in connection with this transaction.

32. Non-Binding Nature

Except for the provisions of Section 29 (Exclusivity) (solely to the extent a separate exclusivity agreement is executed), Section 30 (Confidentiality), Section 31 (Fees and Expenses), and Section 33 (Governing Law), this term sheet is non-binding and does not constitute a commitment, obligation, or agreement to invest or lend by Pinnacle, or to issue or sell securities by the Company.

No party shall have any liability to the other party with respect to the proposed transaction unless and until definitive transaction documents are executed and delivered by all parties. A binding obligation to consummate the proposed investment shall arise only upon the execution and delivery of definitive transaction documents by all parties thereto.

33. Governing Law

This term sheet and the rights and obligations of the parties hereunder, and the definitive transaction documents to be entered into in connection with the proposed investment, shall be governed by and construed in accordance with the laws of the State of Delaware, without regard to principles of conflict of laws that would result in the application of the laws of any other jurisdiction.

34. Expiration

This term sheet shall expire automatically if not accepted by Verdana Software, Inc. on or before May 6, 2022 (fourteen (14) calendar days from the date hereof). If this term sheet is not accepted by such date, it shall be null and void and neither party shall have any further obligation to the other with respect to the subject matter hereof, except that the confidentiality obligations set forth in Section 30 shall survive such expiration.

[Signature Page Follows]

IN WITNESS WHEREOF, the undersigned have executed this Non-Binding Term Sheet as of the date first set forth above.

INVESTOR:

PINNACLE VENTURE FUND II LP

By: Pinnacle Capital Management LLC, its General Partner

By: ________

NON-BINDING TERM SHEET
Series D Preferred Stock Financing
April 22, 2022
CONFIDENTIAL — FOR DISCUSSION PURPOSES ONLY
This term sheet summarizes the principal terms of a proposed Series D Preferred Stock financing of Verdana Software, Inc. This term sheet is for discussion purposes only and, except for the provisions entitled "Confidentiality," "Exclusivity," "Fees and Expenses," and "Governing Law," is not intended to be and does not constitute a legally binding obligation of any party. No binding obligation to consummate the proposed investment shall arise unless and until definitive transaction documents are executed and delivered by all parties. No party may rely on this term sheet as the basis for a contract by estoppel or otherwise.
1. Issuer
Verdana Software, Inc., a Delaware C-corporation (the "Company").
Headquarters: 1175 NW Couch Street, Suite 800, Portland, OR 97209
Registered Agent: Cascade Systems, 1209 Orange Street, Wilmington, DE 19801
Delaware Secretary of State File Number: 6274913
Employer Identification Number (EIN): 93-1485726
Founded: 2016
Key Management:
Business Description: The Company develops and markets an AI-powered supply chain optimization software-as-a-service platform branded as "Verdana SCX." Verdana SCX is sold to mid-market and enterprise manufacturers and logistics companies on multi-year subscription contracts. The platform leverages proprietary machine learning algorithms to optimize procurement, inventory management, demand forecasting, and distribution logistics for its customers.
2. Investor
Pinnacle Venture Fund II LP, a Delaware limited partnership (the "Investor" or "Pinnacle").
Address: 2400 Sand Hill Road, Suite 310, Menlo Park, CA 94025
General Partner: Pinnacle Capital Management LLC, a Delaware limited liability company
Employer Identification Number (EIN): 84-3921057
Key Deal Professional: Marcus Trejo, Partner, Head of Growth Equity
Fund Size: $850,000,000 (Fund II, 2020 vintage)
3. Type of Security
Series D Preferred Stock of the Company (the "Series D Preferred Stock"), to be authorized by the filing of an Amended and Restated Certificate of Incorporation with the Secretary of State of the State of Delaware prior to or concurrently with the closing of the financing (the "Closing").
4. Investment Amount
The aggregate investment amount shall be Sixty Million Dollars ($60,000,000) (the "Investment Amount"), to be provided by a single investor, Pinnacle Venture Fund II LP, in a single closing.
5. Pre-Money Valuation
The pre-money valuation of the Company shall be Two Hundred Sixty Million Dollars ($260,000,000) on a fully diluted basis, resulting in a post-money valuation of Three Hundred Twenty Million Dollars ($320,000,000) (i.e., $260,000,000 + $60,000,000 = $320,000,000).
For purposes of determining the pre-money valuation, the fully diluted shares outstanding of the Company immediately prior to the Closing shall be deemed to be 80,000,000 shares, which figure includes all outstanding shares of common stock, all outstanding shares of preferred stock on an as-converted-to-common-stock basis, and all shares issued, reserved, and available for future grant under the Company's existing Employee Stock Option Plan (the "ESOP").
The pre-money valuation expressly includes the existing ESOP pool of 12,000,000 shares. Any expansion of the option pool prior to or in connection with the Closing shall be included in the pre-money capitalization for purposes of calculating the Series D price per share and the Investor's post-closing ownership percentage.
6. Price Per Share
The purchase price per share of Series D Preferred Stock shall be $3.25 (the "Original Issue Price"), calculated as follows:
$260,000,000 (pre-money valuation) ÷ 80,000,000 (fully diluted shares) = $3.25 per share
7. Shares Issued
The number of shares of Series D Preferred Stock to be issued to Pinnacle at the Closing shall be approximately 18,461,538 shares, calculated as follows:
$60,000,000 (aggregate investment) ÷ $3.25 (price per share) = 18,461,538 shares (rounded to the nearest whole share)
8. Post-Closing Ownership
Following the Closing, Pinnacle's ownership of the Company shall be approximately 18.75% of the fully diluted capitalization, calculated as follows:
18,461,538 Series D shares ÷ 98,461,538 total fully diluted shares = approximately 18.75%
The total post-closing fully diluted share count of 98,461,538 shares consists of the 80,000,000 pre-closing fully diluted shares plus the 18,461,538 newly issued Series D shares.
9. Pre-Investment Capitalization Table (Reference)
The following table sets forth the Company's capitalization on a fully diluted basis immediately prior to the proposed investment. The Company represents that the information below is complete and accurate as of the date of this term sheet.
The Company shall deliver to Pinnacle prior to Closing a fully updated capitalization table verified by Company counsel, reflecting all outstanding securities, options, warrants, convertible instruments, and any other rights to acquire capital stock.
10. Option Pool
The Company's existing ESOP consists of 12,000,000 shares of common stock reserved for issuance to employees, directors, consultants, and advisors pursuant to the Company's equity incentive plan.
Any increase to the option pool prior to or in connection with the Closing shall be treated as included in the pre-money capitalization for purposes of calculating the Series D price per share and Pinnacle's post-closing ownership percentage. Pinnacle's position is that no ESOP expansion should dilute the Series D investor. In the event the Company proposes an increase to the option pool (for example, the addition of 5,000,000 shares), such additional shares must be reflected in the pre-money share count, thereby increasing the denominator used to calculate the pre-money price per share and correspondingly reducing the per-share price. The parties shall negotiate in good faith regarding any proposed ESOP expansion and its impact on the economics of this financing.
11. Dividends
Holders of Series D Preferred Stock shall be entitled to receive cumulative dividends at a rate of eight percent (8%) per annum on the Original Issue Price of $3.25 per share (equivalent to $0.26 per share per annum), accruing from the date of issuance of the Series D Preferred Stock. Dividends shall be non-compounding.
Dividends shall be payable when, as, and if declared by the Board of Directors of the Company. Based on the aggregate Investment Amount of $60,000,000, the annual dividend accrual on the Series D Preferred Stock shall be $4,800,000 per year.
Dividends on the Series D Preferred Stock shall be paid prior and in preference to any dividends declared or paid on the Company's common stock or any other class or series of capital stock that is junior to the Series D Preferred Stock. No dividends shall be declared or paid on common stock unless all accrued but unpaid dividends on the Series D Preferred Stock have been paid in full or declared and set aside for payment.
12. Liquidation Preference
In the event of any liquidation, dissolution, or winding up of the Company, whether voluntary or involuntary, or upon the occurrence of any Deemed Liquidation Event (as defined in Section 13 below), the holders of Series D Preferred Stock shall be entitled to receive, prior and in preference to any distribution or payment to holders of common stock or any class or series of preferred stock that is junior to the Series D Preferred Stock, an amount per share equal to one and one-half times (1.5x) the Original Issue Price per share, plus any declared but unpaid dividends thereon (the "Liquidation Preference").
The Liquidation Preference per share of Series D Preferred Stock shall be $4.875 (i.e., $3.25 × 1.5). Based on the aggregate Investment Amount and the number of Series D shares to be issued, the aggregate Liquidation Preference for all Series D shares shall be approximately $90,000,000 (i.e., $60,000,000 × 1.5), plus any declared but unpaid dividends.
Non-Participating. After payment of the Liquidation Preference in full, the holders of Series D Preferred Stock shall not be entitled to participate further in the distribution of remaining proceeds to holders of common stock or other equity securities. Notwithstanding the foregoing, each holder of Series D Preferred Stock may alternatively elect, at its sole option, to convert all of its shares of Series D Preferred Stock into shares of common stock immediately prior to the applicable liquidation event and participate pro rata in the distribution of all proceeds available to holders of common stock. Such election shall be made on a holder-by-holder basis and shall be irrevocable with respect to the applicable liquidation event.
Seniority. The Liquidation Preference of the Series D Preferred Stock shall be senior to the liquidation preferences of the Series A Preferred Stock, Series B Preferred Stock, and Series C Preferred Stock, such that the Series D Liquidation Preference shall be paid in full before any amounts are paid in respect of the liquidation preferences of such other series. Notwithstanding the foregoing, the Company may elect, subject to negotiation and agreement of the parties in the definitive documents, that the Series D Liquidation Preference shall rank pari passu with the Series C Preferred Stock liquidation preference; the relative priority of the Series D and Series C liquidation preferences shall be a matter for further negotiation between the parties in connection with the preparation of the definitive transaction documents.
13. Deemed Liquidation Events
Each of the following events shall be treated as a liquidation event for purposes of the Liquidation Preference (each, a "Deemed Liquidation Event"):
(a) A merger, consolidation, or other business combination of the Company with or into another entity in which the stockholders of the Company immediately prior to such transaction do not retain a majority of the voting power of the surviving or resulting entity immediately following such transaction;
(b) The sale, lease, exclusive license, or other disposition of all or substantially all of the assets of the Company in a single transaction or a series of related transactions; and
(c) Any other transaction or series of related transactions that results in a change of control of the Company, where "change of control" means the acquisition by any person or group of persons (other than existing stockholders) of beneficial ownership of securities representing more than fifty percent (50%) of the combined voting power of the Company's then-outstanding securities.
The treatment of any such Deemed Liquidation Event shall be set forth in the Amended and Restated Certificate of Incorporation and shall apply regardless of whether such event is characterized as a liquidation, dissolution, or winding up of the Company.
14. Conversion
Optional Conversion. Each share of Series D Preferred Stock shall be convertible at any time, at the option of the holder thereof, into shares of common stock of the Company at the then-applicable conversion rate. The initial conversion rate shall be one-to-one (1:1) (i.e., each share of Series D Preferred Stock shall initially be convertible into one share of common stock), subject to adjustment for anti-dilution provisions as described in Section 15 below, stock splits, stock dividends, combinations, recapitalizations, and other similar events.
Mandatory Conversion. All outstanding shares of Series D Preferred Stock shall automatically convert into shares of common stock at the then-applicable conversion rate upon the earliest to occur of the following events:
(a) The closing of a firm-commitment underwritten initial public offering of the Company's common stock pursuant to a registration statement filed under the Securities Act of 1933, as amended, resulting in aggregate gross proceeds to the Company of at least Seventy-Five Million Dollars ($75,000,000) and a per-share offering price of at least three times (3x) the Original Issue Price (i.e., at least $9.75 per share); or
(b) The written consent or affirmative vote of holders of a majority of the then-outstanding shares of Series D Preferred Stock (voting as a separate class).
Upon any conversion of the Series D Preferred Stock, all accrued but unpaid dividends on the converted shares shall either be paid in cash or, at the election of the Company, converted into additional shares of common stock at the then-applicable conversion rate, as shall be determined in the definitive documents.
15. Anti-Dilution Protection
Full-Ratchet Anti-Dilution Adjustment. If at any time after the Closing, the Company issues or sells (or is deemed to have issued or sold) additional shares of common stock or securities convertible into or exercisable for shares of common stock (collectively, "Additional Shares") at an effective per-share price that is lower than the then-applicable Series D conversion price, the Series D conversion price shall be adjusted downward to equal such lower effective per-share price. Such adjustment shall be on a full-ratchet basis, without regard to the number of Additional Shares issued or sold.
Exceptions. The following issuances shall not constitute issuances of Additional Shares and shall not trigger any anti-dilution adjustment:
(a) Shares of common stock issuable upon conversion of any outstanding shares of preferred stock (Series A, Series B, Series C, or Series D);
(b) Shares of common stock reserved for issuance and issuable pursuant to the ESOP, up to the then-approved pool size (including any increase approved by the Board of Directors with the consent of the Series D director);
(c) Shares of common stock or common stock equivalents issued in connection with bona fide equipment leasing transactions, bank borrowings, or strategic partnership transactions, in each case approved by the Board of Directors (including the affirmative vote of the director designated by the holders of Series D Preferred Stock); and
(d) Shares of common stock issued or issuable in connection with a stock split, stock dividend, combination, recapitalization, or similar transaction applicable to all holders of common stock on a pro rata basis.
16. Voting Rights
Each holder of Series D Preferred Stock shall be entitled to the number of votes equal to the number of shares of common stock into which such holder's shares of Series D Preferred Stock are then convertible, and shall vote together with holders of common stock as a single class on all matters submitted to a vote of the stockholders of the Company.
In addition to the foregoing, holders of Series D Preferred Stock shall be entitled to vote as a separate class on any matter that would alter, amend, or waive the rights, preferences, privileges, or restrictions of the Series D Preferred Stock, as more fully described in Section 17 below.
17. Protective Provisions (Series D Consent Rights)
The Company shall not, without the prior written consent of the holders of a majority of the then-outstanding shares of Series D Preferred Stock (for so long as Pinnacle holds at least fifty percent (50%) of the shares of Series D Preferred Stock originally issued to Pinnacle at the Closing), take any of the following actions, whether directly or indirectly, including through any subsidiary:
(a) Amend, alter, or repeal any provision of the Company's Certificate of Incorporation (including the Amended and Restated Certificate of Incorporation to be filed in connection with this financing) or Bylaws in a manner that adversely affects the rights, preferences, privileges, or powers of the Series D Preferred Stock;
(b) Authorize, create, or issue any equity security (including any class or series of preferred stock, any convertible note, warrant, or other security convertible into equity) that is senior to or pari passu with the Series D Preferred Stock with respect to dividends, liquidation preference, redemption, or voting rights;
(c) Increase or decrease the authorized number of shares of Series D Preferred Stock;
(d) Declare or pay any dividend or distribution on, or redeem, repurchase, or otherwise acquire, any shares of the Company's capital stock, other than (i) cumulative dividends on the Series D Preferred Stock as described in Section 11, and (ii) repurchases of shares of common stock from employees, consultants, or directors of the Company upon termination of service at cost or at the lower of cost and fair market value pursuant to the terms of the ESOP or applicable stock purchase agreements;
(e) Incur, assume, or guarantee any indebtedness (including capital lease obligations) in excess of Five Million Dollars ($5,000,000) in the aggregate, excluding amounts drawn under the Company's existing revolving credit facility with Pacific Summit Bank, N.A. in an aggregate principal amount of up to Ten Million Dollars ($10,000,000);
(f) Adopt or materially modify the Company's annual operating budget, or permit actual expenditures to deviate more than fifteen percent (15%) from the board-approved annual operating plan, without prior consent of the holders of a majority of the Series D Preferred Stock;
(g) Consummate or agree to consummate any Deemed Liquidation Event, whether by merger, consolidation, asset sale, or otherwise;
(h) Increase the size of the Board of Directors of the Company beyond seven (7) members;
(i) Increase the number of shares reserved for issuance under the ESOP above 12,000,000 shares (or such other amount as may be subsequently approved by the Board of Directors, including the affirmative vote of the director designated by the holders of Series D Preferred Stock) without the prior written consent of the holders of a majority of the Series D Preferred Stock; and
(j) Enter into, amend, or approve any transaction, agreement, or arrangement between the Company and any founder, director, officer, or affiliate of the Company (or any immediate family member thereof) involving aggregate consideration or payments in excess of One Hundred Thousand Dollars ($100,000), including compensation arrangements, consulting agreements, loans, guarantees, and any other related-party transactions.
The foregoing protective provisions shall be set forth in the Amended and Restated Certificate of Incorporation and, to the extent applicable, in the Amended and Restated Investors' Rights Agreement.
18. Board of Directors
Following the Closing, the Board of Directors of the Company shall consist of seven (7) members, composed as follows:
(a) Two (2) directors designated by the Founders (initially Raj Anand and Lena Kovac);
(b) One (1) director designated by Ridgeline Ventures Fund III LP, as the holder of the Series A Preferred Stock (currently Priya Dasgupta);
(c) One (1) director designated by Northgate Growth Partners Fund II LP, as the holder of the Series B Preferred Stock (currently Elliott Margolis);
(d) One (1) director designated by Brindoval Capital Group LLC, as the holder of the Series C Preferred Stock (currently Diana Chen);
(e) One (1) director designated by Pinnacle Venture Fund II LP, as the holder of the Series D Preferred Stock (initially Marcus Trejo, or such other designee as Pinnacle may determine in its sole discretion); and
(f) One (1) independent director, who shall be an individual mutually agreed upon by the Founders and Pinnacle, who is not an employee, officer, or affiliate of the Company, any stockholder, or any of their respective affiliates.
The foregoing Board composition shall be set forth in the Amended and Restated Voting Agreement to be executed by all stockholders at or prior to the Closing.
Board Observation Rights. In the event that Pinnacle's designee is not serving as a member of the Board of Directors for any reason, Pinnacle shall have the right to designate one (1) non-voting observer to attend all meetings of the Board of Directors (including any committees thereof). Such observer shall receive all materials and notices provided to Board members at the same time and in the same manner, and shall be entitled to participate in discussions but shall not be entitled to vote. The Company may exclude the observer from any portion of a Board meeting to the extent the Board determines in good faith that such exclusion is necessary to preserve attorney-client privilege or to avoid a conflict of interest.
19. Information Rights
For so long as Pinnacle holds at least fifty percent (50%) of the shares of Series D Preferred Stock originally purchased by Pinnacle at the Closing, the Company shall deliver to Pinnacle the following information:
(a) Quarterly Financial Statements. Unaudited financial statements of the Company (including a balance sheet, income statement, and statement of cash flows), prepared in accordance with generally accepted accounting principles ("GAAP") consistently applied, within forty-five (45) days after the end of each fiscal quarter;
(b) Annual Audited Financial Statements. Annual audited financial statements of the Company (including a balance sheet, income statement, statement of cash flows, and statement of stockholders' equity), prepared in accordance with GAAP and audited by Whitfield & Greer LLP or another nationally or regionally recognized independent accounting firm reasonably acceptable to Pinnacle, within ninety (90) days after the end of each fiscal year;
(c) Monthly Management Reports. Monthly management reports, including key operating metrics (including without limitation annual recurring revenue ("ARR"), customer counts by segment, net dollar retention, average contract value, new bookings, churn, cash position, and monthly burn rate), within thirty (30) days after the end of each calendar month;
(d) Annual Operating Budget. The Company's annual operating budget and financial projections for the upcoming fiscal year, delivered to Pinnacle at least thirty (30) days prior to the start of each fiscal year; and
(e) Notice of Material Events. Prompt written notice of any material adverse event affecting the Company's business, financial condition, or operations, including without limitation (i) any pending or threatened litigation, arbitration, or governmental investigation involving potential liability in excess of $250,000, (ii) any material regulatory action or inquiry, (iii) any material breach or default under any agreement to which the Company is a party, (iv) the departure or termination of any executive officer, and (v) any event that would reasonably be expected to result in a material adverse change to the Company.
The information rights described above shall be set forth in the Amended and Restated Investors' Rights Agreement.
20. Registration Rights
The definitive transaction documents shall provide for the following registration rights in favor of Pinnacle and, as applicable, other holders of registrable securities:
Demand Registration. Pinnacle shall have the right, on up to two (2) occasions after the earlier of (i) the closing of the Company's initial public offering or (ii) five (5) years from the Closing date, to demand that the Company file a registration statement under the Securities Act of 1933, as amended (the "Securities Act"), on an appropriate form covering the resale of all or a portion of Pinnacle's registrable securities. The Company shall not be obligated to effect a demand registration if the anticipated aggregate offering price, net of underwriting discounts and commissions, is less than $15,000,000.
Piggyback Registration. Pinnacle shall have unlimited piggyback registration rights on any registration of the Company's securities for its own account or for the account of other stockholders (other than a registration on Form S-4, Form S-8, or any successor forms). Piggyback registration rights shall be subject to customary underwriter cutback provisions, provided that in no event shall Pinnacle's shares be cut back below twenty-five percent (25%) of the shares included in such registration.
S-3 Registration. At such time as the Company becomes eligible to use Form S-3 (or any successor form) under the Securities Act, Pinnacle shall have unlimited S-3 demand registration rights, subject to reasonable frequency limitations (no more than two (2) registrations in any twelve (12) month period) and a minimum aggregate offering amount of $5,000,000.
Registration Expenses. The Company shall bear all registration expenses incurred in connection with any demand, piggyback, or S-3 registration, including all filing fees, printing expenses, fees and disbursements of the Company's counsel, and accounting fees. Pinnacle shall be responsible for its own selling expenses, including underwriting discounts, selling commissions, and fees and disbursements of its own counsel.
Lock-Up. In connection with the Company's initial public offering, Pinnacle shall agree to a customary lock-up period of one hundred eighty (180) days following the effective date of the IPO registration statement, during which Pinnacle shall not sell, transfer, or otherwise dispose of any shares of the Company's securities, subject to customary exceptions and provided that all directors, officers, and holders of five percent (5%) or more of the Company's outstanding capital stock are subject to the same lock-up restrictions.
21. Right of First Refusal (Pro Rata Rights)
Pinnacle shall have a pro rata right of first refusal to participate in any future issuance of equity securities by the Company (each, a "New Issuance"), on the same terms and at the same price as such New Issuance, in an amount sufficient to maintain Pinnacle's percentage ownership of the Company's fully diluted capitalization immediately prior to such New Issuance.
The pro rata right shall not apply to issuances of securities (a) upon conversion of outstanding preferred stock, (b) pursuant to the ESOP, (c) in connection with a bona fide acquisition approved by the Board of Directors, (d) pursuant to equipment leasing, bank borrowing, or strategic partnership transactions approved by the Board, or (e) in connection with a firm-commitment underwritten public offering.
This right shall continue for so long as Pinnacle holds at least fifty percent (50%) of the shares of Series D Preferred Stock originally purchased by Pinnacle at the Closing.
22. Right of First Refusal and Co-Sale (Founder Transfers)
Right of First Refusal. In the event that any founder (including Raj Anand and Lena Kovac) proposes to transfer any shares of common stock of the Company to a third party, the Company shall have a right of first refusal to purchase such shares at the price and on the terms offered by the proposed transferee. To the extent the Company does not exercise its right of first refusal in full, the holders of preferred stock (including Pinnacle) shall have a secondary right to purchase such shares on a pro rata basis at the same price and on the same terms.
Co-Sale (Tag-Along) Right. In the event that any founder proposes to transfer shares of common stock representing more than one percent (1%) of the Company's outstanding shares to a third party, and neither the Company nor the preferred holders have exercised their right of first refusal in full, each holder of preferred stock (including Pinnacle) shall have the right to participate in such sale on a pro rata basis, selling a proportionate number of shares on the same terms and conditions as the transferring founder.
The right of first refusal and co-sale rights shall be set forth in the Amended and Restated Right of First Refusal and Co-Sale Agreement.
23. Drag-Along Rights
If the holders of a majority of the then-outstanding shares of preferred stock of the Company (Series A, Series B, Series C, and Series D, voting together as a single class on an as-converted-to-common-stock basis) approve a Sale of the Company (as defined in the definitive documents) or an initial public offering, then all stockholders of the Company (including the founders and all other holders of common stock) shall be required to:
(a) Vote in favor of and not oppose such transaction;
(b) Refrain from exercising any dissenters' rights, appraisal rights, or similar rights available under applicable law;
(c) Execute and deliver all agreements and instruments, and take all other actions, necessary or desirable to consummate such transaction on the terms approved by such majority; and
(d) Agree to the same representations, warranties, covenants, indemnification obligations, and escrow or holdback arrangements as the other selling stockholders (on a pro rata basis), subject to customary limitations.
No minimum enterprise value threshold or founder veto shall apply to the exercise of drag-along rights. The drag-along provisions shall be set forth in the Amended and Restated Voting Agreement.
24. Redemption Rights
At any time on or after the fifth (5th) anniversary of the Closing date, the holders of a majority of the then-outstanding shares of Series D Preferred Stock may elect to require the Company to redeem all (but not less than all) of the outstanding shares of Series D Preferred Stock at a redemption price per share equal to the Original Issue Price ($3.25 per share) plus all accrued but unpaid dividends thereon as of the date of redemption (the "Redemption Price").
The aggregate Redemption Price shall be paid by the Company in three (3) equal annual installments, with the first installment due and payable on the date of the redemption election and the second and third installments due on the first and second anniversaries thereof, respectively.
In the event the Company is unable to effect a redemption, in whole or in part, due to applicable legal restrictions under the Delaware General Corporation Law or insufficient legally available funds, the unpaid portion of the Redemption Price shall accrue interest at a rate of ten percent (10%) per annum (compounding annually) from the date such amount was due until paid in full. During any period in which any portion of the Redemption Price remains unpaid, the Company shall not declare or pay any dividends on, or redeem or repurchase any shares of, common stock or any class or series of capital stock that is junior to the Series D Preferred Stock.
25. Pay-to-Play
Mandatory Pay-to-Play. In the event the Company consummates any subsequent financing round involving the issuance of preferred stock (a "Qualified Financing"), each holder of preferred stock (including holders of Series A, Series B, Series C, and Series D Preferred Stock) shall be required to purchase its pro rata share of the securities offered in such Qualified Financing, determined based on such holder's percentage ownership of the Company's fully diluted capitalization immediately prior to such Qualified Financing.
Any holder of preferred stock that fails to purchase its full pro rata share of the securities offered in a Qualified Financing shall have all of its shares of preferred stock automatically converted into shares of common stock of the Company, effective immediately upon the closing of such Qualified Financing. Such conversion shall be irrevocable and the converted shares shall thereafter have only the rights, preferences, and privileges of common stock.
The pay-to-play provision shall be set forth in the Amended and Restated Investors' Rights Agreement or the Amended and Restated Certificate of Incorporation, as the parties may agree.
26. Management Rights Letter
Concurrently with the Closing, the Company shall deliver to Pinnacle a management rights letter in a form reasonably acceptable to Pinnacle, granting Pinnacle (and its authorized representatives) the following rights:
(a) Consultation and advice rights with respect to the Company's business operations, financial planning, and strategic direction;
(b) Reasonable access to the Company's facilities, books, records, and personnel, upon reasonable notice and during normal business hours; and
(c) Such other rights as may be necessary or appropriate to qualify Pinnacle's investment in the Company as a "venture capital investment" within the meaning of the regulations promulgated under the Investment Advisers Act of 1940, as amended, and applicable regulations of the U.S. Department of Labor under the Employee Retirement Income Security Act of 1974, as amended ("ERISA").
27. Indemnification
The Company shall, concurrently with or promptly following the Closing, enter into an indemnification agreement with Pinnacle's Board designee (and any subsequent designee), in a form reasonably acceptable to Pinnacle, providing for indemnification and advancement of expenses to the fullest extent permitted under the laws of the State of Delaware, including without limitation indemnification against all liabilities, judgments, penalties, fines, settlements, and expenses (including attorneys' fees) arising from such designee's service as a director of the Company.
In addition, the Company shall maintain directors' and officers' liability insurance in an amount not less than $10,000,000 per occurrence (or such greater amount as the Board may approve) with coverage terms and carriers reasonably acceptable to Pinnacle, and shall not reduce or cancel such coverage without the prior written consent of Pinnacle.
28. Conditions to Closing
The obligation of Pinnacle to consummate the investment contemplated by this term sheet shall be subject to the satisfaction or waiver of each of the following conditions:
(a) Due Diligence. Completion of legal, financial, technical, and business due diligence by Pinnacle and its advisors, with results satisfactory to Pinnacle in its sole discretion;
(b) Definitive Documents. Negotiation, execution, and delivery of mutually acceptable definitive transaction documents, including without limitation:
(i) Series D Preferred Stock Purchase Agreement;
(ii) Amended and Restated Certificate of Incorporation of the Company;
(iii) Amended and Restated Investors' Rights Agreement;
(iv) Amended and Restated Right of First Refusal and Co-Sale Agreement;
(v) Amended and Restated Voting Agreement;
(vi) Management Rights Letter;
(vii) Indemnification Agreement for Pinnacle's Board designee;
(viii) Disclosure Schedules to the Series D Preferred Stock Purchase Agreement; and
(ix) Such other customary documents and certificates as Pinnacle may reasonably request;
(c) Consents and Approvals. Receipt of all necessary consents, approvals, and waivers, including:
(i) Approval of the Company's Board of Directors;
(ii) Approval of the Company's stockholders to the extent required under the Delaware General Corporation Law or the Company's existing Certificate of Incorporation (including approval of the Amended and Restated Certificate of Incorporation);
(iii) Consent or waiver from Pacific Summit Bank, N.A. with respect to the Company's existing $10,000,000 revolving credit facility, to the extent the issuance of Series D Preferred Stock triggers any negative covenant, change of control provision, or consent requirement thereunder; and
(iv) FINRA compliance by Hargrove Securities LLC with respect to any required filing or clearance in connection with the placement of the Series D Preferred Stock, if applicable;
(d) No Material Adverse Change. No material adverse change in the business, assets, liabilities, financial condition, results of operations, or prospects of the Company shall have occurred between the date of this term sheet and the Closing;
(e) Legal Opinion. Pinnacle shall have received a legal opinion of the Company's counsel, Langford Price & Associates LLP, in a form reasonably satisfactory to Pinnacle and its counsel, addressing the due authorization and valid issuance of the Series D Preferred Stock, the corporate organization and good standing of the Company, and such other customary matters as Pinnacle may reasonably request; and
(f) Representations and Warranties. The representations and warranties of the Company contained in the definitive transaction documents shall be true and correct in all material respects as of the Closing date.
29. Exclusivity
Upon execution of a separate definitive exclusivity agreement (to be negotiated and executed by the parties), the Company shall agree to negotiate exclusively with Pinnacle for a period of sixty (60) days from the date of such exclusivity agreement (the "Exclusivity Period"), during which the Company shall not, directly or indirectly:
(a) Solicit, initiate, encourage, or facilitate any inquiry, proposal, or offer from any third party regarding any equity or debt financing, sale, merger, acquisition, recapitalization, or similar transaction;
(b) Enter into any term sheet, letter of intent, memorandum of understanding, or definitive agreement with any third party regarding any such transaction; or
(c) Provide any non-public information to any third party in connection with any such transaction.
The parties acknowledge that the exclusivity obligation described above shall become binding only upon the execution of the separate exclusivity agreement referenced herein and shall not be binding solely by virtue of the execution of this term sheet.
30. Confidentiality
This term sheet and all related discussions, negotiations, correspondence, and information exchanged between the parties (including, without limitation, all financial, technical, and business information of the Company disclosed to Pinnacle) shall be treated as strictly confidential and shall not be disclosed to any third party without the prior written consent of the other party, except that each party may disclose this term sheet and related information to its respective legal, financial, tax, and accounting advisors on a need-to-know basis, provided that such advisors are bound by obligations of confidentiality no less restrictive than those set forth herein.
This confidentiality provision shall be binding on the parties regardless of whether a definitive transaction is completed or the proposed investment is consummated. The obligations of confidentiality set forth in this Section 30 shall survive the expiration or termination of this term sheet for a period of two (2) years.
31. Fees and Expenses
Each party shall bear its own legal, accounting, and advisory fees and expenses incurred in connection with the proposed transaction and the negotiation and preparation of this term sheet and the definitive transaction documents.
Pinnacle's Legal Counsel:
Calderwood & Harkness LLP 101 Montgomery Street, Suite 3500 San Francisco, CA 94104
Attention: Harrison Wexford, Responsible Partner
Company's Legal Counsel:
Langford Price & Associates LLP 1000 SW Broadway, Suite 1600 Portland, OR 97205
Attention: Jonathan Hale, Lead Partner
Company's Financial Advisor:
Hargrove Securities LLC 600 Lexington Avenue, 22nd Floor New York, NY 10022
Attention: Nathan Callister, Managing Director
The Company has engaged Hargrove Securities LLC as its financial advisor and placement agent in connection with this financing. A placement fee equal to 1.5% of capital raised (estimated at $900,000 based on the $60,000,000 Investment Amount) shall be payable by the Company to Hargrove Securities LLC upon the Closing. The placement fee shall be the sole responsibility of the Company, and Pinnacle shall have no obligation to pay any portion of such fee or any other advisory or brokerage fee in connection with this transaction.
32. Non-Binding Nature
Except for the provisions of Section 29 (Exclusivity) (solely to the extent a separate exclusivity agreement is executed), Section 30 (Confidentiality), Section 31 (Fees and Expenses), and Section 33 (Governing Law), this term sheet is non-binding and does not constitute a commitment, obligation, or agreement to invest or lend by Pinnacle, or to issue or sell securities by the Company.
No party shall have any liability to the other party with respect to the proposed transaction unless and until definitive transaction documents are executed and delivered by all parties. A binding obligation to consummate the proposed investment shall arise only upon the execution and delivery of definitive transaction documents by all parties thereto.
33. Governing Law
This term sheet and the rights and obligations of the parties hereunder, and the definitive transaction documents to be entered into in connection with the proposed investment, shall be governed by and construed in accordance with the laws of the State of Delaware, without regard to principles of conflict of laws that would result in the application of the laws of any other jurisdiction.
34. Expiration
This term sheet shall expire automatically if not accepted by Verdana Software, Inc. on or before May 6, 2022 (fourteen (14) calendar days from the date hereof). If this term sheet is not accepted by such date, it shall be null and void and neither party shall have any further obligation to the other with respect to the subject matter hereof, except that the confidentiality obligations set forth in Section 30 shall survive such expiration.
[Signature Page Follows]
IN WITNESS WHEREOF, the undersigned have executed this Non-Binding Term Sheet as of the date first set forth above.
INVESTOR:
PINNACLE VENTURE FUND II LP
By: Pinnacle Capital Management LLC, its General Partner
By: ________
Name: Marcus Trejo
Title: Partner, Head of Growth Equity
Date: ________
ACKNOWLEDGED AND AGREED AS TO BINDING PROVISIONS ONLY (Sections 29, 30, 31, and 33):
COMPANY:
VERDANA SOFTWARE, INC.
By: ________
Name: Raj Anand
Title: Chief Executive Officer & Co-Founder
Date: ________
Name | Title
Raj Anand | Chief Executive Officer & Co-Founder
Lena Kovac | Chief Technology Officer & Co-Founder
Thomas Brightwell | Chief Financial Officer
Sandra Mikkelsen | General Counsel
Stockholder / Category | Shares | % of Fully Diluted | Price Per Share | Total Invested | Year
Founders (Raj Anand & Lena Kovac) — Common Stock | 28,000,000 | 35.0% | — | — | 2016
Series A Preferred (Ridgeline Ventures Fund III LP) | 12,000,000 | 15.0% | $0.80 | $9,600,000 | 2018
Series B Preferred (Northgate Growth Partners Fund II LP) | 16,000,000 | 20.0% | $2.00 | $32,000,000 | 2019
Series C Preferred (Brindoval Capital Group LLC) | 12,000,000 | 15.0% | $3.00 | $36,000,000 | 2021
ESOP (issued and unissued) | 12,000,000 | 15.0% | — | — | —
Total Fully Diluted | 80,000,000 | 100.0% | $77,600,000

NON-BINDING TERM SHEET

INVESTOR:

PINNACLE VENTURE FUND II LP

Record

Parties

Dates

Amounts