CONFIDENTIAL — ATTORNEY WORK PRODUCT — PRIVILEGED
Prepared by: Calderwood & Harkness LLP 101 Montgomery Street, Suite 3500 San Francisco, CA 94104
Counsel to Pinnacle Venture Fund II LP
Draft Dated: June 8, 2022
DRAFT — FOR DISCUSSION PURPOSES ONLY
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
VERDANA SOFTWARE, INC.
a Delaware corporation
Verdana Software, Inc., a corporation organized and existing under the laws of the State of Delaware (the "Corporation"), hereby certifies as follows:
1. The name of the Corporation is Verdana Software, Inc. The Corporation was originally incorporated under the name "Verdana Software, Inc." by the filing of its original Certificate of Incorporation with the Secretary of State of the State of Delaware on March 14, 2016. The Corporation's file number with the Delaware Secretary of State is 6274913. The Corporation's federal employer identification number is 93-1485726.
2. This Amended and Restated Certificate of Incorporation (the "Restated Certificate") amends, restates, and supersedes in its entirety the Corporation's existing Certificate of Incorporation, as previously amended and restated, and has been duly adopted in accordance with Sections 242 and 245 of the General Corporation Law of the State of Delaware, as amended from time to time (the "DGCL"). This Restated Certificate was approved by the Board of Directors of the Corporation and by the stockholders of the Corporation in accordance with Sections 141, 228, 242, and 245 of the DGCL.
3. The text of the Certificate of Incorporation of the Corporation is hereby amended and restated in its entirety to read as follows:
ARTICLE I
NAME
The name of the Corporation is Verdana Software, Inc.
ARTICLE II
REGISTERED AGENT AND REGISTERED OFFICE
Section 2.1 — Registered Office and Agent. The address of the Corporation's registered office in the State of Delaware is 1209 Orange Street, in the City of Wilmington, County of New Castle, State of Delaware, 19801. The name of the Corporation's registered agent at such address is Cascade Systems
Section 2.2 — Principal Business Office. The principal business office of the Corporation (which shall not constitute its registered office for purposes of Delaware law) is located at 1175 NW Couch Street, Suite 800, Portland, Oregon 97209, or at such other place as the Board of Directors of the Corporation may from time to time determine.
ARTICLE III
PURPOSE
The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the DGCL. The Corporation shall have all powers necessary or convenient to carry out such purpose, including, without limitation, the power to own, lease, and operate property and assets of every kind and description, to borrow money, to issue notes, bonds, and other evidences of indebtedness, and to enter into contracts and agreements of every kind and description as may be necessary, appropriate, or incidental to the accomplishment of the foregoing purpose.
ARTICLE IV
AUTHORIZED CAPITAL STOCK
Section 4.1 — Authorized Shares.
The total number of shares of all classes of capital stock that the Corporation is authorized to issue is [●] shares, consisting of:
(a) [●] shares of Common Stock, par value $0.0001 per share (the "Common Stock"); and
(b) [●] shares of Preferred Stock, par value $0.0001 per share (the "Preferred Stock").
The number of authorized shares of Common Stock or Preferred Stock may be increased or decreased (but not below the number of shares of such class then outstanding) by the affirmative vote of the holders of a majority of the voting power of the capital stock of the Corporation entitled to vote thereon, voting together as a single class, irrespective of the provisions of Section 242(b)(2) of the DGCL (or any successor provision thereto), and no separate class vote of the holders of any class of capital stock shall be required therefor, except as otherwise expressly provided in this Restated Certificate or required by applicable law.
[Drafter's Note: The authorized share count must be sufficient to accommodate all outstanding and reserved shares plus the Series D issuance. The total fully-diluted pre-investment share count is approximately 80,000,000 shares. The Series D issuance contemplates up to 18,461,538 shares at Pinnacle's $3.25/share position or 15,000,000 shares at Verdana's $4.00/share position. Total authorized shares should accommodate approximately 100,000,000 or more shares to provide adequate headroom. Brackets to be resolved upon agreement on pre-money valuation and ESOP pool treatment.]
Section 4.2 — Designation of Preferred Stock Series.
The Preferred Stock authorized by this Restated Certificate is hereby designated into the following series, each having the rights, preferences, privileges, and restrictions set forth herein:
(a) 12,000,000 shares of Series A Preferred Stock (the "Series A Preferred Stock" or "Series A Preferred");
(b) 16,000,000 shares of Series B Preferred Stock (the "Series B Preferred Stock" or "Series B Preferred");
(c) 12,000,000 shares of Series C Preferred Stock (the "Series C Preferred Stock" or "Series C Preferred"); and
(d) [●] shares of Series D Preferred Stock (the "Series D Preferred Stock" or "Series D Preferred").
[Drafter's Note: Number of authorized Series D shares is bracketed pending resolution of price per share. At Pinnacle's position of $3.25/share, 18,461,538 shares of Series D Preferred Stock are required. At Verdana's position of $4.00/share, 15,000,000 shares are required.]
The Series A Preferred Stock, the Series B Preferred Stock, the Series C Preferred Stock, and the Series D Preferred Stock are collectively referred to herein as the "Preferred Stock." Each share of Preferred Stock, irrespective of series, shall have the rights, preferences, privileges, and restrictions set forth in Article VI below, in addition to any rights specifically applicable to the series of which such share is a part.
Section 4.3 — Common Stock.
The rights, preferences, privileges, and restrictions granted to and imposed on the Common Stock are as set forth in Article V below.
ARTICLE V
RIGHTS, PREFERENCES, AND PRIVILEGES OF COMMON STOCK
Section 5.1 — Voting Rights.
Each holder of record of Common Stock shall be entitled to one (1) vote for each share of Common Stock standing in such holder's name on the books of the Corporation on all matters submitted to a vote of the stockholders of the Corporation. Except as otherwise required by this Restated Certificate or by applicable law, the holders of Common Stock shall vote together with the holders of Preferred Stock (on an as-converted basis pursuant to Section 6.3) as a single class on all matters submitted to a vote of the stockholders of the Corporation.
Section 5.2 — Dividends.
Subject to the prior and preferential rights of the holders of Preferred Stock set forth in Section 6.1, and subject to any other provisions of this Restated Certificate, the holders of shares of Common Stock shall be entitled to receive, when and if declared by the Board of Directors out of any assets of the Corporation legally available therefor, such dividends as may be declared from time to time by the Board of Directors. The Corporation shall not declare, pay, or set apart for payment any dividend on shares of Common Stock unless at the time of such declaration, payment, or setting apart all accrued and unpaid dividends on all outstanding shares of Preferred Stock have been paid or declared and set apart for payment.
Section 5.3 — Liquidation.
Subject to the prior and preferential rights of the holders of Preferred Stock set forth in Section 6.2, upon any Liquidation Event (as defined in Section 6.2(a)), the holders of shares of Common Stock shall be entitled to share ratably in all remaining assets of the Corporation available for distribution to its stockholders, in proportion to the number of shares of Common Stock held by each such holder relative to the total number of shares of Common Stock then outstanding.
Section 5.4 — No Preemptive Rights.
No holder of Common Stock shall be entitled, as a matter of right, to subscribe for, purchase, or receive any part of any new or additional issue of stock of any class, whether now or hereafter authorized, or of bonds, debentures, or other securities convertible into or exchangeable for stock, except as may otherwise be provided by contract or agreement.
ARTICLE VI
RIGHTS, PREFERENCES, AND PRIVILEGES OF PREFERRED STOCK
The Preferred Stock shall have the following rights, preferences, privileges, and restrictions:
Section 6.1 — Dividends.
Section 6.1(a) — Series D Preferred Dividends. The holders of the outstanding shares of Series D Preferred Stock shall be entitled to receive cumulative dividends at the rate of eight percent (8%) per annum of the Series D Original Issue Price (as defined below) per share, accruing on a daily basis from the date of issuance of such shares, whether or not declared by the Board of Directors, and whether or not there shall be funds legally available for the payment of such dividends. Such dividends shall not be compounding. As used herein, the "Series D Original Issue Price" shall mean $[●] per share, subject to appropriate adjustment in the event of any stock split, stock dividend, combination, reclassification, or similar event with respect to the Series D Preferred Stock.
[Drafter's Note: Series D Original Issue Price is $3.25/share at Pinnacle's position (based on a $260,000,000 pre-money valuation) or $4.00/share at Verdana's position (based on a $320,000,000 pre-money valuation). On the total investment amount of $60,000,000, the annual dividend accrual is $4,800,000 per year regardless of which price-per-share is adopted, as the aggregate investment amount remains constant.]
Dividends on the Series D Preferred Stock shall be payable when and if declared by the Board of Directors. All accrued and unpaid dividends shall accumulate and compound on a non-compounding basis (i.e., dividends shall not accrue on previously accrued but unpaid dividends). No dividends shall be paid on any shares of Common Stock or on any other series of Preferred Stock ranking junior to or pari passu with the Series D Preferred Stock with respect to dividends unless and until all accrued but unpaid dividends on the Series D Preferred Stock have first been paid in full or declared and a sum sufficient for the payment thereof has been set apart.
Section 6.1(b) — Series A, B, and C Preferred Dividends. The holders of the outstanding shares of Series A Preferred Stock, Series B Preferred Stock, and Series C Preferred Stock shall be entitled to receive cumulative dividends at the rate of eight percent (8%) per annum of the applicable Original Issue Price per share for each such series, accruing on a daily basis from the date of issuance of such shares, whether or not declared by the Board of Directors, and whether or not there shall be funds legally available for the payment of such dividends. Such dividends shall not be compounding. The applicable Original Issue Prices are as follows:
(i) Series A Original Issue Price: $0.80 per share, subject to appropriate adjustment in the event of any stock split, stock dividend, combination, reclassification, or similar event with respect to the Series A Preferred Stock;
(ii) Series B Original Issue Price: $2.00 per share, subject to appropriate adjustment in the event of any stock split, stock dividend, combination, reclassification, or similar event with respect to the Series B Preferred Stock; and
(iii) Series C Original Issue Price: $3.00 per share, subject to appropriate adjustment in the event of any stock split, stock dividend, combination, reclassification, or similar event with respect to the Series C Preferred Stock.
Dividends on the Series A Preferred Stock, the Series B Preferred Stock, and the Series C Preferred Stock shall be payable when and if declared by the Board of Directors. All accrued and unpaid dividends shall accumulate on a non-compounding basis.
Section 6.1(c) — Payment Priority of Dividends. The dividend rights of the Series D Preferred Stock shall rank pari passu with the dividend rights of the Series A Preferred Stock, the Series B Preferred Stock, and the Series C Preferred Stock. In the event that funds are available to pay dividends but are insufficient to pay all accrued and unpaid dividends on all series of Preferred Stock in full, such funds shall be distributed ratably among all holders of Preferred Stock in proportion to the full preferential amounts to which they would otherwise be entitled.
[Drafter's Note: Draft reflects pari passu treatment of dividends across all series. Whether Series D dividends are senior to or pari passu with Series A, B, and C dividends remains subject to negotiation.]
Section 6.2 — Liquidation Rights.
Section 6.2(a) — Definition of Liquidation Event. A "Liquidation Event" shall mean: (i) any voluntary or involuntary liquidation, dissolution, or winding up of the affairs of the Corporation; (ii) any merger, consolidation, share exchange, or similar transaction in which the stockholders of the Corporation immediately prior to such transaction do not hold, immediately following such transaction, at least a majority of the voting power of the surviving or resulting entity (or its parent entity); or (iii) a sale, lease, transfer, exclusive license, or other disposition, in a single transaction or a series of related transactions, of all or substantially all of the assets of the Corporation (each of clauses (ii) and (iii), a "Deemed Liquidation Event"). The treatment of any Deemed Liquidation Event as a Liquidation Event for purposes of this Section 6.2 may be waived by the affirmative vote or written consent of the holders of a majority of the then-outstanding shares of Preferred Stock, voting together as a single class on an as-converted basis. The Corporation shall not have the power to effect a Deemed Liquidation Event unless the agreement or plan of merger, consolidation, or similar transaction provides that the consideration payable to the stockholders of the Corporation shall be allocated and paid in accordance with this Section 6.2.
Section 6.2(b) — Series D Liquidation Preference. In the event of any Liquidation Event, before any distribution or payment shall be made to the holders of Common Stock or to the holders of any other series of Preferred Stock ranking junior to the Series D Preferred Stock with respect to liquidation preference, each holder of then-outstanding shares of Series D Preferred Stock shall be entitled to receive, out of the assets of the Corporation available for distribution to its stockholders, an amount per share of Series D Preferred Stock equal to one and one-half times (1.5x) the Series D Original Issue Price, plus all accrued but unpaid dividends thereon (the "Series D Liquidation Preference").
The aggregate Series D Liquidation Preference, exclusive of accrued dividends, based on a total investment of $60,000,000, is $90,000,000 (i.e., 1.5 multiplied by the Series D Original Issue Price multiplied by the total number of shares of Series D Preferred Stock outstanding).
The Series D Preferred Stock shall be non-participating. Following the payment in full of the Series D Liquidation Preference to the holders of the Series D Preferred Stock, such holders shall not be entitled to participate in any further distribution of assets to the holders of Common Stock. Notwithstanding the foregoing, in lieu of receiving the Series D Liquidation Preference, any holder of Series D Preferred Stock may elect to convert all (but not less than all) of such holder's shares of Series D Preferred Stock into shares of Common Stock pursuant to Section 6.3 immediately prior to the Liquidation Event and participate in the distribution of assets on an as-converted basis together with the holders of Common Stock, provided that such conversion shall be irrevocable and shall be deemed to have occurred immediately prior to the closing of the Liquidation Event.
[Drafter's Note: This Section reflects Pinnacle's negotiating position of a 1.5x non-participating liquidation preference, yielding an aggregate preference of $90,000,000 on the $60,000,000 investment. Verdana and the existing investors (particularly Brindoval Capital Group LLC) have proposed 1.0x non-participating ($60,000,000 aggregate), consistent with the terms of the Series A, Series B, and Series C Preferred Stock. This remains a major open negotiation point.]
Section 6.2(c) — Series A, B, and C Liquidation Preferences. In the event of any Liquidation Event, the holders of the Series A Preferred Stock, the Series B Preferred Stock, and the Series C Preferred Stock shall be entitled to receive, out of the assets of the Corporation available for distribution to its stockholders, the following amounts per share:
(i) Series C Preferred Stock: Each holder of then-outstanding shares of Series C Preferred Stock shall be entitled to receive an amount per share equal to one times (1.0x) the Series C Original Issue Price ($3.00 per share), plus all accrued but unpaid dividends thereon (the "Series C Liquidation Preference"). The Series C Preferred Stock is non-participating.
(ii) Series B Preferred Stock: Each holder of then-outstanding shares of Series B Preferred Stock shall be entitled to receive an amount per share equal to one times (1.0x) the Series B Original Issue Price ($2.00 per share), plus all accrued but unpaid dividends thereon (the "Series B Liquidation Preference"). The Series B Preferred Stock is non-participating.
(iii) Series A Preferred Stock: Each holder of then-outstanding shares of Series A Preferred Stock shall be entitled to receive an amount per share equal to one times (1.0x) the Series A Original Issue Price ($0.80 per share), plus all accrued but unpaid dividends thereon (the "Series A Liquidation Preference"). The Series A Preferred Stock is non-participating.
As with the Series D Preferred Stock, in lieu of receiving the applicable Liquidation Preference, any holder of Series A Preferred Stock, Series B Preferred Stock, or Series C Preferred Stock may elect to convert all (but not less than all) of such holder's shares of such series into shares of Common Stock pursuant to Section 6.3 immediately prior to the Liquidation Event and participate in the distribution of assets on an as-converted basis together with the holders of Common Stock, provided that such conversion shall be irrevocable and shall be deemed to have occurred immediately prior to the closing of the Liquidation Event.
The Series D Liquidation Preference, the Series C Liquidation Preference, the Series B Liquidation Preference, and the Series A Liquidation Preference are collectively referred to herein as the "Liquidation Preferences."
Section 6.2(d) — Payment Priority (Liquidation Waterfall). The Liquidation Preferences of the Series D Preferred Stock, the Series C Preferred Stock, the Series B Preferred Stock, and the Series A Preferred Stock shall rank pari passu with one another. In the event of any Liquidation Event, the Liquidation Preferences of all series of Preferred Stock shall be paid simultaneously, on a pari passu basis, before any distribution or payment shall be made to the holders of Common Stock.
[Drafter's Note: Draft reflects pari passu treatment of all Preferred Stock series in the liquidation waterfall. Whether Series D is senior to all prior series (as Pinnacle may seek) or pari passu (as reflected here) remains subject to negotiation. Bracketed language may be revised.]
Section 6.2(e) — Remaining Assets After Payment of Preferences. After the payment in full of the Liquidation Preferences to all holders of Preferred Stock entitled thereto (or the setting apart of a sum sufficient for such payment), the remaining assets of the Corporation available for distribution to its stockholders shall be distributed ratably among the holders of Common Stock in proportion to the number of shares of Common Stock held by each such holder relative to the total number of shares of Common Stock then outstanding. For the avoidance of doubt, holders of Preferred Stock who have received their full Liquidation Preference shall not participate in the distribution of remaining assets to holders of Common Stock, except to the extent that any such holder has elected to convert its shares of Preferred Stock into Common Stock pursuant to Section 6.3 prior to the Liquidation Event.
Section 6.2(f) — Insufficient Assets. If, upon any Liquidation Event, the assets of the Corporation available for distribution to its stockholders are insufficient to permit the payment in full of the aggregate Liquidation Preferences to all holders of all series of Preferred Stock, then the entire assets of the Corporation available for distribution shall be distributed ratably among all holders of Preferred Stock in proportion to the aggregate Liquidation Preference amounts that would otherwise be payable to such holders if the assets were sufficient to pay all Liquidation Preferences in full. No distribution shall be made to holders of Common Stock until the Liquidation Preferences of all series of Preferred Stock have been paid in full.
Section 6.2(g) — Valuation of Non-Cash Consideration. Whenever the distribution provided for in this Section 6.2 shall be payable in property other than cash, the value of such distribution shall be the fair market value thereof as determined in good faith by the Board of Directors. In the event of a Deemed Liquidation Event, if any portion of the consideration payable to the stockholders of the Corporation consists of securities or other property other than cash, the value of such non-cash consideration shall be determined in accordance with the applicable merger agreement, purchase agreement, or similar transaction document, provided that such determination is made in good faith by the Board of Directors.
Section 6.3 — Conversion Rights.
Section 6.3(a) — Optional Conversion. Each share of Preferred Stock shall be convertible, at the option of the holder thereof, at any time and from time to time, without the payment of any additional consideration by the holder, into such number of fully paid and non-assessable shares of Common Stock as is determined by dividing the applicable Original Issue Price for such series by the applicable Conversion Price (as defined below) for such series in effect at the time of conversion. The initial "Conversion Price" for each series of Preferred Stock shall be equal to its respective Original Issue Price as follows:
(i) Series A Conversion Price: $0.80 per share;
(ii) Series B Conversion Price: $2.00 per share;
(iii) Series C Conversion Price: $3.00 per share; and
(iv) Series D Conversion Price: $[●] per share (equal to the Series D Original Issue Price).
The initial conversion rate for each series of Preferred Stock shall be one-to-one (1:1) (i.e., each share of Preferred Stock shall initially be convertible into one (1) share of Common Stock), subject to adjustment as provided in Section 6.4 and this Section 6.3. The "Conversion Rate" for each series at any given time shall be equal to the Original Issue Price for such series divided by the then-applicable Conversion Price for such series.
Section 6.3(b) — Automatic Conversion. Each share of Preferred Stock shall automatically be converted into shares of Common Stock at the then-applicable Conversion Rate for such series upon the earliest to occur of:
(i) the closing of a firmly underwritten public offering of shares of Common Stock of the Corporation pursuant to an effective registration statement under the Securities Act of 1933, as amended, resulting in aggregate gross proceeds to the Corporation of not less than $[●] (before deduction of underwriting discounts, commissions, and expenses), at a price per share to the public of not less than [●] times the Series D Original Issue Price (a "Qualified IPO"); or
(ii) the receipt by the Corporation of the written consent of the holders of a majority of the then-outstanding shares of Preferred Stock, voting together as a single class on an as-converted basis.
Upon the occurrence of any event specified in clauses (i) or (ii) above, all outstanding shares of Preferred Stock shall be converted automatically, without any further action by the holders thereof, into shares of Common Stock at the respective then-applicable Conversion Rates.
Section 6.3(c) — Conversion Mechanics. (i) Before any holder of Preferred Stock shall be entitled to convert such shares into shares of Common Stock upon an optional conversion, such holder shall surrender the certificate or certificates therefor (or, in the case of uncertificated shares, deliver an instruction letter in form reasonably acceptable to the Corporation), duly endorsed, at the office of the Corporation or of any transfer agent for the Preferred Stock, and shall give written notice to the Corporation at its principal corporate office of the election to convert the same and shall state therein the name or names in which the certificate or certificates for shares of Common Stock are to be issued (or, if applicable, the name in which such shares are to be registered in book-entry form).
(ii) The Corporation shall, as soon as practicable after such delivery of certificates (or instructions) and notice (and, in any event, within five (5) business days thereafter), issue and deliver at such office to such holder of Preferred Stock, or to the nominee or nominees of such holder, a certificate or certificates for (or book-entry evidence of) the number of shares of Common Stock to which such holder shall be entitled as aforesaid.
(iii) Such conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the certificate or certificates (or delivery of instructions) representing the shares of Preferred Stock to be converted, and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock as of such date.
(iv) No fractional shares of Common Stock shall be issued upon any conversion of Preferred Stock. In lieu of any fractional shares to which the holder would otherwise be entitled, the Corporation shall pay cash equal to such fraction multiplied by the then-applicable fair market value of one share of Common Stock, as determined in good faith by the Board of Directors.
(v) The Conversion Price for each series of Preferred Stock shall be subject to adjustment as set forth in Section 6.4.
Section 6.4 — Anti-Dilution Protection.
Section 6.4(a) — Series D Anti-Dilution — Full Ratchet. If the Corporation shall at any time or from time to time after the original issuance date of the Series D Preferred Stock issue any additional shares of Common Stock or Preferred Stock (or rights, options, warrants, or other securities exercisable for or convertible into Common Stock) (collectively, "Additional Shares") at a price per share (or having an effective conversion or exercise price per share) less than the then-applicable Series D Conversion Price (a "Down Round"), then the Series D Conversion Price shall be reduced, concurrently with such issuance, to the price per share at which such Additional Shares are issued (or the effective conversion or exercise price at which such securities are convertible or exercisable into Common Stock), without any further adjustment for the number of shares outstanding or the number of shares issued in the Down Round (a "full-ratchet" adjustment).
For the avoidance of doubt, no adjustment shall be made to the Series D Conversion Price in the event that Additional Shares are issued at a price per share equal to or greater than the then-applicable Series D Conversion Price.
[Drafter's Note: This Section reflects Pinnacle's position. Verdana and the existing investors, including Brindoval Capital Group LLC, have proposed broad-based weighted average anti-dilution for the Series D Preferred Stock, consistent with the anti-dilution protection afforded to the Series A, Series B, and Series C Preferred Stock. Brindoval has specifically objected to granting full-ratchet anti-dilution to Series D as inconsistent with prior round terms and potentially disadvantageous to existing investors in a down-round scenario. This is a major open negotiation point.]
Section 6.4(b) — Series A, B, and C Anti-Dilution — Broad-Based Weighted Average. If the Corporation shall at any time or from time to time after the original issuance date of the applicable series of Preferred Stock issue any Additional Shares at a price per share (or having an effective conversion or exercise price per share) less than the then-applicable Conversion Price for the Series A Preferred Stock, the Series B Preferred Stock, or the Series C Preferred Stock, as applicable, then the Conversion Price for the affected series shall be reduced, concurrently with such issuance, to the price determined by multiplying the then-applicable Conversion Price for such series by a fraction:
(i) the numerator of which shall be the sum of (A) the number of shares of Common Stock outstanding immediately prior to such issuance (calculated on a fully-diluted basis, assuming the conversion or exercise of all outstanding convertible or exercisable securities), plus (B) the number of shares of Common Stock that the aggregate consideration received by the Corporation for the total number of Additional Shares so issued would purchase at the then-applicable Conversion Price for such series; and
(ii) the denominator of which shall be the sum of (A) the number of shares of Common Stock outstanding immediately prior to such issuance (calculated on a fully-diluted basis, assuming the conversion or exercise of all outstanding convertible or exercisable securities), plus (C) the actual number of Additional Shares so issued.
Expressed as a formula:
New Conversion Price = Old Conversion Price × (A + B) / (A + C)
Where:
• A = the number of shares of Common Stock outstanding immediately prior to the issuance (fully diluted);
• B = the number of shares of Common Stock that the aggregate consideration received for the Additional Shares would purchase at the Old Conversion Price; and
• C = the actual number of Additional Shares issued.
This anti-dilution protection for the Series A Preferred Stock, the Series B Preferred Stock, and the Series C Preferred Stock conforms to the provisions of the previously existing Certificate of Incorporation.
Section 6.4(c) — Excluded Issuances. Notwithstanding the foregoing, no adjustment to any Conversion Price shall be made in connection with the issuance of any of the following (collectively, "Excluded Issuances"):
(i) shares of Common Stock (or options or restricted stock units to acquire shares of Common Stock) issued or issuable to employees, officers, directors, consultants, or other service providers of the Corporation pursuant to any equity incentive plan, stock purchase plan, or similar compensatory arrangement duly adopted or approved by the Board of Directors (including the affirmative vote of at least one director designated by the holders of Preferred Stock), provided that the aggregate number of shares reserved under all such plans does not exceed 12,000,000 shares (subject to adjustment for stock splits, stock dividends, combinations, reclassifications, and similar events);
(ii) shares of Common Stock issued upon conversion of any shares of Preferred Stock outstanding as of the date hereof or issued hereunder;
(iii) shares of Common Stock (or warrants or other rights to acquire shares of Common Stock) issued in connection with bona fide equipment leasing transactions or borrowing arrangements with banks, commercial lenders, or similar financial institutions, in each case approved by the Board of Directors (including the affirmative vote of at least one director designated by the holders of Preferred Stock);
(iv) shares of Common Stock (or warrants or other rights to acquire shares of Common Stock) issued in connection with bona fide strategic partnerships, joint ventures, or technology licensing arrangements, in each case approved by the Board of Directors (including the affirmative vote of at least one director designated by the holders of Preferred Stock), provided that the primary purpose of such issuance is not to raise equity capital;
(v) shares of Common Stock issued in connection with any stock split, stock dividend, or recapitalization of the Corporation; and
(vi) shares of Common Stock issued upon exercise or conversion of any options, warrants, or convertible securities outstanding as of the date of filing of this Restated Certificate with the Secretary of State of the State of Delaware.
Section 6.4(d) — Certificate as to Adjustments. Upon the occurrence of each adjustment or readjustment of a Conversion Price pursuant to this Section 6.4, the Corporation, at its expense, shall promptly compute such adjustment or readjustment in accordance with the terms hereof and prepare and furnish to each holder of Preferred Stock a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. The Corporation shall, upon the written request at any time of any holder of Preferred Stock, furnish or cause to be furnished to such holder a like certificate setting forth (i) such adjustment or readjustment, (ii) the Conversion Price at the time in effect for such series, and (iii) the number of shares of Common Stock and the amount, if any, of other property that at the time would be received upon the conversion of such holder's Preferred Stock.
Section 6.5 — Voting Rights.
Section 6.5(a) — General Voting. Each holder of outstanding shares of Preferred Stock shall be entitled to the number of votes equal to the number of whole shares of Common Stock into which such holder's shares of Preferred Stock are then convertible pursuant to Section 6.3, at each meeting of stockholders of the Corporation (and in each written consent in lieu of a meeting) with respect to any and all matters presented to the stockholders of the Corporation for their action or consideration. Except as otherwise provided in this Restated Certificate or as required by applicable law, the holders of Preferred Stock shall vote together with the holders of Common Stock as a single class.
Section 6.5(b) — Series D Separate Class Vote. For so long as any shares of Series D Preferred Stock remain outstanding, the Corporation shall not, without the prior written consent or affirmative vote of the holders of a majority of the then-outstanding shares of Series D Preferred Stock, voting as a separate class:
(i) amend, alter, or repeal any provision of this Restated Certificate or the Bylaws of the Corporation (whether by merger, consolidation, or otherwise) in any manner that adversely affects or alters the rights, preferences, privileges, or powers of the Series D Preferred Stock in a manner different from the effect on other series of Preferred Stock;
(ii) authorize or issue, or obligate itself to issue, any equity security (or any security convertible into or exchangeable for any equity security) having rights, preferences, or privileges senior to or on parity with the Series D Preferred Stock as to liquidation preference, dividends, or redemption, or authorize or issue any additional shares of Series D Preferred Stock;
(iii) reclassify, alter, or amend any existing security of the Corporation if such reclassification, alteration, or amendment would render such security having rights, preferences, or privileges senior to or on parity with the Series D Preferred Stock;
(iv) increase or decrease (other than by conversion of Preferred Stock) the authorized number of shares of Series D Preferred Stock;
(v) effect any Deemed Liquidation Event (as defined in Section 6.2(a));
(vi) declare, set aside, or pay any dividend or make any other distribution on or with respect to any shares of Common Stock (other than dividends payable solely in shares of Common Stock);
(vii) redeem, repurchase, or otherwise acquire for value any shares of Common Stock or any series of Preferred Stock (other than (A) repurchases of shares from former employees, officers, directors, consultants, or other service providers upon termination of their service at cost or at the lower of cost and fair market value pursuant to agreements approved by the Board of Directors, or (B) repurchases approved by the Board of Directors in connection with the exercise of a right of first refusal held by the Corporation); or
(viii) increase the number of shares of Common Stock reserved for issuance under the Corporation's equity incentive plan(s) (including any successor plan) beyond the currently authorized ESOP pool of 12,000,000 shares.
[Drafter's Note: Regarding clause (viii), the existing ESOP pool is 12,000,000 shares. Verdana has proposed expanding the pool to 17,000,000 shares (an increase of 5,000,000 shares). Whether this expansion occurs pre-close or post-close, and whether it is included in the pre-money or post-money capitalization calculation, is a major open negotiation point that materially affects Pinnacle's ownership percentage. Under Pinnacle's position ($3.25/share, no ESOP expansion pre-close), Pinnacle would hold approximately 18.75% of the Corporation's fully-diluted capitalization. If the 5,000,000-share ESOP expansion is treated as pre-money, Pinnacle's ownership drops to approximately 15.00%.]
Section 6.5(c) — Protective Provisions Applicable to All Preferred Stock. For so long as any shares of Preferred Stock remain outstanding, the Corporation shall not, without the prior written consent or affirmative vote of the holders of a majority of the then-outstanding shares of Preferred Stock (voting together as a single class on an as-converted basis):
(i) amend, alter, or repeal any provision of this Restated Certificate or the Bylaws of the Corporation (whether by merger, consolidation, or otherwise) in any manner that adversely affects the rights, preferences, privileges, or powers of the Preferred Stock;
(ii) increase or decrease the authorized number of shares of Preferred Stock (or any series thereof), or authorize or issue any new series of Preferred Stock;
(iii) effect any Deemed Liquidation Event (as defined in Section 6.2(a));
(iv) declare, set aside, or pay any dividend or make any other distribution on or with respect to any shares of Common Stock;
(v) redeem, repurchase, or otherwise acquire for value any shares of Common Stock or Preferred Stock (other than repurchases from former employees, officers, directors, consultants, or other service providers at cost or at the lower of cost and fair market value, or pursuant to a right of first refusal);
(vi) create, incur, assume, guarantee, or otherwise become liable for any indebtedness for borrowed money in excess of $10,000,000 in the aggregate outstanding at any time (excluding amounts outstanding under the existing revolving credit facility with Pacific Summit Bank, N.A.);
(vii) increase or decrease the authorized size of the Board of Directors;
(viii) make any material change in the Corporation's principal line of business;
(ix) enter into or effect any transaction or series of related transactions involving the issuance of shares of capital stock of the Corporation in connection with any merger, consolidation, or acquisition; or
(x) grant, issue, or sell any equity securities (or rights, options, warrants, or other securities convertible into or exercisable for equity securities) other than Excluded Issuances.
Section 6.6 — Pinnacle-Specific Consent Rights (Protective Provisions).
For so long as Pinnacle Venture Fund II LP (or any of its Affiliates, as defined below) holds at least [●]% of the shares of Series D Preferred Stock originally purchased by Pinnacle Venture Fund II LP pursuant to the Series D Preferred Stock Purchase Agreement (the "Pinnacle Ownership Threshold"), the Corporation shall not, without the prior written consent of Pinnacle Venture Fund II LP (or its successor or designee):
Section 6.6(a) — Debt Consent Right. Incur, assume, guarantee, or otherwise become liable for any indebtedness for borrowed money (including, without limitation, any capital lease obligations, purchase money indebtedness, or guaranty of indebtedness of any other person or entity) in excess of Five Million Dollars ($5,000,000) in the aggregate outstanding at any time, excluding (A) amounts outstanding under the Corporation's existing revolving credit facility with Pacific Summit Bank, N.A. (as in effect on the date hereof, including any refinancing or replacement thereof on substantially similar or more favorable terms), and (B) trade payables and other current liabilities incurred in the ordinary course of business.
[Drafter's Note: The $5,000,000 debt consent threshold reflects Pinnacle's demand for consent over material new borrowings. This is more restrictive than the $10,000,000 threshold in the Preferred Stock protective provisions in Section 6.5(c)(vi). This provision is contested by Verdana.]
Section 6.6(b) — Budget Deviation Consent Right. Approve, adopt, or permit the Corporation's actual annual operating expenditures (in the aggregate) to deviate by more than fifteen percent (15%) from the annual operating budget or plan approved by the Board of Directors for the applicable fiscal year, whether by increasing expenditures above the approved budget or by reducing revenues materially below the approved revenue forecast, without the prior written consent of Pinnacle Venture Fund II LP.
[Drafter's Note: This is one of Pinnacle's key protective provision demands. Verdana has expressed concern that this provision grants a single investor veto power over ordinary-course operational decisions.]
Section 6.6(c) — Additional Consent Rights. Without the prior written consent of Pinnacle Venture Fund II LP:
(i) The Corporation shall not change or materially alter its principal line of business, or enter into any business materially different from its current business of developing and commercializing enterprise software solutions and related products and services.
(ii) The Corporation shall not enter into any transaction with any Affiliate (as defined below) of the Corporation, or any officer, director, or holder of more than five percent (5%) of any class of capital stock of the Corporation, or any member of the immediate family of any such officer, director, or stockholder, or any entity in which any such officer, director, or stockholder or member of his or her immediate family is an officer, director, partner, or holder of more than five percent (5%) of any class of equity interest, except (A) transactions on arm's-length terms in the ordinary course of business approved by a majority of the disinterested members of the Board of Directors, and (B) compensation arrangements approved by the Compensation Committee of the Board of Directors (or, if no Compensation Committee exists, by the Board of Directors).
(iii) The Corporation shall not hire, terminate (other than for cause), or materially change the compensation (including base salary, incentive compensation, equity grants, or benefits) of the Chief Executive Officer or the Chief Financial Officer of the Corporation.
As used herein, "Affiliate" means, with respect to any specified person or entity, any other person or entity that, directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with, such specified person or entity.
Section 6.7 — Redemption Rights.
Section 6.7(a) — Election to Redeem. At any time on or after the fifth (5th) anniversary of the original issuance date of the Series D Preferred Stock (the "Redemption Eligibility Date"), upon the written election (a "Redemption Election") of the holders of a majority of the then-outstanding shares of Series D Preferred Stock, the Corporation shall redeem all outstanding shares of Series D Preferred Stock in three (3) equal annual installments, with the first installment payable within ninety (90) days following the date of the Redemption Election and the second and third installments payable on the first and second anniversaries of the first installment payment date, respectively.
Section 6.7(b) — Redemption Price. The per-share redemption price for each share of Series D Preferred Stock to be redeemed (the "Redemption Price") shall be the greater of:
(i) the Series D Original Issue Price plus all accrued but unpaid dividends thereon as of the applicable redemption date; and
(ii) the fair market value per share of such Series D Preferred Stock as of the applicable redemption date, as determined by an independent appraiser of nationally recognized standing selected by the Board of Directors and reasonably acceptable to the holders of a majority of the then-outstanding shares of Series D Preferred Stock.
Section 6.7(c) — Mechanics of Redemption. The Corporation shall give written notice of each redemption installment to each holder of Series D Preferred Stock not less than thirty (30) days prior to the applicable redemption date, specifying the number of shares to be redeemed, the Redemption Price, and the date and place of redemption. On or before the applicable redemption date, each holder of Series D Preferred Stock shall surrender the certificate or certificates evidencing such shares to the Corporation, duly endorsed, and shall receive payment of the Redemption Price therefor. If the funds of the Corporation legally available for redemption are insufficient to redeem all shares of Series D Preferred Stock required to be redeemed on any redemption date, the Corporation shall redeem the maximum number of shares that may be redeemed with such available funds, ratably among the holders of Series D Preferred Stock in proportion to the number of shares held by each, and the Corporation shall redeem the remaining shares as soon as practicable after additional funds become legally available.
Section 6.7(d) — Termination of Rights. Upon the full payment of the Redemption Price for any share of Series D Preferred Stock, all rights of the holder thereof as a holder of such share shall cease (except the right to receive the Redemption Price), and such share shall no longer be deemed outstanding.
[Drafter's Note: Redemption rights were proposed by Pinnacle and are an open negotiation point. Series A, B, and C Preferred Stock do not carry redemption rights. The inclusion of redemption rights in the Series D terms is contested by Verdana and the existing investors.]
Section 6.8 — Pay-to-Play Provision.
Section 6.8(a) — Pay-to-Play Obligation. If the Corporation consummates a Qualified Financing (as defined below), each holder of Preferred Stock shall have the obligation to purchase its pro rata share of the securities issued in such Qualified Financing, determined based on such holder's percentage ownership of the Corporation's outstanding capital stock on an as-converted, fully-diluted basis immediately prior to such Qualified Financing (such holder's "Pro Rata Share").
Section 6.8(b) — Consequences of Failure to Participate. If any holder of Preferred Stock fails to purchase at least its full Pro Rata Share of the securities offered in a Qualified Financing (a "Non-Participating Holder"), all shares of Preferred Stock held by such Non-Participating Holder shall automatically be converted into an equal number of shares of Common Stock (on an as-converted basis at the then-applicable Conversion Rate) immediately prior to the closing of such Qualified Financing, and such shares of Common Stock shall thereafter be subject to no conversion rights, no liquidation preference, no anti-dilution protection, and no other preferential rights. Such conversion shall be irrevocable and shall be effected without any action on the part of the Non-Participating Holder.
Section 6.8(c) — Qualified Financing. As used herein, a "Qualified Financing" shall mean any issuance by the Corporation of shares of Preferred Stock (or securities convertible into Preferred Stock) in a bona fide equity financing transaction with aggregate gross proceeds to the Corporation of at least $[●].
Section 6.8(d) — Applicability. The pay-to-play provisions of this Section 6.8 shall apply to all holders of Preferred Stock, including holders of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, and Series D Preferred Stock, without exception.
[Drafter's Note: This Section reflects Pinnacle's proposal for a mandatory pay-to-play provision applicable to all Preferred Stock holders. Verdana and the existing investors have objected to this provision. The minimum Qualified Financing threshold dollar amount is to be negotiated.]
ARTICLE VII
BOARD OF DIRECTORS
Section 7.1 — Board Size and Composition.
The number of directors constituting the entire Board of Directors of the Corporation shall be seven (7), unless otherwise changed by amendment to this Restated Certificate or the Bylaws of the Corporation in accordance with applicable law and subject to the protective provisions set forth in Article VI. The Board of Directors shall be composed as follows:
(a) Two (2) directors designated by the holders of a majority of the shares of Common Stock held by the founders of the Corporation (currently Raj Anand and Lena Kovac) (such directors, the "Founder Directors");
(b) One (1) director designated by Ridgeline Ventures Fund III LP (or its successor or permitted assigns), for so long as Ridgeline Ventures Fund III LP (or its successor or permitted assigns) continues to hold at least the number of shares of Series A Preferred Stock set forth in the Voting Agreement (as defined below) (the initial designee being Priya Dasgupta);
(c) One (1) director designated by Northgate Growth Partners Fund II LP (or its successor or permitted assigns), for so long as Northgate Growth Partners Fund II LP (or its successor or permitted assigns) continues to hold at least the number of shares of Series B Preferred Stock set forth in the Voting Agreement (the initial designee being Elliott Margolis);
(d) One (1) director designated by Brindoval Capital Group LLC (or its successor or permitted assigns), for so long as Brindoval Capital Group LLC (or its successor or permitted assigns) continues to hold at least the number of shares of Series C Preferred Stock set forth in the Voting Agreement (the initial designee being Diana Chen);
(e) One (1) director designated by Pinnacle Venture Fund II LP (or its successor or permitted assigns), for so long as Pinnacle Venture Fund II LP (or its successor or permitted assigns) continues to hold at least the number of shares of Series D Preferred Stock set forth in the Voting Agreement (the initial designee being Marcus Trejo or his designee) (the "Series D Director"); and
(f) One (1) independent director who qualifies as "independent" under applicable stock exchange rules and regulations, mutually agreed upon by (I) the holders of a majority of the shares of Common Stock and (II) the holders of a majority of the shares of Preferred Stock (voting together as a single class on an as-converted basis).
As used herein, the "Voting Agreement" means that certain Amended and Restated Voting Agreement, dated as of the date hereof, among the Corporation and the stockholders party thereto, as may be amended from time to time.
Section 7.2 — Removal and Vacancies.
Each designated director may be removed from office, with or without cause, only by the affirmative vote or written consent of the party or parties entitled to designate such director pursuant to Section 7.1 above. No other person or group of stockholders shall be entitled to vote for the removal of a designated director, and any purported removal by any other person or group shall be void and of no effect. Any vacancy in a designated board seat (whether arising from death, resignation, disqualification, removal, or any other cause) shall be filled solely by the party or parties entitled to designate such director pursuant to Section 7.1 above.
Section 7.3 — Board Observer Rights.
[Reserved. Board observer rights, if any, shall be addressed in the Amended and Restated Investors' Rights Agreement among the Corporation and the investors party thereto.]
ARTICLE VIII
INDEMNIFICATION AND LIMITATION OF LIABILITY
Section 8.1 — Limitation of Director Liability.
To the fullest extent permitted by the DGCL as it now exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than the DGCL permitted the Corporation to provide prior to such amendment), no director of the Corporation shall be personally liable to the Corporation or to any of its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the DGCL (relating to unlawful payment of dividends, unlawful stock purchases, or unlawful redemptions), or (iv) for any transaction from which the director derived an improper personal benefit. This provision is intended to provide the maximum protection permitted by Section 102(b)(7) of the DGCL.
If the DGCL is amended after the filing of this Restated Certificate to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director of the Corporation shall be eliminated or limited to the fullest extent permitted by the DGCL, as so amended.
Section 8.2 — Indemnification.
The Corporation shall indemnify and hold harmless, to the fullest extent permitted by applicable law, as now or hereafter in effect, each person who was or is made a party to, or is threatened to be made a party to, or is otherwise involved in, any threatened, pending, or completed action, suit, or proceeding, whether civil, criminal, administrative, or investigative (a "Proceeding"), by reason of the fact that such person is or was a director or officer of the Corporation, or, while serving as a director or officer of the Corporation, is or was serving at the request of the Corporation as a director, officer, employee, agent, trustee, or fiduciary of another corporation, partnership, joint venture, trust, nonprofit entity, or other enterprise, including service with respect to employee benefit plans (each, an "Indemnified Person"), against all liability, loss, and expense (including, without limitation, attorneys' fees, judgments, fines, ERISA excise taxes or penalties, and amounts paid in settlement) actually and reasonably incurred by such Indemnified Person in connection with such Proceeding.
The Corporation shall, to the fullest extent not prohibited by applicable law, pay the expenses (including attorneys' fees) incurred by any Indemnified Person in defending or otherwise participating in any Proceeding in advance of its final disposition; provided, however, that, to the extent required by applicable law, such payment of expenses in advance of the final disposition of the Proceeding shall be made only upon receipt of an undertaking by the Indemnified Person to repay all amounts advanced if it shall ultimately be determined by final judicial decision from which there is no further right to appeal that such Indemnified Person is not entitled to be indemnified for such expenses under this Restated Certificate or otherwise.
The rights to indemnification and advancement of expenses conferred by this Section 8.2 shall be contract rights, shall vest upon the Indemnified Person's commencement of service as a director or officer of the Corporation, and shall continue as to an Indemnified Person who has ceased to be a director or officer of the Corporation and shall inure to the benefit of such person's heirs, executors, and administrators. No amendment, alteration, or repeal of this Section 8.2 that adversely affects the rights of any Indemnified Person shall be effective as to such Indemnified Person with respect to any Proceeding involving any occurrence or alleged occurrence of any action or omission to act that took place prior to such amendment, alteration, or repeal.
The rights conferred by this Article VIII shall not be exclusive of any other right that any person may have or hereafter acquire under any statute, provision of this Restated Certificate, the Bylaws, any agreement (including, without limitation, any separate indemnification agreement between the Corporation and any director or officer, including the Indemnification Agreement for the Pinnacle board designee), any vote of stockholders or disinterested directors, or otherwise.
The Corporation may, to the extent authorized from time to time by the Board of Directors, provide rights to indemnification and advancement of expenses to employees and agents of the Corporation similar to those conferred in this Section 8.2 to directors and officers of the Corporation.
ARTICLE IX
CORPORATE GOVERNANCE PROVISIONS
Section 9.1 — Bylaws.
The Board of Directors is expressly authorized to adopt, amend, alter, or repeal the Bylaws of the Corporation, subject to the protective provisions set forth in Article VI hereof. The stockholders of the Corporation shall also have the power to adopt, amend, alter, or repeal the Bylaws of the Corporation, provided that any such action by the stockholders shall require the affirmative vote of the holders of a majority of the voting power of all outstanding shares of capital stock of the Corporation entitled to vote thereon, voting together as a single class, in addition to any separate class or series vote required under Article VI.
Section 9.2 — Written Consent of Stockholders.
Any action required or permitted to be taken at any annual or special meeting of stockholders of the Corporation may be taken without a meeting, without prior notice, and without a vote, if a consent or consents in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Prompt notice of the taking of any corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing.