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PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGE ATTORNEY WORK PRODUCT

PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT PRIVILEGE — ATTORNEY WORK PRODUCT

TAX STRUCTURE MEMORANDUM

PINNACLE CONTINUATION VEHICLE LP

CALDERWOOD & HARKNESS LLP 555 California Street, Suite 4200 San Francisco, California 94104

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I. EXECUTIVE SUMMARY

This memorandum presents the recommended tax-optimal fund-level structure for Pinnacle Continuation Vehicle LP ("PCV" or the "CV"), a GP-led secondary continuation vehicle designed to hold three high-performing software and SaaS portfolio company stakes currently held by Pinnacle Venture Fund II LP ("Fund II"). The proposed transaction is structured as a GP-led secondary / continuation vehicle transaction, a structure that has become increasingly prevalent in the venture capital and growth equity markets for extending the holding period of top-performing assets beyond the original fund term while providing liquidity options to existing limited partners.

This engagement was opened on July 15, 2025, and this memorandum constitutes the core deliverable under our engagement letter of even date. We have been working closely with the Pinnacle Capital Management LLC team, as well as with the other advisors described herein, to develop the structural recommendations set forth below.

Portfolio Summary. The three portfolio companies to be transferred to the CV are all Delaware C-corporations operating in the enterprise software and SaaS sectors:

• Luminos Systems Inc. — current fair market value ("FMV") of Pinnacle's stake of $612 million;

• ClearArc Software Inc. — current FMV of $468 million; and

• Vectral Cloud Inc. — current FMV of $260 million.

The aggregate FMV of the three stakes is approximately $1.34 billion, against an aggregate original cost basis of $138 million, yielding aggregate unrealized gain of approximately $1.202 billion and an implied gross multiple on invested capital ("MOIC") of 9.71×.

CV Capitalization. The total capitalization of the CV at closing is expected to be approximately $1.074 billion, comprised of: (a) approximately $680 million in net asset value rolled into the CV by existing Fund II limited partners electing to continue their exposure to the portfolio (the "Rolling LPs"); (b) $380 million of new capital committed by Garrison Secondaries Fund IV LP, the lead secondary buyer (Mitchell Adler, Partner; counsel: Whitfield & Calloway LLP, Douglas Whitfield, Partner); and (c) $14 million of GP co-investment capital.

Key Tax Objectives. The tax structuring of the CV is designed to achieve the following principal objectives:

(a) Non-recognition treatment on contribution under Section 721. The contribution of portfolio company shares from Fund II (or from Rolling LPs, as applicable) to the CV must qualify for non-recognition treatment under Section 721 of the Internal Revenue Code of 1986, as amended (the "Code"), thereby preserving the existing low tax basis and long-term holding periods in the contributed shares.

(b) QSBS preservation under Section 1202. All three portfolio companies were initially acquired at original issuance and are believed to meet the requirements for qualified small business stock ("QSBS") under Section 1202. Preservation of QSBS status through the CV structuring is critical to enabling Rolling LPs and GP principals to claim the Section 1202 gain exclusion upon ultimate disposition. This is particularly sensitive with respect to Vectral Cloud Inc., whose five-year holding period will not be satisfied until March 2026.

(c) Section 1061 holding period preservation for legacy GP carry. The existing carried interest held by the GP in Fund II has satisfied the three-year holding period requirement under Section 1061 (applicable to "applicable partnership interests" or "APIs"). The CV structure must preserve this holding period through a rollover of the legacy carry into the CV, while appropriately delineating the new CV carry interest, which will commence a fresh three-year holding period.

(d) UBTI blocking for tax-exempt LPs and ECI/FIRPTA blocking for non-U.S. LPs. Certain Rolling LPs are U.S. tax-exempt entities (including Meridian Public Employees' Retirement System and Ashford University Endowment) or non-U.S. investors (including Sovereign Capital Partners (Cayman) Ltd.). The structure must include blocker entities to prevent the flow-through of unrelated business taxable income ("UBTI") to tax-exempt investors and effectively connected income ("ECI") and FIRPTA gain to non-U.S. investors.

(e) Equitable Section 704(c) allocation of $1.202 billion in built-in gain. The contribution of appreciated portfolio company shares to the CV creates a significant disparity between tax basis and book value. Section 704(c) requires that allocations of income, gain, loss, and deduction with respect to contributed property take into account the built-in gain, so that pre-contribution gain is allocated to the contributing partners (Rolling LPs) rather than to Garrison or other new investors.

(f) State tax optimization. The structure should, to the extent possible, minimize state income tax exposure for the fund, its GP, and its investors, while complying with applicable state withholding and filing requirements.

Summary Recommendation. Based on the analysis set forth in detail in this memorandum, we recommend the following structure:

• The CV will be organized as a Delaware limited partnership (Pinnacle Continuation Vehicle LP) with a Delaware LLC general partner (Pinnacle CV Partners LLC).

• A dual blocker architecture will be employed, consisting of PCV Domestic blocker Inc., a Delaware C-corporation for U.S. tax-exempt LPs, and PCV International Holdings Ltd., a Cayman Islands exempted company for non-U.S. LPs.

• The portfolio company shares will be contributed to the CV pursuant to Section 721, preserving basis, holding period, and QSBS status. The transfer will employ a two-step distribution/contribution approach (distribution from Fund II to Rolling LPs under Section 1202(h)(4)(A), followed by contribution from Rolling LPs to the CV under Section 721) to maximize QSBS tacking protection.

• The remedial allocation method under Treasury Regulations Section 1.704-3(d) will be adopted for purposes of Section 704(c), ensuring that the $1.202 billion of built-in gain is allocated equitably to the contributing partners and that Garrison is not burdened with pre-contribution gain.

• The GP carried interest will be bifurcated into a legacy carry tranche (rolling over the Fund II carried interest with its existing three-year holding period) and a new carry tranche (15% over 7% preferred return, with a fresh Section 1061 holding period commencing at closing).

Coordination Note. Hawthorne Reid LLP (Vanessa Liu, Partner) is serving as fund formation and corporate counsel to Pinnacle and is responsible for drafting the CV limited partnership agreement (the "LPA"). This memorandum addresses tax structuring only. We will provide Hawthorne Reid LLP with a markup of the tax-related provisions of the LPA following delivery of this memorandum.

Disclaimer. This memorandum constitutes tax advice and does not constitute a formal tax opinion. A separate Section 721 non-recognition opinion letter will be prepared and delivered at closing, currently targeted for October 31, 2025.

The remainder of this memorandum addresses each of these issues in detail.

II. BACKGROUND AND TRANSACTION OVERVIEW

A. Fund II Overview

Pinnacle Venture Fund II LP ("Fund II") is a Delaware limited partnership formed in 2019 and registered with the Delaware Secretary of State under LP File No. DE-LP-2019-04817. Fund II's employer identification number is 84-3291067. Its registered agent is Pacific Registered Agents Inc., located at 1209 Orange Street, Wilmington, Delaware 19801.

Fund II's general partner is Pinnacle Capital Partners II LLC, a Delaware limited liability company with EIN 84-3291104. The management company for the fund is Pinnacle Capital Management LLC, a Delaware limited liability company with EIN 82-6140538, with its principal office at 2100 Sand Hill Road, Suite 340, Menlo Park, California 94025.

Fund II is a 2019-vintage venture capital fund. The fund held its final close in December 2019. Total committed capital is $875 million, of which $831.25 million has been called (representing approximately 95% of total commitments). The fund's investment period ended in December 2024. The management fee, originally charged at a rate based on committed capital during the investment period, has transitioned to 1.5% per annum on invested capital for the post-investment period.

As of June 30, 2025, Fund II's current gross net asset value ("NAV") is approximately $1.82 billion, with a net NAV of approximately $1.56 billion after accrued management fees, carried interest reserves, and fund-level expenses. These figures are based on audited financials prepared by Andover & Strauss LLP (Patricia Clemons, Audit Partner).

Fund II's carried interest is structured as a 20% carry over an 8% preferred return (compounded annually), with a 100% GP catch-up to a 20/80 split, on a whole-fund waterfall basis. The economic interests of the GP principals in Fund II's carried interest are allocated as follows:

B. Portfolio Companies to Be Transferred

The CV is being formed to hold Fund II's equity positions in three high-performing portfolio companies, each of which is a Delaware C-corporation. The following subsections describe each portfolio company in detail.

1. Luminos Systems Inc. Luminos Systems Inc. is a Delaware C-corporation (EIN 47-8823156) headquartered at 500 Folsom Street, 14th Floor, San Francisco, California 94105. The company is led by CEO Priya Venkatesh. Luminos has developed an AI-powered revenue operations platform designed for enterprise SaaS companies, providing predictive analytics, pipeline management, and revenue forecasting capabilities. The company has experienced strong growth since Fund II's initial investment and has established itself as a category leader in the revenue operations space.

Fund II made its initial investment in Luminos during the first quarter of 2020, leading the company's Series B financing round. Fund II subsequently participated in the company's Series C round. Fund II's current ownership in Luminos is 24.7% on a fully diluted basis. The current fair market value of Fund II's stake is $612 million, based on a June 2025 Section 409A valuation that established the company's enterprise value at $2.48 billion. Fund II's original cost basis in the Luminos shares, across the Series B and Series C rounds, is $58.5 million, resulting in a built-in gain of $553.5 million ($612M − $58.5M).

With respect to QSBS eligibility, the Luminos shares were acquired at original issuance from the company. The five-year holding period under Section 1202 will be satisfied as of August 2025. We have confirmed that the company's aggregate gross assets were below $50 million at the time of issuance. The 10× exclusion ceiling under Section 1202(b)(1)(B) is $585 million per eligible taxpayer (10 × $58.5M cost basis). Based on our preliminary analysis, QSBS status for the Luminos shares is believed to be intact.

2. ClearArc Software Inc. ClearArc Software Inc. is a Delaware C-corporation (EIN 83-5519274) headquartered at 1201 Lake Austin Blvd, Suite 600, Austin, Texas 78703. The company is led by CEO Jonathan Hargrove. ClearArc has developed a cloud-native compliance and audit automation platform purpose-built for financial services institutions, enabling banks, insurance companies, and fintech firms to automate regulatory compliance workflows, internal audit processes, and risk management reporting.

Fund II made its initial investment in ClearArc during the second quarter of 2020, serving as the lead investor in the company's Series A round. Fund II subsequently participated in the company's Series B round. Fund II's current ownership in ClearArc is 31.2% on a fully diluted basis. The current fair market value of Fund II's stake is $468 million, based on a $1.50 billion enterprise value. Fund II's original cost basis across the Series A and Series B rounds is $37.4 million, resulting in a built-in gain of $430.6 million ($468M − $37.4M).

With respect to QSBS eligibility, the ClearArc shares were acquired at original issuance from the company. The five-year holding period under Section 1202 will be satisfied as of September 2025. The 10× exclusion ceiling is $374 million per eligible taxpayer (10 × $37.4M). Based on our preliminary analysis, QSBS status for the ClearArc shares is believed to be intact.

3. Vectral Cloud Inc. Vectral Cloud Inc. is a Delaware C-corporation (EIN 85-1102847) headquartered at 700 17th Street, Suite 2200, Denver, Colorado 80202. The company is led by CEO Elena Kowalski. Vectral has developed a multi-cloud infrastructure orchestration and FinOps platform that enables enterprises to manage, optimize, and govern workloads across multiple cloud providers (Meridian Technologies, Azure, Northgate Corporation), with a particular focus on cost optimization, security posture management, and regulatory compliance for cloud infrastructure.

Fund II made its initial investment in Vectral in March 2021, participating in the company's Series B round. Fund II's current ownership in Vectral is 18.9% on a fully diluted basis. The current fair market value of Fund II's stake is $260 million, based on a $1.376 billion enterprise value (18.9% × $1.376B ≈ $260M). Fund II's original cost basis is $42.1 million (Series B investment), resulting in a built-in gain of $217.9 million ($260M − $42.1M).

Vectral presents two important issues with respect to QSBS eligibility that distinguish it from the other two portfolio companies:

First, the five-year holding period under Section 1202 is not yet satisfied. Fund II's initial investment was made in March 2021, meaning the five-year holding period will not be reached until March 2026 — approximately five months after the CV's target final close of October 31, 2025. As discussed in detail in Section V below, the CV structure must be carefully designed to ensure that the holding period tacks through the transfer to the CV so that the March 2026 date is not reset.

Second, the company's aggregate gross assets at the time of the March 2021 Series B issuance were near the $50 million threshold established under Section 1202(d)(1). Further diligence is required to confirm that Vectral's gross assets did not exceed this threshold at the time of issuance. We recommend obtaining a formal certification from Elena Kowalski (CEO) regarding the company's gross asset levels at the time of the Series B issuance, as well as reviewing the audited financial statements for the relevant period.

4. Aggregate Portfolio Summary. The following table summarizes the aggregate portfolio to be transferred to the CV:

The implied gross MOIC on the aggregate portfolio is 9.71× ($1,340,000,000 ÷ $138,000,000).

C. LP Elections and Capitalization

The Fund II limited partnership agreement permits the GP to offer existing limited partners an election to either "roll" their interests into the CV (retaining continued exposure to the three portfolio companies) or "cash out" their interests (receiving liquidity funded by Garrison's new capital commitment). The LP election deadline is September 15, 2025. The capitalization estimates set forth below are based on preliminary indications received from investors and their advisors as of the date of this memorandum.

1. Rolling LPs (Estimated ~$680M NAV). The following known Rolling LPs have indicated their intention to roll 100% of their respective Fund II interests into the CV:

Meridian Public Employees' Retirement System (Trevor Huang, Chief Investment Officer): Meridian committed $125 million to Fund II and has indicated it will roll 100% of its interest into the CV. Meridian is a U.S. tax-exempt pension fund organized under a state retirement statute, qualifying for tax-exempt status under Section 501(a) of the Code by reason of its status as a trust forming part of a plan described in Section 401(a). Meridian has high UBTI sensitivity and requires a blocker entity to prevent the flow-through of unrelated business taxable income.

Ashford University Endowment (Camille Berger, Director of Investments): Ashford committed $50 million to Fund II and has indicated it will roll 100% of its interest into the CV. Ashford is a U.S. tax-exempt organization described in Section 501(c)(3) of the Code. Like Meridian, Ashford has high UBTI sensitivity and requires a blocker entity.

Sovereign Capital Partners (Cayman) Ltd. (Kenneth Fong, Managing Director): Sovereign committed $75 million to Fund II and has indicated it will roll 100% of its interest into the CV. Sovereign is a Cayman Islands exempted company that serves as a non-U.S. feeder vehicle for Asian family offices. As a non-U.S. investor, Sovereign has high ECI/FIRPTA sensitivity and requires an offshore blocker entity to avoid U.S. tax filing obligations, ECI taxation under Section 882, and FIRPTA withholding under Sections 897 and 1445.

Other Rolling LPs: The remainder of the estimated $680 million Rolling LP pool consists of additional Fund II limited partners that have indicated their intention to roll their interests. The final composition will be confirmed following the September 15, 2025 LP election deadline.

2. Cashing-Out LPs (~$280M NAV). Certain Fund II limited partners have elected or are expected to elect to cash out their interests in exchange for liquidity:

Redstone Family Office LLC (Barbara Redstone, Principal): Redstone committed $40 million to Fund II and is electing full liquidity. Redstone is a U.S. taxable domestic investor and does not require a blocker entity.

Other Cashing-Out LPs: The balance of the approximately $280 million in liquidity elections is comprised of various other Fund II limited partners. The cash-out will be funded by Garrison's new capital commitment, as described below.

3. New Secondary Investor. Garrison Secondaries Fund IV LP is the lead secondary buyer for the CV transaction. Garrison is a Delaware limited partnership headquartered at 399 Park Avenue, 22nd Floor, New York, New York 10022. Its general partner is Garrison Capital Advisors LLC. The key contact for the transaction is Mitchell Adler, Partner. Garrison's counsel is Whitfield & Calloway LLP (Douglas Whitfield, Partner), located at 280 Park Avenue, 30th Floor, New York, New York 10017.

Garrison has committed to provide $380 million of new capital to the CV. Of this amount, $280 million will be used to fund the liquidity payments to cashing-out LPs, and $100 million will be reserved for follow-on investments in the portfolio companies and CV operating expenses.

4. Total CV Capitalization. The total capitalization of the CV at closing is summarized as follows:

D. Transaction Advisors

The following professional advisors have been engaged in connection with the CV transaction:

III. ENTITY SELECTION AND PROPOSED CV STRUCTURE

A. Recommended Entity Type for the CV

We recommend that the CV be organized as a Delaware limited partnership under the name Pinnacle Continuation Vehicle LP. This recommendation is based on the following considerations:

Flow-Through Taxation. As a partnership for U.S. federal income tax purposes, the CV will not be subject to an entity-level federal income tax. Instead, all items of income, gain, loss, deduction, and credit will flow through to the partners on their respective Schedule K-1s, ensuring that investors are taxed only once on the economic returns generated by the portfolio companies. This single layer of taxation is a fundamental advantage over a corporate structure, particularly given the magnitude of the built-in gain in the portfolio ($1.202 billion aggregate).

Allocation Flexibility. The partnership form provides substantial flexibility in the allocation of income, gain, loss, and deduction among the partners. This flexibility is critical for the CV, which must implement complex allocation provisions including: (a) remedial allocations under Section 704(c) for the built-in gain in the contributed portfolio company shares; (b) bifurcated carried interest allocations between legacy and new carry tranches; (c) preferred return and waterfall mechanics; and (d) special allocations to account for the different tax characteristics of the various investor classes (taxable, tax-exempt, and non-U.S.).

Compatibility with Section 721. The contribution of appreciated portfolio company shares to a partnership qualifies for non-recognition treatment under Section 721(a), subject to the analysis set forth in Section IV of this memorandum. A partnership structure is therefore essential to achieving the primary tax objective of preserving the existing low basis and long holding period in the contributed shares.

Industry Standard. The Delaware limited partnership is the industry-standard vehicle for GP-led continuation fund transactions. Institutional investors, secondary buyers, and their respective counsel are familiar with the governance framework, fiduciary standards, and economic conventions of the Delaware limited partnership form. This familiarity reduces negotiation friction and facilitates the closing process.

Alternative Structures Considered. We considered two alternative structures and concluded that neither is preferable:

Delaware LLC. A Delaware limited liability company would provide similar flow-through taxation and allocation flexibility. However, the limited partnership form is preferred for several reasons: (i) limited partners in a Delaware limited partnership have a well-defined, limited role in governance that is familiar to institutional investors; (ii) the distinction between the general partner (with management authority and fiduciary duties) and limited partners (with economic interests and limited governance rights) mirrors the GP/LP dynamic expected in the CV; and (iii) the limited partnership form is more widely used in the continuation vehicle market, reducing documentation and negotiation costs.

Offshore Limited Partnership (e.g., Cayman Islands). An offshore limited partnership could provide certain tax benefits for non-U.S. investors but would create substantial complications for U.S. investors (who constitute the majority of the CV's capitalization), including potential controlled foreign corporation ("CFC") or passive foreign investment company ("PFIC") issues. The dual blocker architecture described in Section VII below addresses the needs of non-U.S. investors more effectively without imposing these burdens on U.S. investors.

Proposed GP Entity. The general partner of the CV will be Pinnacle CV Partners LLC, to be formed as a Delaware limited liability company. As a single-member LLC (owned by the Pinnacle principals), the GP entity will be disregarded for federal income tax purposes unless an election is made otherwise. The GP entity will have customary general partner authority under the CV LPA, including authority over investment decisions, fund operations, and portfolio company management.

Term. The CV will have a term of five years from the final close (i.e., through approximately October 31, 2030), with two one-year extensions at the discretion of the GP. This provides a total potential investment horizon of seven years from closing, which is consistent with the expected timeline for exit of the portfolio companies through initial public offerings, strategic acquisitions, or other liquidity events.

B. Proposed Economic Terms

The economic terms of the CV have been negotiated with the Rolling LPs and Garrison and reflect the current market for GP-led continuation vehicle transactions. The proposed terms represent a significant concession from Fund II's original terms, consistent with industry practice for continuation vehicles where the GP is seeking to extend the investment period beyond the original fund term.

Management Fee. The CV management fee will be 1.25% per annum calculated on NAV, reduced from Fund II's current rate of 1.5% on invested capital. This reduction reflects the fact that the CV is holding a concentrated portfolio of three mature investments that require less active management than a diversified fund deploying new capital across multiple new investments.

Carried Interest. The GP's carried interest in the CV will be 15% over a 7% preferred return, structured as a European-style (whole-fund) waterfall. This compares favorably for investors to Fund II's original terms of 20% carry over an 8% preferred return on a whole-fund basis. The reduced carry percentage and lower hurdle rate reflect the continuation vehicle market convention, the maturity of the underlying investments, and the reduced risk profile associated with a portfolio that has already demonstrated significant value creation.

GP Co-Investment. The GP will contribute $14 million of co-investment capital to the CV, demonstrating alignment of interest with the limited partners. The GP co-invest will be treated as a capital interest (not a profits interest or carried interest), as discussed further in Section VI.F below.

Estimated AUM at Close. The estimated assets under management at closing will consist of the portfolio company FMV of $1.34 billion plus the $100 million of follow-on reserves and expense funding contributed by Garrison, for a total of approximately $1.44 billion.

C. Structural Diagram Overview

The following narrative describes the overall organizational structure of the CV transaction. A schematic organizational chart is attached as Appendix C.

Step One: Distribution from Fund II to Rolling LPs. Fund II will distribute the portfolio company shares (Luminos, ClearArc, and Vectral) in kind to the Rolling LPs in proportion to their respective interests in Fund II. This distribution will be structured as a current distribution under Section 731 and will qualify for QSBS tacking under Section 1202(h)(4)(A). Each Rolling LP will receive its pro rata share of the portfolio company shares based on its economic interest in Fund II.

Step Two: Contribution from Rolling LPs to PCV. Each Rolling LP will contribute its newly received portfolio company shares to Pinnacle Continuation Vehicle LP in exchange for a limited partnership interest in the CV. This contribution will qualify for non-recognition treatment under Section 721(a) of the Code. The CV's basis in the contributed shares will be the Rolling LPs' carry-over basis (Section 722), and the Rolling LPs' basis in their CV interests will equal their basis in the contributed shares (Section 723). Holding periods will tack under Section 1223(1).

Step Three: Garrison Subscription. Garrison Secondaries Fund IV LP will subscribe for a new limited partnership interest in the CV by contributing $380 million in cash. Of this amount, $280 million will be distributed by the CV (or, as structured, paid directly to Fund II for distribution) to Fund II to provide liquidity to the cashing-out LPs. The remaining $100 million will be retained in the CV for follow-on investments and operating expenses.

Step Four: Blocker Entity Interposition. The Rolling LPs that are tax-exempt (Meridian and Ashford) will invest in the CV through PCV Domestic blocker Inc., a newly formed Delaware C-corporation. The non-U.S. Rolling LP (Sovereign Capital Partners) will invest through PCV International Holdings Ltd., a newly formed Cayman Islands exempted company. Each blocker entity will hold a limited partnership interest in the CV on behalf of its respective investor class.

Step Five: GP and Carry Structure. Pinnacle CV Partners LLC will serve as general partner and will hold the GP co-invest capital interest and the carried interest in the CV. The carried interest will be bifurcated into a legacy carry tranche (rolling over the economics and holding period from Fund II) and a new carry tranche (reflecting the reduced 15%/7% terms negotiated for the CV).

Flow of Funds. At closing, the flow of funds will be as follows: (i) Garrison will fund its $380 million commitment; (ii) $280 million will be used to provide liquidity to cashing-out LPs; (iii) $100 million will be held in the CV's accounts for follow-on reserves and expenses; (iv) the GP will contribute $14 million of co-invest capital; and (v) the Rolling LPs will contribute portfolio company shares (and/or interests through blocker entities) with an aggregate FMV of $680 million and an aggregate tax basis determined by reference to their respective bases in their Fund II interests.

IV. SECTION 721 NON-RECOGNITION CONTRIBUTION ANALYSIS

A. General Rule Under Section 721(a)

Section 721(a) of the Code provides that "[n]o gain or loss shall be recognized to a partnership or to any of its partners in the case of a contribution of property to the partnership in exchange for an interest in the partnership." This non-recognition rule is one of the foundational provisions of subchapter K and reflects the policy judgment that the formation of or contribution to a partnership represents a change in the form of ownership, rather than a realization event, that should not trigger current taxation.

Application to the CV Transaction. The CV transaction involves the contribution of three sets of highly appreciated portfolio company shares — with an aggregate built-in gain of $1.202 billion — to a newly formed partnership (PCV) in exchange for limited partnership interests. If the contribution qualifies under Section 721(a), no gain or loss will be recognized by the contributing partners (the Rolling LPs) or by the CV on the contribution. This non-recognition treatment is the cornerstone of the CV's tax structure and is essential to achieving the transaction's principal tax objectives.

As discussed in Section IV.B below, the precise mechanics of the contribution — whether Fund II contributes the shares directly to the CV in a single step or whether Fund II first distributes the shares to the Rolling LPs who then contribute them to the CV in a two-step process — affect the analysis under both Section 721 and Section 1202. Under either approach, the contribution of property (portfolio company shares) in exchange for a partnership interest (CV limited partnership interest) falls squarely within the scope of Section 721(a), provided that the transaction is not recharacterized as a sale, exchange, or disguised sale under the rules discussed in Section IV.C below.

Basis Consequences Under Section 722. Under Section 722, the CV's basis in the contributed portfolio company shares will equal the contributing partners' adjusted basis in those shares immediately before the contribution — i.e., the carry-over basis from Fund II. The aggregate carry-over basis in the contributed shares is $138 million ($58.5M Luminos + $37.4M ClearArc + $42.1M Vectral). This means that the CV will hold shares with an aggregate FMV of $1.34 billion and an aggregate tax basis of only $138 million, necessitating the Section 704(c) allocation provisions discussed in Section VIII.

Basis in CV Interests Under Section 723. Under Section 723 (read in conjunction with the general basis rules applicable to partnership contributions), each Rolling LP's basis in its CV limited partnership interest will equal its adjusted basis in the portfolio company shares contributed (or, if the contribution is structured as a partnership-to-partnership transfer, its basis in its Fund II interest, as applicable). This ensures that the built-in gain is preserved at the partner level and will be recognized when the Rolling LP ultimately disposes of its CV interest or when the CV disposes of the contributed portfolio company shares.

Holding Period Tacking Under Section 1223(1). Under Section 1223(1), if property received in an exchange has the same basis (in whole or in part) as the property exchanged, the holding period of the received property includes the holding period of the exchanged property. Accordingly, the Rolling LPs' holding period in their CV interests will include their holding period in the contributed portfolio company shares (or Fund II interests, as applicable), and the CV's holding period in the contributed shares will include the contributing partners' holding period. This tacking is critical for maintaining long-term capital gain treatment and, as discussed in Section V, for preserving QSBS holding periods under Section 1202.

B. Partnership-to-Partnership Contribution Mechanics

A significant structural question in the CV transaction is whether the transfer of portfolio company shares from Fund II to the CV should be effected as a single-step or two-step process. Each approach has distinct tax consequences, and the optimal choice depends on balancing administrative efficiency against the need for clear QSBS tacking under Section 1202(h).

Single-Step Approach: Fund II Contributes Directly to the CV. Under this approach, Fund II would contribute the portfolio company shares directly to the CV in exchange for CV limited partnership interests, which would then be distributed to the Rolling LPs. This approach is administratively simpler — it requires fewer intermediate transactions and documentation — but raises questions regarding QSBS tacking. Specifically, Section 1202(h) addresses distributions of QSBS from a partnership to a partner (preserving QSBS status and tacking the holding period) but does not expressly address contributions of QSBS from one partnership to another partnership. There is limited direct authority on whether a partnership-to-partnership contribution preserves QSBS status.

Additionally, the single-step approach raises questions regarding the interaction with Fund II's existing Section 704(c) layers. Fund II may have its own Section 704(c) built-in gain allocations with respect to the portfolio company shares, and a direct contribution from Fund II to the CV would need to account for the tiering of these allocations through two partnership levels.

Two-Step Approach: Fund II Distributes to Rolling LPs; Rolling LPs Contribute to CV. Under this approach: (1) Fund II distributes the portfolio company shares in kind to the Rolling LPs, and (2) each Rolling LP contributes its share of the portfolio company stock to the CV in exchange for a CV limited partnership interest. This approach provides the clearest path to QSBS preservation because:

• Step One (distribution from Fund II to Rolling LPs) falls squarely within Section 1202(h)(4)(A), which provides that QSBS distributed by a partnership to a partner retains its QSBS character, and the partner tacks the partnership's holding period.

• Step Two (contribution from Rolling LPs to CV) is a standard Section 721 contribution, which does not constitute a "sale or exchange" and therefore does not trigger a resetting of the QSBS holding period. The Rolling LPs' holding period in the QSBS shares tacks to the CV under Section 1223(1).

The two-step approach also avoids the complexities of tiered Section 704(c) layers, because Fund II's Section 704(c) obligations with respect to the portfolio company shares are resolved at the Fund II level upon distribution, and the CV establishes fresh Section 704(c) layers based on the difference between the shares' FMV and carry-over basis at the time of contribution.

Interaction with Fund II's Existing Section 704(c) Layers. Fund II may have existing Section 704(c) layers with respect to the portfolio company shares if there were prior admissions of new limited partners at different valuations. Under the two-step approach, the in-kind distribution from Fund II to the Rolling LPs would trigger the application of Fund II's Section 704(c) allocations. We will need to coordinate with Andover & Strauss LLP to identify any existing Section 704(c) layers at the Fund II level and ensure that the distribution is properly accounted for.

Recommendation. As discussed more fully in Section V below, we recommend the two-step approach as the primary structuring method, primarily because it provides the most robust QSBS tacking analysis under Section 1202(h). The administrative burden of the two-step approach is manageable given the concentrated nature of the portfolio (three investments) and the relatively defined investor base.

C. Disguised Sale Risk Under Section 707(a)(2)(B)

Section 707(a)(2)(B) of the Code, together with the regulations promulgated thereunder (Treas. Reg. §§ 1.707-3 through 1.707-9), provides that a transfer of property by a partner to a partnership, followed by a related transfer of money or other consideration from the partnership to the partner (or a related person), may be treated as a disguised sale of the property by the contributing partner. If a transaction is recharacterized as a disguised sale, the contributing partner recognizes gain on the transfer as if it had sold the property for the amount of consideration received, and the partnership takes a cost basis in the property (equal to FMV), rather than a carry-over basis under Section 722.

Two-Year Presumption. Under Treas. Reg. § 1.707-3(c), if within a two-year period a partner transfers property to a partnership and the partnership transfers money or other consideration to the partner (or a related person), the transfers are presumed to be a sale unless the facts and circumstances clearly establish otherwise. Conversely, if more than two years elapse between the property transfer and the money transfer, the transfers are presumed not to be a sale unless the facts and circumstances clearly establish otherwise.

Application to the CV Transaction. The disguised sale rules require careful attention in the context of the CV transaction because two economically related events are occurring contemporaneously:

(i) The Rolling LPs are contributing appreciated portfolio company shares to the CV (property transfer to the partnership); and

(ii) The cashing-out LPs are receiving cash from the CV, funded by Garrison's capital commitment (money transfer from the partnership).

The critical question is whether the cash distributions to the cashing-out LPs could be imputed to the Rolling LPs as part of a disguised sale. If the Rolling LPs were deemed to have received cash consideration in connection with their contribution of property, the contribution would be recharacterized as a sale to the extent of the cash received, and the Rolling LPs would recognize gain.

Analysis. We believe the disguised sale risk in this transaction is low, based on the following analysis:

First, the cash distributions to the cashing-out LPs are not being made to the Rolling LPs. The Rolling LPs are contributing property and receiving only CV limited partnership interests in return — they are not receiving any cash or other consideration from the CV. The cash distributions to the cashing-out LPs are funded by Garrison's independent subscription of $380 million, which is a separate capital commitment made by an unrelated third-party investor. The Rolling LPs and the cashing-out LPs are different partners with different economic elections.

Second, the transaction is structured so that the cash to the cashing-out LPs flows through Fund II's existing distribution waterfall, not through the CV's distribution provisions. Garrison's capital is contributed to the CV, which then distributes cash to Fund II (or directly to the cashing-out LPs) to fund the liquidity elections. The Rolling LPs do not receive any distributions from the CV in connection with the closing.

Third, the economic substance of the transaction supports non-sale treatment. The Rolling LPs are continuing their investment in the same portfolio companies through a different fund vehicle — they are not disposing of their economic interest. The purpose of the CV structure is to extend the investment horizon, not to monetize the Rolling LPs' positions.

Safe Harbors. We have analyzed whether the facts satisfy any of the safe harbors under the disguised sale regulations:

• Preformation Expenditure Safe Harbor (Treas. Reg. § 1.707-4(d)): This safe harbor is not directly applicable, as the distributions to cashing-out LPs do not constitute reimbursements of preformation capital expenditures.

• Reasonable Guaranteed Payment Safe Harbor (Treas. Reg. § 1.707-4(a)): This safe harbor applies to guaranteed payments for capital, but the distributions here are not characterized as guaranteed payments.

• Debt-Financed Distribution Analysis: If the CV incurs leverage at closing, distributions of borrowed funds could potentially trigger the disguised sale rules. However, the current transaction does not contemplate CV-level borrowing at closing; the cash for the cashing-out LPs is funded entirely by Garrison's equity commitment.

Qualified Liability Exception Under Treas. Reg. § 1.707-5. If the CV does assume or take property subject to any liabilities in connection with the contribution, the qualified liability exception under Treas. Reg. § 1.707-5 would need to be analyzed. As currently contemplated, the portfolio company shares are not subject to any liabilities, and the CV is not assuming any Fund II-level debt in connection with the transaction. Accordingly, this exception is not expected to be relevant.

Allocation of CV-Level Debt Under Section 752. Section 752 provides rules for the allocation of partnership liabilities among the partners, which can affect the disguised sale analysis (because an increase in a partner's share of partnership liabilities is treated as a contribution of money under Section 752(a), and a decrease is treated as a distribution of money under Section 752(b)). The current transaction does not contemplate CV-level borrowing at closing. If CV-level debt is subsequently incurred, the allocation of that debt among the partners will need to be analyzed for disguised sale implications.

Recommendation. We recommend that the transaction documents clearly separate the Rolling LP contributions from the cashing-out LP liquidity events. Specifically:

(a) The Rolling LP contribution agreements should make clear that the Rolling LPs are contributing property solely in exchange for CV limited partnership interests, without any contemporaneous or related cash distributions.

(b) The cashing-out LP liquidity payments should be documented as separate transactions funded by Garrison's independent capital commitment.

(c) The transaction documents should include recitals establishing the intent and economic substance of each transaction step.

(d) The GP should avoid making any distributions from the CV to the Rolling LPs within two years of the closing (other than tax distributions, which are not treated as part of a disguised sale under Treas. Reg. § 1.707-4(a)(2)).

D. Section 721 Opinion Letter

As noted in the Executive Summary, a separate formal tax opinion letter will be prepared and delivered at the CV closing (target October 31, 2025). The opinion letter will opine that the contribution of the portfolio company shares by the Rolling LPs to the CV qualifies for non-recognition treatment under Section 721(a) of the Code, and will address the related basis, holding period, and disguised sale issues discussed above.

The opinion letter will be addressed to Pinnacle Capital Management LLC and Pinnacle Venture Fund II LP. The opinion will be signed by Sylvia Hartwell, Responsible Partner, Tax, Calderwood & Harkness LLP. The opinion will be rendered at a "should" level of confidence (i.e., that the contribution "should" qualify for non-recognition treatment), subject to customary assumptions, qualifications, and limitations.

V. QSBS PRESERVATION UNDER SECTION 1202

A. Overview of Section 1202

Section 1202 of the Code provides an exclusion from gross income for gain realized on the sale or exchange of "qualified small business stock" ("QSBS") held for more than five years. For QSBS acquired after September 27, 2010, the exclusion is 100% of the gain, up to the greater of (a) $10 million, or (b) 10 times the taxpayer's adjusted basis in the stock. The excluded gain is also exempt from the 3.8% net investment income tax under Section 1411.

The Section 1202 exclusion is among the most valuable tax benefits available to venture capital investors, and the preservation of QSBS eligibility for the CV portfolio is a paramount tax objective of this transaction. Given the magnitude of the built-in gain in the portfolio ($1.202 billion aggregate), the potential tax savings from QSBS treatment are substantial.

Requirements for QSBS Eligibility. To qualify as QSBS under Section 1202, stock must satisfy all of the following requirements:

(a) Domestic C-Corporation. The stock must be stock of a domestic C-corporation. All three portfolio companies are Delaware C-corporations, satisfying this requirement.

(b) Original Issuance. The stock must be acquired by the taxpayer at its original issuance (directly or through an underwriter), in exchange for money, property (other than stock), or services. Stock acquired on the secondary market does not qualify.

(c) Qualified Small Business. At the time of issuance, the corporation must be a "qualified small business," meaning its aggregate gross assets did not exceed $50 million (including the amount received in the issuance). This is a one-time test measured at the time of stock issuance.

(d) Active Business Requirement. During substantially all of the taxpayer's holding period, at least 80% (by value) of the corporation's assets must be used in the active conduct of one or more qualified trades or businesses. Certain businesses are excluded, including professional services, banking, insurance, farming, and mining. Software/SaaS businesses generally qualify.

(e) Five-Year Holding Period. The taxpayer must hold the stock for more than five years.

Per-Taxpayer Exclusion. The exclusion is applied on a per-taxpayer, per-issuer basis. Each eligible taxpayer may exclude gain up to the greater of $10 million or 10 times its adjusted basis in the stock of each issuing corporation.

B. Analysis by Portfolio Company

1. Luminos Systems Inc. The Luminos shares held by Fund II were acquired at original issuance in connection with the company's Series B and Series C financing rounds. Fund II's aggregate cost basis in the Luminos shares is $58.5 million. The five-year holding period for the initial Series B shares (acquired Q1 2020) will be satisfied as of approximately the first quarter of 2025, and for any additional shares acquired in the Series C round, no later than August 2025 based on the information available to us. We have confirmed that Luminos's aggregate gross assets at the time of each issuance were below the $50 million threshold.

The 10× exclusion ceiling for the Luminos shares is $585 million per eligible taxpayer (10 × $58.5M cost basis). Given that Fund II's current FMV in Luminos is $612 million, the built-in gain of $553.5 million is within the 10× exclusion ceiling, although the $612 million FMV approaches the ceiling. If the company's value continues to appreciate, some portion of the gain could exceed the 10× ceiling on a per-LP basis depending on the LP's proportionate share of the cost basis.

Based on our preliminary analysis, QSBS status for the Luminos shares is believed to be intact, subject to verification of the active business requirement during the holding period and confirmation that no disqualifying events have occurred.

2. ClearArc Software Inc. The ClearArc shares held by Fund II were acquired at original issuance in connection with the company's Series A and Series B financing rounds. Fund II's aggregate cost basis is $37.4 million. The five-year holding period for the initial Series A shares (acquired Q2 2020) will be satisfied as of approximately September 2025. We understand that the company's aggregate gross assets at the time of each issuance were below the $50 million threshold.

The 10× exclusion ceiling is $374 million per eligible taxpayer (10 × $37.4M). Fund II's built-in gain in ClearArc is $430.6 million, which exceeds the 10× exclusion ceiling. Accordingly, a portion of the gain — approximately $56.6 million on an aggregate basis — would not be eligible for the QSBS exclusion even if all other requirements are satisfied. However, the per-LP allocation of the exclusion ceiling depends on each LP's proportionate basis, and many LPs may remain within the ceiling on an individual basis.

Based on our preliminary analysis, QSBS status for the ClearArc shares is believed to be intact, subject to the same caveats as Luminos.

3. Vectral Cloud Inc. The Vectral shares held by Fund II were acquired at original issuance in connection with the company's Series B financing round in March 2021. Fund II's cost basis is $42.1 million. The five-year holding period will not be satisfied until March 2026, which is approximately five months after the CV's target final close of October 31, 2025.

This presents two critical issues:

Holding Period Issue. The CV structure must be designed to ensure that the five-year holding period for the Vectral shares tacks through the distribution from Fund II and contribution to the CV, so that the March 2026 maturity date is preserved. If the transfer were recharacterized as a sale or exchange, the holding period would reset, and the five-year requirement would not be satisfied until 2030 or later — eliminating the QSBS benefit for many years.

Gross Asset Issue. The company's aggregate gross assets at the time of the March 2021 Series B issuance were near the $50 million threshold. If Vectral's aggregate gross assets (including the amount received in the Series B issuance) exceeded $50 million at the time of issuance, the Series B shares would not qualify as QSBS. Further diligence is required to confirm eligibility. We recommend obtaining a formal certification from Elena Kowalski (CEO) regarding the company's gross asset levels at the time of the Series B issuance, and reviewing Andover & Strauss LLP's work papers or the company's own auditor's records for the relevant period.

The 10× exclusion ceiling is $421 million per eligible taxpayer (10 × $42.1M). Fund II's built-in gain in Vectral is $217.9 million, which is well within the 10× ceiling.

QSBS status for the Vectral shares requires further diligence to confirm and is subject to both the gross asset confirmation and the successful tacking of the five-year holding period through the CV transfer.

C. Section 1202(h) Tacking Analysis

The critical legal question for QSBS preservation in the CV transaction is whether the transfer of QSBS from Fund II to the CV preserves the stock's QSBS character and permits tacking of the holding period. Section 1202(h) addresses this question in part but does not expressly cover all of the transactional steps involved.

Statutory Framework. Section 1202(h) provides several tacking rules:

• Section 1202(h)(2) — Gifts: QSBS transferred by gift retains its QSBS character, and the transferee tacks the donor's holding period.

• Section 1202(h)(4)(A) — Partnership Distributions: QSBS distributed by a partnership to a partner retains its QSBS character, and the partner tacks the partnership's holding period. This is the provision most directly relevant to the first step of the recommended two-step approach (Fund II distributing shares to the Rolling LPs).

• Section 1202(h)(4)(B) — Contributions to Partnerships: There is no express statutory provision in Section 1202(h) that addresses the contribution of QSBS to a partnership. Section 1202(h) is largely silent on this transaction. However, a contribution to a partnership under Section 721 is not a "sale or exchange" — it is a non-recognition transfer — and therefore should not constitute a disposition that would terminate QSBS eligibility.

Analysis of the Two-Step Approach.

Step One: Fund II Distributes Shares to Rolling LPs. Under Section 1202(h)(4)(A), when a partnership distributes QSBS to a partner, the distributed stock retains its QSBS character in the hands of the distributee partner, and the partner's holding period includes the partnership's holding period. This provision clearly applies to the first step of the recommended approach. After the distribution, each Rolling LP will hold QSBS shares with a tacked holding period that includes Fund II's holding period (dating back to the original issuance dates in 2020 and 2021).

Step Two: Rolling LPs Contribute Shares to the CV. The second step — the contribution of the QSBS shares by the Rolling LPs to the CV — is a Section 721 non-recognition contribution. Section 721 is not a "sale or exchange" and does not trigger gain recognition. The key question is whether the QSBS character survives this contribution.

While Section 1202(h) does not expressly address contributions to partnerships, we believe the QSBS character should survive for the following reasons:

(i) The contribution under Section 721 is a non-recognition event, not a sale, exchange, or other realization event. Section 1202 refers to gain from the "sale or exchange" of QSBS — since no sale or exchange occurs upon contribution, there is no event that would terminate QSBS eligibility.

(ii) After the contribution, the CV holds the QSBS shares with a tacked holding period and carry-over basis under Sections 1223(2) and 722. If the CV subsequently sells the QSBS shares, the gain will be allocated to the partners under Sections 704(b) and 704(c). Each partner's share of the gain should be eligible for the Section 1202 exclusion to the extent the partner's holding period (including tacked periods) exceeds five years.

(iii) The legislative history of Section 1202 reflects a policy of encouraging long-term investment in small businesses. The contribution of QSBS to a partnership is an intermediate step that facilitates continued holding — exactly the type of transaction that Section 1202 was designed to encourage.

(iv) Several commentators and practitioners have taken the position that QSBS status survives a Section 721 contribution, reasoning by analogy to the partnership distribution rules of Section 1202(h)(4)(A) and the general holding period tacking rules of Section 1223.

Risk Assessment. We note that there is limited direct authority — no published IRS ruling, regulation, or judicial decision — that specifically addresses whether a Section 721 contribution of QSBS from one partnership to another partnership preserves QSBS status. There is a risk that the IRS could take the position that the contribution to the CV constitutes a disposition that interrupts QSBS eligibility, or could attempt to collapse the two steps under the step transaction doctrine, treating the entire transfer as a single transaction that falls outside the safe harbor of Section 1202(h)(4)(A).

We believe this risk is manageable but not negligible, particularly with respect to Vectral, where the five-year holding period will not be satisfied until March 2026. If the IRS were to successfully recharacterize the transaction as a sale or exchange resetting the holding period, the Vectral shares would lose their QSBS eligibility, and the Rolling LPs would lose the ability to exclude up to $217.9 million of gain.

Step Transaction Doctrine Risk. There is a risk that the IRS could seek to collapse the two-step distribution/contribution into a single integrated transaction under the step transaction doctrine, arguing that the distribution from Fund II and the contribution to the CV were mutually dependent steps with no independent economic significance. To mitigate this risk, we recommend:

(a) Ensuring that each step has independent legal and economic significance — the distribution from Fund II should be documented as a bona fide distribution under the Fund II LPA, and the contribution to the CV should be documented as a separate contribution agreement.

(b) Allowing a reasonable time interval between the two steps (even a short period of days) to demonstrate that they are not simultaneously executed.

(c) Documenting the independent business purposes of each step — the distribution serves to wind down Fund II's holding of the portfolio company shares, and the contribution serves to capitalize the CV.

Alternative Approach: Single-Step Contribution. If the two-step approach is determined to be impractical or is disfavored for non-tax reasons, the alternative is a single-step Section 721 contribution directly from Fund II to the CV. This approach is more administratively efficient but, as discussed above, relies on a less well-established legal basis for QSBS tacking. We do not recommend this approach as the primary structure, but we note that it is a viable alternative with a reasonable (though less certain) basis for QSBS preservation.

Vectral-Specific Consideration. Because Vectral's five-year QSBS holding period does not expire until March 2026, any disposition of the Vectral shares before that date would result in the loss of QSBS eligibility. We recommend including a specific holding covenant in the Tax Protection Agreement that prohibits the CV from disposing of the Vectral shares before March 2026, absent the written consent of a supermajority of the Rolling LPs. This covenant should be enforceable by the Rolling LPs and should include appropriate remedies (including indemnification for lost QSBS benefits) in the event of a breach.

D. California Non-Conformity

California does not conform to the federal Section 1202 QSBS exclusion. Revenue and Taxation Code Section 18152.5 expressly decouples California from Section 1202, effective for taxable years beginning on or after January 1, 2013. Accordingly, all gain on the ultimate disposition of the portfolio company shares will be subject to California income tax at ordinary income rates (currently up to 13.3%) for California-resident LPs and to the extent the income is characterized as California-source income.

This non-conformity is a significant cost for California taxpayers in the fund. Given that Fund II and Pinnacle Capital Management LLC are California entities, and that the GP principals (Marcus Aldren, Diana Tsao, and Rafael Montoya) are presumed to be California residents, the California tax exposure on the GP carry and co-invest is substantial. For non-California LPs, the exposure depends on whether the gain from the disposition of the portfolio company shares is characterized as California-source income, which in turn depends on the commercial domicile and activities of the CV and the portfolio companies within California. Luminos Systems, headquartered in San Francisco, creates significant California nexus. We address state tax considerations in greater detail in Section X.

No structuring technique can eliminate California tax exposure for California taxpayers on gain recognized from the sale of the portfolio company shares. The focus of the state tax planning should be on ensuring that non-California LPs are not subjected to unnecessary California-source characterization.

E. Recommendations. Based on the foregoing analysis, we recommend the following actions to preserve QSBS eligibility:

1. Proceed with the two-step distribution/contribution approach as the primary recommendation for transferring the portfolio company shares from Fund II to the CV, in order to maximize the applicability of the Section 1202(h)(4)(A) safe harbor for QSBS tacking.

2. Obtain QSBS eligibility certifications from each portfolio company CEO (Priya Venkatesh for Luminos, Jonathan Hargrove for ClearArc, and Elena Kowalski for Vectral) confirming: (a) the company's status as a domestic C-corporation; (b) the aggregate gross assets at the time of each issuance of QSBS to Fund II; (c) compliance with the active business requirement during the relevant holding period; and (d) the absence of any disqualifying events.

3. Include

PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGE ATTORNEY WORK PRODUCT
PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT PRIVILEGE — ATTORNEY WORK PRODUCT
TAX STRUCTURE MEMORANDUM
PINNACLE CONTINUATION VEHICLE LP
CALDERWOOD & HARKNESS LLP 555 California Street, Suite 4200 San Francisco, California 94104
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I. EXECUTIVE SUMMARY
This memorandum presents the recommended tax-optimal fund-level structure for Pinnacle Continuation Vehicle LP ("PCV" or the "CV"), a GP-led secondary continuation vehicle designed to hold three high-performing software and SaaS portfolio company stakes currently held by Pinnacle Venture Fund II LP ("Fund II"). The proposed transaction is structured as a GP-led secondary / continuation vehicle transaction, a structure that has become increasingly prevalent in the venture capital and growth equity markets for extending the holding period of top-performing assets beyond the original fund term while providing liquidity options to existing limited partners.
This engagement was opened on July 15, 2025, and this memorandum constitutes the core deliverable under our engagement letter of even date. We have been working closely with the Pinnacle Capital Management LLC team, as well as with the other advisors described herein, to develop the structural recommendations set forth below.
Portfolio Summary. The three portfolio companies to be transferred to the CV are all Delaware C-corporations operating in the enterprise software and SaaS sectors:
• Luminos Systems Inc. — current fair market value ("FMV") of Pinnacle's stake of $612 million;
• ClearArc Software Inc. — current FMV of $468 million; and
• Vectral Cloud Inc. — current FMV of $260 million.
The aggregate FMV of the three stakes is approximately $1.34 billion, against an aggregate original cost basis of $138 million, yielding aggregate unrealized gain of approximately $1.202 billion and an implied gross multiple on invested capital ("MOIC") of 9.71×.
CV Capitalization. The total capitalization of the CV at closing is expected to be approximately $1.074 billion, comprised of: (a) approximately $680 million in net asset value rolled into the CV by existing Fund II limited partners electing to continue their exposure to the portfolio (the "Rolling LPs"); (b) $380 million of new capital committed by Garrison Secondaries Fund IV LP, the lead secondary buyer (Mitchell Adler, Partner; counsel: Whitfield & Calloway LLP, Douglas Whitfield, Partner); and (c) $14 million of GP co-investment capital.
Key Tax Objectives. The tax structuring of the CV is designed to achieve the following principal objectives:
(a) Non-recognition treatment on contribution under Section 721. The contribution of portfolio company shares from Fund II (or from Rolling LPs, as applicable) to the CV must qualify for non-recognition treatment under Section 721 of the Internal Revenue Code of 1986, as amended (the "Code"), thereby preserving the existing low tax basis and long-term holding periods in the contributed shares.
(b) QSBS preservation under Section 1202. All three portfolio companies were initially acquired at original issuance and are believed to meet the requirements for qualified small business stock ("QSBS") under Section 1202. Preservation of QSBS status through the CV structuring is critical to enabling Rolling LPs and GP principals to claim the Section 1202 gain exclusion upon ultimate disposition. This is particularly sensitive with respect to Vectral Cloud Inc., whose five-year holding period will not be satisfied until March 2026.
(c) Section 1061 holding period preservation for legacy GP carry. The existing carried interest held by the GP in Fund II has satisfied the three-year holding period requirement under Section 1061 (applicable to "applicable partnership interests" or "APIs"). The CV structure must preserve this holding period through a rollover of the legacy carry into the CV, while appropriately delineating the new CV carry interest, which will commence a fresh three-year holding period.
(d) UBTI blocking for tax-exempt LPs and ECI/FIRPTA blocking for non-U.S. LPs. Certain Rolling LPs are U.S. tax-exempt entities (including Meridian Public Employees' Retirement System and Ashford University Endowment) or non-U.S. investors (including Sovereign Capital Partners (Cayman) Ltd.). The structure must include blocker entities to prevent the flow-through of unrelated business taxable income ("UBTI") to tax-exempt investors and effectively connected income ("ECI") and FIRPTA gain to non-U.S. investors.
(e) Equitable Section 704(c) allocation of $1.202 billion in built-in gain. The contribution of appreciated portfolio company shares to the CV creates a significant disparity between tax basis and book value. Section 704(c) requires that allocations of income, gain, loss, and deduction with respect to contributed property take into account the built-in gain, so that pre-contribution gain is allocated to the contributing partners (Rolling LPs) rather than to Garrison or other new investors.
(f) State tax optimization. The structure should, to the extent possible, minimize state income tax exposure for the fund, its GP, and its investors, while complying with applicable state withholding and filing requirements.
Summary Recommendation. Based on the analysis set forth in detail in this memorandum, we recommend the following structure:
• The CV will be organized as a Delaware limited partnership (Pinnacle Continuation Vehicle LP) with a Delaware LLC general partner (Pinnacle CV Partners LLC).
• A dual blocker architecture will be employed, consisting of PCV Domestic blocker Inc., a Delaware C-corporation for U.S. tax-exempt LPs, and PCV International Holdings Ltd., a Cayman Islands exempted company for non-U.S. LPs.
• The portfolio company shares will be contributed to the CV pursuant to Section 721, preserving basis, holding period, and QSBS status. The transfer will employ a two-step distribution/contribution approach (distribution from Fund II to Rolling LPs under Section 1202(h)(4)(A), followed by contribution from Rolling LPs to the CV under Section 721) to maximize QSBS tacking protection.
• The remedial allocation method under Treasury Regulations Section 1.704-3(d) will be adopted for purposes of Section 704(c), ensuring that the $1.202 billion of built-in gain is allocated equitably to the contributing partners and that Garrison is not burdened with pre-contribution gain.
• The GP carried interest will be bifurcated into a legacy carry tranche (rolling over the Fund II carried interest with its existing three-year holding period) and a new carry tranche (15% over 7% preferred return, with a fresh Section 1061 holding period commencing at closing).
Coordination Note. Hawthorne Reid LLP (Vanessa Liu, Partner) is serving as fund formation and corporate counsel to Pinnacle and is responsible for drafting the CV limited partnership agreement (the "LPA"). This memorandum addresses tax structuring only. We will provide Hawthorne Reid LLP with a markup of the tax-related provisions of the LPA following delivery of this memorandum.
Disclaimer. This memorandum constitutes tax advice and does not constitute a formal tax opinion. A separate Section 721 non-recognition opinion letter will be prepared and delivered at closing, currently targeted for October 31, 2025.
The remainder of this memorandum addresses each of these issues in detail.
II. BACKGROUND AND TRANSACTION OVERVIEW
A. Fund II Overview
Pinnacle Venture Fund II LP ("Fund II") is a Delaware limited partnership formed in 2019 and registered with the Delaware Secretary of State under LP File No. DE-LP-2019-04817. Fund II's employer identification number is 84-3291067. Its registered agent is Pacific Registered Agents Inc., located at 1209 Orange Street, Wilmington, Delaware 19801.
Fund II's general partner is Pinnacle Capital Partners II LLC, a Delaware limited liability company with EIN 84-3291104. The management company for the fund is Pinnacle Capital Management LLC, a Delaware limited liability company with EIN 82-6140538, with its principal office at 2100 Sand Hill Road, Suite 340, Menlo Park, California 94025.
Fund II is a 2019-vintage venture capital fund. The fund held its final close in December 2019. Total committed capital is $875 million, of which $831.25 million has been called (representing approximately 95% of total commitments). The fund's investment period ended in December 2024. The management fee, originally charged at a rate based on committed capital during the investment period, has transitioned to 1.5% per annum on invested capital for the post-investment period.
As of June 30, 2025, Fund II's current gross net asset value ("NAV") is approximately $1.82 billion, with a net NAV of approximately $1.56 billion after accrued management fees, carried interest reserves, and fund-level expenses. These figures are based on audited financials prepared by Andover & Strauss LLP (Patricia Clemons, Audit Partner).
Fund II's carried interest is structured as a 20% carry over an 8% preferred return (compounded annually), with a 100% GP catch-up to a 20/80 split, on a whole-fund waterfall basis. The economic interests of the GP principals in Fund II's carried interest are allocated as follows:
B. Portfolio Companies to Be Transferred
The CV is being formed to hold Fund II's equity positions in three high-performing portfolio companies, each of which is a Delaware C-corporation. The following subsections describe each portfolio company in detail.
1. Luminos Systems Inc. Luminos Systems Inc. is a Delaware C-corporation (EIN 47-8823156) headquartered at 500 Folsom Street, 14th Floor, San Francisco, California 94105. The company is led by CEO Priya Venkatesh. Luminos has developed an AI-powered revenue operations platform designed for enterprise SaaS companies, providing predictive analytics, pipeline management, and revenue forecasting capabilities. The company has experienced strong growth since Fund II's initial investment and has established itself as a category leader in the revenue operations space.
Fund II made its initial investment in Luminos during the first quarter of 2020, leading the company's Series B financing round. Fund II subsequently participated in the company's Series C round. Fund II's current ownership in Luminos is 24.7% on a fully diluted basis. The current fair market value of Fund II's stake is $612 million, based on a June 2025 Section 409A valuation that established the company's enterprise value at $2.48 billion. Fund II's original cost basis in the Luminos shares, across the Series B and Series C rounds, is $58.5 million, resulting in a built-in gain of $553.5 million ($612M − $58.5M).
With respect to QSBS eligibility, the Luminos shares were acquired at original issuance from the company. The five-year holding period under Section 1202 will be satisfied as of August 2025. We have confirmed that the company's aggregate gross assets were below $50 million at the time of issuance. The 10× exclusion ceiling under Section 1202(b)(1)(B) is $585 million per eligible taxpayer (10 × $58.5M cost basis). Based on our preliminary analysis, QSBS status for the Luminos shares is believed to be intact.
2. ClearArc Software Inc. ClearArc Software Inc. is a Delaware C-corporation (EIN 83-5519274) headquartered at 1201 Lake Austin Blvd, Suite 600, Austin, Texas 78703. The company is led by CEO Jonathan Hargrove. ClearArc has developed a cloud-native compliance and audit automation platform purpose-built for financial services institutions, enabling banks, insurance companies, and fintech firms to automate regulatory compliance workflows, internal audit processes, and risk management reporting.
Fund II made its initial investment in ClearArc during the second quarter of 2020, serving as the lead investor in the company's Series A round. Fund II subsequently participated in the company's Series B round. Fund II's current ownership in ClearArc is 31.2% on a fully diluted basis. The current fair market value of Fund II's stake is $468 million, based on a $1.50 billion enterprise value. Fund II's original cost basis across the Series A and Series B rounds is $37.4 million, resulting in a built-in gain of $430.6 million ($468M − $37.4M).
With respect to QSBS eligibility, the ClearArc shares were acquired at original issuance from the company. The five-year holding period under Section 1202 will be satisfied as of September 2025. The 10× exclusion ceiling is $374 million per eligible taxpayer (10 × $37.4M). Based on our preliminary analysis, QSBS status for the ClearArc shares is believed to be intact.
3. Vectral Cloud Inc. Vectral Cloud Inc. is a Delaware C-corporation (EIN 85-1102847) headquartered at 700 17th Street, Suite 2200, Denver, Colorado 80202. The company is led by CEO Elena Kowalski. Vectral has developed a multi-cloud infrastructure orchestration and FinOps platform that enables enterprises to manage, optimize, and govern workloads across multiple cloud providers (Meridian Technologies, Azure, Northgate Corporation), with a particular focus on cost optimization, security posture management, and regulatory compliance for cloud infrastructure.
Fund II made its initial investment in Vectral in March 2021, participating in the company's Series B round. Fund II's current ownership in Vectral is 18.9% on a fully diluted basis. The current fair market value of Fund II's stake is $260 million, based on a $1.376 billion enterprise value (18.9% × $1.376B ≈ $260M). Fund II's original cost basis is $42.1 million (Series B investment), resulting in a built-in gain of $217.9 million ($260M − $42.1M).
Vectral presents two important issues with respect to QSBS eligibility that distinguish it from the other two portfolio companies:
First, the five-year holding period under Section 1202 is not yet satisfied. Fund II's initial investment was made in March 2021, meaning the five-year holding period will not be reached until March 2026 — approximately five months after the CV's target final close of October 31, 2025. As discussed in detail in Section V below, the CV structure must be carefully designed to ensure that the holding period tacks through the transfer to the CV so that the March 2026 date is not reset.
Second, the company's aggregate gross assets at the time of the March 2021 Series B issuance were near the $50 million threshold established under Section 1202(d)(1). Further diligence is required to confirm that Vectral's gross assets did not exceed this threshold at the time of issuance. We recommend obtaining a formal certification from Elena Kowalski (CEO) regarding the company's gross asset levels at the time of the Series B issuance, as well as reviewing the audited financial statements for the relevant period.
4. Aggregate Portfolio Summary. The following table summarizes the aggregate portfolio to be transferred to the CV:
The implied gross MOIC on the aggregate portfolio is 9.71× ($1,340,000,000 ÷ $138,000,000).
C. LP Elections and Capitalization
The Fund II limited partnership agreement permits the GP to offer existing limited partners an election to either "roll" their interests into the CV (retaining continued exposure to the three portfolio companies) or "cash out" their interests (receiving liquidity funded by Garrison's new capital commitment). The LP election deadline is September 15, 2025. The capitalization estimates set forth below are based on preliminary indications received from investors and their advisors as of the date of this memorandum.
1. Rolling LPs (Estimated ~$680M NAV). The following known Rolling LPs have indicated their intention to roll 100% of their respective Fund II interests into the CV:
Meridian Public Employees' Retirement System (Trevor Huang, Chief Investment Officer): Meridian committed $125 million to Fund II and has indicated it will roll 100% of its interest into the CV. Meridian is a U.S. tax-exempt pension fund organized under a state retirement statute, qualifying for tax-exempt status under Section 501(a) of the Code by reason of its status as a trust forming part of a plan described in Section 401(a). Meridian has high UBTI sensitivity and requires a blocker entity to prevent the flow-through of unrelated business taxable income.
Ashford University Endowment (Camille Berger, Director of Investments): Ashford committed $50 million to Fund II and has indicated it will roll 100% of its interest into the CV. Ashford is a U.S. tax-exempt organization described in Section 501(c)(3) of the Code. Like Meridian, Ashford has high UBTI sensitivity and requires a blocker entity.
Sovereign Capital Partners (Cayman) Ltd. (Kenneth Fong, Managing Director): Sovereign committed $75 million to Fund II and has indicated it will roll 100% of its interest into the CV. Sovereign is a Cayman Islands exempted company that serves as a non-U.S. feeder vehicle for Asian family offices. As a non-U.S. investor, Sovereign has high ECI/FIRPTA sensitivity and requires an offshore blocker entity to avoid U.S. tax filing obligations, ECI taxation under Section 882, and FIRPTA withholding under Sections 897 and 1445.
Other Rolling LPs: The remainder of the estimated $680 million Rolling LP pool consists of additional Fund II limited partners that have indicated their intention to roll their interests. The final composition will be confirmed following the September 15, 2025 LP election deadline.
2. Cashing-Out LPs (~$280M NAV). Certain Fund II limited partners have elected or are expected to elect to cash out their interests in exchange for liquidity:
Redstone Family Office LLC (Barbara Redstone, Principal): Redstone committed $40 million to Fund II and is electing full liquidity. Redstone is a U.S. taxable domestic investor and does not require a blocker entity.
Other Cashing-Out LPs: The balance of the approximately $280 million in liquidity elections is comprised of various other Fund II limited partners. The cash-out will be funded by Garrison's new capital commitment, as described below.
3. New Secondary Investor. Garrison Secondaries Fund IV LP is the lead secondary buyer for the CV transaction. Garrison is a Delaware limited partnership headquartered at 399 Park Avenue, 22nd Floor, New York, New York 10022. Its general partner is Garrison Capital Advisors LLC. The key contact for the transaction is Mitchell Adler, Partner. Garrison's counsel is Whitfield & Calloway LLP (Douglas Whitfield, Partner), located at 280 Park Avenue, 30th Floor, New York, New York 10017.
Garrison has committed to provide $380 million of new capital to the CV. Of this amount, $280 million will be used to fund the liquidity payments to cashing-out LPs, and $100 million will be reserved for follow-on investments in the portfolio companies and CV operating expenses.
4. Total CV Capitalization. The total capitalization of the CV at closing is summarized as follows:
D. Transaction Advisors
The following professional advisors have been engaged in connection with the CV transaction:
III. ENTITY SELECTION AND PROPOSED CV STRUCTURE
A. Recommended Entity Type for the CV
We recommend that the CV be organized as a Delaware limited partnership under the name Pinnacle Continuation Vehicle LP. This recommendation is based on the following considerations:
Flow-Through Taxation. As a partnership for U.S. federal income tax purposes, the CV will not be subject to an entity-level federal income tax. Instead, all items of income, gain, loss, deduction, and credit will flow through to the partners on their respective Schedule K-1s, ensuring that investors are taxed only once on the economic returns generated by the portfolio companies. This single layer of taxation is a fundamental advantage over a corporate structure, particularly given the magnitude of the built-in gain in the portfolio ($1.202 billion aggregate).
Allocation Flexibility. The partnership form provides substantial flexibility in the allocation of income, gain, loss, and deduction among the partners. This flexibility is critical for the CV, which must implement complex allocation provisions including: (a) remedial allocations under Section 704(c) for the built-in gain in the contributed portfolio company shares; (b) bifurcated carried interest allocations between legacy and new carry tranches; (c) preferred return and waterfall mechanics; and (d) special allocations to account for the different tax characteristics of the various investor classes (taxable, tax-exempt, and non-U.S.).
Compatibility with Section 721. The contribution of appreciated portfolio company shares to a partnership qualifies for non-recognition treatment under Section 721(a), subject to the analysis set forth in Section IV of this memorandum. A partnership structure is therefore essential to achieving the primary tax objective of preserving the existing low basis and long holding period in the contributed shares.
Industry Standard. The Delaware limited partnership is the industry-standard vehicle for GP-led continuation fund transactions. Institutional investors, secondary buyers, and their respective counsel are familiar with the governance framework, fiduciary standards, and economic conventions of the Delaware limited partnership form. This familiarity reduces negotiation friction and facilitates the closing process.
Alternative Structures Considered. We considered two alternative structures and concluded that neither is preferable:
Delaware LLC. A Delaware limited liability company would provide similar flow-through taxation and allocation flexibility. However, the limited partnership form is preferred for several reasons: (i) limited partners in a Delaware limited partnership have a well-defined, limited role in governance that is familiar to institutional investors; (ii) the distinction between the general partner (with management authority and fiduciary duties) and limited partners (with economic interests and limited governance rights) mirrors the GP/LP dynamic expected in the CV; and (iii) the limited partnership form is more widely used in the continuation vehicle market, reducing documentation and negotiation costs.
Offshore Limited Partnership (e.g., Cayman Islands). An offshore limited partnership could provide certain tax benefits for non-U.S. investors but would create substantial complications for U.S. investors (who constitute the majority of the CV's capitalization), including potential controlled foreign corporation ("CFC") or passive foreign investment company ("PFIC") issues. The dual blocker architecture described in Section VII below addresses the needs of non-U.S. investors more effectively without imposing these burdens on U.S. investors.
Proposed GP Entity. The general partner of the CV will be Pinnacle CV Partners LLC, to be formed as a Delaware limited liability company. As a single-member LLC (owned by the Pinnacle principals), the GP entity will be disregarded for federal income tax purposes unless an election is made otherwise. The GP entity will have customary general partner authority under the CV LPA, including authority over investment decisions, fund operations, and portfolio company management.
Term. The CV will have a term of five years from the final close (i.e., through approximately October 31, 2030), with two one-year extensions at the discretion of the GP. This provides a total potential investment horizon of seven years from closing, which is consistent with the expected timeline for exit of the portfolio companies through initial public offerings, strategic acquisitions, or other liquidity events.
B. Proposed Economic Terms
The economic terms of the CV have been negotiated with the Rolling LPs and Garrison and reflect the current market for GP-led continuation vehicle transactions. The proposed terms represent a significant concession from Fund II's original terms, consistent with industry practice for continuation vehicles where the GP is seeking to extend the investment period beyond the original fund term.
Management Fee. The CV management fee will be 1.25% per annum calculated on NAV, reduced from Fund II's current rate of 1.5% on invested capital. This reduction reflects the fact that the CV is holding a concentrated portfolio of three mature investments that require less active management than a diversified fund deploying new capital across multiple new investments.
Carried Interest. The GP's carried interest in the CV will be 15% over a 7% preferred return, structured as a European-style (whole-fund) waterfall. This compares favorably for investors to Fund II's original terms of 20% carry over an 8% preferred return on a whole-fund basis. The reduced carry percentage and lower hurdle rate reflect the continuation vehicle market convention, the maturity of the underlying investments, and the reduced risk profile associated with a portfolio that has already demonstrated significant value creation.
GP Co-Investment. The GP will contribute $14 million of co-investment capital to the CV, demonstrating alignment of interest with the limited partners. The GP co-invest will be treated as a capital interest (not a profits interest or carried interest), as discussed further in Section VI.F below.
Estimated AUM at Close. The estimated assets under management at closing will consist of the portfolio company FMV of $1.34 billion plus the $100 million of follow-on reserves and expense funding contributed by Garrison, for a total of approximately $1.44 billion.
C. Structural Diagram Overview
The following narrative describes the overall organizational structure of the CV transaction. A schematic organizational chart is attached as Appendix C.
Step One: Distribution from Fund II to Rolling LPs. Fund II will distribute the portfolio company shares (Luminos, ClearArc, and Vectral) in kind to the Rolling LPs in proportion to their respective interests in Fund II. This distribution will be structured as a current distribution under Section 731 and will qualify for QSBS tacking under Section 1202(h)(4)(A). Each Rolling LP will receive its pro rata share of the portfolio company shares based on its economic interest in Fund II.
Step Two: Contribution from Rolling LPs to PCV. Each Rolling LP will contribute its newly received portfolio company shares to Pinnacle Continuation Vehicle LP in exchange for a limited partnership interest in the CV. This contribution will qualify for non-recognition treatment under Section 721(a) of the Code. The CV's basis in the contributed shares will be the Rolling LPs' carry-over basis (Section 722), and the Rolling LPs' basis in their CV interests will equal their basis in the contributed shares (Section 723). Holding periods will tack under Section 1223(1).
Step Three: Garrison Subscription. Garrison Secondaries Fund IV LP will subscribe for a new limited partnership interest in the CV by contributing $380 million in cash. Of this amount, $280 million will be distributed by the CV (or, as structured, paid directly to Fund II for distribution) to Fund II to provide liquidity to the cashing-out LPs. The remaining $100 million will be retained in the CV for follow-on investments and operating expenses.
Step Four: Blocker Entity Interposition. The Rolling LPs that are tax-exempt (Meridian and Ashford) will invest in the CV through PCV Domestic blocker Inc., a newly formed Delaware C-corporation. The non-U.S. Rolling LP (Sovereign Capital Partners) will invest through PCV International Holdings Ltd., a newly formed Cayman Islands exempted company. Each blocker entity will hold a limited partnership interest in the CV on behalf of its respective investor class.
Step Five: GP and Carry Structure. Pinnacle CV Partners LLC will serve as general partner and will hold the GP co-invest capital interest and the carried interest in the CV. The carried interest will be bifurcated into a legacy carry tranche (rolling over the economics and holding period from Fund II) and a new carry tranche (reflecting the reduced 15%/7% terms negotiated for the CV).
Flow of Funds. At closing, the flow of funds will be as follows: (i) Garrison will fund its $380 million commitment; (ii) $280 million will be used to provide liquidity to cashing-out LPs; (iii) $100 million will be held in the CV's accounts for follow-on reserves and expenses; (iv) the GP will contribute $14 million of co-invest capital; and (v) the Rolling LPs will contribute portfolio company shares (and/or interests through blocker entities) with an aggregate FMV of $680 million and an aggregate tax basis determined by reference to their respective bases in their Fund II interests.
IV. SECTION 721 NON-RECOGNITION CONTRIBUTION ANALYSIS
A. General Rule Under Section 721(a)
Section 721(a) of the Code provides that "[n]o gain or loss shall be recognized to a partnership or to any of its partners in the case of a contribution of property to the partnership in exchange for an interest in the partnership." This non-recognition rule is one of the foundational provisions of subchapter K and reflects the policy judgment that the formation of or contribution to a partnership represents a change in the form of ownership, rather than a realization event, that should not trigger current taxation.
Application to the CV Transaction. The CV transaction involves the contribution of three sets of highly appreciated portfolio company shares — with an aggregate built-in gain of $1.202 billion — to a newly formed partnership (PCV) in exchange for limited partnership interests. If the contribution qualifies under Section 721(a), no gain or loss will be recognized by the contributing partners (the Rolling LPs) or by the CV on the contribution. This non-recognition treatment is the cornerstone of the CV's tax structure and is essential to achieving the transaction's principal tax objectives.
As discussed in Section IV.B below, the precise mechanics of the contribution — whether Fund II contributes the shares directly to the CV in a single step or whether Fund II first distributes the shares to the Rolling LPs who then contribute them to the CV in a two-step process — affect the analysis under both Section 721 and Section 1202. Under either approach, the contribution of property (portfolio company shares) in exchange for a partnership interest (CV limited partnership interest) falls squarely within the scope of Section 721(a), provided that the transaction is not recharacterized as a sale, exchange, or disguised sale under the rules discussed in Section IV.C below.
Basis Consequences Under Section 722. Under Section 722, the CV's basis in the contributed portfolio company shares will equal the contributing partners' adjusted basis in those shares immediately before the contribution — i.e., the carry-over basis from Fund II. The aggregate carry-over basis in the contributed shares is $138 million ($58.5M Luminos + $37.4M ClearArc + $42.1M Vectral). This means that the CV will hold shares with an aggregate FMV of $1.34 billion and an aggregate tax basis of only $138 million, necessitating the Section 704(c) allocation provisions discussed in Section VIII.
Basis in CV Interests Under Section 723. Under Section 723 (read in conjunction with the general basis rules applicable to partnership contributions), each Rolling LP's basis in its CV limited partnership interest will equal its adjusted basis in the portfolio company shares contributed (or, if the contribution is structured as a partnership-to-partnership transfer, its basis in its Fund II interest, as applicable). This ensures that the built-in gain is preserved at the partner level and will be recognized when the Rolling LP ultimately disposes of its CV interest or when the CV disposes of the contributed portfolio company shares.
Holding Period Tacking Under Section 1223(1). Under Section 1223(1), if property received in an exchange has the same basis (in whole or in part) as the property exchanged, the holding period of the received property includes the holding period of the exchanged property. Accordingly, the Rolling LPs' holding period in their CV interests will include their holding period in the contributed portfolio company shares (or Fund II interests, as applicable), and the CV's holding period in the contributed shares will include the contributing partners' holding period. This tacking is critical for maintaining long-term capital gain treatment and, as discussed in Section V, for preserving QSBS holding periods under Section 1202.
B. Partnership-to-Partnership Contribution Mechanics
A significant structural question in the CV transaction is whether the transfer of portfolio company shares from Fund II to the CV should be effected as a single-step or two-step process. Each approach has distinct tax consequences, and the optimal choice depends on balancing administrative efficiency against the need for clear QSBS tacking under Section 1202(h).
Single-Step Approach: Fund II Contributes Directly to the CV. Under this approach, Fund II would contribute the portfolio company shares directly to the CV in exchange for CV limited partnership interests, which would then be distributed to the Rolling LPs. This approach is administratively simpler — it requires fewer intermediate transactions and documentation — but raises questions regarding QSBS tacking. Specifically, Section 1202(h) addresses distributions of QSBS from a partnership to a partner (preserving QSBS status and tacking the holding period) but does not expressly address contributions of QSBS from one partnership to another partnership. There is limited direct authority on whether a partnership-to-partnership contribution preserves QSBS status.
Additionally, the single-step approach raises questions regarding the interaction with Fund II's existing Section 704(c) layers. Fund II may have its own Section 704(c) built-in gain allocations with respect to the portfolio company shares, and a direct contribution from Fund II to the CV would need to account for the tiering of these allocations through two partnership levels.
Two-Step Approach: Fund II Distributes to Rolling LPs; Rolling LPs Contribute to CV. Under this approach: (1) Fund II distributes the portfolio company shares in kind to the Rolling LPs, and (2) each Rolling LP contributes its share of the portfolio company stock to the CV in exchange for a CV limited partnership interest. This approach provides the clearest path to QSBS preservation because:
• Step One (distribution from Fund II to Rolling LPs) falls squarely within Section 1202(h)(4)(A), which provides that QSBS distributed by a partnership to a partner retains its QSBS character, and the partner tacks the partnership's holding period.
• Step Two (contribution from Rolling LPs to CV) is a standard Section 721 contribution, which does not constitute a "sale or exchange" and therefore does not trigger a resetting of the QSBS holding period. The Rolling LPs' holding period in the QSBS shares tacks to the CV under Section 1223(1).
The two-step approach also avoids the complexities of tiered Section 704(c) layers, because Fund II's Section 704(c) obligations with respect to the portfolio company shares are resolved at the Fund II level upon distribution, and the CV establishes fresh Section 704(c) layers based on the difference between the shares' FMV and carry-over basis at the time of contribution.
Interaction with Fund II's Existing Section 704(c) Layers. Fund II may have existing Section 704(c) layers with respect to the portfolio company shares if there were prior admissions of new limited partners at different valuations. Under the two-step approach, the in-kind distribution from Fund II to the Rolling LPs would trigger the application of Fund II's Section 704(c) allocations. We will need to coordinate with Andover & Strauss LLP to identify any existing Section 704(c) layers at the Fund II level and ensure that the distribution is properly accounted for.
Recommendation. As discussed more fully in Section V below, we recommend the two-step approach as the primary structuring method, primarily because it provides the most robust QSBS tacking analysis under Section 1202(h). The administrative burden of the two-step approach is manageable given the concentrated nature of the portfolio (three investments) and the relatively defined investor base.
C. Disguised Sale Risk Under Section 707(a)(2)(B)
Section 707(a)(2)(B) of the Code, together with the regulations promulgated thereunder (Treas. Reg. §§ 1.707-3 through 1.707-9), provides that a transfer of property by a partner to a partnership, followed by a related transfer of money or other consideration from the partnership to the partner (or a related person), may be treated as a disguised sale of the property by the contributing partner. If a transaction is recharacterized as a disguised sale, the contributing partner recognizes gain on the transfer as if it had sold the property for the amount of consideration received, and the partnership takes a cost basis in the property (equal to FMV), rather than a carry-over basis under Section 722.
Two-Year Presumption. Under Treas. Reg. § 1.707-3(c), if within a two-year period a partner transfers property to a partnership and the partnership transfers money or other consideration to the partner (or a related person), the transfers are presumed to be a sale unless the facts and circumstances clearly establish otherwise. Conversely, if more than two years elapse between the property transfer and the money transfer, the transfers are presumed not to be a sale unless the facts and circumstances clearly establish otherwise.
Application to the CV Transaction. The disguised sale rules require careful attention in the context of the CV transaction because two economically related events are occurring contemporaneously:
(i) The Rolling LPs are contributing appreciated portfolio company shares to the CV (property transfer to the partnership); and
(ii) The cashing-out LPs are receiving cash from the CV, funded by Garrison's capital commitment (money transfer from the partnership).
The critical question is whether the cash distributions to the cashing-out LPs could be imputed to the Rolling LPs as part of a disguised sale. If the Rolling LPs were deemed to have received cash consideration in connection with their contribution of property, the contribution would be recharacterized as a sale to the extent of the cash received, and the Rolling LPs would recognize gain.
Analysis. We believe the disguised sale risk in this transaction is low, based on the following analysis:
First, the cash distributions to the cashing-out LPs are not being made to the Rolling LPs. The Rolling LPs are contributing property and receiving only CV limited partnership interests in return — they are not receiving any cash or other consideration from the CV. The cash distributions to the cashing-out LPs are funded by Garrison's independent subscription of $380 million, which is a separate capital commitment made by an unrelated third-party investor. The Rolling LPs and the cashing-out LPs are different partners with different economic elections.
Second, the transaction is structured so that the cash to the cashing-out LPs flows through Fund II's existing distribution waterfall, not through the CV's distribution provisions. Garrison's capital is contributed to the CV, which then distributes cash to Fund II (or directly to the cashing-out LPs) to fund the liquidity elections. The Rolling LPs do not receive any distributions from the CV in connection with the closing.
Third, the economic substance of the transaction supports non-sale treatment. The Rolling LPs are continuing their investment in the same portfolio companies through a different fund vehicle — they are not disposing of their economic interest. The purpose of the CV structure is to extend the investment horizon, not to monetize the Rolling LPs' positions.
Safe Harbors. We have analyzed whether the facts satisfy any of the safe harbors under the disguised sale regulations:
• Preformation Expenditure Safe Harbor (Treas. Reg. § 1.707-4(d)): This safe harbor is not directly applicable, as the distributions to cashing-out LPs do not constitute reimbursements of preformation capital expenditures.
• Reasonable Guaranteed Payment Safe Harbor (Treas. Reg. § 1.707-4(a)): This safe harbor applies to guaranteed payments for capital, but the distributions here are not characterized as guaranteed payments.
• Debt-Financed Distribution Analysis: If the CV incurs leverage at closing, distributions of borrowed funds could potentially trigger the disguised sale rules. However, the current transaction does not contemplate CV-level borrowing at closing; the cash for the cashing-out LPs is funded entirely by Garrison's equity commitment.
Qualified Liability Exception Under Treas. Reg. § 1.707-5. If the CV does assume or take property subject to any liabilities in connection with the contribution, the qualified liability exception under Treas. Reg. § 1.707-5 would need to be analyzed. As currently contemplated, the portfolio company shares are not subject to any liabilities, and the CV is not assuming any Fund II-level debt in connection with the transaction. Accordingly, this exception is not expected to be relevant.
Allocation of CV-Level Debt Under Section 752. Section 752 provides rules for the allocation of partnership liabilities among the partners, which can affect the disguised sale analysis (because an increase in a partner's share of partnership liabilities is treated as a contribution of money under Section 752(a), and a decrease is treated as a distribution of money under Section 752(b)). The current transaction does not contemplate CV-level borrowing at closing. If CV-level debt is subsequently incurred, the allocation of that debt among the partners will need to be analyzed for disguised sale implications.
Recommendation. We recommend that the transaction documents clearly separate the Rolling LP contributions from the cashing-out LP liquidity events. Specifically:
(a) The Rolling LP contribution agreements should make clear that the Rolling LPs are contributing property solely in exchange for CV limited partnership interests, without any contemporaneous or related cash distributions.
(b) The cashing-out LP liquidity payments should be documented as separate transactions funded by Garrison's independent capital commitment.
(c) The transaction documents should include recitals establishing the intent and economic substance of each transaction step.
(d) The GP should avoid making any distributions from the CV to the Rolling LPs within two years of the closing (other than tax distributions, which are not treated as part of a disguised sale under Treas. Reg. § 1.707-4(a)(2)).
D. Section 721 Opinion Letter
As noted in the Executive Summary, a separate formal tax opinion letter will be prepared and delivered at the CV closing (target October 31, 2025). The opinion letter will opine that the contribution of the portfolio company shares by the Rolling LPs to the CV qualifies for non-recognition treatment under Section 721(a) of the Code, and will address the related basis, holding period, and disguised sale issues discussed above.
The opinion letter will be addressed to Pinnacle Capital Management LLC and Pinnacle Venture Fund II LP. The opinion will be signed by Sylvia Hartwell, Responsible Partner, Tax, Calderwood & Harkness LLP. The opinion will be rendered at a "should" level of confidence (i.e., that the contribution "should" qualify for non-recognition treatment), subject to customary assumptions, qualifications, and limitations.
V. QSBS PRESERVATION UNDER SECTION 1202
A. Overview of Section 1202
Section 1202 of the Code provides an exclusion from gross income for gain realized on the sale or exchange of "qualified small business stock" ("QSBS") held for more than five years. For QSBS acquired after September 27, 2010, the exclusion is 100% of the gain, up to the greater of (a) $10 million, or (b) 10 times the taxpayer's adjusted basis in the stock. The excluded gain is also exempt from the 3.8% net investment income tax under Section 1411.
The Section 1202 exclusion is among the most valuable tax benefits available to venture capital investors, and the preservation of QSBS eligibility for the CV portfolio is a paramount tax objective of this transaction. Given the magnitude of the built-in gain in the portfolio ($1.202 billion aggregate), the potential tax savings from QSBS treatment are substantial.
Requirements for QSBS Eligibility. To qualify as QSBS under Section 1202, stock must satisfy all of the following requirements:
(a) Domestic C-Corporation. The stock must be stock of a domestic C-corporation. All three portfolio companies are Delaware C-corporations, satisfying this requirement.
(b) Original Issuance. The stock must be acquired by the taxpayer at its original issuance (directly or through an underwriter), in exchange for money, property (other than stock), or services. Stock acquired on the secondary market does not qualify.
(c) Qualified Small Business. At the time of issuance, the corporation must be a "qualified small business," meaning its aggregate gross assets did not exceed $50 million (including the amount received in the issuance). This is a one-time test measured at the time of stock issuance.
(d) Active Business Requirement. During substantially all of the taxpayer's holding period, at least 80% (by value) of the corporation's assets must be used in the active conduct of one or more qualified trades or businesses. Certain businesses are excluded, including professional services, banking, insurance, farming, and mining. Software/SaaS businesses generally qualify.
(e) Five-Year Holding Period. The taxpayer must hold the stock for more than five years.
Per-Taxpayer Exclusion. The exclusion is applied on a per-taxpayer, per-issuer basis. Each eligible taxpayer may exclude gain up to the greater of $10 million or 10 times its adjusted basis in the stock of each issuing corporation.
B. Analysis by Portfolio Company
1. Luminos Systems Inc. The Luminos shares held by Fund II were acquired at original issuance in connection with the company's Series B and Series C financing rounds. Fund II's aggregate cost basis in the Luminos shares is $58.5 million. The five-year holding period for the initial Series B shares (acquired Q1 2020) will be satisfied as of approximately the first quarter of 2025, and for any additional shares acquired in the Series C round, no later than August 2025 based on the information available to us. We have confirmed that Luminos's aggregate gross assets at the time of each issuance were below the $50 million threshold.
The 10× exclusion ceiling for the Luminos shares is $585 million per eligible taxpayer (10 × $58.5M cost basis). Given that Fund II's current FMV in Luminos is $612 million, the built-in gain of $553.5 million is within the 10× exclusion ceiling, although the $612 million FMV approaches the ceiling. If the company's value continues to appreciate, some portion of the gain could exceed the 10× ceiling on a per-LP basis depending on the LP's proportionate share of the cost basis.
Based on our preliminary analysis, QSBS status for the Luminos shares is believed to be intact, subject to verification of the active business requirement during the holding period and confirmation that no disqualifying events have occurred.
2. ClearArc Software Inc. The ClearArc shares held by Fund II were acquired at original issuance in connection with the company's Series A and Series B financing rounds. Fund II's aggregate cost basis is $37.4 million. The five-year holding period for the initial Series A shares (acquired Q2 2020) will be satisfied as of approximately September 2025. We understand that the company's aggregate gross assets at the time of each issuance were below the $50 million threshold.
The 10× exclusion ceiling is $374 million per eligible taxpayer (10 × $37.4M). Fund II's built-in gain in ClearArc is $430.6 million, which exceeds the 10× exclusion ceiling. Accordingly, a portion of the gain — approximately $56.6 million on an aggregate basis — would not be eligible for the QSBS exclusion even if all other requirements are satisfied. However, the per-LP allocation of the exclusion ceiling depends on each LP's proportionate basis, and many LPs may remain within the ceiling on an individual basis.
Based on our preliminary analysis, QSBS status for the ClearArc shares is believed to be intact, subject to the same caveats as Luminos.
3. Vectral Cloud Inc. The Vectral shares held by Fund II were acquired at original issuance in connection with the company's Series B financing round in March 2021. Fund II's cost basis is $42.1 million. The five-year holding period will not be satisfied until March 2026, which is approximately five months after the CV's target final close of October 31, 2025.
This presents two critical issues:
Holding Period Issue. The CV structure must be designed to ensure that the five-year holding period for the Vectral shares tacks through the distribution from Fund II and contribution to the CV, so that the March 2026 maturity date is preserved. If the transfer were recharacterized as a sale or exchange, the holding period would reset, and the five-year requirement would not be satisfied until 2030 or later — eliminating the QSBS benefit for many years.
Gross Asset Issue. The company's aggregate gross assets at the time of the March 2021 Series B issuance were near the $50 million threshold. If Vectral's aggregate gross assets (including the amount received in the Series B issuance) exceeded $50 million at the time of issuance, the Series B shares would not qualify as QSBS. Further diligence is required to confirm eligibility. We recommend obtaining a formal certification from Elena Kowalski (CEO) regarding the company's gross asset levels at the time of the Series B issuance, and reviewing Andover & Strauss LLP's work papers or the company's own auditor's records for the relevant period.
The 10× exclusion ceiling is $421 million per eligible taxpayer (10 × $42.1M). Fund II's built-in gain in Vectral is $217.9 million, which is well within the 10× ceiling.
QSBS status for the Vectral shares requires further diligence to confirm and is subject to both the gross asset confirmation and the successful tacking of the five-year holding period through the CV transfer.
C. Section 1202(h) Tacking Analysis
The critical legal question for QSBS preservation in the CV transaction is whether the transfer of QSBS from Fund II to the CV preserves the stock's QSBS character and permits tacking of the holding period. Section 1202(h) addresses this question in part but does not expressly cover all of the transactional steps involved.
Statutory Framework. Section 1202(h) provides several tacking rules:
• Section 1202(h)(2) — Gifts: QSBS transferred by gift retains its QSBS character, and the transferee tacks the donor's holding period.
• Section 1202(h)(4)(A) — Partnership Distributions: QSBS distributed by a partnership to a partner retains its QSBS character, and the partner tacks the partnership's holding period. This is the provision most directly relevant to the first step of the recommended two-step approach (Fund II distributing shares to the Rolling LPs).
• Section 1202(h)(4)(B) — Contributions to Partnerships: There is no express statutory provision in Section 1202(h) that addresses the contribution of QSBS to a partnership. Section 1202(h) is largely silent on this transaction. However, a contribution to a partnership under Section 721 is not a "sale or exchange" — it is a non-recognition transfer — and therefore should not constitute a disposition that would terminate QSBS eligibility.
Analysis of the Two-Step Approach.
Step One: Fund II Distributes Shares to Rolling LPs. Under Section 1202(h)(4)(A), when a partnership distributes QSBS to a partner, the distributed stock retains its QSBS character in the hands of the distributee partner, and the partner's holding period includes the partnership's holding period. This provision clearly applies to the first step of the recommended approach. After the distribution, each Rolling LP will hold QSBS shares with a tacked holding period that includes Fund II's holding period (dating back to the original issuance dates in 2020 and 2021).
Step Two: Rolling LPs Contribute Shares to the CV. The second step — the contribution of the QSBS shares by the Rolling LPs to the CV — is a Section 721 non-recognition contribution. Section 721 is not a "sale or exchange" and does not trigger gain recognition. The key question is whether the QSBS character survives this contribution.
While Section 1202(h) does not expressly address contributions to partnerships, we believe the QSBS character should survive for the following reasons:
(i) The contribution under Section 721 is a non-recognition event, not a sale, exchange, or other realization event. Section 1202 refers to gain from the "sale or exchange" of QSBS — since no sale or exchange occurs upon contribution, there is no event that would terminate QSBS eligibility.
(ii) After the contribution, the CV holds the QSBS shares with a tacked holding period and carry-over basis under Sections 1223(2) and 722. If the CV subsequently sells the QSBS shares, the gain will be allocated to the partners under Sections 704(b) and 704(c). Each partner's share of the gain should be eligible for the Section 1202 exclusion to the extent the partner's holding period (including tacked periods) exceeds five years.
(iii) The legislative history of Section 1202 reflects a policy of encouraging long-term investment in small businesses. The contribution of QSBS to a partnership is an intermediate step that facilitates continued holding — exactly the type of transaction that Section 1202 was designed to encourage.
(iv) Several commentators and practitioners have taken the position that QSBS status survives a Section 721 contribution, reasoning by analogy to the partnership distribution rules of Section 1202(h)(4)(A) and the general holding period tacking rules of Section 1223.
Risk Assessment. We note that there is limited direct authority — no published IRS ruling, regulation, or judicial decision — that specifically addresses whether a Section 721 contribution of QSBS from one partnership to another partnership preserves QSBS status. There is a risk that the IRS could take the position that the contribution to the CV constitutes a disposition that interrupts QSBS eligibility, or could attempt to collapse the two steps under the step transaction doctrine, treating the entire transfer as a single transaction that falls outside the safe harbor of Section 1202(h)(4)(A).
We believe this risk is manageable but not negligible, particularly with respect to Vectral, where the five-year holding period will not be satisfied until March 2026. If the IRS were to successfully recharacterize the transaction as a sale or exchange resetting the holding period, the Vectral shares would lose their QSBS eligibility, and the Rolling LPs would lose the ability to exclude up to $217.9 million of gain.
Step Transaction Doctrine Risk. There is a risk that the IRS could seek to collapse the two-step distribution/contribution into a single integrated transaction under the step transaction doctrine, arguing that the distribution from Fund II and the contribution to the CV were mutually dependent steps with no independent economic significance. To mitigate this risk, we recommend:
(a) Ensuring that each step has independent legal and economic significance — the distribution from Fund II should be documented as a bona fide distribution under the Fund II LPA, and the contribution to the CV should be documented as a separate contribution agreement.
(b) Allowing a reasonable time interval between the two steps (even a short period of days) to demonstrate that they are not simultaneously executed.
(c) Documenting the independent business purposes of each step — the distribution serves to wind down Fund II's holding of the portfolio company shares, and the contribution serves to capitalize the CV.
Alternative Approach: Single-Step Contribution. If the two-step approach is determined to be impractical or is disfavored for non-tax reasons, the alternative is a single-step Section 721 contribution directly from Fund II to the CV. This approach is more administratively efficient but, as discussed above, relies on a less well-established legal basis for QSBS tacking. We do not recommend this approach as the primary structure, but we note that it is a viable alternative with a reasonable (though less certain) basis for QSBS preservation.
Vectral-Specific Consideration. Because Vectral's five-year QSBS holding period does not expire until March 2026, any disposition of the Vectral shares before that date would result in the loss of QSBS eligibility. We recommend including a specific holding covenant in the Tax Protection Agreement that prohibits the CV from disposing of the Vectral shares before March 2026, absent the written consent of a supermajority of the Rolling LPs. This covenant should be enforceable by the Rolling LPs and should include appropriate remedies (including indemnification for lost QSBS benefits) in the event of a breach.
D. California Non-Conformity
California does not conform to the federal Section 1202 QSBS exclusion. Revenue and Taxation Code Section 18152.5 expressly decouples California from Section 1202, effective for taxable years beginning on or after January 1, 2013. Accordingly, all gain on the ultimate disposition of the portfolio company shares will be subject to California income tax at ordinary income rates (currently up to 13.3%) for California-resident LPs and to the extent the income is characterized as California-source income.
This non-conformity is a significant cost for California taxpayers in the fund. Given that Fund II and Pinnacle Capital Management LLC are California entities, and that the GP principals (Marcus Aldren, Diana Tsao, and Rafael Montoya) are presumed to be California residents, the California tax exposure on the GP carry and co-invest is substantial. For non-California LPs, the exposure depends on whether the gain from the disposition of the portfolio company shares is characterized as California-source income, which in turn depends on the commercial domicile and activities of the CV and the portfolio companies within California. Luminos Systems, headquartered in San Francisco, creates significant California nexus. We address state tax considerations in greater detail in Section X.
No structuring technique can eliminate California tax exposure for California taxpayers on gain recognized from the sale of the portfolio company shares. The focus of the state tax planning should be on ensuring that non-California LPs are not subjected to unnecessary California-source characterization.
E. Recommendations. Based on the foregoing analysis, we recommend the following actions to preserve QSBS eligibility:
1. Proceed with the two-step distribution/contribution approach as the primary recommendation for transferring the portfolio company shares from Fund II to the CV, in order to maximize the applicability of the Section 1202(h)(4)(A) safe harbor for QSBS tacking.
2. Obtain QSBS eligibility certifications from each portfolio company CEO (Priya Venkatesh for Luminos, Jonathan Hargrove for ClearArc, and Elena Kowalski for Vectral) confirming: (a) the company's status as a domestic C-corporation; (b) the aggregate gross assets at the time of each issuance of QSBS to Fund II; (c) compliance with the active business requirement during the relevant holding period; and (d) the absence of any disqualifying events.
3. Include

PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGE ATTORNEY WORK PRODUCT

TAX STRUCTURE MEMORANDUM

PINNACLE CONTINUATION VEHICLE LP

I. EXECUTIVE SUMMARY

II. BACKGROUND AND TRANSACTION OVERVIEW

III. ENTITY SELECTION AND PROPOSED CV STRUCTURE

IV. SECTION 721 NON-RECOGNITION CONTRIBUTION ANALYSIS

V. QSBS PRESERVATION UNDER SECTION 1202

Record

Parties

Dates

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