MARKUP OF TAX PROVISIONS
DRAFT LIMITED PARTNERSHIP AGREEMENT
OF PINNACLE CONTINUATION VEHICLE LP
Calderwood & Harkness LLP Comments and Proposed Revisions to Hawthorne Reid LLP Draft Dated July 28, 2025
Prepared by: Calderwood & Harkness LLP 555 California Street, Suite 4200 San Francisco, California 94104
Engagement Reference No.: 1002-00005 Matter No.: 117443.00001
Date of Markup: August 8, 2025
August 8, 2025
ADDRESSED TO:
Vanessa Liu, Esq. Partner Hawthorne Reid LLP 2000 University Avenue, Suite 500 Palo Alto, California 94303
COPIES TO:
Marcus Aldren, Founder & Managing Partner Diana Tsao, Partner Rafael Montoya, Partner Pinnacle Capital Management LLC 2100 Sand Hill Road, Suite 340 Menlo Park, California 94025
PREPARED BY:
FORMAT NOTE: All Calderwood & Harkness proposed additions are shown as . All Calderwood & Harkness proposed deletions are shown as . Calderwood & Harkness comments and annotations are indicated by the notation [C&H Comment] and are intended as guidance for the parties and counsel; they are not part of the operative LPA text and should be removed from the final executed document.
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TRANSMITTAL NOTE
Dear Vanessa:
We write on behalf of our client, Pinnacle Capital Management LLC (the "Sponsor"), in connection with the proposed formation of Pinnacle Continuation Vehicle LP (the "Partnership" or the "CV"). We have reviewed the draft Limited Partnership Agreement of the Partnership prepared by your office and dated July 28, 2025 (the "Draft LPA"), and we are providing herewith our markup limited to the tax-related provisions contained therein.
Scope of Review. Our review encompasses all Articles and Sections of the Draft LPA dealing with the following subject matters: (a) definitions of tax-related terms; (b) capital account maintenance and allocations of income, gain, loss, and deduction under Section 704(b) and Section 704(c) of the Internal Revenue Code of 1986, as amended (the "Code"); (c) the distribution waterfall, including carried interest bifurcation and tax distribution mechanics; (d) tax elections, tax returns, and information reporting; (e) designation of the partnership representative under the centralized partnership audit regime enacted by the Bipartisan Budget Act of 2015; (f) qualified small business stock ("QSBS") preservation covenants under Section 1202 of the Code; (g) Section 1061 carried interest compliance provisions; (h) withholding and indemnification provisions; (i) disguised sale protections under Section 707 of the Code; (j) Section 752 liability allocation provisions; and (k) blocker entity participation provisions for Tax-Exempt Partners and Non-U.S. Partners.
Limitations. Our review is limited to U.S. federal, state, and local tax provisions. Hawthorne Reid LLP retains primary responsibility for all non-tax provisions of the Draft LPA, including but not limited to governance, management authority, transfer restrictions, fiduciary duties, default remedies, exculpation and indemnification of the General Partner, and all other provisions not specifically addressed in this markup. We express no opinion on the non-tax provisions and have not reviewed them for this purpose.
Companion Deliverables. This markup is being transmitted together with the following companion deliverables, each dated August 8, 2025, which provide detailed analysis supporting the revisions proposed herein:
1. Tax Structure Memorandum (August 8, 2025);
2. QSBS Preservation Analysis Memorandum;
3. Section 1061 Carried Interest Memorandum;
4. Blocker Entity Structure Memorandum;
5. Section 704(c) Allocation Methodology Memorandum; and
6. Draft Tax Protection Agreement.
Summary of Key Revisions. We highlight below the principal revisions and additions reflected in the attached markup:
(a) Comprehensive Rewrite of Section 704(c) Provisions. The Draft LPA's Section 704(c) provisions are substantially incomplete and do not specify an allocation method. We have proposed a comprehensive rewrite specifying the remedial allocation method under Treasury Regulation Section 1.704-3(d) for the $1.202 billion of aggregate built-in gain in the Contributed Assets. The remedial method is the most equitable approach given the magnitude of the built-in gain and the negotiated expectation of the Secondary Investors (principally Garrison Secondaries Fund IV LP) that they will not bear pre-contribution tax gain. See the companion Section 704(c) Allocation Methodology Memorandum for a detailed comparative analysis of the traditional method, curative method, and remedial method.
(b) Addition of Legacy Carry Tranche / New Carry Tranche Bifurcation for Section 1061 Compliance. The Draft LPA does not address Section 1061 of the Code or the three-year holding period requirement applicable to carried interest. We have added a new section bifurcating the General Partner's carried interest into a Legacy Carry Tranche (inheriting the Fund II holding period commencing December 2019, which has already satisfied the three-year requirement) and a New Carry Tranche (commencing on the Final Closing Date, with the three-year period not satisfied until October 31, 2028). This bifurcation is essential to preserve the favorable tax treatment of the legacy carry.
(c) Addition of QSBS Preservation Covenants. The Draft LPA contains no QSBS-related provisions. Given that the three portfolio companies contributed to the Partnership are believed to qualify as QSBS under Section 1202 of the Code, and the potential Section 1202 exclusion represents a significant component of the value proposition for eligible Partners, we have added comprehensive QSBS preservation covenants.
(d) Addition of Mandatory Tax Distribution Provisions. The Draft LPA does not include a mechanism for mandatory tax distributions. We have added a new section providing for quarterly tax distributions to each Partner based on such Partner's allocable share of estimated taxable income, multiplied by the highest combined marginal rate applicable to an individual residing in California (approximately 50.3%).
(e) Expanded Withholding and Indemnification Provisions. The Draft LPA's withholding provisions are skeletal. We have expanded them to address Section 1446 (ECI withholding on Non-U.S. Partners), Section 1445 (FIRPTA withholding), state and local withholding obligations, and a comprehensive indemnification framework.
(f) BBA Partnership Audit Regime Provisions. The Draft LPA's partnership representative provisions are outdated and reference the pre-BBA "tax matters partner" regime. We have proposed a complete rewrite to comply with the centralized audit regime under Sections 6221 through 6241 of the Code, including a commitment to the push-out election under Section 6226.
(g) blocker Entity Participation Provisions. The Draft LPA makes passing reference to the use of blocker entities but does not include detailed provisions. We have added a new Article addressing the formation, capitalization, tax treatment, and governance of the Domestic blocker (PCV Domestic blocker Inc.) and the Offshore blocker (PCV International Holdings Ltd.).
We look forward to discussing these revisions with you and the Pinnacle team at the next working group call. Please do not hesitate to reach out to Sylvia Hartwell at (415) 555-7200 or shartwell@calderwoodharkness.com, or Garrett Simmons at (415) 555-7218 or gsimmons@calderwoodharkness.com, with any questions.
Very truly yours,
CALDERWOOD & HARKNESS LLP
ARTICLE X — DEFINITIONS (Tax-Related Definitions)
Section X.1 — Defined Terms (Additions and Revisions)
The following defined terms are Article I of the Agreement. Unless otherwise defined herein, capitalized terms used in this Article shall have the meanings ascribed to them in Article I of the Agreement.
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"Book Value"
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"Capital Account"
"Carried Interest"
"Code" means the Internal Revenue Code of 1986, as amended from time to time, and any successor statute. Any reference herein to a specific section of the Code shall include any successor provision thereto and any Treasury Regulation promulgated thereunder.
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"Preferred Return" means a cumulative, compounded annual return of seven percent (7%) per annum on each Partner's Unreturned Capital Contributions, computed from the date of each such Partner's capital contribution through and including the date of distribution.
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[C&H Comment: We have added approximately twenty-five (25) new defined terms and revised several existing definitions to support the tax-related provisions set forth in the Articles below. We recommend that Hawthorne Reid update all cross-references to Article I definitions throughout the Draft LPA to incorporate these additions and revisions. In particular, the deletion of the "Tax Matters Partner" definition and its replacement with "Partnership Representative" will require conforming changes in multiple locations.]
ARTICLE Y — CAPITAL ACCOUNTS AND ALLOCATIONS
Section Y.1 — Capital Accounts
(a) Establishment and Maintenance. The Partnership shall establish and maintain a separate Capital Account for each Partner in accordance with Treasury Regulation Section 1.704-1(b)(2)(iv). The Capital Accounts shall be maintained for the full term of the Partnership and through the completion of the liquidation and winding up of the Partnership's affairs.
(b) Credits to Capital Accounts. Each Partner's Capital Account shall be credited with:
(i) the amount of cash actually contributed by such Partner to the Partnership;
(ii) the fair market value of any property contributed by such Partner to the Partnership (net of any liabilities secured by such property that the Partnership is considered to assume or take subject to under Section 752 of the Code), as determined by the General Partner in good faith; provided that, with respect to the Contributed Assets, the fair market value shall be the Book Value thereof as set forth in the definition of "Book Value" in Section X.1 (aggregate fair market value of $1,340,000,000, as determined by the Kessler Pratt LLP valuation as of June 30, 2025);
(iii) allocations to such Partner of Net Income and items of income and gain (including income and gain exempt from tax and income and gain described in Treasury Regulation Section 1.704-1(b)(2)(iv)(g), but excluding income and gain described in Treasury Regulation Section 1.704-1(b)(4)(i)); and
(iv) such other items as are required to be credited to a Partner's Capital Account under Treasury Regulation Section 1.704-1(b)(2)(iv).
(c) Debits to Capital Accounts. Each Partner's Capital Account shall be debited with:
(i) the amount of cash distributed to such Partner by the Partnership;
(ii) the fair market value of any property distributed to such Partner by the Partnership (net of any liabilities secured by such property that such Partner is considered to assume or take subject to under Section 752 of the Code), as determined by the General Partner in good faith;
(iii) allocations to such Partner of Net Loss and items of deduction and loss (including expenditures described in Section 705(a)(2)(B) of the Code and loss and deduction described in Treasury Regulation Section 1.704-1(b)(2)(iv)(g), but excluding items described in Treasury Regulation Section 1.704-1(b)(4)(i)); and
(iv) such other items as are required to be debited from a Partner's Capital Account under Treasury Regulation Section 1.704-1(b)(2)(iv).
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(f) Transfers of Partnership Interests. In the event of a transfer of all or a portion of a Partner's interest in the Partnership in accordance with the terms of this Agreement, the transferee shall succeed to the Capital Account of the transferor to the extent it relates to the transferred interest.
(g) Interpretation. The provisions of this Section Y.1 and the other provisions of this Agreement relating to the maintenance of Capital Accounts are intended to comply with Treasury Regulation Section 1.704-1(b) and shall be interpreted and applied in a manner consistent with such Treasury Regulations. In the event the General Partner determines that it is prudent to modify the manner in which the Capital Accounts, or any credits or debits thereto, are computed in order to comply with such Treasury Regulations, the General Partner may make such modification, provided that such modification is not likely to have a material effect on the amounts distributable to any Partner pursuant to Article Z upon the dissolution of the Partnership.
Section Y.2 — Allocations of Net Income and Net Loss (Section 704(b) Allocations)
Section Y.2(a) — General Allocation Rule
[C&H Comment: The Hawthorne Reid draft's simplified pro rata allocation of income and loss is inappropriate for a vehicle with a carried interest and a preferred return. A target capital account (or "targeted allocation") approach is the standard methodology for private equity fund LPAs with a waterfall structure. This approach ensures that if the Partnership were liquidated at any point, each Partner's Capital Account balance would be equal to the amount such Partner would receive under the waterfall. We have replaced the Hawthorne Reid draft's allocation provisions accordingly.]
Section Y.2(b) — Regulatory Allocations
Notwithstanding the general allocation rule set forth in Section Y.2(a), the following special allocations shall be made in the following order of priority:
(i) Minimum Gain Chargeback. Notwithstanding any other provision of this Article Y, if there is a net decrease in Partnership Minimum Gain (as defined in Treasury Regulation Sections 1.704-2(b)(2) and 1.704-2(d)) during any fiscal year, each Partner shall be allocated items of income and gain for such fiscal year (and, if necessary, subsequent fiscal years) in an amount equal to such Partner's share of the net decrease in Partnership Minimum Gain, determined in accordance with Treasury Regulation Section 1.704-2(g). Allocations pursuant to the preceding sentence shall be made in proportion to the respective amounts required to be allocated to each Partner pursuant thereto. The items to be so allocated shall be determined in accordance with Treasury Regulation Sections 1.704-2(f)(6) and 1.704-2(j)(2). This Section Y.2(b)(i) is intended to comply with the "minimum gain chargeback" requirement in Treasury Regulation Section 1.704-2(f) and shall be interpreted consistently therewith.
(ii) Partner Nonrecourse Debt Minimum Gain Chargeback. Notwithstanding any other provision of this Article Y (other than Section Y.2(b)(i)), if there is a net decrease in Partner Nonrecourse Debt Minimum Gain (as defined in Treasury Regulation Section 1.704-2(i)(2)) attributable to a Partner Nonrecourse Debt (as defined in Treasury Regulation Section 1.704-2(b)(4)) during any fiscal year, each Partner who has a share of the Partner Nonrecourse Debt Minimum Gain attributable to such Partner Nonrecourse Debt, determined in accordance with Treasury Regulation Section 1.704-2(i)(5), shall be specially allocated items of income and gain for such fiscal year (and, if necessary, subsequent fiscal years) in an amount equal to such Partner's share of the net decrease in Partner Nonrecourse Debt Minimum Gain attributable to such Partner Nonrecourse Debt, determined in accordance with Treasury Regulation Section 1.704-2(i)(4). Allocations pursuant to the preceding sentence shall be made in proportion to the respective amounts required to be allocated to each Partner pursuant thereto. The items to be so allocated shall be determined in accordance with Treasury Regulation Sections 1.704-2(i)(4) and 1.704-2(j)(2). This Section Y.2(b)(ii) is intended to comply with the "partner nonrecourse debt minimum gain chargeback" requirement in Treasury Regulation Section 1.704-2(i)(4) and shall be interpreted consistently therewith.
(iii) Qualified Income Offset. In the event any Partner unexpectedly receives any adjustments, allocations, or distributions described in Treasury Regulation Sections 1.704-1(b)(2)(ii)(d)(4), (5), or (6) that cause or increase a deficit balance in such Partner's Capital Account (in excess of any amount such Partner is obligated to restore or is deemed obligated to restore pursuant to the penultimate sentences of Treasury Regulation Sections 1.704-2(g)(1) and 1.704-2(i)(5)), items of income and gain shall be specially allocated to such Partner in an amount and manner sufficient to eliminate, to the extent required by the Treasury Regulations, such deficit balance as quickly as possible. This Section Y.2(b)(iii) is intended to constitute a "qualified income offset" within the meaning of Treasury Regulation Section 1.704-1(b)(2)(ii)(d) and shall be interpreted consistently therewith.
(iv) Nonrecourse Deductions. Nonrecourse Deductions (as defined in Treasury Regulation Sections 1.704-2(b)(1) and 1.704-2(c)) for any fiscal year shall be allocated among the Partners in proportion to their respective Percentage Interests.
(v) Partner Nonrecourse Deductions. Any Partner Nonrecourse Deductions (as defined in Treasury Regulation Sections 1.704-2(i)(1) and 1.704-2(i)(2)) for any fiscal year shall be allocated one hundred percent (100%) to the Partner who bears the economic risk of loss with respect to the Partner Nonrecourse Debt to which such Partner Nonrecourse Deductions are attributable, in accordance with Treasury Regulation Section 1.704-2(i)(1).
(vi) Code Section 754 Adjustments. To the extent an adjustment to the adjusted Tax Basis of any Partnership asset pursuant to Section 734(b) or Section 743(b) of the Code is required, pursuant to Treasury Regulation Section 1.704-1(b)(2)(iv)(m)(2) or Treasury Regulation Section 1.704-1(b)(2)(iv)(m)(4), to be taken into account in determining Capital Accounts as the result of a distribution to a Partner in complete liquidation of such Partner's interest in the Partnership, the amount of such adjustment to the Capital Accounts shall be treated as an item of gain (if the adjustment increases the basis of the asset) or loss (if the adjustment decreases such basis) and such gain or loss shall be specially allocated to the Partners in accordance with their interests in the Partnership in the event that Treasury Regulation Section 1.704-1(b)(2)(iv)(m)(2) applies, or to the Partner to whom such distribution was made in the event that Treasury Regulation Section 1.704-1(b)(2)(iv)(m)(4) applies.
[C&H Comment: The regulatory allocations set forth in Section Y.2(b) are required by the Treasury Regulations to maintain the "substantial economic effect" safe harbor under Treasury Regulation Section 1.704-1(b). These allocations override the general allocation rule in Section Y.2(a) to the extent required by the Treasury Regulations. The ordering of these allocations is intentional: minimum gain chargeback first, then partner nonrecourse debt minimum gain chargeback, then qualified income offset, followed by the general allocation provisions.]
Section Y.2(c) — Curative / Corrective Allocations
Section Y.3 — Section 704(c) Allocations
[C&H Comment: The Hawthorne Reid draft contained a single sentence stating that "the Partnership shall make allocations in accordance with Section 704(c) of the Code." This is wholly inadequate given the $1.202 billion of Built-In Gain in the Contributed Assets and the critical importance of the Section 704(c) allocation method to the economic deal between the Rolling LPs and the Secondary Investors. We have provided a comprehensive rewrite of this section.]
Section Y.3(a) — Contributed Property — Remedial Allocation Method
[C&H Comment: The remedial method is recommended as the most equitable and economically appropriate approach for this transaction. The magnitude of the Built-In Gain ($1.202 billion on an aggregate Tax Basis of only $138 million) means that the ceiling rule under the traditional method would impose substantial phantom income on the Secondary Investors, which is commercially unacceptable. The curative method, while also capable of addressing ceiling rule distortions, is less flexible and may not have sufficient offsetting items available to fully cure the distortion. See the companion Section 704(c) Allocation Methodology Memorandum dated August 8, 2025, for a detailed comparative analysis of all three methods (traditional, curative, and remedial) and the basis for our recommendation.]
Section Y.3(b) — Revaluations — Reverse Section 704(c)
Section Y.3(c) — Anti-Abuse and Consistency
[C&H Comment: The 75% consent threshold for a method change is a protective measure for the Secondary Investors (particularly Garrison). A change from the remedial method to the traditional method after closing would expose the Secondary Investors to significant phantom income. This provision is flagged for discussion with Garrison's counsel, as Garrison may seek a higher threshold or a requirement of Garrison's specific consent.]
Section Y.4 — Allocations for Tax Purposes vs. Book Purposes
ARTICLE Z — DISTRIBUTIONS
Section Z.1 — Distribution Waterfall (European-Style)
[C&H Comment: The Hawthorne Reid draft contained a simplified deal-by-deal waterfall with a flat 20% carry and no preferred return. Per instructions from Marcus Aldren and consistent with the Garrison term sheet dated June 15, 2025, this should be a European-style (whole-fund) waterfall with a 7% preferred return and a 15% carry. We have revised accordingly.]
Section Z.2 — Bifurcation of Carried Interest: Legacy Carry Tranche and New Carry Tranche
[C&H Comment: The bifurcation of the Carried Interest into Legacy and New Carry Tranches is essential to preserve the favorable Section 1061 holding period for the legacy carry. Without this bifurcation, there is a risk that the IRS could treat the entire Carried Interest as a new API, thereby subjecting all carry-related gains to the three-year holding period requirement beginning on the CV Closing Date. See the companion Section 1061 Carried Interest Memorandum dated August 8, 2025, for a detailed analysis. We note that the allocation methodology between the two tranches (Section Z.2(d)) requires further technical analysis in coordination with Andover & Strauss LLP, particularly with respect to the K-1 reporting of the tranche bifurcation. This is flagged as Open Item No. 7.]
Section Z.3 — GP Clawback
(a) Clawback Obligation. At the end of the Partnership term or upon a liquidation of the Partnership, if the General Partner has received cumulative Carried Interest distributions (under Sections Z.1(c) and Z.1(d)) in excess of the amount that the General Partner would have been entitled to receive on a cumulative, whole-fund basis under the waterfall set forth in Section Z.1 (taking into account all Capital Contributions, all distributions to all Partners, and the Preferred Return as calculated over the entire life of the Partnership), the General Partner shall, within days following the final liquidating distribution, return such excess (the "Clawback Amount") to the Partnership for distribution to the Limited Partners in accordance with their respective Partnership Interests.
(b) After-Tax Basis. The Clawback Amount shall be calculated on an after-tax basis, taking into account the U.S. federal, state, and local income taxes actually paid (or deemed paid) by the General Partner (or its individual members, as applicable) with respect to the Carried Interest distributions subject to clawback. The assumed combined marginal tax rate to be used for this after-tax calculation shall be agreed upon by the General Partner and the LP Advisory Committee prior to the Final Closing Date.
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[C&H Comment: The clawback escrow percentage is intentionally left as a blank to be negotiated between Pinnacle and Garrison. Market practice for continuation vehicles of this size typically ranges from 25% to 40% of each carry distribution. This is flagged as Open Item No. 3.]
(d) Joint and Several Liability. The clawback obligation of the General Partner shall be the joint and several obligation of each individual who received any portion of the Carried Interest distributions (i.e., Marcus Aldren, Diana Tsao, and Rafael Montoya), subject to a cap for each individual equal to such individual's pro rata share of the Clawback Amount (based on the GP economics allocation in Section Z.2(e)), net of taxes deemed paid by such individual.
Section Z.4 — Tax Distributions
[C&H Comment: Using the California blended rate as the Assumed Tax Rate is appropriate given that the GP principals (Aldren, Tsao, Montoya) reside in California and that California imposes the highest state income tax rate in the nation. However, we note that Garrison Secondaries Fund IV LP is a Delaware limited partnership with a principal office in Connecticut, and Garrison may negotiate for a lower Assumed Tax Rate based on its own tax profile (e.g., a New York or Connecticut blended rate, or the federal rate alone). This is flagged as Open Item No. 1 for discussion between Pinnacle and Garrison.]
ARTICLE AA — TAX MATTERS
Section AA.1 — Tax Elections
(a) Section 754 Election. The Partnership shall make, and the General Partner shall cause to be filed with the Partnership's U.S. federal income tax return for the taxable year that includes the Initial Closing Date, an election under Section 754 of the Code. Once made, such election shall remain in effect for all subsequent taxable years of the Partnership and shall not be revoked without the prior written consent of Partners holding at least seventy-five percent (75%) of the Partnership Interests then outstanding.
[C&H Comment: The Section 754 election is critical to this transaction. Upon the admission of the Secondary Investors (including Garrison Secondaries Fund IV LP) and the purchase of Partnership Interests by such investors, a Section 754 election will cause a Section 743(b) adjustment to be made with respect to the Partnership's assets, stepping up the inside basis of such assets (for the benefit of the purchasing partners) to reflect the purchase price paid. Without a Section 754 election, Garrison (and other Secondary Investors) would have a basis mismatch: their outside basis in their Partnership Interests (equal to the purchase price) would exceed their share of the Partnership's inside basis in the Contributed Assets (which have an aggregate Tax Basis of only $138 million). This mismatch would result in phantom income upon future dispositions of the Contributed Assets. The Section 754 election eliminates this mismatch by increasing the inside basis allocable to the Secondary Investors.]
(b) Taxable Year. The Partnership shall use the calendar year (January 1 through December 31) as its taxable year for U.S. federal income tax purposes.
(c) Method of Accounting. The Partnership shall use the accrual method of accounting for U.S. federal income tax purposes.
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(f) Other Elections. The General Partner shall make or refrain from making any other tax election as it determines in good faith to be in the best interests of the Partners as a whole, provided that no election that would have a disproportionately adverse effect on any class of Partners (including, without limitation, the Tax-Exempt Partners, the Non-U.S. Partners, or the Secondary Investors) shall be made without the prior written consent of the affected Partners (or, in the case of Partners investing through a blocker Entity, the prior written consent of the applicable blocker Entity).
Section AA.2 — Tax Returns and Information
(a) Preparation and Filing. The General Partner shall cause the Partnership's U.S. federal income tax return (Form 1065, U.S. Return of Partnership Income) and all required state and local income, franchise, and information tax returns to be prepared and timely filed (including any extensions) for each taxable year of the Partnership. The Partnership's tax return preparer shall be Andover & Strauss LLP (350 South Grand Avenue, Suite 2600, Los Angeles, California 90071; contact: Patricia Clemons, CPA, Audit Partner), or such other nationally recognized accounting firm as the General Partner may designate from time to time.
(b) Schedule K-1 Delivery. The General Partner shall furnish (or cause to be furnished) to each Partner a Schedule K-1 (Form 1065) (or any successor form) for each taxable year of the Partnership, together with such other information as is reasonably necessary for each Partner to prepare its U.S. federal, state, and local income tax returns. The General Partner shall use commercially reasonable efforts to deliver the final Schedule K-1 to each Partner within seventy-five (75) days after the close of each fiscal year of the Partnership (i.e., by March 15 of the following calendar year for calendar-year partners).
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Section AA.3 — Partnership Representative (BBA Centralized Audit Regime)
[C&H Comment: The Hawthorne Reid draft references the pre-BBA "tax matters partner" regime under former Section 6231(a)(7) of the Code, which was repealed by the Bipartisan Budget Act of 2015 effective for partnership tax years beginning after December 31, 2017. The Partnership is subject to the centralized partnership audit regime under Sections 6221 through 6241 of the Code (the "BBA Audit Rules"), which requires the designation of a "partnership representative" (not a "tax matters partner"). We have proposed a complete rewrite of this section.]
[C&H Comment: The push-out election under Section 6226 is strongly recommended. Without a push-out election, the Partnership would be liable for an "imputed underpayment" calculated at the highest individual tax rate (currently 37% for ordinary income, plus any applicable state tax rates), without regard to the individual tax characteristics of the Partners. This calculation would be particularly unfavorable to (i) Tax-Exempt Partners (such as Meridian Public Employees' Retirement System and Ashford University Endowment), which are generally exempt from federal income tax and would effectively be subsidizing the tax liabilities of other Partners; (ii) Non-U.S. Partners (such as Sovereign Capital Partners (Cayman) Ltd.), which may not be subject to U.S. tax on certain items of income; and (iii) Partners that are subject to lower rates (e.g., long-term capital gain rates) or that have offsetting losses or credits. The push-out election ensures that each Partner bears the tax consequences of any audit adjustment in accordance with its own tax position.]
Section AA.4 — QSBS Preservation Covenants (Section 1202)
[C&H Comment: The Vectral Cloud $50 million gross asset test is a critical open item. If Vectral Cloud's aggregate gross assets exceeded $50 million at the time of the Series B issuance in March 2021, the shares would fail to qualify as QSBS. We are conducting further diligence with Andover & Strauss LLP and Vectral Cloud's management team to resolve this issue. This is flagged as Open Item No. 2.]
Section AA.5 — Section 1061 Compliance
Section AA.6 — Withholding and Indemnification
Section AA.6(a) — Section 1446 Withholding (ECI Withholding on Non-U.S. Partners)
**[C&H Comment: The Offshore blocker (PCV International Holdings Ltd.) is specifically designed to ECI from flowing through to Non-U.S. Partners, including Sovereign Capital Partners (Cayman) Ltd. (commitment of $75,000,000). If the Offshore blocker is properly interposed and functioning as intended, the Offshore blocker (as a foreign corporation) will be the "partner" for purposes of Section 1446, and the Offshore blocker itself will be subject to U.S. federal income tax on any ECI allocated to it (filing Form 1120-F). Non-U.S. Partners investing through the Offshore blocker should not themselves be treated as receiving ECI allocations, and Section 1446 withholding should not apply at the investor level. However, this withholding provision must remain in the LPA to address any Non-U.S. Partner that elects to invest directly in the Partnership (rather than through the Offshore blocker), or in the event the Offshore blocker structure is for any reason not effective in blocking ECI.]**
Section AA.6(b) — Section 1445 Withholding (FIRPTA Withholding on USRPIs)
[C&H Comment: The Portfolio Companies (Luminos Systems, ClearArc Software, and Vectral Cloud) are software and SaaS businesses and are not expected to hold significant U.S. real property interests. Accordingly, the FIRPTA withholding provisions are included as a protective measure and are not expected to be frequently invoked. However, if any Portfolio Company were to acquire real property (e.g., an office building or data center) representing a significant portion of its assets, or if the shares of a Portfolio Company were treated as USRPIs under the FIRPTA look-through rules applicable to partnerships, these provisions would become operative.]
Section AA.6(c) — State and Local Withholding
Section AA.6(d) — Indemnification for Withholding
Section AA.7 — Section 707 Disguised Sale Protections
Section AA.8 — Section 752 Liability Allocations
ARTICLE BB — BLOCKER ENTITY PROVISIONS
Section BB.1 — Domestic blocker (PCV Domestic blocker Inc.)
Section BB.2 — Offshore blocker (PCV International Holdings Ltd.)
Section BB.3 — Aggregate blocker Capital and Allocation Interaction
[C&H Comment: The interaction of the blocker structures and the remedial allocation method requires particularly careful drafting and modeling. The blocker Entities are Non-Contributing Partners (they did not contribute the Contributed Assets and have no share of the Built-In Gain). Under the remedial method, the blocker Entities should be allocated tax gain equal to their book gain — no more, no less. However, if the remedial allocations are not properly implemented, the blocker Entities could be allocated "phantom income" (tax gain in excess of book gain), which would be especially problematic for the Domestic blocker (triggering unnecessary corporate-level tax) and the Tax-Exempt Partners investing through it. We recommend that the General Partner's tax advisors (Andover & Strauss LLP) prepare detailed allocation models prior to the Final Closing to confirm the proper operation of the remedial allocations in the context of the blocker structures. Given the magnitude of the Built-In Gain ($1.202 billion) and the aggregate blocker capital ($250 million), this modeling exercise is critical.]
ARTICLE CC — MISCELLANEOUS TAX PROVISIONS
Section CC.1 — Tax Treatment of the Partnership
(a) The Partnership shall be treated as a partnership for U.S. federal income tax purposes and shall not elect to be classified as a corporation or an association taxable as a corporation pursuant to Treasury Regulation Section 301.7701-3. The Partnership shall file a Form 1065 (U.S. Return of Partnership Income) with the Internal Revenue Service for each taxable year.
(b) No Partner shall take any action or filing position that is inconsistent with the treatment of the Partnership as a partnership for U.S. federal income tax purposes, unless otherwise required by a final determination (within the meaning of Section 1313 of the Code) of a court of competent jurisdiction or the Internal Revenue Service.
(c) In the event the Internal Revenue Service or any state or local taxing authority challenges the treatment of the Partnership as a partnership, the General Partner shall take such actions as are necessary to defend such treatment, and the Partners shall cooperate with the General Partner in such defense.
Section CC.2 — Tax Controversies and Cooperation
(a) Each Partner shall cooperate fully with the Partnership and the Partnership Representative in connection with any tax audit, examination, investigation, or judicial or administrative proceeding involving the Partnership, including (without limitation) by providing information, executing documents, and making personnel available for interviews or testimony, in each case to the extent reasonably requested by the General Partner or the Partnership Representative.
(b) Each Partner shall furnish to the Partnership, promptly upon request, such tax information as the General Partner reasonably requests for the Partnership to comply with its withholding, reporting, and filing obligations under applicable federal, state, local, and foreign tax law, including (without limitation) properly completed and executed copies of:
(i) Internal Revenue Service Form W-9 (Request for Taxpayer Identification Number and Certification), for each U.S. Partner;
(ii) Internal Revenue Service Form W-8BEN (Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting — Individuals) or Form W-8BEN-E (Certificate of Status of Beneficial Owner for United States Tax Withholding and Reporting — Entities), as applicable, for each Non-U.S. Partner;
(iii) Internal Revenue Service Form W-8IMY (Certificate of Foreign Intermediary, Foreign Flow-Through Entity, or Certain U.S. Branches for United States Tax Withholding and Reporting), to the extent the Partnership invests through intermediate entities; and
(iv) such other forms, certifications, or documentation as the General Partner may reasonably request to comply with applicable tax law (including any forms required by the laws of any foreign jurisdiction in which the Partnership or any Portfolio Company operates or has tax obligations).
(c) Each Partner shall promptly notify the General Partner in writing of any tax audit, examination, investigation, or proceeding involving such Partner that relates to, or may affect, the tax treatment of the Partnership or the Partnership's items of income, gain, loss, deduction, or credit.
Section CC.3 — Survival of Tax Provisions
The tax-related obligations of the Partners under this Agreement (including, without limitation, the obligations relating to withholding indemnification under Section AA.6(d), information reporting and cooperation under Section CC.2, capital account maintenance under Section Y.1, and the GP clawback under Section Z.3) shall survive the dissolution, winding up, and termination of the Partnership, and the withdrawal, removal, or transfer of a Partner's interest in the Partnership. Such obligations shall continue in full force and effect until the later of: (a) the date on which all applicable statutes of limitations (including any extensions thereof) have expired with respect to the taxable years of the Partnership; and (b) the date on which all tax audits, examinations, investigations, and proceedings with respect to the Partnership have been finally resolved.
Section CC.4 — No Tax Advice
EACH PARTNER ACKNOWLEDGES AND AGREES THAT NEITHER THE PARTNERSHIP, THE GENERAL PARTNER, PINNACLE CAPITAL MANAGEMENT LLC, NOR ANY OF THEIR RESPECTIVE AFFILIATES, DIRECTORS, OFFICERS, EMPLOYEES, OR AGENTS PROVIDES TAX ADVICE TO ANY PARTNER. THE TAX TREATMENT OF THE PARTNERSHIP AND EACH PARTNER'S INVESTMENT THEREIN DEPENDS ON EACH PARTNER'S INDIVIDUAL TAX CIRCUMSTANCES. EACH PARTNER IS URGED TO CONSULT ITS OWN TAX ADVISOR REGARDING THE U.S. FEDERAL, STATE, LOCAL, AND FOREIGN TAX CONSEQUENCES OF ITS INVESTMENT IN THE PARTNERSHIP, INCLUDING (WITHOUT LIMITATION) THE APPLICABILITY AND EFFECT OF SECTION 1202 (QSBS), SECTION 1061 (CARRIED INTEREST), SECTIONS 511 THROUGH 514 (UBTI), SECTIONS 864 AND 871 THROUGH 897 (ECI AND FIRPTA), SECTIONS 1291 THROUGH 1298 (PFIC), SECTIONS 951 THROUGH 965 (CFC), AND APPLICABLE STATE AND LOCAL INCOME AND FRANCHISE TAXES. NOTHING IN THIS AGREEMENT OR IN ANY OTHER DOCUMENT DELIVERED BY THE PARTNERSHIP OR THE GENERAL PARTNER SHALL BE CONSTRUED AS TAX ADVICE TO ANY PARTNER.
SCHEDULE A — CONTRIBUTED ASSETS AND TAX BASIS DETAIL
The following table sets forth the details of each Contributed Asset, including the issuing Portfolio Company, the employer identification number (EIN) of each Portfolio Company, the approximate ownership percentage represented by the contributed shares, the adjusted Tax Basis of the contributed shares, the fair market value of the contributed shares as of June 30, 2025 (as determined by Kessler Pratt LLP), the Built-In Gain at the time of contribution, and the status of the five-year holding period for QSBS purposes under Section 1202 of the Code.
Valuation. The fair market values set forth above were determined by Kessler Pratt LLP (101 Montgomery Street, Suite 1800, San Francisco, California 94104; contact: David Kessler, Managing Partner), an independent valuation firm, as of June 30, 2025, using a combination of discounted cash flow analysis, comparable company analysis, and precedent transaction analysis. Kessler Pratt LLP is expected to deliver a formal fairness opinion on or about September 22, 2025.
Tax Basis. The adjusted Tax Basis amounts set forth above represent the original cost basis of each Portfolio Company investment as held by Pinnacle Venture Fund II LP, adjusted for any capitalized transaction costs and other basis adjustments through the date of contribution to the Partnership.
QSBS Holding Period. The QSBS five-year holding period for each Portfolio Company is measured from the date of original issuance of the QSBS shares. Upon the contribution of the Contributed Assets from Pinnacle Venture Fund II LP to the Partnership (structured as a Section 721 contribution), each Partner's holding period in the QSBS shares (for Section 1202 purposes) is expected to tack to include the holding period of Pinnacle Venture Fund II LP, pursuant to Section 1202(h) of the Code. The Vectral Cloud holding period will not be satisfied until March 2026.
SCHEDULE B — SECTION 1061 CARRY TRANCHE TRACKING
The following table sets forth the key parameters of the Legacy Carry Tranche and the New Carry Tranche for purposes of Section 1061 of the Code.
GP Economics Allocation Within Both Tranches:
Notes:
1. The Legacy Carry Tranche preserves the favorable Section 1061 treatment of the General Partner's pre-existing carried interest in Pinnacle Venture Fund II LP. Because the three-year holding period was satisfied in December 2022, long-term capital gain allocated with respect to the Legacy Carry Tranche should not be recharacterized as short-term capital gain under Section 1061(a), provided the underlying assets have been held for more than three years.
2. The New Carry Tranche constitutes a new Applicable Partnership Interest (API) with a three-year holding period commencing on October 31, 2025. Any long-term capital gain allocated with respect to the New Carry Tranche that is recognized before October 31, 2028 will be recharacterized as short-term capital gain under Section 1061(a).
3. The allocation of gains between the two tranches (see Section Z.2(d) of the Agreement) requires further technical analysis in coordination with Andover & Strauss LLP, as described in Open Item No. 7 of the Appendix.
SCHEDULE C — BLOCKER ENTITY SUMMARY
The following table summarizes the key characteristics of the Domestic blocker and the Offshore blocker.
Aggregate blocker Capital as a Percentage of Total CV Capitalization: $250,000,000 / $1,074,000,000 = approximately 23.3%.
Formation Timeline: Both blocker Entities are targeted for formation on or before September 30, 2025, to be operational prior to the Final Closing Date (target: October 31, 2025).
Key Tax Considerations:
• Domestic blocker: Subject to U.S. corporate income tax at 21% on its allocable share of Partnership income. Distributions to Tax-Exempt Partners treated as dividends (to the extent of E&P) and should not constitute UBTI. See Section BB.1 of the Agreement.
• Offshore blocker: Subject to U.S. tax on ECI (if any) at the corporate rate. Must file Form 1120-F. Must be monitored for PFIC and CFC status. Distributions to Non-U.S. Partners subject to 30% withholding (or reduced treaty rate). See Section BB.2 of the Agreement.
APPENDIX — SUMMARY OF CALDERWOOD & HARKNESS COMMENTS
The following is a numbered index of all Calderwood & Harkness comments and annotations embedded in the markup, together with cross-references to the applicable LPA section, for ease of reference by Hawthorne Reid LLP and the parties during negotiation and revision. Open items requiring further discussion among Hawthorne Reid LLP, Pinnacle Capital Management LLC, and Garrison Secondaries Fund IV LP (and their respective counsel) are identified with an asterisk (*).
Summary of Open Items Requiring Discussion
The following open items have been identified in the markup and require further discussion and resolution among Hawthorne Reid LLP (fund counsel to the Partnership), Pinnacle Capital Management LLC (the Sponsor), Garrison Secondaries Fund IV LP (lead Secondary Investor), and their respective tax advisors:
Open Item No. 1 — Assumed Tax Rate for Tax Distributions (Section Z.4). Calderwood & Harkness has proposed a California blended rate (approximately 50.3% for ordinary income / 37.1% for long-term capital gain) as the Assumed Tax Rate for quarterly Tax Distributions. Garrison Secondaries Fund IV LP may seek a lower rate based on its own tax profile (e.g., a Connecticut or federal-only rate). The parties should negotiate an agreed-upon rate or a mechanism for calculating the rate based on the individual circumstances of the Partners (e.g., the highest rate applicable to any Partner, or a weighted-average rate).
Open Item No. 2 — Vectral Cloud QSBS Diligence (Section AA.4(a)(iv)). The aggregate gross assets of Vectral Cloud Inc. at the time of its Series B financing in March 2021 were in close proximity to the $50,000,000 threshold under Section 1202(d)(1) of the Code. Calderwood & Harkness LLP and Andover & Strauss LLP are conducting further diligence to confirm whether the threshold was exceeded. If the threshold was exceeded, the shares of Vectral Cloud contributed to the Partnership would not qualify as QSBS. The General Partner should provide all available financial records (including audited and unaudited balance sheets) of Vectral Cloud as of March 2021 to facilitate the completion of this analysis.
Open Item No. 3 — GP Clawback Escrow Percentage (Section Z.3(c)). The percentage of each Carried Interest distribution to be deposited into the Clawback Escrow at Coastal Fiduciary Trust Company has been left blank for negotiation. Market practice for continuation vehicles of this size typically ranges from 25% to 40%. The parties should agree on the applicable percentage prior to the Final Closing.
Open Item No. 4 — Section 704(c) Method Lock-In (Section Y.3(c)). Calderwood & Harkness has proposed a 75% consent threshold for any change to the Section 704(c) allocation method (remedial method). Garrison may seek a higher threshold (e.g., 90% or unanimous consent) or may request that Garrison's specific affirmative consent be required for any method change. The parties should discuss the appropriate level of partner protection.
Open Item No. 5 — Push-Out Election Commitment (Section AA.3(d)). Calderwood & Harkness has proposed a mandatory push-out election under Section 6226 in the event of a partnership-level audit adjustment. The push-out election is strongly recommended to protect Tax-Exempt Partners and Non-U.S. Partners, but the General Partner may have practical concerns about the administrative burden of furnishing adjusted statements to all Partners. The parties should confirm the Partnership Representative's willingness to commit to the push-out election.