PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT
CALDERWOOD & HARKNESS LLP 2000 McKinney Avenue, Suite 3400 Dallas, TX 75201
MEMORANDUM
Matter No.: 1042-00004
TO: Beatrice Holloway, Responsible Partner, Mergers & Acquisitions
FROM: Ryan Kowalski, Lead Associate; Megan Chu, Working Associate
DATE: May 26, 2023
RE: Due Diligence Summary Memorandum — Codelaunch Labs, Inc. (Legal Diligence Findings in Connection with Proposed Acquisition by Brightfield Cloud Services Inc.)
REVIEWED BY: Beatrice Holloway
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I. Executive Summary
The purpose of this memorandum is to summarize the findings from legal due diligence conducted from May 1 through May 26, 2023 on Codelaunch Labs, Inc. ("Codelaunch" or the "Target") in connection with the proposed acquisition of the Target by Brightfield Cloud Services Inc. ("BCS" or the "Buyer"). This memorandum is intended to identify material legal risks and to recommend transaction structuring and protective measures for the benefit of BCS in its evaluation and negotiation of the proposed transaction.
Transaction Overview. BCS proposes to acquire Codelaunch via a forward merger for aggregate consideration of $22,000,000 (the "Aggregate Merger Consideration"). The transaction is structured as an acqui-hire, with a central commercial objective of retaining the three co-founders of Codelaunch — Naveen Subramaniam, Elise Thornberry, and Marcus Okonkwo — who are responsible for the design, development, and continued evolution of the Target's core technology platform. The Aggregate Merger Consideration is comprised of (i) $16,500,000 in closing cash consideration payable to all stockholders, (ii) a $2,200,000 escrow holdback to secure post-closing indemnification obligations, and (iii) up to $3,300,000 in earnout consideration payable to the three co-founders upon achievement of specified product-line performance milestones.
Target Overview. Codelaunch is a Delaware-incorporated developer-tools startup with its principal offices located in Austin, Texas. The Target offers CI/CD (continuous integration / continuous deployment) pipeline orchestration and automated code-review software, delivered to customers on a software-as-a-service ("SaaS") basis. Codelaunch was founded in 2019 and currently generates annual recurring revenue ("ARR") of approximately $4,800,000. As of the date of this memorandum, the Target employs 38 individuals.
Coordination with Other Advisors. Legal due diligence has been coordinated with Kerrigan & Pryce LLP (1700 Pacific Avenue, Suite 1500, Dallas, TX 75201), which is serving as BCS's financial diligence advisor and is separately addressing financial and accounting matters. This memorandum covers legal diligence findings only and does not purport to address financial, accounting, or technical diligence matters.
Seller's Counsel and Advisors. The Target is represented in connection with the proposed transaction by Caldwell, Raines & Fitch LLP (Geoffrey Aldrich, lead partner; Dana Whitford, associate), 600 Congress Avenue, Suite 2200, Austin, TX 78701. The Target's investment banker is Ashburn Park Capital LLC (Tara Novak, Managing Director), 200 West 6th Street, Suite 600, Austin, TX 78701. We have been in regular communication with Mr. Aldrich and Ms. Whitford throughout the diligence process, and they have been generally responsive to our document requests and follow-up inquiries.
Overall Assessment. Based on the findings described in detail below, we believe the Target is suitable for acquisition by BCS. The Target's corporate organization is clean, its capitalization is well-documented, its intellectual property portfolio appears properly assigned, and its litigation profile is clear. The material risks identified during diligence — principally relating to founder retention, IP chain of title on pending provisional patent applications, and certain minor compliance gaps — can be effectively mitigated through the proposed transaction structuring, including the earnout for founder retention, indemnification protections, an escrow holdback, and a buy-side representations and warranties insurance policy. Key risk areas and recommended mitigants are discussed in detail throughout this memorandum and summarized in Section XII below.
II. Corporate Organization and Good Standing
A. Formation and Jurisdiction
We have reviewed the corporate formation documents of the Target and confirm the following organizational details:
• Full Legal Name: Codelaunch Labs, Inc.
• Entity Type: Corporation incorporated under the laws of the State of Delaware
• Delaware File Number: 7834219
• Employer Identification Number (EIN): 84-3291057
• Date of Incorporation: 2019
• Registered Agent: Capitol Registered Agents LLC, 1209 Orange Street, Wilmington, DE 19801
• Principal Office: 1607 East 6th Street, Suite 300, Austin, TX 78702
The Target was incorporated in Delaware in 2019, which is consistent with the representations made by Target management during our initial interview sessions. The Delaware Secretary of State's records confirm the Target's formation date and file number. The registered agent, Capitol Registered Agents LLC, is a reputable commercial registered agent service provider, and its address is the standard designated office address used by many Delaware-incorporated entities.
B. Good Standing and Qualification
We obtained and reviewed a Certificate of Good Standing issued by the Delaware Secretary of State, which confirms that Codelaunch Labs, Inc. is in good standing as of the date of our review. All annual franchise tax filings and payments appear to be current.
We further confirmed that the Target is qualified to transact business in the State of Texas, where its principal office is located and where substantially all of its employees are based. We reviewed the Target's certificate of authority filed with the Texas Secretary of State, which is active and in good standing.
No other foreign qualifications were identified during our review. Given that the Target operates a SaaS business and may have customers in multiple states, we recommend that BCS assess whether any customer-facing operations, the presence of remote employees, or other activities in states beyond Texas may require the Target to qualify as a foreign corporation in additional jurisdictions. While the absence of such qualifications is not uncommon for a startup of this size and does not present a material risk to the transaction, it is a housekeeping item that may warrant attention post-closing.
C. Organizational Documents
We reviewed the Target's Certificate of Incorporation, including the original certificate and all amendments thereto filed with the Delaware Secretary of State. The Certificate of Incorporation, as amended, authorizes the issuance of common stock only. We note that the Target previously had authorized preferred stock in connection with its Series A financing; however, all shares of Series A preferred stock have been converted to common stock, and the certificate of incorporation was subsequently amended to eliminate the preferred stock designation. This is discussed further in Section III below.
We also reviewed the Target's Bylaws, as amended to date. The Bylaws contain standard provisions for a Delaware corporation, including provisions relating to meetings of stockholders, the Board of Directors, officers, indemnification and advancement of expenses, and amendments to the Bylaws.
The authorized capital stock of the Target, as reflected in the current Certificate of Incorporation, consists solely of common stock. There is no preferred stock outstanding. The authorized share count and par value are consistent with the capitalization table discussed in Section III.
The Target's Board of Directors currently consists of three members:
(i) Naveen Subramaniam (Co-Founder and CEO);
(ii) Elise Thornberry (Co-Founder and CTO); and
(iii) one director designee of Ridgeway Ventures Fund II, LP, the Target's Series A lead investor.
We reviewed the Board of Directors meeting minutes and written consent resolutions from the date of the Target's formation through the present. The minutes and resolutions reflect appropriate corporate governance practices and the proper authorization of key corporate actions, including the Series A financing, adoption and amendment of the equity incentive plan, the engagement of Ashburn Park Capital LLC as the Target's investment banker, and the authorization of the Board to engage with BCS regarding the proposed transaction. No irregularities were noted in our review of the corporate minutes and records.
D. Subsidiaries and Affiliates
Codelaunch has no subsidiaries, whether wholly owned or partially owned. We confirmed through management representations and a review of the data room that the Target has not formed or acquired any subsidiary entities, and has no equity interests in any other entity. No joint ventures, strategic partnerships involving equity participation, or minority equity investments were identified. The corporate structure is straightforward, consisting of the single operating entity, Codelaunch Labs, Inc.
III. Capitalization
A. Outstanding Equity
Based on our review of the Target's stock ledger, certificates of incorporation (as amended), stock purchase agreements, option grant agreements, and the capitalization table provided by Target's counsel, the fully diluted capitalization of Codelaunch Labs, Inc. is as follows:
The three co-founders collectively hold 7,000,000 shares, representing 70% of the fully diluted capitalization. Ridgeway Ventures Fund II, LP holds 2,200,000 shares (22%), representing the balance of the investor shares. The remaining 800,000 shares (8%) are held by a combination of angel investors and employees holding outstanding stock options, presented on an as-exercised, fully diluted basis.
B. Stock Option Plan
Codelaunch maintains an equity incentive plan (the "Plan") under which stock options have been granted to certain employees and service providers. The option holders are included within the 800,000 shares (8%) attributed to "various angel investors and option holders" on the fully diluted capitalization table set forth above.
We reviewed the Plan document, the form of stock option agreement, and individual grant documentation for all outstanding options. All option grants appear to have been made at fair market value as determined in accordance with Section 409A of the Internal Revenue Code. We reviewed the 409A valuation reports prepared by an independent valuation firm retained by the Target, and the reports appear to have been prepared using methodologies consistent with IRS guidance and industry practice.
Vesting schedules for outstanding options vary, with most following a standard four-year vesting schedule with a one-year cliff. As of the date of this memorandum, certain options remain unvested. In connection with the proposed merger, all outstanding options (whether vested or unvested) will need to be addressed — either cancelled in exchange for merger consideration (net of exercise price) or assumed or substituted by BCS. We recommend cancellation in exchange for cash consideration at closing, consistent with the overall deal structure, subject to negotiation with Target's counsel.
C. Prior Financing Rounds
The Target completed one institutional financing round. Ridgeway Ventures Fund II, LP led the Target's Series A financing, investing in shares of Series A preferred stock. Since the completion of the Series A round, all outstanding shares of Series A preferred stock have been converted to shares of common stock in accordance with the terms of the Certificate of Incorporation. The conversion was properly documented and reflected in the corporate records.
No outstanding convertible notes, simple agreements for future equity ("SAFEs"), warrants, or other convertible or equity-linked securities were identified, other than the outstanding stock options described above. This simplifies the capitalization structure and eliminates the risk of undisclosed dilutive instruments.
D. Stockholder Agreements
The Target and its stockholders are parties to the following stockholder agreements, which we reviewed in full:
(i) Investors' Rights Agreement — providing for information rights, registration rights, and certain other protective provisions in favor of Ridgeway Ventures Fund II, LP;
(ii) Right of First Refusal and Co-Sale Agreement — providing for rights of first refusal and co-sale (tag-along) rights in connection with proposed transfers of shares by the founders; and
(iii) Voting Agreement — providing for certain voting arrangements regarding the composition of the Board of Directors.
All three agreements are in standard forms commonly used by venture-backed companies, and we did not identify any unusual or non-standard provisions. With respect to the proposed merger, we confirmed that there are no drag-along, tag-along, or consent rights in any of these agreements that would impede the consummation of the transaction, provided that the requisite stockholder approval is obtained in accordance with applicable law.
Under Section 251 of the Delaware General Corporation Law ("DGCL"), approval of the merger agreement will require the affirmative vote of the holders of a majority of the outstanding shares of common stock entitled to vote thereon. Alternatively, under DGCL § 228, the merger agreement may be approved by written consent of stockholders holding a majority of the outstanding shares, without the need for a stockholders' meeting. Given that the three co-founders collectively hold 7,000,000 shares, representing 70% of the outstanding shares — well in excess of the majority threshold — the merger agreement can be adopted promptly by written consent following its execution.
E. Observations
The capitalization of the Target appears clean and well-documented. The stock ledger, option grant records, and stockholder agreements are consistent and do not reflect any discrepancies or missing documentation. We recommend the following actions in connection with the proposed transaction:
• Obtain the written consent of stockholders promptly following the signing of the merger agreement to eliminate any execution risk associated with the stockholder approval condition.
• Confirm the cancellation of all outstanding stock options at or prior to closing, with appropriate treatment of vested in-the-money options (cash-out at closing consideration net of exercise price) and unvested options (cancellation without consideration, unless BCS elects otherwise).
• Establish a letter of transmittal process for all stockholders and option holders to surrender their shares or options in exchange for the applicable merger consideration.
IV. Material Contracts
A. Customer Contracts
We reviewed a representative sample of the Target's customer agreements, consisting of the Target's standard form of SaaS subscription agreement and a selection of individually negotiated enterprise customer contracts. The Target's customer base is composed predominantly of small-to-midsize technology companies and development teams subscribing to the Codelaunch CI/CD platform and automated code-review tools.
Customer contracts are predominantly structured as annual subscription agreements with recurring revenue characteristics. The standard terms include automatic renewal provisions (typically with 30-day advance notice required for non-renewal), a data processing addendum addressing the handling of customer data in compliance with applicable data protection laws, and a standard limitation of liability provision capping the Target's liability to the fees paid by the customer during the twelve-month period preceding the claim.
No single customer accounts for more than 8% of the Target's ARR, reflecting moderate customer concentration. While the absence of a dominant customer is a positive factor, the relatively large number of small-value contracts also means that the Target's revenue is distributed across a broad customer base, reducing the risk of material revenue loss from any single customer departure.
Importantly, we did not identify any "most favored nation" pricing clauses, exclusivity provisions, or other restrictive covenants in the customer contracts that would impair BCS's ability to integrate the Codelaunch platform into its broader product suite or modify pricing post-closing. Certain enterprise customer agreements contain assignment or change-of-control provisions, but these are generally limited to notice requirements rather than consent requirements, and the forward merger structure (in which Codelaunch merges into a BCS subsidiary) should minimize the triggering of anti-assignment clauses in most cases. We nonetheless recommend a careful review of the top-revenue customer contracts to confirm that the merger does not constitute an "assignment" requiring consent under any individually negotiated agreement.
B. Vendor and Supplier Agreements
We reviewed the Target's key vendor and supplier agreements, with particular focus on the cloud infrastructure hosting arrangements that underpin the Target's SaaS platform. The Target's primary cloud infrastructure is hosted on Ridgeway Industries ("Meridian Technologies") under a standard commercial terms of service arrangement, supplemented by agreements with third-party data center and content delivery network providers.
These agreements are on standard commercial terms and do not contain any minimum commitment, take-or-pay, or volume-based pricing arrangements that would present material financial risk to BCS post-closing. The Meridian Technologies arrangement, in particular, is a pay-as-you-go model with no long-term contractual commitment beyond standard terms. We did not identify any vendor agreements with unusual termination penalties, exclusivity requirements, or other provisions that would be problematic in the context of the proposed transaction or the post-closing integration.
C. Strategic Partnerships
We identified two co-marketing and integration partnership agreements between the Target and third-party developer platforms. These agreements provide for the integration of the Codelaunch CI/CD platform with the partner platforms, along with mutual marketing commitments and revenue-sharing arrangements for customers referred through the partnership channels.
Both partnership agreements include change-of-control provisions. Notably, these provisions require notice of a change of control to the partner but do not require the partner's consent as a condition to the continuation of the agreement. We recommend that BCS provide the required notice promptly following the signing of the merger agreement (or, if the agreements specify a post-closing notice period, promptly following the closing) to ensure compliance with these provisions and to maintain goodwill with the partner organizations.
Neither partnership agreement generates material revenue for the Target, and the termination of either agreement would not have a material adverse effect on the Target's business or the value of the transaction. Nonetheless, BCS may find the partner relationships to be strategically valuable as part of its broader developer-tools platform strategy, and maintaining them in good standing is advisable.
D. Lease Agreement
The Target leases office space at 1607 East 6th Street, Suite 300, Austin, TX 78702 pursuant to a commercial office lease agreement. The key terms of the lease are as follows:
• Lease Term: Three years, with an expiration date in mid-2024.
• Monthly Rent: Modest; consistent with comparable office space in the East Austin area.
• Renewal Options: None identified in the current lease.
• Use Restrictions: Standard office use; no unusual restrictions.
The lease contains an assignment and change-of-control clause that requires the prior written consent of the landlord in connection with any assignment of the lease or any change in the controlling ownership of the tenant. The forward merger structure of the proposed transaction will likely trigger this clause, as the merger will result in a change in the ultimate ownership and control of the tenant entity. Accordingly, we recommend obtaining the landlord's written consent (or a waiver of the consent requirement) prior to or at the closing of the transaction. Given the relatively short remaining term of the lease and the modest rental amount, we do not anticipate difficulty in obtaining such consent, but it should be tracked as a closing deliverable.
We did not identify any provisions in the lease that would create material ongoing liabilities for BCS, and the lease does not contain any unusual provisions, personal guarantees by the founders, or security deposit arrangements that warrant special attention.
E. Financing Agreements
Codelaunch has no outstanding indebtedness in the form of loans, credit facilities, lines of credit, or other financing obligations. The company has operated to date using the proceeds of its equity financing rounds and cash generated from operations.
We reviewed the documentation relating to the Ridgeway Ventures equity investment, including the Series A Stock Purchase Agreement and the related transaction documents. All shares of Series A preferred stock have been converted to common stock, and we confirmed that no anti-dilution protections, redemption rights, put or call rights, or other preferential rights survive the conversion. Ridgeway Ventures' current rights are limited to those set forth in the stockholder agreements described in Section III.D above and the standard protective provisions applicable to all holders of common stock.
F. Observations
No material contracts were identified that would materially impede the transaction or the post-closing integration of the Target's business into BCS's operations. The Target's contract portfolio is relatively straightforward and consistent with that of a venture-backed SaaS company of its size and stage.
The change-of-control notice requirements in the two strategic partnership agreements and the landlord consent requirement in the office lease should be tracked on the closing checklist to ensure timely compliance. We recommend that the merger agreement include a pre-closing covenant requiring the Target to use commercially reasonable efforts to obtain any required third-party consents prior to the closing date.
V. Intellectual Property
A. Overview of IP Portfolio
The Target's core intellectual property consists of its proprietary CI/CD pipeline orchestration platform and automated code-review software, which together comprise the technology stack delivered to customers on a SaaS basis. The Codelaunch platform represents the primary asset being acquired in this transaction, and the integrity and ownership of the underlying intellectual property are critical to the value of the deal.
The Target's IP portfolio is principally composed of proprietary software source code, algorithms, data models, user interface designs, documentation, and related know-how. The Target does not hold any issued patents. However, we identified two pending U.S. provisional patent applications relating to the Target's automated code-review algorithms. These provisional applications were filed within the past twelve months and establish a priority date for the claimed inventions. We reviewed the filing documentation and confirmed that the applications are currently pending with the U.S. Patent and Trademark Office ("USPTO"). It will be necessary to confirm that each provisional patent application has been properly assigned to Codelaunch Labs, Inc. by the named inventor(s), and we discuss this further in Section V.D below.
B. Trademarks
The Target uses the name "Codelaunch" as a trademark for its products and services. A federal trademark application for the "Codelaunch" wordmark has been filed with the USPTO, and registration is currently pending. We reviewed the application file and confirmed that it is active and in good standing with no outstanding office actions or oppositions.
The "Codelaunch Labs" logo is used by the Target in commerce as a common law trademark. No federal trademark registration application has been filed for the logo. While the Target enjoys common law trademark rights in the logo based on its use in commerce, we recommend that BCS consider filing a federal registration application for the logo post-closing to strengthen the trademark portfolio and secure additional legal protections.
C. Domain Names
The Target owns the following domain names, which we confirmed through a registrar records review:
• codelaunch.io — the primary domain used for the Target's SaaS platform and marketing website.
• codelaunchlabs.com — a secondary domain redirecting to the primary site.
Both domain names are registered in the name of Codelaunch Labs, Inc. and are currently active with registrations in good standing. We recommend that the domain name registrations be reviewed post-closing to ensure that the registrant contact information is updated to reflect BCS's ownership and that auto-renewal is enabled to prevent inadvertent lapse.
D. IP Assignments
A cornerstone of our IP diligence was the review of intellectual property assignment documentation to confirm that all IP developed by employees and founders has been properly assigned to the company.
Employee IP Assignments. We reviewed the Proprietary Information and Inventions Assignment Agreements ("PIIAs") for all 38 current employees of the Target. Each employee has executed a PIIA containing standard provisions assigning to the company all rights in inventions, works of authorship, and other intellectual property created in the scope of employment or using company resources. The PIIAs also include confidentiality obligations and, in most cases, non-solicitation provisions. We are satisfied that the employee IP assignment framework is comprehensive and properly documented.
Founder IP Assignments. We reviewed the IP assignment agreements executed by each of the three co-founders — Naveen Subramaniam, Elise Thornberry, and Marcus Okonkwo — at or around the time of the company's formation. Each founder executed an agreement transferring to the company all pre-existing intellectual property related to the business, as well as all intellectual property created after formation in connection with the company's business. The founder IP assignments are broadly drafted and appear to cover the core technology that forms the basis of the Codelaunch platform.
Provisional Patent Applications. As noted in Section V.A, we identified two pending U.S. provisional patent applications. The named inventors on these applications include Elise Thornberry and Marcus Okonkwo. While the founders' IP assignment agreements appear to cover inventions disclosed in these applications, we recommend confirming that specific assignments of the provisional patent applications have been filed with the USPTO, and if not, that such assignments be executed and recorded prior to or at closing. This is a standard chain-of-title housekeeping item, but it is important to ensure that the Target has clear, recorded title to the patent applications.
E. Open-Source Software
The Target's software platform incorporates various open-source software components, as is standard in the software industry. We conducted an open-source compliance review in coordination with BCS's engineering team, focusing on the license terms governing the open-source components used in the Target's core product codebase.
The open-source components identified in the codebase are predominantly licensed under permissive open-source licenses, including the Apache License 2.0, the MIT License, and the BSD License. These permissive licenses generally allow free use, modification, and distribution of the licensed software, subject to standard attribution and notice requirements, and do not impose "copyleft" obligations requiring the disclosure or licensing of proprietary source code.
Critically, no copyleft or "viral" licenses — such as the GNU General Public License v3 ("GPL v3") — were identified in the core product codebase. The use of GPL v3 or similar copyleft licenses in proprietary software can create obligations to release the proprietary source code under the copyleft license, which would be materially adverse to the value of the Target's IP. The absence of such licenses in the core codebase is a positive finding.
We note that certain development tools and testing frameworks used in the Target's build and deployment pipeline may be subject to copyleft licenses, but these tools are used in the development environment only and are not incorporated into or distributed with the Target's production software. This usage pattern does not trigger copyleft obligations with respect to the Target's proprietary code. Overall, we did not identify any material open-source compliance issues.
F. Third-Party IP
We did not identify any material third-party intellectual property licenses, other than standard commercial software licenses for development tools, productivity software, and similar business applications. The Target does not rely on any third-party IP that is subject to restrictive licensing terms or that would be affected by the proposed change of control.
We also confirmed that no claims or allegations of intellectual property infringement have been made against or by Codelaunch Labs, Inc. No cease-and-desist letters, demand letters, or IP-related disputes were identified in the data room or disclosed during management interviews.
G. Observations
The Target's intellectual property portfolio appears clean and properly assigned to the company. The combination of comprehensive employee PIIAs, founder IP assignment agreements, and the absence of copyleft open-source licenses provides a strong foundation for the IP component of this transaction. We recommend the following:
• Confirm the chain of title on the two pending U.S. provisional patent applications prior to closing, including execution and recording of specific assignments if not already completed.
• Include robust IP representations and warranties in the merger agreement, with specific coverage for ownership and assignment of all IP, absence of infringement claims, compliance with open-source license terms, and the sufficiency of the IP to operate the business as currently conducted.
• Negotiate specific indemnification coverage for IP-related claims, with IP representations designated as "fundamental representations" not subject to the general indemnification cap, or alternatively, covered by the R&W insurance policy with no sublimit on IP claims.
VI. Employment and Labor Matters
A. Workforce Overview
As of the date of this memorandum, the Target employs 38 individuals. All employees are located in the Austin, Texas metropolitan area, with some employees working in a remote or hybrid arrangement. The workforce is composed primarily of software engineers and developers, with a smaller number of employees in product management, marketing, sales, customer success, and general and administrative functions.
There are no unionized employees, and the Target is not a party to any collective bargaining agreements. All employees are employed on an at-will basis under Texas law, and there are no employment agreements other than standard offer letters. The offer letters contain basic terms of employment (position, compensation, benefits eligibility) and reference the employee's obligation to execute the PIIA and acknowledge at-will employment status. We reviewed a representative sample of offer letters and found them to be consistent and in standard form.
B. Key Employees / Co-Founders
The three co-founders of the Target are the key personnel whose continued employment is central to the value of this transaction:
• Naveen Subramaniam — Co-Founder and Chief Executive Officer. Mr. Subramaniam holds 2,800,000 shares of common stock (28% of fully diluted capitalization). He serves as the primary business and strategic leader of the company, overseeing go-to-market strategy, customer relationships, and fundraising.
• Elise Thornberry — Co-Founder and Chief Technology Officer. Ms. Thornberry holds 2,400,000 shares of common stock (24% of fully diluted capitalization). She is the architect of the Codelaunch platform and leads the product development and engineering teams. Ms. Thornberry is a named inventor on both pending provisional patent applications.
• Marcus Okonkwo — Co-Founder and Vice President of Engineering. Mr. Okonkwo holds 1,800,000 shares of common stock (18% of fully diluted capitalization). He is responsible for the day-to-day management of the engineering team and plays a critical role in code development, technical architecture, and platform reliability.
All three co-founders are critical to the ongoing value of the Codelaunch platform and its successful integration into BCS's product suite. Their departure — individually or collectively — would pose significant business risk to BCS, both in terms of the loss of institutional knowledge and technical expertise and in terms of the potential impact on employee morale and customer confidence.
Notably, none of the co-founders currently has a written employment agreement with the Target beyond the standard offer letters described above. There are no non-compete agreements, non-solicitation agreements (other than those contained in the PIIAs), or restrictive covenants in place at the Target level that would contractually bind the founders to remain with the business post-closing. This underscores the importance of the retention-focused transaction structuring discussed in Section VI.D below.
C. Employee Benefits
The Target offers its employees a standard benefits package that is typical for a venture-backed technology startup, including:
• Group health insurance (medical, dental, and vision coverage);
• A 401(k) retirement plan (no employer matching contribution);
• Paid time off ("PTO") and paid holidays; and
• Standard workers' compensation insurance as required by Texas law.
We reviewed the benefit plan documents, summary plan descriptions, and most recent Form 5500 filings (where applicable) for each of the Target's employee benefit plans. We did not identify any material unfunded liabilities, pending or threatened claims, or compliance issues under the Employee Retirement Income Security Act of 1974 ("ERISA") or applicable provisions of the Internal Revenue Code. The Target does not maintain any defined benefit pension plans, post-retirement health benefit plans, or other benefit arrangements that would give rise to significant ongoing liabilities.
D. Retention Risk and Mitigation
Key Risk. The acqui-hire nature of this transaction means that the value of the deal is substantially tied to the continued employment of the three co-founders and their engineering team. If one or more of the co-founders were to depart BCS shortly after closing, BCS would lose a significant portion of the value it is paying for in the transaction. This is the single most significant commercial risk identified in our diligence process.
Recommended Mitigation. We recommend structuring an earnout tied to the continued employment of the three co-founders (collectively, the "Founder Earnout Participants"), with performance milestones linked to objective product-line metrics — specifically, enterprise customer account growth and ARR growth — payable over a 24-month period following the closing of the transaction. The earnout creates a direct financial incentive for the founders to remain engaged and committed to the success of the Codelaunch product line within BCS.
Proposed Earnout Terms. The maximum earnout consideration is $3,300,000, representing 15% of the Aggregate Merger Consideration. The earnout is allocated among the three Founder Earnout Participants based on their relative equity percentages (calculated as a percentage of the co-founders' aggregate holdings), as follows:
Employment Agreements. In addition to the earnout, each Founder Earnout Participant should execute a BCS employment agreement at or prior to closing, containing the following terms:
• At-will employment under Texas law (no fixed term);
• Competitive base salaries: Naveen Subramaniam — $310,000 per year; Elise Thornberry — $295,000 per year; Marcus Okonkwo — $280,000 per year;
• Eligibility for BCS's standard employee benefits package;
• Equity grants under BCS's 2021 Equity Incentive Plan, in the form of restricted stock units ("RSUs"): 50,000 RSUs each, subject to a four-year vesting schedule with a one-year cliff; and
• Standard confidentiality, invention assignment, non-solicitation, and (to the extent enforceable under Texas law) non-competition covenants.
Earnout Forfeiture Provisions. To reinforce the retention mechanism, we recommend that the earnout include forfeiture provisions as follows: if a Founder Earnout Participant voluntarily departs BCS's employment, or is terminated by BCS for "Cause" (as defined in the applicable employment agreement), prior to the measurement date for an earnout milestone, that participant's share of the unpaid earnout corresponding to that milestone shall be forfeited. Forfeited earnout amounts should be redistributed pro rata among the remaining qualifying Founder Earnout Participants who are still employed as of the applicable measurement date. This structure ensures that the departing founder does not benefit from the earnout while simultaneously rewarding the remaining founders for their continued commitment.
E. Employee Transition
Of the Target's 38 current employees, BCS intends to extend offer letters to 34 employees, who will transition to BCS employment at or following the closing. Four employees are expected not to be retained, as their roles are duplicative with existing BCS functions and are not necessary for the post-closing integration plan.
We recommend careful handling of the employee transition to minimize the risk of constructive termination claims or other employment-related disputes. With respect to the four employees who will not be retained, BCS should consider offering severance packages in exchange for releases of claims, consistent with BCS's standard practices and applicable law. We note that the federal Worker Adjustment and Retraining Notification ("WARN") Act, which requires 60 days' advance notice of a "mass layoff" or "plant closing," does not apply in this case because the Target's headcount of 38 employees falls well below the 100-employee threshold for WARN Act coverage. Similarly, the Texas counterpart statute does not impose additional requirements at this headcount level.
F. Observations
Founder retention is the central commercial rationale for this transaction. The combination of the earnout structure, the employment agreements with competitive compensation and equity grants, and the forfeiture provisions creates a meaningful incentive framework designed to align the co-founders' financial interests with BCS's post-closing objectives.
We recommend that the merger agreement include comprehensive representations and warranties regarding employee matters, including representations concerning the Target's compliance with employment laws, the accuracy and completeness of information provided regarding employees and compensation, the status of benefit plans, and the absence of employment-related litigation or disputes. These representations should be supported by detailed disclosure schedules listing all employees, compensation levels, outstanding equity awards, and benefit plans.
VII. Litigation and Disputes
A. Pending Litigation
We conducted a comprehensive review of the Target's litigation profile, including searches of federal and state court records, arbitration databases, and regulatory enforcement databases in jurisdictions where the Target operates. Based on our review, there is no pending litigation involving Codelaunch Labs, Inc., either as plaintiff or defendant, in any federal or state court. No pending arbitration proceedings, governmental investigations, or regulatory enforcement actions were identified.
B. Threatened Claims
We reviewed the contents of the virtual data room for any written threats of litigation, demand letters, cease-and-desist letters, or other correspondence indicating potential disputes. No such documents were identified.
Additionally, during management interviews conducted as part of the diligence process, Naveen Subramaniam, in his capacity as CEO, confirmed that there are no known threatened or anticipated disputes involving the Target, and that the Target has not received any communications from third parties that could reasonably be expected to result in litigation or other formal proceedings.
C. Historical Matters
The Target has no prior litigation history. From its founding in 2019 through the present date, Codelaunch has not been involved in any lawsuits, arbitrations, administrative proceedings, or other formal disputes of any kind. This is consistent with the Target's relatively short operating history and its status as a small, privately held technology company.
D. Observations
The litigation profile of the Target is clean, which is a favorable factor in the overall diligence assessment. We recommend that the merger agreement include standard representations and warranties regarding the absence of litigation and undisclosed liabilities, with specific representations confirming that:
(i) there is no pending or threatened litigation involving the Target;
(ii) there are no outstanding judgments, orders, injunctions, or decrees against the Target;
(iii) the Target is not subject to any governmental investigation or enforcement action; and
(iv) there are no undisclosed liabilities (whether accrued, contingent, or otherwise) that would be material to the business or financial condition of the Target.
These representations should survive for the full 18-month survival period (or, in the case of fundamental representations, for the applicable statute of limitations period) and should be supported by the indemnification and escrow protections described in Section XI.
VIII. Tax Matters
A. Federal and State Tax Status
Codelaunch Labs, Inc. is treated as a C corporation for U.S. federal income tax purposes. The Target's Employer Identification Number is 84-3291057.
We reviewed the Target's federal income tax returns (IRS Form 1120) for fiscal years 2019 through 2022, along with all related schedules and attachments. The returns were prepared by Whitaker & Ross CPAs, PLLC, Austin, Texas, and appear to have been properly and timely filed. We did not identify any material issues, inconsistencies, or red flags in the federal tax returns. The Target has not been the subject of any federal income tax audit, examination, or inquiry by the Internal Revenue Service, and no such proceedings are currently pending or anticipated.
With respect to state taxes, the Target has filed state income and franchise tax returns in Delaware (Delaware franchise tax) and Texas (Texas margin tax). We confirmed that the Target is current on all filings and payments in both jurisdictions. No state tax audits, examinations, or inquiries were identified.
B. Tax Attributes
Codelaunch has accumulated net operating losses ("NOLs") from inception, which is typical for an early-stage technology startup that has prioritized growth and product development over profitability. However, we note that following the consummation of the proposed merger, these NOLs will be subject to the annual limitation imposed by Section 382 of the Internal Revenue Code. Section 382 imposes an annual limit on the amount of pre-change NOLs that may be used to offset post-change taxable income following an "ownership change," as defined in the statute. The proposed merger will constitute an ownership change for Section 382 purposes, and the annual limitation will be calculated based on the fair market value of the Target's equity immediately before the ownership change, multiplied by the applicable long-term tax-exempt rate. Given the Target's current valuation and the prevailing interest rate environment, the Section 382 annual limitation may significantly reduce the practical value of the accumulated NOLs to BCS. We have flagged this matter for Kerrigan & Pryce LLP to incorporate into their financial diligence and valuation analysis.
We also note that the Target has not filed any research and development ("R&D") tax credit claims under Section 41 of the Internal Revenue Code, despite engaging in significant software development activities that may qualify for the credit. This represents a potential post-closing tax planning opportunity for BCS, which may be able to claim R&D credits for qualified research activities conducted by the Codelaunch engineering team on a going-forward basis.
C. Sales Tax
The Target collects and remits sales tax in the State of Texas, where SaaS is generally subject to sales tax. We reviewed the Target's Texas sales tax returns and confirmed that filings and payments are current.
However, the taxability of SaaS varies significantly across state jurisdictions and is an evolving area of state tax law. Several states have enacted or are considering legislation that subjects SaaS transactions to sales or use tax, while other states have issued administrative guidance on the issue. The Target has customers in multiple states beyond Texas but does not currently collect sales tax in all of those jurisdictions. This creates a potential exposure for uncollected sales tax in states where (i) SaaS is subject to sales tax and (ii) the Target has sufficient nexus (whether through economic nexus thresholds, physical presence, or other factors) to trigger a collection obligation.
We believe this exposure is modest given the Target's current ARR level of approximately $4,800,000 and the fact that the potential liability, if any, would be limited to the period from the establishment of nexus through the closing date. Moreover, the risk is partially mitigated by the indemnification provisions and R&W insurance policy described in Section XI. We recommend that the merger agreement include specific representations regarding the Target's sales tax compliance, with any identified exposure disclosed on the applicable disclosure schedule.
D. Transfer Pricing / International
The Target has no international operations, no foreign subsidiaries, no foreign employees, and no cross-border transactions. Accordingly, there are no transfer pricing issues, and the Target is not subject to any foreign tax obligations or reporting requirements.
E. Observations
We recommend the following tax-related actions in connection with the proposed transaction:
• Include standard tax representations and warranties in the merger agreement, covering the timely filing and accuracy of tax returns, the absence of tax audits or disputes, the validity and status of tax attributes, and compliance with sales and use tax obligations.
• Factor the Section 382 limitation on the Target's accumulated NOLs into the valuation considerations for the transaction. This item has been flagged for Kerrigan & Pryce LLP.
• Consider obtaining a FIRPTA (Foreign Investment in Real Property Tax Act) certificate from the Target at closing to confirm the non-foreign status of the Target and its stockholders, thereby ensuring that BCS is not required to withhold on the merger consideration under Section 1445 of the Internal Revenue Code.
• Evaluate the R&D tax credit opportunity post-closing.
IX. Regulatory and Compliance Matters
A. Government Contracts
We confirmed through data room review and management interviews that the Target does not hold any government contracts, subcontracts, or grants, and has not submitted any bids or proposals for government contracts. Accordingly, the Target is not subject to the Federal Acquisition Regulation ("FAR"), the Defense Federal Acquisition Regulation Supplement ("DFARS"), or any similar government procurement regulations.
The Target's products are not subject to the International Traffic in Arms Regulations ("ITAR"), the Export Administration Regulations ("EAR"), or any other export control regime. The Target's software is a commercial developer-tools product with no military, defense, or dual-use applications, and it is not listed on any export control classification list. No export licenses have been applied for or obtained, and none appear to be required.
B. Data Privacy and Security
The Target's SaaS platform processes customer data in the ordinary course of its operations, including developer source code, CI/CD pipeline configuration data, build logs, and related metadata. While the Target does not process consumer personal data in significant volumes, it does handle data that is commercially sensitive to its customers, and the security and confidentiality of such data is critical to customer trust and the value of the platform.
We reviewed the Target's privacy policy and terms of service, both of which are published on the Codelaunch.io website. These documents are generally consistent with industry standards for B2B SaaS companies and address the collection, use, storage, and sharing of customer data in a manner that is reasonably comprehensive. The Target's customer agreements include data processing addenda that address data handling obligations and allocate data security responsibilities between the Target and its customers.