Exhibit 10.3
 

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Employment Agreement

by and between

Carbon Natural Gas Company

and

Mark D. Pierce

Dated as of March 30, 2013
 

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TABLE OF CONTENTS
 

    Page      
ARTICLE 1
TERM OF EMPLOYMENT
1
1.1
Position and Employment Period.
1
1.2
Change in Control.
1
     
ARTICLE 2
DUTIES
3
2.1
Duties.
3
     
ARTICLE 3
COMPENSATION
3
3.1
Salary.
3
3.2
Benefits.
3
3.3
Reimbursement of Expenses.
3
     
ARTICLE 4
DEATH, DISABILITY AND TERMINATION
4
4.1
Death.
4
4.2
Disability.
4
4.3
Determination of Disability.
4
4.4
Termination.
4
     
ARTICLE 5
TERMINATION BENEFITS
5
5.1
Severance Payments.
5
5.2
Termination for Cause.
5
5.3
Limitations on Severance Payments and Certain Additional Payments by the
Company.
5
5.4
Release and Delayed Payment Restriction.
7
     
ARTICLE 6
COVENANTS OF EXECUTIVE
8
6.1
Confidential Information.
8
6.2
Ownership of Confidential Information.
8
6.3
Non-Solicitation.
8
6.4
Non-Competition.
8
     
ARTICLE 7
MISCELLANEOUS
9
7.1
Disagreements.
9
7.2
Binding Effect; Benefits.
9
7.3
Notices.
9
7.4
Entire Agreement.
9
7.5
Amendments and Waivers.
9
7.6
Section Headings.
9
7.7
Severability.
9
7.8
Governing Law.
9
7.9
Counterparts; Facsimile.
9

 
 

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EMPLOYMENT AGREEMENT

THIS EMPLOYMENT AGREEMENT (this “Agreement”) is dated and effective as of March
30, 2013 (the “Effective Date”), by and between CARBON NATURAL GAS COMPANY, a
Delaware corporation ( the “Company”), and MARK D. PIERCE, residing in Kentucky
(“Executive”).

RECITALS

WHEREAS, the Company desires that Executive continue to provide services to the
Company, and Executive desires to be employed by the Company effective as of the
Effective Date upon the terms and conditions set forth in this Agreement.
 
AGREEMENT

NOW THEREFORE, in consideration of these premises and other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged, the
parties hereto do hereby agree as follows:
 
ARTICLE 1
TERM OF EMPLOYMENT
 
1.1   Position and Employment Period. The Company hereby employs Executive as
its President and Executive hereby accepts employment with the Company, all in
accordance with the terms and conditions hereof.  Unless sooner terminated as
provided herein, the term of this Agreement shall commence on the Effective Date
and end December 31, 2015 (the “Initial Term”), which term shall automatically
be extended for successive terms of one-year (each, an “Additional Term”);
provided, however, that the Board of Directors of the Company (the “Board”) may
terminate this Agreement as of the end of the Initial Term or of any Additional
Term by giving written notice of termination to Executive at least three months
preceding the end of the then current Term.  The Initial Term, together with
each Additional Term, is referred to herein as the “Employment Period.”
 
1.2   Change in Control.

(a)   Termination Within Two Years After a Change in Control.  If Executive’s
employment by the Company or any successor thereto shall be subject to an
Involuntary Termination (defined below) which occurs within two years after the
date upon which a Change in Control (as defined below) occurs, then the Company
will, as additional compensation for services rendered to the Company, (i) pay
to Executive (subject to any applicable payroll or other taxes required to be
withheld and any employee benefit premiums) a lump sum cash payment in an amount
equal to 200% of the Compensation (as defined below), (ii) 100% of the annual
cost to the Company of the benefits provided to Executive, and (iii) cause any
(A) component of Compensation and (B) equity-based award previously granted to
Executive that are subject to vesting or other conditions on Executive’s receipt
thereof to become 100% vested and any such conditions to lapse, provided that if
the terms of any plan or other agreement relating to such Compensation or
equity-based award provide for vesting upon the occurrence of a Change in
Control, then the vesting terms of such plan or other agreement shall control.
 
(b)   Severance.  Payment of the amount provided for under subsection (a) of
this Section 1.2, shall be in lieu of any Severance Payments provided for in
Section 5.1(a) and Section 5.1(b) below that would otherwise be due upon an
Involuntary Termination of Executive’s employment.
 
(c)   Payment.  Subject to the provisions of Section 5.4, such payment shall be
made on the date that is 60 days after the date of Executive’s Involuntary
Termination or on the immediately following business day if such day is not a
business day.
 
(d)   Compensation.  As used in this Agreement, the term “Compensation” means
the arithmetic average of Executive’s annual base salary, bonus and other cash
compensation paid for each of the three years prior to (i) the Change in Control
Date, or (ii) with respect to Section 5.1(a), the effective date of termination
of Executive’s employment pursuant to ARTICLE 4, below.  For purposes of the
foregoing, other cash compensation shall only include compensation paid to
Executive to the extent taxable as compensation to Executive and deductible as
such by the Company under the Internal Revenue Code of 1986, as amended (the
“Code”).
 
 
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(e)   Change in Control.  A “Change in Control” shall be deemed to have occurred
on the first to occur of the following (the “Change in Control Date”):
 
(i)    
the acquisition within any 12-month period by any “Person” (as the term person
is used for purposes of Section 13(d) or 14(d) of the Securities and Exchange
Act or 1934, as amended (the “Exchange Act”), immediately after which such
Person has “Beneficial Ownership” (within the meaning of Rule 13d-3 promulgated
under the Exchange Act) of thirty percent (30%) or more of the total voting
power of the then outstanding stock of the Company entitled to vote generally in
the election of directors, but excluding the following transactions (the
“Excluded Acquisitions”):

 
(A)  
any acquisition directly from the Company (other than an acquisition by virtue
of the exercise of a conversion privilege of a security that was not acquired
directly from the Company),

 
(B)  
any acquisition by the Company, and

 
(C)  
any acquisition by an employee benefit plan (or related trust) sponsored or
maintained by the Company;

 
(ii)    
a change in the composition of the Board such that at any time during a period
of 12 months or less, individuals who at the beginning of such period constitute
the Board (and any new directors whose election by the Board or nomination for
election by the Company’s stockholders was approved by a vote of at least a
majority of the directors then still in office who either were directors at the
beginning of the period or whose election or nomination for election was so
approved) cease for any reason to constitute a majority thereof;

 
(iii)    
an acquisition (other than an Excluded Acquisition) by any Person of fifty
percent (50%) or more of the voting power or value of the Company’s stock;

 
(iv)    
the consummation of a merger, consolidation, reorganization or similar corporate
transaction, whether or not the Company is the surviving Company in such
transaction, other than a merger, consolidation, or reorganization that would
result in the Persons who are Beneficial Owners of the Company’s stock
outstanding immediately prior thereto continuing to Beneficially Own, directly
or indirectly, in substantially the same proportions, at least fifty percent
(50%) of the combined voting power or value of the Company’s stock (or the stock
of the surviving entity) outstanding immediately after such merger,
consolidation or reorganization; or

 
(v)    
the sale or other disposition during any 12 month period of all or substantially
all of the assets of the Company, provided that such sale is of assets having a
total gross fair market value equal to or greater than forty percent (40%) of
the total gross fair market value of the assets of the Company immediately prior
to such sale or disposition.

 
The foregoing definition of “Change in Control” is intended to comply with the
requirements of Section 409A of the Code and the guidance issued thereunder and
shall be interpreted and applied by the Board or the Compensation Committee of
the Board (the “Compensation Committee”), as the case may be, in a manner
consistent therewith.
 
(f)   Involuntary Termination.  “Involuntary Termination” means any termination
of Executive’s employment with the Company which does not result from a
resignation by Executive (other than for Good Reason pursuant to Section
4.4(b)); provided, however, the term “Involuntary Termination” shall not include
a Termination for Cause or any termination as a result of death or Disability. 
For all purposes of this Agreement, Executive shall be considered to have
terminated employment with the Company when Executive incurs a “separation from
service” with the Company within the meaning of Section 409A(a)(2)(A)(i) of the
Code and applicable administrative guidance issued thereunder.
 
 
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ARTICLE 2
DUTIES
 
2.1   Duties. During the Employment Period:
 
(a)   Executive shall serve as President of the Company and, in such capacities,
shall perform such duties and have such responsibilities of an executive nature
as are customarily performed by a person holding such offices, as well as such
additional executive duties and services as from time to time may be reasonably
decided upon by the Board.  Subject to the next succeeding sentence, Executive
shall devote such time as is necessary to perform his duties and shall discharge
such duties to the best of his abilities.  During the Employment Period and
subject to compliance with subsection (b) of this Section 2.1, Executive may
invest his personal assets and his time in enterprises other than the Company
provided they do not interfere with the performance of Executive’s duties under
this Agreement.
 
(b)   Executive will not pursue, directly or indirectly, any business
opportunity for the exploration and/or development of oil, gas or other
hydrocarbons unless (a) Executive has presented such opportunity to the Company,
and (b) the Company has evaluated such opportunity and the Board has made a
determination that the Company does not wish to pursue such opportunity.  The
foregoing restriction shall not apply to (i) equity holdings of the Executive
existing as of the Effective Date, or (ii) holdings of 5% or less of any company
whose shares are publicly traded.
 
(c)   The Company shall not, without the written consent of Executive, require
Executive to perform services away from the Lexington, Kentucky area at such
frequency or duration as might, in the reasonable opinion of Executive,
necessitate his moving his residence from the Lexington, Kentucky area.
 
ARTICLE 3
COMPENSATION
 
3.1   Salary. The Company’s indirect subsidiary, Nytis Exploration Company LLC
(the “Subsidiary”), shall pay Executive a base salary of not less than $200,000
per year, to be paid at the usual times for the payment of the Company’s
executives, subject to adjustment as provided herein.  Executive’s base salary
shall be reviewed annually by the Board and may be increased, but shall not be
decreased.  Incentive compensation or bonuses (called in this Agreement
incentive compensation) will be determined by the Board at its discretion and
pursuant to the terms and conditions of any incentive plan(s), if any, adopted
by the Company from time to time.
 
3.2   Benefits.  Executive shall be entitled to participate in all benefits
plans offered by the Company to the Company’s senior executives, in accordance
with the terms and conditions of the applicable employee benefit plans, as may
be amended by the Company at its sole discretion from time to time.  Executive
shall be eligible to participate in all incentive compensation, stock incentive,
performance unit or similar plans or programs as the Board (or the Compensation
Committee) may determine in its sole discretion based upon the Company’s
compensation practices and Executive’s responsibilities and
performance.  Executive shall also be entitled to participate in all benefits
plans offered by the Subsidiary to its employees, in accordance with the terms
and conditions of the applicable employee benefit plans, as may be amended by
the Subsidiary at its sole discretion from time to time.  If the application of
the immediately preceding sentence would result in Executive participating in
substantially similar benefit plans offered by the Company and by the
Subsidiary, the Executive must choose only one such benefit plan in which he
will participate.
 
3.3   Reimbursement of Expenses.  In addition, the Company (or the Subsidiary)
shall promptly reimburse Executive for all reasonable and documented
out-of-pocket expenses incurred in the performance of his duties hereunder,
including without limitation, expenses for entertainment, travel, accounting and
management seminars and the like.
 
 
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ARTICLE 4
DEATH, DISABILITY AND TERMINATION
 
4.1   Death.  If Executive dies during the Employment Period, the Employment
Period shall thereupon terminate for all purposes of this Agreement, and the
Company’s obligations hereunder shall terminate immediately, and the Company (or
the Subsidiary) shall pay Executive’s estate or legal representative the
following:
 
(a)   any earned and unpaid salary or other compensation through the date of
Executive’s death;
 
(b)   at the discretion of the Board, a bonus; and
 
(c)   any reimbursable expenses incurred through the date of Executive’s death.
 
4.2   Disability.  If Executive is unable to perform his duties as required
under this Agreement by reason of mental or physical illness or incapacity, the
Company agrees to continue all payments due hereunder, including salary, for a
period of 180 days from the date of disability, after which period Executive
shall be considered disabled and the Company may terminate this
Agreement.  Notwithstanding anything to the contrary contained herein, Executive
shall be considered disabled and the Company may terminate this Agreement at any
time Executive shall be absent from employment as a result of mental or physical
illness or incapacity for a continuous period of 180 days, and all obligations
of the Company hereunder shall cease upon any such termination.  Upon any such
termination, the Company shall pay Executive the following:
 
(a)   any earned and unpaid salary or other compensation through the date of
Executive’s termination less any amount of disability insurance benefits
actually received by Executive through the date of termination;
 
(b)   at the discretion of the Board, a bonus; and
 
(c)   any reimbursable expenses incurred through the date of Executive’s
disability.
 
4.3   Determination of Disability.  For purposes of this Agreement, if at any
time a question arises as to the disability of Executive, then the Company and
Executive shall agree on one physician who is a member of the American Medical
Association to examine Executive and determine if his physical and/or mental
condition is such as to render him incapable of performing the usual duties of
his employment with the Company.  If the Company and Executive fail to agree on
such physician, then each shall select a physician and the two so selected shall
select a third such physician to make such examination and determination.
 
4.4   Termination.  In addition to any termination pursuant to the foregoing
provisions, the Employment Period and Executive’s employment with the Company
may be terminated by:
 
(a)   the Company for Cause (as defined in Section 5.2), immediately upon
determination by the Board and providing Executive with written notice of
termination;
 
(b)   Executive for Good Reason; or
 
(c)   either party upon 90 days prior written notice from the terminating party
to the other party.
 
For purposes of this Agreement, “Good Reason” means (a) there has been (i) a
change in the Executive's position below the level of the Company's (or its
successor) President or (ii) a change in the character of Executive's assigned
duties or responsibilities that would reasonably be expected to have a material
adverse effect on Executive's ability to attain earnings reasonably expected to
be attained if there had been no such change, provided Executive does not
voluntarily accept the change in position but notifies the Company of his
non-acceptance thereof, (b) there has been a material diminution in Executive's
benefits or level of eligibility for incentive programs as a result of the
Company's (or its successor's) action, other that any diminution accompanied by
a general diminution for the other executives of the Company, or any diminution
on account of the terms of any benefit plan or program: provided, however, that
any reduction in Executive's current salary, without the Executive's written
consent, shall constitute “Good Reason,” (c) there has been a change in the
location of Executive's place of employment outside of the Lexington, Kentucky
area; or (d) any material breach by the Company of the provisions of this
Agreement, provided, however, that in the event of termination for Good Reason
pursuant to clause (a), (b) or (d) above, Executive shall be required to give
the Company written notice of such breach and the Company shall have failed to
cure such breach within 30 days of such notice.
 
 
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ARTICLE 5
TERMINATION BENEFITS
 
5.1   Severance Payments.  Subject to the provisions of Section 1.2 hereof and
except as otherwise provided in Section 1.2(b) hereof, if Executive’s employment
shall be subject to an Involuntary Termination, then the Company shall pay
Executive a termination benefit as follows:
 
(a)   The Company (or the Subsidiary) shall pay Executive, in a single lump sum
payment an amount equal to the sum of (i) the greater of (A) all base salary and
other compensation due under the terms of this Agreement over the remainder of
the Employment Period, and (B) 100% of Executive’s Compensation (the “Severance
Payments”) plus (ii) the cost to provide benefits for a period of 12 months from
the date of termination at the same levels of coverage as in effect immediately
prior to the date of termination.  The Severance Payments shall be paid
regardless of whether Executive is able to secure alternative employment.  In
the event Executive should die before payment of all amounts due under this
ARTICLE 5, the remaining amounts shall be paid to Executive’s designated
beneficiary, if any, and otherwise to Executive’s estate.  Subject to the
provisions of Section 5.4, the Severance Payments shall be made to Executive
within 10 business days of Executive’s termination.
 
(b)   Subject to the provisions of Section 5.4, upon an Involuntary Termination
of Executive’s employment, any (i) component of Compensation or
(ii) equity-based award previously granted to Executive that is subject to
vesting or other conditions on Executive’s receipt thereof shall become 100%
vested and any such conditions shall lapse.
 
(c)   Executive shall not be required to mitigate the amount of any payment
provided for in this Agreement by seeking other employment or otherwise and no
such payment shall be offset or reduced by the amount of any compensation or
benefits provided to Executive in any subsequent employment except as provided
herein.
 
(d)   The Severance Payments and benefits provided in this Agreement shall be in
lieu of any other severance pay which Executive is entitled to under any other
Company severance plan, program or arrangement, and shall be conditioned upon
Executive signing a full and complete release in accordance with Section 5.4 and
in a form approved by the Board.
 
5.2   Termination for Cause.  If Executive is terminated for Cause, then he
shall receive no further benefits hereunder.  “Cause” means a termination on
account of (i) refusal to obey written directions of the Board or a superior
officer (so long as such directions do not involve illegal or immoral acts);
(ii) acts of substance abuse which are materially injurious to the Company or
any of its subsidiaries, (iii) fraud or dishonesty that is materially injurious
to the Company or any of its subsidiaries, (iv) material breach of any
obligation of nondisclosure or confidentiality owed to the Company or any of its
subsidiaries, (v) commission of a criminal offense involving money or other
property of the Company (excluding any traffic violations or similar
violations), or (vi) commission of a criminal offense that constitutes a felony
in the jurisdiction in which the offense is committed.
 
5.3   Limitations on Severance Payments and Certain Additional Payments by the
Company.
 
(a)
(i)
Anything in this Agreement to the contrary notwithstanding, in the event that
(A) there is a Change in Control, and (B) the receipt of all payments,
distributions or benefits (including without limitation accelerated vesting of
equity-based awards) from the Company (or the Subsidiary) in the nature of
compensation to or for Executive’s benefit, whether paid or payable pursuant to
this Agreement or otherwise (a “Payment”), would subject Executive to the excise
tax under Section 4999 of the Code by virtue of Section 280G of the Code, the
accounting firm which audited the Company prior to the Change in Control which
results in the application of such excise tax, or another nationally known
accounting or employee benefits consulting firm selected by the Company prior to
such Change in Control (the “Accounting Firm”), shall determine whether to
reduce any of the Payments paid or payable pursuant to this Agreement (the
“Agreement Payments”) to the Reduced Amount (as defined below).  The Agreement
Payments shall be reduced to the Reduced Amount only if the Accounting Firm
determines that Executive would have a greater Net After-Tax Receipt (as defined
below) of aggregate Payments if Executive’s Agreement Payments were reduced to
the Reduced Amount.  If such a determination is not made by the Accounting Firm,
Executive shall receive all Agreement Payments to which Executive is entitled
under this Agreement.

 
 
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(ii)
 If the Accounting Firm determines that aggregate Agreement Payments should be
reduced to the Reduced Amount, the Company shall promptly give Executive notice
to that effect and a copy of the detailed calculation thereof.  All
determinations made by the Accounting Firm under this Section 5.3(a) shall be
made as soon as reasonably practicable and in no event later than 60 days
following the date of termination or such earlier date as requested by the
Company and Executive.  For purposes of reducing the Agreement Payments to the
Reduced Amount, only amounts payable under this Agreement (and no other
Payments) shall be reduced, in the following order:  (A) payments under
Paragraph 1.2(a)(i) hereof, (B) accelerated vesting of any other component of
Compensation which occurs in accordance with Section 1.2(a)(ii)(A) (and such
other components of Compensation shall continue to vest in accordance with their
terms), and (C) accelerated vesting of equity-based awards which occurs in
accordance with Section 1.2(a)(ii)(B) hereof (and such equity-based awards shall
continue to vest in accordance with their terms).  All fees and expenses of the
Accounting Firm shall be borne solely by the Company.

 
(iii)
As a result of the uncertainty in the application of Sections 280G and 4999 of
the Code at the time of the initial determination by the Accounting Firm
hereunder, it is possible that amounts will have been paid or distributed by the
Company to or for the benefit of Executive pursuant to this Agreement which
should not have been so paid or distributed (the “Overpayment”) or that
additional amounts which will have not been paid or distributed by the Company
to or for the benefit of Executive pursuant to this Agreement could have been so
paid or distributed (the “Underpayment”), in each case, consistent with the
calculation of the Reduced Amount hereunder.  In the event that the Accounting
Firm, based upon the assertion of a deficiency by the Internal Revenue Service
against either the Company or Executive which the Accounting Firm believes has a
high probability of success, determines that an Overpayment has been made,
Executive shall pay any such Overpayment to the Company, together with interest
at the applicable federal rate provided for in Section 7872(f)(2) of the Code;
provided, however, that no amount shall be payable by Executive to the Company
if and to the extent such payment would not either reduce the amount on which
Executive is subject to tax under Section 1 and Section 4999 of the Code or
generate a refund of such taxes.  In the event that the Accounting Firm, based
upon controlling precedent or substantial authority, determines that an
Underpayment has occurred, any such Underpayment shall be paid promptly (and in
no event later than 60 days following the date on which the Underpayment is
determined) by the Company to or for the benefit of Executive together with
interest at the applicable federal rate provided for in Section 7872(f)(2) of
the Code.

 
 
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(iv)
For purposes hereof, the following terms have the meanings set forth below: 
(A)  “Reduced Amount” shall mean the greatest amount of Payments that can be
paid that would not result in the imposition of the excise tax under Section
4999 of the Code if the Accounting Firm determines to reduce Payments pursuant
to this Section 5.3(a) and (B) “Net After-Tax Receipt” shall mean the present
value (as determined in accordance with Section 280G(b)(2)(A)(ii) and Section
280G(d)(4) of the Code) of a Payment net of all taxes imposed on Executive with
respect thereto under Section 1 and Section 4999 of the Code and under
applicable state and local laws, determined by applying the highest marginal
rate under Section 1 of the Code and under state and local laws which applied to
Executive’s taxable income for the immediately preceding taxable year, or such
other rate(s) as Executive certifies, in Executive’s sole discretion, as likely
to apply to him in the relevant tax year(s).

(b)   On or before the date upon which a Change in Control occurs, the
Compensation Committee shall make a determination under the Company’s annual
incentive plan as to whether bonuses under such plan for the year during which
the Change in Control occurs are due based on partial year results through the
date of the Change in Control, and, if the Compensation Committee determines
that such bonuses are due, then the Compensation Committee shall also determine
the amount of such bonus that shall be paid to Executive.  On or before the date
of the Change in Control, the Company (or the Subsidiary) shall pay to Executive
the amount of Executive’s bonus that has been determined by the Compensation
Committee in accordance with the preceding sentence.
 
5.4   Release and Delayed Payment Restriction.
 
(a)   As a condition to the receipt of any benefit under Section 1.2(a) or
Section 5.1 hereof, Executive shall first execute a release substantially in the
form attached hereto as Exhibit A.
 
(b)   The release described in Section 5.4(a) hereof must be effective and
irrevocable within 55 days after the date of the termination of Executive’s
employment with the Company, or the payments and benefits provided to Executive
under Section 1.2(a) or Section 5.1 shall not be paid or provided. 
Notwithstanding any provision in this Agreement to the contrary, if the payment
of any amount or benefit under this Agreement would be subject to additional
taxes and interest under Section 409A of the Code because the timing of such
payment is not delayed as provided in Section 409A(a)(2)(B)(i) of the Code and
the regulations thereunder, then any such payment or benefit that Executive
would otherwise be entitled to during the first six months following the date of
Executive’s termination of employment shall be accumulated and paid or provided,
as applicable, on the date that is six months after the date of Executive’s
termination of employment (or if such date does not fall on a business day of
the Company, the next following business day of the Company), or such earlier
date upon which such amount can be paid or provided under Section 409A of the
Code without being subject to such additional taxes and interest.  If this
Section 5.4(b) becomes applicable such that the payment of any amount is
delayed, any payments that are so delayed shall accrue interest on a
non-compounded basis, from the date such payment would have been made had this
Section 5.4(b) not applied to the actual date of payment, at the prime rate of
interest quoted in the Wall Street Journal on the date of Executive’s
termination of employment (or the first business day following such date if such
termination does not occur on a business day) and shall be paid in a lump sum on
the actual date of payment of the delayed payment amount.   Executive hereby
agrees to be bound by the Company’s determination of its “specified employees”
(as such term is defined in Section 409A of the Code) in accordance with any of
the methods permitted under the regulations issued under Section 409A of the
Code.
 
 
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ARTICLE 6
COVENANTS OF EXECUTIVE
 
6.1              Confidential Information.  Executive covenants and agrees that
he will not at any time during or after the Period of Employment, whether under
this Agreement, or otherwise, (i) knowingly use for an improper personal benefit
any Confidential Information, or (ii) reveal, divulge or make known to any
person any Confidential Information except (A) in the performance of his duties
hereunder, (B) as required by applicable law, (C) in connection with the
enforcement of his rights under this Agreement, (D) business opportunities that
the Board determines the Company does not wish to pursue under Section 2.1(b) of
this Agreement, or (E) with the prior consent of the Board.  As used herein,
“Confidential Information” includes information with respect to the Company’s
and any of its subsidiaries’ properties, facilities and methods, seismic data,
well logs, trade secrets and other intellectual property, systems, patents, and
patent applications, procedures, manuals, drilling reports, acreage positions,
exploration prospects, confidential reports, financial information, business
plans, prospects or opportunities; provided, however, such term does not include
information that (x) is or becomes generally known or publicly available other
than as a result of disclosure by Executive, or (y) is or becomes known or
available to Executive on a non-confidential basis from a source (other than the
Company or any of its directors, officers, employees or agents) which, to
Executive’s knowledge, is not prohibited from disclosing such information to
Executive by a legal, contractual, fiduciary or other obligation to the Company
or its subsidiaries.  In the event of a breach or threatened breach by Executive
of the provisions of this Section 6.1, the Company shall be entitled, in
addition to any remedy hereunder or under any applicable law, to an injunction
restraining Executive from disclosing or using, in whole or in part, any
Confidential Information.  The covenants contained in this Section 6.1 shall
survive the termination or expiration of this Agreement.
 
6.2   Ownership of Confidential Information.   Executive confirms that all
Confidential Information is the exclusive property of the Company, and that all
business records, papers and documents kept or made by Executive relating to the
business of the Company shall be and remain the property of the Company.  Upon
termination of Executive’s employment with the Company or upon request of the
Company at any time, Executive shall promptly deliver to the Company, and shall
retain no copies of, any written materials, records and documents made by
Executive or coming into his possession concerning the business and affairs of
the Company other than Executive’s personal notes or correspondence not
containing Confidential Information.
 
6.3      Non-Solicitation. In consideration of the payments and benefits to
which Executive would be entitled in the event of an Involuntary Termination
under the conditions described in Section 1.2 or Section 5.1 hereof, Executive
agrees, until the day prior to the first anniversary of Executive’s termination
of employment with the Company, to refrain from knowingly, directly or
indirectly soliciting for employment or causing the solicitation of any
employees of the Company without the advance written consent of the Company,
which consent may be withheld for any reason.

6.4      Non-Competition.
 
(a) The Executive acknowledges and agrees that in performing the duties and
responsibilities of his employment as outlined in this Agreement, he will occupy
a position of high fiduciary trust and confidence, pursuant to which he will
develop and acquire wide experience and knowledge with respect to all aspects of
the business carried on by the Company and its affiliates, and the manner in
which such business is conducted.  It is the expressed intent and agreement of
the Executive and the Company that such knowledge and experience shall be used
solely and exclusively in furtherance of the business interests of the Company
and such affiliates, and not in any manner detrimental to them.  The Executive
therefore agrees that, so long as he is employed by the Company pursuant to this
Agreement, he shall not engage in any practice or business that competes with
the business of the Company anywhere where the Company does business.
 
(b) The Executive further covenants and agrees that for a period of three
(3) years after the Executive ceases to be an employee of the Company (or the
Subsidiary) for any reason whatsoever, the Executive shall not (directly or
indirectly), (i) use, for the Executive’s own purpose, or for any purposes other
than those of the Company, any information or technology, which the Executive
may have acquired or may in the future acquire in relation to the business or
affairs of the Company or (ii) engage in any of the following activities within
a 2000 foot radius surrounding any well in which the Company (or the Subsidiary)
holds an interest and which produces oil, natural gas or liquids: (A) lease
minerals or (B) explore for or produce oil, natural gas or liquids.
 
 
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ARTICLE 7
MISCELLANEOUS
 
7.1      Disagreements.  In the event of any disagreement between the Company
and Executive as to their respective rights and obligations hereunder, then the
Company shall pay reasonable counsel fees incurred by Executive in connection
with such disagreement if Executive prevails in his position, unless the court,
arbitration tribunal or other jurisdictional body determines otherwise.
 
7.2      Binding Effect; Benefits.  This Agreement shall inure to the benefit
of, and shall be binding upon, the parties hereto and their respective
successors, heirs, legal representatives and permitted assigns.  This Agreement
may not be assigned by Executive or the Company.
 
7.3      Notices.  All notices which are required or permitted to be given to
the Parties under this Agreement shall be sufficient in all respects if given in
writing and delivered in person, by facsimile, by electronic mail, by overnight
courier, or by certified mail, postage prepaid, return receipt requested to the
receiving Party at the following address:
 
If delivered to the Company:
 
CARBON NATURAL GAS COMPANY
1700 Broadway, Suite 1170
Denver, CO  80290
Attention:  Chief Executive Officer
Facsimile:  720-407-7031
email:  pmcdonald@carbonnaturalgas.com
 
If delivered to Executive:
 
MARK D. PIERCE
2480 Fortune Drive, Suite 300
Lexington, Kentucky  40509
Facsimile:  859-299-0772
email:  mpierce@nytisky.com
 
or such other address as such party may have given to the other by notice
pursuant to this Section 7.3.  Notice shall be deemed given on the date of
delivery in the case of personal delivery, electronic mail, or facsimile, or on
the delivery or refusal date, as specified on the return receipt in the case of
certified mail or, on the tracking report in the case of overnight courier.
 
7.4     Entire Agreement.  This Agreement contains the entire agreement between
the parties hereto and supersedes all prior agreements and understandings, oral
or written, between the parties hereto with respect to the subject matter
hereof.
 
7.5   Amendments and Waivers.  This Agreement may not be modified or amended
except by an instrument or instruments in writing signed by the party against
whom enforcement or any such modification or amendment is sought.  Either party
hereto may, by an instrument in writing, waive compliance by the other party
with any term or provision of this Agreement on the part of such other party
hereto to be performed or complied with.  The waiver by any party hereto of a
breach of any term or provision of this Agreement shall not be construed as a
waiver of any subsequent breach.
 
7.6      Section Headings.  The section and other headings contained in this
Agreement are for reference purposes only and shall not be deemed to be a part
of this Agreement or to control or affect the meaning or construction of any
provision of this Agreement.
 
7.7      Severability.  If any term or provision of this Agreement is held or
deemed to be invalid or unenforceable, in whole or in part, by a court of
competent jurisdiction, this Agreement shall be ineffective to the extent of
such invalidity or unenforceability without rendering invalid or unenforceable
the remaining terms and provisions of this Agreement.
 
7.8      Governing Law.  This Agreement shall be governed by and construed and
enforced in accordance with the laws of the State of Delaware without regard to
its principals regarding conflicts of law.
 
7.9      Counterparts; Facsimile. This Agreement may be executed in any number
of counterparts, each of which shall be deemed an original, and all of which
together shall be deemed one and the same instrument.  This Agreement may be
delivered by facsimile.
 
 
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IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement on the
day and year first above written.

THE COMPANY:
CARBON NATURAL GAS COMPANY         By:      
Patrick R. McDonald,
Chief Executive Officer
     
EXECUTIVE:
       
Mark D. Pierce

 
Signature Page
Employment Agreement – Pierce
 
 
 

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EXHIBIT A

RELEASE OF CLAIMS

This General Release of all Claims (this “Agreement”) is entered into on
___________, 20__, by ________________________ (“Executive”) and Carbon Natural
Gas Company, a Delaware corporation (the “Company”).
 
In consideration of the promises set forth in the Employment Agreement between
Executive and the Company, dated as of ___________, 20__ (the “Employment
Agreement”), and as a condition to the receipt of any benefit under
Section 1.2(a) or Section 5.1 of the Employment Agreement as described in
Section 5.4 of the Employment Agreement, Executive agrees as follows:
 
1.             General Release and Waiver of Claims.

(a)           Release.  In consideration of the payments and benefits provided
to Executive under Section 1.2(a) or Section 5.1 of the Employment Agreement, as
applicable, and after consultation with counsel, Executive and each of
Executive’s respective heirs, executors, administrators, representatives,
agents, successors and assigns (collectively, the “Releasors”) hereby
irrevocably and unconditionally release and forever discharge the Company and
each of its subsidiaries and affiliates and each of their respective officers,
employees, directors, shareholders and agents (collectively, “Releasees”) from
any and all claims, actions, causes of action, rights, judgments, obligations,
damages, demands, accountings or liabilities of whatever kind or character
(collectively, “Claims”), including, without limitation, any Claims under any
federal, state, local or foreign law, that the Releasors may have or in the
future may possess, arising out (i) of Executive’s employment relationship with
and service as an employee, officer or director of the Company, and the
termination of such relationship or service and (ii) any event, condition,
circumstance or obligation that occurred, existed or arose on or prior to the
date hereof; provided, however, that notwithstanding anything else herein to the
contrary, this Agreement shall not affect: (xi) the obligations of the Company
or Executive set forth in the Employment Agreement or other obligations that, in
each case, by their terms, are to be performed after the date hereof by the
Company or Executive (including, without limitation, obligations to Executive
under the Employment Agreement for any severance or similar payments or
benefits, under any stock option, stock or equity-based award, plan or
agreements, or payments or obligations under any pension plan or other benefit
or deferred compensation plan, all of which shall remain in effect in accordance
with their terms); (xii) any indemnification or similar rights Executive has as
a current or former officer or director of the Company including, without
limitation, any and all rights thereto referenced in the Employment Agreement,
the Company’s bylaws, other governance documents or any rights with respect to
directors’ and officers’ insurance policies; Executive’s right to reimbursement
of business expenses; and any Claims the Releasors may have against the
Releasees in the event that the Company or any member of the Releasees brings
any Claims against Executive or any member of the Releasors.
 
(b)           Specific Release of ADEA Claims.  In further consideration of the
payments and benefits provided to Executive under Section 1.2(a) or Section 5.1
of the Employment Agreement, as applicable, the Releasors hereby unconditionally
release and forever discharge the Releasees from any and all Claims that the
Releasors may have as of the date Executive signs this Agreement arising under
the Federal Age Discrimination in Employment Act of 1967, as amended, and the
applicable rules and regulations promulgated thereunder (“ADEA”).  By signing
this Agreement, Executive hereby acknowledges and confirms the following: 
(i) Executive was advised by the Company in connection with his  termination to
consult with an attorney of his choice prior to signing this Agreement and to
have such attorney explain to Executive the terms of this Agreement, including,
without limitation, the terms relating to Executive’s release of claims arising
under ADEA, and Executive has in fact consulted with an attorney; (ii) Executive
was given a period of not fewer than twenty-one (21) calendar days to consider
the terms of this Agreement and to consult with an attorney of his choosing with
respect thereto; and (iii) Executive knowingly and voluntarily accepts the terms
of this Agreement.  Executive also understands that he has seven (7) calendar
days following the date on which he signs this Agreement within which to revoke
the release contained in this paragraph, by providing the Company a written
notice of his revocation of the release and waiver contained in this paragraph.
 
 
A-1

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(c)           No Assignment.  Executive represents and warrants that he has not
assigned any of the Claims being released under this Agreement.
 
2.             Proceedings.  Executive has not filed, and agrees not to initiate
or cause to be initiated on his behalf, any complaint, charge, claim or
proceeding against the Releasees before any local, state or federal agency,
court or other body, other than with respect to the obligations of the Company
to Executive under the Employment Agreement or in respect of any other matter
described in the proviso to Section 1(a) (each, individually, a “Proceeding”),
and agrees not to participate voluntarily in any Proceeding.  Executive waives
any right he may have to benefit in any manner from any relief (whether monetary
or otherwise) arising out of any Proceeding.
 
3.             Remedies.  In the event Executive initiates or voluntarily
participates in any Proceeding following his receipt of written notice from the
Company and a failure to cease such participation within 30 calendar days
following receipt of such notice, or if he revokes the ADEA release contained in
Section 1(b) of this Agreement within the seven calendar-day period provided
under Section 1(b), the Company may, in addition to any other remedies it may
have, reclaim any amounts paid to him under the termination provisions of the
Employment Agreement or terminate any benefits or payments that are subsequently
due under the Employment Agreement, without waiving the release granted herein. 
Executive understands that by entering into this Agreement he will be limiting
the availability of certain remedies that he may have against the Company and
limiting also his ability to pursue certain claims against the Company.
 
4.              Non-Disparagement.  Each party agrees that it will not disparage
or defame the other party, its management, practices, or good reputation.

5.              Severability Clause.  In the event any provision or part of this
Agreement is found to be invalid or unenforceable, only that particular
provision or part so found, and not the entire Agreement, will be inoperative.
 
6.              Nonadmission.  Nothing contained in this Agreement will be
deemed or construed as an admission of wrongdoing or liability on the part of
the Company.
 
7.              Governing Law.  All matters affecting this Agreement, including
the validity thereof, are to be governed by, and interpreted and construed in
accordance with, the laws of the State of Colorado applicable to contracts
executed in and to be performed in that State.
 
8.               Notices.  All notices or communications hereunder shall be in
writing, addressed as provided in Section 7.3 of the Employment Agreement.
 
EXECUTIVE ACKNOWLEDGES THAT HE HAS READ THIS AGREEMENT AND THAT HE FULLY KNOWS,
UNDERSTANDS AND APPRECIATES ITS CONTENTS, AND THAT HE HEREBY EXECUTES THE SAME
AND MAKES THIS AGREEMENT AND THE RELEASE AND AGREEMENTS PROVIDED FOR HEREIN
VOLUNTARILY AND OF HIS OWN FREE WILL.
 
IN WITNESS WHEREOF, Executive has executed this Agreement on the date first set
forth below.
 

 
EXECUTIVE
         
Mark D. Pierce
         
Date of Execution:
 

 
 
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