NEITHER THIS WARRANT NOR THE SECURITIES FOR WHICH THIS WARRANT IS EXERCISABLE
HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE
SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES
ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED
EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT
OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO,
THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN COMPLIANCE WITH
APPLICABLE STATE SECURITIES OR BLUE SKY LAWS.

 

FALCONSTOR SOFTWARE, INC.

 

WARRANT

 

Dated: February 23, 2018 (the “Issuance Date”)

 

FALCONSTOR SOFTWARE, INC., a Delaware corporation (the “Company”), hereby
certifies that, for value received, HCP-FVA, LLC or its registered assigns (the
“Holder”), is entitled to purchase from the Company up to a total of 366,990,000
(subject to adjustment as provided herein) fully paid and non-assessable shares
of common stock, $0.001 par value per share (the “Common Stock”), of the Company
(each such share, a “Warrant Share” and all such shares, the “Warrant Shares”)
at an exercise price equal to $0.001 per share (as adjusted from time to time as
provided in Section 9, the “Exercise Price”), at any time and from time to time
from and after the Initial Exercise Date (as defined in Section 4(a) below) and
through and including February 23, 2028 (the “Expiration Date”), and subject to
the following terms and conditions. This Warrant (this “Warrant”) is being
issued pursuant to Section 12.1.19 of that certain Amended and Restated Term
Loan Credit Agreement, dated as of February 23, 2018 (the “Loan Agreement”), by
and among the Company, as borrower, the subsidiaries party thereto, as
guarantors, HCP-FVA, LLC, as lender (together with its successors and assigns,
the “Lender”), and HCP-FVA, LLC, as administrative agent and collateral agent
for the Lender, and constitutes the HCP-FVA Financing Unit Warrants. This
Warrant is in addition to the Loan & Backstop Warrants issued to the Holder.

 

1.           Definitions. In addition to the terms defined elsewhere in this
Warrant, the following capitalized terms shall have the meanings set forth below
and capitalized terms used but not defined herein shall have the respective
meanings ascribed thereto in the Loan Agreement:

 

(a)          “Affiliate” means, with respect to any Person, each other Person
that owns or controls directly or indirectly the Person, any Person that
controls or is controlled by or is under common control with the Person,
including, without limitation, any parallel fund, related fund, or management
company of a Person (or such other Person responsible for its management), and
each of that Person’s senior executive officers, directors, partners and, for
any Person that is a limited liability company, that Person’s managers and
members.

 

 

(b)          “Business Day” means any day that is not a Saturday, Sunday or a
nationally recognized holiday.

 

(c)          “Change of Control” means that (A) the Company shall, directly or
indirectly, including through Subsidiaries, Affiliates or otherwise, in one or
more related transactions, (i) consolidate or merge with or into another Subject
Entity where the holders of a majority of the Company’s outstanding Common Stock
immediately prior to the consolidation or merger do not continue to own at least
50.1% of the surviving corporation, or (ii) sell, assign, transfer, convey or
otherwise dispose of all or substantially all of the properties and assets of
the Company and its Subsidiaries, or (iii) make, or be subject to or have the
Common Stock be subject to or party to one or more Subject Entities making, a
purchase, tender or exchange offer that is accepted by the holders of at least
either (x) 50.1% of the outstanding shares of Common Stock, or (y) such number
of shares of Common Stock such that all Subject Entities making or party to, or
Affiliated with any Subject Entity making or party to, such purchase, tender or
exchange offer, become collectively the beneficial owners (as defined in Rule
13d-3 under the Exchange Act) of at least 50.1% of the outstanding shares of
Common Stock, or (iv) consummate a stock purchase agreement or other business
combination (including, without limitation, a reorganization, recapitalization,
spin-off or scheme of arrangement) with one or more Subject Entities whereby all
such Subject Entities, individually or in the aggregate, acquire, either (x) at
least 50.1% of the outstanding shares of Common Stock, or (y) such number of
shares of Common Stock such that the Subject Entities become collectively the
beneficial owners (as defined in Rule 13d-3 under the Exchange Act) of at least
50.1% of the outstanding shares of Common Stock, or (v) reorganize, recapitalize
or reclassify its Common Stock or effect a compulsory share exchange pursuant to
which the Common Stock is effectively converted into or exchanged for other
securities, cash or property, or (vi) the execution by the Company or any
Subsidiary of a definitive agreement directly or indirectly providing for any of
the foregoing events, (B) any Subject Entity individually or the Subject
Entities in the aggregate is or shall become the “beneficial owner” (as defined
in Rule 13d-3 under the Exchange Act), directly or indirectly, whether through
acquisition, purchase, assignment, conveyance, tender, tender offer, exchange,
reduction in outstanding shares of Common Stock, merger, consolidation, business
combination, reorganization, recapitalization, spin-off, scheme of arrangement,
reorganization, recapitalization or reclassification or otherwise in any manner
whatsoever, of either (x) at least 50.1% of the aggregate ordinary voting power
of the Common Stock (as determined on an as-converted to Common Stock basis), or
(y) a percentage of the aggregate ordinary voting power represented by issued
and outstanding shares of Common Stock or other equity securities of the Company
sufficient to allow such Subject Entities to effect a statutory short form
merger or other transaction requiring other stockholders of the Company to
surrender their shares of Common Stock without approval of the stockholders of
the Company, (C) Continuing Directors cease to constitute more than a majority
of the members of the Board of Directors or (D) the issuance of or the entering
into any other instrument or transaction structured in a manner to circumvent,
or that circumvents, the intent of this definition in which case this definition
shall be construed and implemented in a manner otherwise than in strict
conformity with the terms hereof to the extent necessary to correct this
definition or any portion hereof which may be defective or inconsistent with the
intended treatment of such instrument or transaction.

 

2

 

(d)          “Closing Price” means, for any date, the price determined by the
first of the following clauses that applies: (a) if the Common Stock is then
listed or quoted on an Eligible Market or any other national securities
exchange, the closing bid price per share of Common Stock for such date (or the
nearest preceding date) on the primary Eligible Market or exchange on which the
Common Stock is then listed or quoted; (b) if the Common Stock is then listed or
quoted on the OTC Bulletin Board, the most recent closing bid price per share of
Common Stock so reported; (c) if prices for the Common Stock are then reported
in the “Pink Sheets” published by OTC Markets Group Inc. (or a similar
organization or agency succeeding to its functions of reporting prices), the
most recent bid price per share of Common Stock so reported; or (d) in all other
cases, the fair market value of a share of Common Stock as determined by an
independent appraiser selected in good faith by the Holder.

 

(e)          “Continuing Director” means (i) any individual who is a member of
the Board of Directors of the Company on the Issuance Date and (ii) any
individual who is appointed to the Board of Directors of the Company or
nominated for election to the Board of Directors of the Company by other
Continuing Directors or by the holders of the Company’s outstanding Series A
Preferred Stock in accordance with the terms of the Certificate of Designations
for the Series A Preferred Stock

 

(f)           “Control” (including the terms “controlling”, “controlled by” or
“under common control with”) means the possession, direct or indirect, of the
power to direct or cause the direction of the management and policies of a
Person, whether through the ownership of voting securities, by contract or
otherwise.

 

(g)          “Eligible Market” means any of the following markets or exchanges
on which the Common Stock is listed or quoted for trading on the date in
question: The NASDAQ Global Market, The NASDAQ Global Select Market, The NASDAQ
Capital Market, the New York Stock Exchange, NYSE Arca or the NYSE MKT (or any
successor to any of the foregoing).

 

(h)          “Exchange Act” means the Securities Exchange Act of 1934, as
amended, or any successor statute, and the rules and regulations promulgated
thereunder.

 

(i)            “Person” means an individual or corporation, partnership, trust,
incorporated or unincorporated association, joint venture, limited liability
company, joint stock company, government (or an agency or subdivision thereof)
or other entity of any kind.

 

(j)           “Proceeding” means an action, claim, suit, investigation or
proceeding (including, without limitation, an investigation or partial
proceeding, such as a deposition).

 

(k)          “Securities Act” means the Securities Act of 1933, as amended, or
any successor statute, and the rules and regulations promulgated thereunder.

 

(l)            “Subject Entity” means any Person, Persons or “group” (as that
term is used in Section 13(d) of the Exchange Act and as defined in Rule 13d-5
thereunder) or any Affiliate or associate of any such Person, Persons or Group
(other than the Holder and its Affiliates).

 

3

 

(m)        “Subsidiary(ies)” means at any time any Person which the Company
(either alone or through or together with any other Subsidiary), owns, directly
or indirectly, more than a majority of the capital stock or other equity
interests the holders of which are generally entitled to vote for the election
of the board of directors or other governing body of such Person.

 

(n)          “Trading Day” means (a) any day on which the Common Stock is listed
or quoted and traded on an Eligible Market, or (b) if the Common Stock is not
then listed or quoted and traded on any Eligible Market, then any Business Day.

 

(o)          “VWAP” means, on any particular Trading Day or for any particular
period, the volume weighted average trading price per share of Common Stock on
such Trading Day or for such particular period on the primary Eligible Market on
which the Common Stock is then traded as reported by Bloomberg L.P., through its
“Volume at Price” functions, or any successor performing similar functions, or,
if the foregoing does not apply, the average of the highest Closing Price and
the lowest closing ask price of any of the market makers for the Common Stock as
reported in the “pink sheets” by OTC Markets Group Inc.; provided, however, that
during any period the VWAP is being determined, the VWAP shall be subject to
adjustment from time to time for stock splits, stock dividends, combinations and
similar events (as applicable).

 

2.           Registration of Warrant. The Company shall register this Warrant,
upon records to be maintained by the Company for that purpose (the “Warrant
Register”), in the name of the record Holder hereof from time to time. The
Company may deem and treat the registered Holder of this Warrant as the absolute
owner hereof for the purpose of any exercise hereof or any distribution to the
Holder, and for all other purposes, absent actual notice to the contrary.

 

3.           Registration of Transfers. This Warrant and all rights hereunder
are transferable in whole or in part upon the books of the Company by the Holder
hereof; provided, however, that the transferee shall agree in writing to be
bound by the terms and subject to the conditions of this Warrant. The Company
shall register the transfer of any portion of this Warrant in the Warrant
Register, upon surrender of this Warrant, with the Form of Assignment attached
hereto duly completed and signed, to the Company at its address specified
herein. Upon any such registration or transfer, a new warrant to purchase Common
Stock, in substantially the form of this Warrant (any such new warrant, a “New
Warrant”), evidencing the portion of this Warrant not so transferred, if any,
shall be issued to the transferring Holder. The acceptance of the New Warrant by
the transferee thereof shall be deemed the acceptance by such transferee of all
of the rights and obligations of a holder of a Warrant.

 

4.           Exercise and Duration of Warrants; Cancellation of Warrants.

 

(a)          This Warrant shall be exercisable by the registered Holder at any
time and from time to time on or after the receipt of Stockholder Approval (the
“Initial Exercise Date”) to and including the Expiration Date. At 5:30 P.M., New
York City time on the Expiration Date, the portion of this Warrant not exercised
prior thereto shall be and become void and of no value; provided that, if the
average of the Closing Prices for the five (5) Trading Days immediately prior to
(but not including) the Expiration Date exceeds the Exercise Price on the
Expiration Date, then this Warrant shall be deemed to have been exercised in
full on a “cashless exercise” basis at 5:30 P.M. New York City time on the
Expiration Date.

 

4

 

(b)          A Holder may exercise this Warrant by delivering to the Company (i)
an exercise notice, in the form attached hereto (the “Exercise Notice”),
appropriately completed and duly signed, and (ii) payment of the Exercise Price
for the number of Warrant Shares as to which this Warrant is being exercised
(which may take the form of a “cashless exercise” if so indicated in the
Exercise Notice), and the date such items are delivered to the Company (as
determined in accordance with the notice provisions hereof) is an “Exercise
Date.” The Holder shall not be required to deliver the original Warrant in order
to effect an exercise hereunder. Execution and delivery of the Exercise Notice
shall have the same effect as cancellation of the original Warrant and issuance
of a New Warrant evidencing the right to purchase the remaining number of
Warrant Shares. The Holder shall deliver the original Warrant to the Company
within ten (10) days after the full exercise of this Warrant, provided, that the
Holder’s failure to so deliver the original Warrant shall not affect the
validity of such exercise or any of the Company’s obligations under this Warrant
and the Company’s sole remedy for the Holder’s failure to deliver the original
Warrant shall be to obtain an affidavit of lost warrant from the Holder, which
affidavit shall have customary indemnification terms.

 

(c)          Reference is hereby made to the Commitment Letter and the Loan
Agreement. Pursuant to the Commitment Letter, on the Issuance Date, the Holder
has pre-funded all of the HCP Commitment (as defined in the Commitment Letter)
pursuant to a Pre-Funding Commitment Notice (as defined in the Commitment
Letter) from the Company. If (y) Eligible Stockholders (other than Holder and
its Affiliates) subscribe for and purchase Units in the Financing on the terms
and conditions set forth in Section 10.13 of the Loan Agreement and Schedule
10.13 thereto (including by purchasing Units within the time frame set forth on
Schedule 10.13 to the Loan Agreement, or such other time frame agreed to by the
Company and Holder) (the “Eligible Stockholder Investment”) and, (z)
concurrently with such Eligible Stockholder Investment, a portion of the
Financing pre-funded by the Holder in excess of the HCP Minimum Purchase (as
defined in the Commitment Letter) is repaid by the Company (the “Excess Repaid
Portion”) from any proceeds of the Eligible Stockholder Investment, then that
portion of the HCP-FVA Financing Unit Warrants attributable to the Excess Repaid
Portion (as determined on a post-cashless exercise basis if the HCP-FVA
Financing Unit Warrants have been exercised) shall be cancelled (and, if the
Holder has exercised the HCP-FVA Financing Unit Warrants on a non-cashless
exercise basis, then the Company shall reimburse the Holder for the cash
exercise price paid in respect of the cancelled Warrant Shares). For the
avoidance of doubt, any such Eligible Stockholder purchasing Units in the
Financing must purchase all of the securities that comprise a Unit (including
secondary Series A Preferred Stock from HCP-FVA, LLC).

 

5.           Delivery of Warrant Shares.

 

(a)          Upon exercise of this Warrant, the Company shall promptly (but in
no event later than three (3) Trading Days after the Exercise Date) issue (or
cause to be issued) and cause to be delivered to the Holder (or upon the written
order of the Holder issued and delivered to such Person or Persons the Holder
may designate) a certificate for the Warrant Shares issuable upon such exercise
or credit the Holder’s balance account with DTC for the Warrant Shares issuable
upon such exercise, in either case, free of restrictive legends unless required
by Section 5(d) below. The Holder, or any Person so designated by the Holder to
receive Warrant Shares, shall be deemed to have become holder of record of such
Warrant Shares as of the Exercise Date.

 

5

 

(b)          This Warrant is exercisable, either in its entirety or, from time
to time, for a portion of the number of Warrant Shares. Upon surrender of this
Warrant following one or more partial exercises, the Company shall issue or
cause to be issued, at its expense, a New Warrant evidencing the right to
purchase the remaining number of Warrant Shares.

 

(c)          The Company’s obligations to issue and deliver Warrant Shares in
accordance with the terms and subject to the conditions hereof are absolute and
unconditional, irrespective of any action or inaction by the Holder to enforce
the same, any waiver or consent with respect to any provision hereof, the
recovery of any judgment against any Person or any action to enforce the same,
or any setoff, counterclaim, recoupment, limitation or termination, or any
breach or alleged breach by the Holder or any other Person of any obligation to
the Company or any violation or alleged violation of law by the Holder or any
other Person, and irrespective of any other circumstance which might otherwise
limit such obligation of the Company to the Holder in connection with the
issuance of Warrant Shares. Nothing herein shall limit the Holder’s right to
pursue any other remedies available to it hereunder, at law or in equity
including, without limitation, a decree of specific performance and/or
injunctive relief with respect to the Company’s failure to timely deliver
certificates representing shares of Common Stock upon exercise of the Warrant as
required pursuant to the terms hereof.

 

(d)          Each certificate for Warrant Shares shall bear a restrictive legend
only if (i) there is not then an effective registration statement covering the
resale of the Warrant Shares and naming the Holder as a selling stockholder
thereunder and (ii) the Warrant Shares are not freely transferable without
volume restrictions pursuant to Rule 144; provided, that, no such restrictive
legend shall be required if, in the opinion of outside counsel for the Holder
(which opinion shall be reasonably satisfactory to counsel for the Company) or
the Company, the securities represented thereby are not, at such time, required
by law to bear such legend.

 

6.           Charges, Taxes and Expenses. Issuance and delivery of certificates
for shares of Common Stock upon exercise of this Warrant shall be made without
charge to the Holder for any issue or transfer tax, withholding tax, transfer
agent fee or other incidental tax or expense in respect of the issuance of such
certificates, all of which taxes and expenses shall be paid by the Company;
provided, however, that the Company shall not be required to pay any tax which
may be payable in respect of any transfer involved in the registration of any
certificates for Warrant Shares or Warrants in a name other than that of the
Holder or an Affiliate thereof.

 

7.           Replacement of Warrant. If this Warrant is mutilated, lost, stolen
or destroyed, the Company shall issue or cause to be issued in exchange and
substitution for and upon cancellation hereof, or in lieu of and substitution
for this Warrant, a New Warrant, but only upon receipt of evidence reasonably
satisfactory to the Company of such loss, theft or destruction and customary and
reasonable indemnity, if requested. Applicants for a New Warrant under such
circumstances shall also comply with such other reasonable regulations and
procedures as the Company may prescribe.

 

6

 

8.           Reservation of Warrant Shares. Subject to receipt of Stockholder
Approval, the Company covenants that it will at all times reserve and keep
available out of the aggregate of its authorized but unissued and otherwise
unreserved Common Stock, solely for the purpose of enabling it to issue Warrant
Shares upon exercise of this Warrant as herein provided, the number of Warrant
Shares which are then issuable and deliverable upon the exercise of this entire
Warrant, free from preemptive rights or any other contingent purchase rights of
persons other than the Holder (taking into account the adjustments and
restrictions of Section 9). The Company covenants that all Warrant Shares so
issuable and deliverable shall, upon issuance and the payment of the applicable
Exercise Price in accordance with the terms hereof, be duly and validly
authorized, issued and fully paid and nonassessable. The Company will take all
such action as may be necessary to assure that such shares of Common Stock may
be issued as provided herein without violation of any applicable law or
regulation, or of any requirements of any securities exchange or automated
quotation system upon which the Common Stock may be listed.

 

9.           Certain Adjustments. The Exercise Price and number of Warrant
Shares issuable upon exercise of this Warrant are subject to adjustment from
time to time as set forth in this Section 9.

 

(a)          Stock Dividends and Splits. If the Company, at any time while this
Warrant is outstanding, (i) pays a stock dividend on its Common Stock or
otherwise makes a distribution on any class of capital stock that is payable in
shares of Common Stock, (ii) subdivides outstanding shares of Common Stock into
a larger number of shares, or (iii) combines outstanding shares of Common Stock
into a smaller number of shares, then in each such case the Exercise Price shall
be multiplied by a fraction of which the numerator shall be the number of shares
of Common Stock outstanding immediately before such event and of which the
denominator shall be the number of shares of Common Stock outstanding
immediately after such event. Any adjustment made pursuant to clause (i) of this
paragraph shall become effective immediately after the record date for the
determination of stockholders entitled to receive such dividend or distribution,
and any adjustment pursuant to clause (ii) or (iii) of this paragraph shall
become effective immediately after the effective date of such subdivision or
combination.

 

(b)          Pro Rata Distributions. If the Company, at any time while this
Warrant is outstanding, distributes to holders of Common Stock (i) evidences of
its indebtedness, (ii) any security (other than a distribution of Common Stock
covered by the preceding paragraph), (iii) rights or warrants to subscribe for
or purchase any security, or (iv) cash or any other asset (in each case,
“Distributed Property”), then in each such case the Exercise Price in effect
immediately prior to the record date fixed for determination of stockholders
entitled to receive such distribution shall be adjusted (effective on such
record date) to equal the product of such Exercise Price times a fraction of
which the denominator shall be the average of the Closing Prices for the five
(5) Trading Days immediately prior to (but not including) such record date and
of which the numerator shall be such average less the then fair market value of
the Distributed Property distributed in respect of one outstanding share of
Common Stock, as determined by the Company’s independent certified public
accountants that regularly examine the financial statements of the Company (an
“Appraiser”). In such event, the Holder, after receipt of the determination by
the Appraiser, shall have the right to select an additional appraiser (which
shall be a nationally recognized accounting firm), in which case such fair
market value shall be deemed to equal the average of the values determined by
each of the Appraiser and such appraiser. As an alternative to the foregoing
adjustment to the Exercise Price, at the request of the Holder delivered before
the ninetieth (90th) day after such record date, provision shall be made such
that the Holder will receive upon exercise of this Warrant (or, if later, the
latter of five (5) Trading Days after such request and the effective date of
such distribution), the Distributed Property that the Holder would have been
entitled to receive in respect of the Warrant Shares for which this Warrant
could have been exercised immediately prior to such record date.

 

7

 

(c)          Fundamental Transactions. If, at any time while this Warrant is
outstanding, (i) the Company effects any merger or consolidation of the Company
with or into another Person, (ii) the Company effects any sale of all or
substantially all of its assets to another Person in one or a series of related
transactions, (iii) any tender offer or exchange offer (whether by the Company
or another Person) is completed pursuant to which holders of more than 50.1% of
the outstanding Common Stock tender or exchange their shares for other
securities, cash or property, (iv) the Company effects any reclassification of
the Common Stock or any compulsory share exchange pursuant to which the Common
Stock is effectively converted into or exchanged for other securities, cash or
property (other than as a result of a subdivision or combination of shares of
Common Stock covered by Section 9(a) above), or (v) there is a Change of Control
(in any such case, a “Fundamental Transaction”), then the Holder shall have the
right thereafter to receive, upon exercise of this Warrant, the same amount and
kind of securities, cash or property as it would have been entitled to receive
upon the occurrence of such Fundamental Transaction if it had been, immediately
prior to such Fundamental Transaction, the holder of the number of Warrant
Shares then issuable upon exercise in full of this Warrant (the “Alternate
Consideration”). The aggregate Exercise Price for this Warrant will not be
affected by any such Fundamental Transaction, but the Company shall apportion
such aggregate Exercise Price among the Alternate Consideration in a reasonable
manner reflecting the relative value of any different components of the
Alternate Consideration. If holders of Common Stock are given any choice as to
the securities, cash or property to be received in a Fundamental Transaction,
then the Holder shall be given the same choice as to the Alternate Consideration
it receives upon any exercise of this Warrant following such Fundamental
Transaction. In the event of a Fundamental Transaction, the Company or the
successor or purchasing Person, as the case may be, shall execute with the
Holder a written agreement providing that:

 

(x)        this Warrant shall thereafter entitle the Holder to purchase the
Alternate Consideration in accordance with this Section 9(c),

 

(y)       in the case of any such successor or purchasing Person, upon such
consolidation, merger, statutory exchange, combination, sale or conveyance such
successor or purchasing Person shall be jointly and severally liable with the
Company for the performance of all of the Company’s obligations under this
Warrant, and

 

(z)       if registration or qualification is required under the Exchange Act or
applicable state law for the public resale by the Holder of shares of stock and
other securities so issuable upon exercise of this Warrant, such registration or
qualification shall be completed prior to such reclassification, change,
consolidation, merger, statutory exchange, combination or sale.

 

8

 

If, in the case of any Fundamental Transaction, the Alternate Consideration
includes shares of stock, other securities, other property or assets of a Person
other than the Company or any such successor or purchasing Person, as the case
may be, in such Fundamental Transaction, then such written agreement shall also
be executed by such other Person and shall contain such additional provisions to
protect the interests of the Holder as the Board of Directors of the Company
shall reasonably consider necessary by reason of the foregoing. At the Holder’s
request, any successor to the Company or surviving entity in such Fundamental
Transaction shall issue to the Holder a New Warrant consistent with the
foregoing provisions and evidencing the Holder’s right to purchase the Alternate
Consideration for the aggregate Exercise Price upon exercise thereof. The terms
of any agreement pursuant to which a Fundamental Transaction is effected shall
include terms requiring any such successor or surviving entity to comply with
the provisions of this paragraph (c) and insuring that the Warrant (or any such
replacement security) will be similarly adjusted upon any subsequent transaction
analogous to a Fundamental Transaction.

 

(d)          Number of Warrant Shares. Simultaneously with any adjustment to the
Exercise Price pursuant to paragraphs (a) or (b) of this Section, the number of
Warrant Shares that may be purchased upon exercise of this Warrant shall be
increased or decreased proportionately, so that after such adjustment the
aggregate Exercise Price payable hereunder for the increased or decreased number
of Warrant Shares shall be the same as the aggregate Exercise Price in effect
immediately prior to such adjustment.

 

(e)          Calculations. All calculations under this Section 9 shall be made
to the nearest cent or the nearest 1/100th of a share, as applicable. The number
of shares of Common Stock outstanding at any given time shall not include shares
owned or held by or for the account of the Company, and the disposition of any
such shares shall be considered an issue or sale of Common Stock.

 

(f)           Notice of Adjustments. Upon the occurrence of each adjustment
pursuant to this Section 9, the Company at its expense will promptly compute
such adjustment in accordance with the terms of this Warrant and prepare a
certificate setting forth such adjustment, including a statement of the adjusted
Exercise Price and adjusted number or type of Warrant Shares or other securities
issuable upon exercise of this Warrant (as applicable), describing the
transactions giving rise to such adjustments and showing in detail the facts
upon which such adjustment is based. Upon written request, the Company will
promptly deliver a copy of each such certificate to the Holder and to the
Company’s transfer agent.

 

(g)          Notice of Corporate Events. If the Company (i) declares a dividend
or any other distribution of cash, securities or other property in respect of
its Common Stock, including without limitation any granting of rights or
warrants to subscribe for or purchase any capital stock of the Company, (ii)
authorizes or approves, enters into any agreement contemplating or solicits
stockholder approval for a Fundamental Transaction or (iii) authorizes the
voluntary dissolution, liquidation or winding up of the affairs of the Company,
then the Company shall deliver to the Holder a notice describing the material
terms and conditions of such transaction, at least twenty (20) calendar days
prior to the applicable record or effective date on which a Person would need to
hold Common Stock in order to participate in or vote with respect to such
transaction, and the Company will take all steps reasonably necessary in order
to insure that the Holder is given the practical opportunity to exercise this
Warrant prior to such time so as to participate in or vote with respect to such
transaction; provided, however, that the failure to deliver such notice or any
defect therein shall not affect the validity of the corporate action required to
be described in such notice.

 

9

 

10.       Fractional Shares. The Company shall not be required to issue or cause
to be issued fractional Warrant Shares on the exercise of this Warrant. If any
fraction of a Warrant Share would, except for the provisions of this Section, be
issuable upon exercise of this Warrant, the number of Warrant Shares to be
issued will be rounded up to the nearest whole share or right to purchase the
nearest whole share, as the case may be.

 

11.       Notices. Any and all notices or other communications or deliveries
hereunder (including without limitation any Exercise Notice) shall be in writing
and shall be deemed given and effective on the earliest of (i) the date of
transmission, if such notice or communication is delivered via facsimile at the
facsimile number specified in this Section prior to 5:30 p.m. (New York City
time) on a Trading Day, (ii) the next Trading Day after the date of
transmission, if such notice or communication is delivered via facsimile at the
facsimile number specified in this Section on a day that is not a Trading Day or
later than 5:30 p.m. (New York City time) on any Trading Day, (iii) the Trading
Day following the date of mailing, if sent by a nationally recognized overnight
courier service specifying next Business Day delivery, or (iv) upon actual
receipt by the party to whom such notice is required to be given, if by hand
delivery. The address and facsimile number of a party for such notices or
communications shall be as set forth in the Loan Agreement, unless changed by
such party by two (2) Trading Days’ prior notice to the other party in
accordance with this Section 11.

 

12.       Warrant Agent. The Company shall serve as warrant agent under this
Warrant. Upon thirty (30) days’ notice to the Holder, the Company may appoint a
new warrant agent. Any corporation into which the Company or any new warrant
agent may be merged or any corporation resulting from any consolidation to which
the Company or any new warrant agent shall be a party or any corporation to
which the Company or any new warrant agent transfers substantially all of its
corporate trust or stockholders services business shall be a successor warrant
agent under this Warrant without any further act. Any such successor warrant
agent shall promptly cause notice of its succession as warrant agent to be
mailed (by first class mail, postage prepaid) to the Holder at the Holder’s last
address as shown on the Warrant Register.

 

13.       Indemnification. The Company shall indemnify, defend and hold the
Holder and its affiliates, and their respective directors, officers, partners,
managers, members, employees, agents, attorneys, or any other Person affiliated
with or representing any of the foregoing (each, an “Indemnified Person”)
harmless from and against all obligations, demands, claims, costs, losses,
liabilities, damages, and expenses asserted against any Indemnified Person in
connection with or arising out of the issuance of this Warrant or any exercise
thereof by the Holder.

 

14.       Payment of Exercise Price. The Holder, at its election, may either pay
the Exercise Price in immediately available funds, or satisfy its obligation to
pay the Exercise Price through a “cashless exercise,” in which event the Company
shall issue to the Holder the number of Warrant Shares determined as follows:

 

10

 

  X = Y [(A-B)/A] where:     X = the number of Warrant Shares to be issued to
the Holder.       Y = the number of Warrant Shares with respect to which this
Warrant is being exercised.       A = the Current Market Price (as of the
Exercise Date) of one share of Common Stock.       B = the Exercise Price (as
adjusted to the Exercise Date).

 

For purposes of this Warrant, the “Current Market Price” of one share of Common
Stock as of the Exercise Date shall be determined as follows: (a) if traded on a
national securities exchange, the Current Market Price shall be deemed to be the
arithmetic average of the VWAPs for the five (5) consecutive Trading Days
immediately preceding the Exercise Date; (b) if traded over-the-counter but not
on the Nasdaq Stock Market, the Current Market Price shall be deemed to be the
average of the closing bid and asked prices for the five (5) Trading Days
immediately preceding the Exercise Date; and (c) if there is no active public
market, the Current Market Price shall be the fair market value of the Common
Stock as of the Exercise Date, as determined by an independent appraiser
selected in good faith by the Holder.

 

For purposes of Rule 144, it is intended, understood and acknowledged that the
Warrant Shares issued in a cashless exercise transaction shall be deemed to have
been acquired by the Holder, and the holding period for the Warrant Shares shall
be deemed to have commenced, on the Issuance Date.

 

15.       Miscellaneous.

 

(a)          Subject to the restrictions on transfer set forth on the first page
hereof and in Section 3, this Warrant may be assigned by the Holder. This
Warrant may not be assigned by the Company except to a successor in the event of
a Fundamental Transaction or with the prior written consent of the Holder. This
Warrant shall be binding on and inure to the benefit of the parties hereto and
their respective successors and assigns. Subject to the preceding sentence,
nothing in this Warrant shall be construed to give to any Person other than the
Company and the Holder any legal or equitable right, remedy or cause of action
under this Warrant. This Warrant constitutes the entire agreement of the parties
with respect to the subject matter hereof. This Warrant may be amended only in
writing signed by the Company and the Holder and their successors and assigns.

 

(b)          The Company will not, by amendment of its governing documents or
through any reorganization, transfer of assets, consolidation, merger,
dissolution, issue or sale of securities or any other voluntary action, avoid or
seek to avoid the observance or performance of any of the terms of this Warrant,
but will at all times in good faith assist in the carrying out of all such terms
and in the taking of all such action as may be necessary or appropriate in order
to protect the rights of the Holder against impairment. Without limiting the
generality of the foregoing, subject to receipt of Stockholder Approval, the
Company (i) will take all such action as may be reasonably necessary or
appropriate in order that the Company may validly and legally issue fully paid
and nonassessable Warrant Shares on the exercise of this Warrant, and (ii) will
not close its stockholder books or records in any manner which interferes with
the timely exercise of this Warrant.

 

11

 

(c)          Governing Law; Venue; Waiver Of Jury Trial. all questions
concerning the construction, validity, enforcement and interpretation of this
warrant shall be governed by and construed and enforced in accordance with the
laws of the state of new york (except for matters governed by corporate law in
the state of Delaware). each party hereby irrevocably submits to the exclusive
jurisdiction of the state and federal courts sitting in the city of new york,
borough of manhattan, for the adjudication of any dispute hereunder or in
connection herewith or with any transaction contemplated hereby or discussed
herein, and hereby irrevocably waives, and agrees not to assert in any suit,
action or proceeding, any claim that it is not personally subject to the
jurisdiction of any such court, that such suit, action or proceeding is
improper. each party hereby irrevocably waives personal service of process and
consents to process being served in any such suit, action or proceeding by
mailing a copy thereof via registered or certified mail or overnight delivery
(with evidence of delivery) to such party at the address in effect for notices
to it under this warrant and agrees that such service shall constitute good and
sufficient service of process and notice thereof. nothing contained herein shall
be deemed to limit in any way any right to serve process in any manner permitted
by law. the company hereby waives all rights to a trial by jury.

 

(d)          The headings herein are for convenience only, do not constitute a
part of this Warrant and shall not be deemed to limit or affect any of the
provisions hereof.

 

(e)          In case any one or more of the provisions of this Warrant shall be
invalid or unenforceable in any respect, the validity and enforceability of the
remaining terms and provisions of this Warrant shall not in any way be affected
or impaired thereby and the parties will attempt in good faith to agree upon a
valid and enforceable provision which shall be a commercially reasonable
substitute therefor, and upon so agreeing, shall incorporate such substitute
provision in this Warrant.

 

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK,
SIGNATURE PAGE FOLLOWS]

 

12

 

IN WITNESS WHEREOF, the Company has caused this Warrant to be duly executed by
its authorized officer as of the date first indicated above.

 

  FALCONSTOR SOFTWARE, INC.               By: /s/ Patrick McClain   Name:
Patrick McClain   Title: EVP and Chief Financial Officer

 

Acknowledged and Agreed to by:

 

HCP-FVA, LLC

 

By: Hale Capital Partners, LP               By: /s/ Martin Hale, Jr.   Name:
Martin Hale, Jr.   Title: Chief Executive Officer  

 

13

 

FORM OF EXERCISE NOTICE

 

(To be executed by the Holder to exercise the right to purchase shares of Common
Stock under the foregoing Warrant)

 

To: FALCONSTOR SOFTWARE, INC.

 

The undersigned is the Holder of a Warrant (the “Warrant”) issued by FALCONSTOR
SOFTWARE, INC., a Delaware corporation (the “Company”). Capitalized terms used
herein and not otherwise defined have the respective meanings set forth in the
Warrant.

 

1.The Warrant is currently exercisable to purchase a total of ______________
Warrant Shares.

 

2.The undersigned Holder hereby exercises its right to purchase
_________________ Warrant Shares pursuant to the Warrant.

 

3.The Holder intends that payment of the Exercise Price shall be made as (check
one):

 

____ cash exercise under Section 14

 

____ cashless exercise under Section 14

 

4.Pursuant to this exercise, the Company shall deliver to the Holder
_______________ Warrant Shares in accordance with the terms of the Warrant.

 

5.Following this exercise, the Warrant shall be exercisable to purchase a total
of ______________ Warrant Shares.

 

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK,
SIGNATURE PAGE FOLLOWS]

 

 

IN WITNESS WHEREOF, the undersigned has caused this Exercise Notice to be duly
executed as of the date indicated below.

 

Dated: _________________, _______   Name of Holder:           (Print)          
  By:       Name:       Title:             (Signature must conform in all
respects to name of holder as specified on the face of the Warrant)

 

 

FORM OF ASSIGNMENT

 

[To be completed and signed only upon transfer of Warrant]

 

FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto
________________________________ the right represented by the within Warrant to
purchase ____________ shares of Common Stock of FALCONSTOR SOFTWARE, INC. to
which the within Warrant relates and appoints ________________ attorney to
transfer said right on the books of FALCONSTOR SOFTWARE, INC. with full power of
substitution in the premises.

 

Dated: _________________, ______           (Signature must conform in all
respects to name of holder as specified on the face of the Warrant)        
Address of Transferee                     In the presence of: