Exhibit 10.4

 

PHOTOWORKS, INC.

 

INVESTOR RIGHTS AGREEMENT

 

February 16, 2005

 

 

 

 

TABLE OF CONTENTS

Page

1.

Registration Rights

2

 

1.1

Definitions

2

 

1.2

Form S-1/S-2 Registration

3

 

1.3

Obligations of the Company

3

 

1.4

Information From Holders

3

 

1.5

Expenses of Registration

3

 

1.6

Delay of Registration

3

 

1.7

Indemnification

3

 

1.8

Reports Under the Exchange Act

3

 

1.9

Assignment of Registration Rights

3

 

1.10

Termination of Registration Rights

3

2.

Covenants of the Company

3

 

2.1

Nomination of Sunra Director

3

 

2.2

Termination of Covenants

3

3.

Voting Agreement

3

4.

Miscellaneous

3

 

4.1

Termination

3

 

4.2

Entire Agreement

3

 

4.3

Successors and Assigns

3

 

4.4

Amendments and Waivers

3

 

4.5

Notices

3

 

4.6

Severability

3

 

4.7

Governing Law

3

 

4.8

Counterparts

3

 

4.9

Titles and Subtitles

3

 

4.10

Aggregation of Stock and Principal Balances

3

 

4.11

No Revocation

3

 

 

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PHOTOWORKS, INC.

 

INVESTOR RIGHTS AGREEMENT

 

This Investor Rights Agreement (the “Agreement”) is effective as of this 16th
day of February, 2005 by and among Photoworks, Inc., a Washington corporation
(the “Company”), Sunra Capital Holdings, Ltd. (“Sunra” or the "Investor"), Orca
Bay Partners (“Orca Bay”), Madrona Venture Fund I-A, L.P. (“Madrona I-A”),
Madrona Venture Fund I-B, L.P. (“Madrona I-B”), Madrona Managing Director Fund,
LLC (“Madrona LLC” and collectively with Madrona I-A and Madrona I-B,
“Madrona”), and Matinicus LP (“Matinicus”).

RECITALS

The Company is currently in negotiations with its principal security holders to
complete a series of transactions pursuant to which (i) all outstanding shares
of the Company’s Series A Preferred Stock (the “Series A Preferred”) will be
converted into shares of the Company's Common Stock (the "Common Stock"),
(ii) the debentures issued pursuant to that certain Subordinated Convertible
Debenture Purchase Agreement dated April 25, 2001 by and among the Company and
the parties listed on Schedule 1 thereto (collectively, the “Series B
Debentures”) will be amended to permit the conversion of all outstanding
principal and interest thereon into shares of Common Stock at a conversion price
of $0.11 per share pursuant to the terms of that certain Amendment to
Subordinated Debentures dated as of February 16, 2005 between the Company and
Matinicus (the “Debenture Amendment”), (iii) all Series B Debentures (as so
amended) will be converted into shares of Common Stock, (iv) the Company will
sell and issue convertible promissory notes (collectively, the “New Notes”) in
the aggregate amount of $2,000,000 to certain purchasers pursuant to that
certain Convertible Note, Warrant and Common Stock Purchase Agreement dated as
of even date herewith among the Company and certain parties listed on the
signature pages thereto (the “New Purchase Agreement”), (v) the New Notes will
be converted into shares of Common Stock at a conversion price of $0.1078 per
share, (vi) the Company will issue warrants to purchase an aggregate of up to
6,082,024 shares of Common Stock at an exercise price of $0.21 per share
pursuant to the terms of the New Purchase Agreement and the Debenture Amendment
(collectively, the “Warrants”), and (vii) the Company will sell and issue
18,552,876 shares of Common Stock to certain purchasers named in the New
Purchase Agreement for a purchase price of $0.1078 per share. All of these
actions are hereinafter referred to collectively as the “Transactions”. The term
"Investors" as used herein shall collectively mean Sunra and any other purchaser
of New Notes, Warrants or common stock pursuant to the New Purchase Agreement,
as the same may be amended from time to time.

In order to induce the Investors, Orca Bay, Madrona and Matinicus to enter into
agreements described above, as applicable, and consummate the Transactions, and
the Investors to invest funds in the Company pursuant to the New Purchase
Agreement, the Company hereby agrees that this Agreement shall govern the rights
of the Investors to cause the Company to register certain shares of Common Stock
issued or issuable to them and certain other matters as set forth herein.

 

 

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AGREEMENT

The parties hereby agree as follows:

1.

Registration Rights. The Company and the Investors covenant and agree as
follows:

 

1.1

Definitions. For purposes of this Section 1:

 

(a)                The term “Affiliated Fund” means, with respect to a Holder
that is a limited liability company or a limited liability partnership, a fund
or entity managed by the same manager or managing member or general partner or
management company or by an entity controlling, controlled by, or under common
control with such manager or managing member or general partner or management
company;

(b)               The term “Bylaws” means the Company’s bylaws as amended from
time to time.

(c)                The term “Exchange Act” means the Securities Exchange Act of
1934, as amended (and any successor thereto) and the rules and regulations
promulgated thereunder;

(d)               The term “Form S-1” means Form S-1 under the Securities Act or
such other form under the Securities Act as in effect on the date hereof or any
successor form under the Securities Act that permits significant incorporation
by reference of the Company’s subsequent public filings under the Exchange Act;

(e)                The term “Form S-2” means Form S-2 under the Securities Act
or such other form under the Securities Act as in effect on the date hereof or
any successor form under the Securities Act that permits significant
incorporation by reference of the Company’s subsequent public filings under the
Exchange Act;

(f) The term “Holder” means any person owning or having the right to acquire
Registrable Securities or any assignee thereof in accordance with Section 1.9 of
this Agreement (the names of the Holders and the number of shares of Registrable
Securities held by each of them on the date hereof are set forth on Exhibit A);

(g)                The terms “register,” “registered,” and “registration” refer
to a registration effected by preparing and filing a registration statement or
similar document in compliance with the Securities Act, and the declaration or
ordering of effectiveness of such registration statement or document;

(h)               The term “Registrable Securities” means (i) the shares of
Common Stock issuable or issued upon conversion of the New Notes that are
outstanding as of the date hereof and held on the date hereof by the Investors,
other than shares for which registration rights have terminated pursuant to
Section 1.10 hereof, (ii) the shares of Common Stock issuable or issued upon
exercise of the Warrants that are outstanding as of the date hereof and held on
the date hereof by the Investors, other than shares for which registration
rights have terminated pursuant to Section 1.10 hereof, and (iii) any other
shares of Common Stock of the Company issued as (or issuable upon the conversion
or exercise of any warrant, right or other security which is issued as) a
dividend or other distribution with respect to, or in exchange for or in
replacement of, the shares listed in (i) or (ii), excluding in all cases any
Registrable Securities sold by a person in a transaction in which his or her
rights under this Agreement are not assigned. Notwithstanding the foregoing,
Common Stock or other securities shall only be treated as

 

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Registrable Securities if and so long as (A) they have not been sold to or
through a broker or dealer or underwriter in a public distribution or a public
securities transaction, (B) they have not been sold in a transaction exempt from
the registration and prospectus delivery requirements of the Securities Act
under Section 4(1) thereof so that all transfer restrictions, and restrictive
legends with respect thereto, if any, are removed upon the consummation of such
sale, or (C) the Holder thereof is entitled to exercise any right provided in
Section 1 in accordance with Section 1.10 below;

(i) The number of shares of “Registrable Securities then outstanding” shall be
determined by the number of shares of Common Stock outstanding which are, and
the number of shares of Common Stock issuable pursuant to then exercisable or
convertible securities which are, Registrable Securities;

(j) The term “Registration Statement” means the registration statement filed by
the Company pursuant to Section 1.2 below.

(k)                The term “Restated Articles” means the Company’s Third
Amended and Restated Articles of Incorporation, as such may be amended from time
to time

(l)

The term “SEC” means the Securities and Exchange Commission; and

(m)              The term “Securities Act” means the Securities Act of 1933, as
amended (and any successor thereto) and the rules and regulations promulgated
thereunder.

1.2

Form S-1/S-2 Registration.

(a)                The Company shall use commercially reasonable efforts to
effect a registration covering the Registrable Securities on Form S-1 or S-2 and
all such qualifications and compliances as may be so requested and as would
permit or facilitate the sale and distribution of the Registrable Securities;
provided, that the Company shall not be obligated to effect any such
registration, qualification or compliance, pursuant to this Section 1.2 in any
jurisdiction in which the Company would be required to qualify to do business or
to execute a general consent to service of process in effecting such
registration, qualification or compliance unless the Company is already
qualified to do business or subject to service of process in that jurisdiction.

(b)               Subject to the foregoing, the Company (i) shall file a
registration statement covering the Registrable Securities no later than
ninety (90) days following the date of its 2005 annual shareholder meeting and
(ii)  use commercially reasonable efforts to have this Registration Statement
declared effective as promptly as practicable but in no event no later than one
hundred fifty (150) days following the initial filing of the registration.

(c)                Notwithstanding the preceding Section 1.2(b) or any other
provision in this Agreement, if the Company shall furnish to Holders requesting
a registration statement pursuant to this Section 1.2, a certificate signed by
the President of the Company stating that in the good faith judgment of the
Board of Directors of the Company, it would be seriously detrimental to the
Company and its stockholders for such registration statement to be filed and it
is therefore essential to defer the filing of such registration statement, the
Company shall be entitled,to suspend the use of the prospectus that is part of
the Registration Statement for periods not to exceed the lesser of (i) an
aggregate of thirty (30) days in any ninety-day (90-day) period or (ii) an
aggregate of sixty (60) days in any twelve-month (12-month) period.

 

 

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1.3               Obligations of the Company. Whenever required under this
Section 1 to effect the registration of any Registrable Securities, the Company
shall, as expeditiously as reasonably possible:

(a)                Prepare and file with the SEC a registration statement with
respect to the Registrable Securities and use commercially reasonable efforts to
cause such registration statement to become effective and keep such registration
statement effective for up to two (2) years, or until the distribution described
in such registration statement is completed, if earlier.

(b)               Prepare and file with the SEC such amendments and supplements
to such registration statement and the prospectus used in connection with such
registration statement as may be necessary to comply with the provisions of the
Securities Act with respect to the disposition of all securities covered by such
registration statement for up to two (2) years, or until the distribution
described in such registration statement is completed, if earlier.

(c)                Furnish to the Holders such numbers of copies of a
prospectus, including a preliminary prospectus, in conformity with the
requirements of the Securities Act, and such other documents as they may
reasonably request in order to facilitate the disposition of Registrable
Securities owned by them.

(d)               Use commercially reasonable efforts to register and qualify
the securities covered by such registration statement under such other
securities or Blue Sky laws of such jurisdictions as shall be reasonably
requested by the Holders, provided that the Company shall not be required in
connection therewith or as a condition thereto to qualify to do business or to
file a general consent to service of process in any such states or jurisdiction
unless the Company is already qualified to do business or subject to service of
process in that jurisdiction.

(e)                Notify each Holder of Registrable Securities covered by such
registration statement at any time when a prospectus relating thereto is
required to be delivered under the Securities Act of the happening of any event
as a result of which the prospectus included in such registration statement, as
then in effect, includes an untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances then
existing, such obligation to continue for one hundred twenty (120) days.

(f) Provide a transfer agent and registrar for all Registrable Securities
registered pursuant hereunder and a CUSIP number for all such Registrable
Securities, in each case not later than the effective date of such registration.

(g)     In the event of any underwritten public offering, enter into and perform
its obligations under an underwriting agreement, in usual and customary form,
with the managing underwriter(s) of such offering (each Holder participating in
such underwriting shall also enter into and perform its obligations under such
an agreement).

(h)     Notify each Holder of Registrable Securities covered by such
registration statement at any time when a prospectus relating thereto is
required to be delivered under the Securities Act of the happening of any event
as a result of which the prospectus included in such registration statement, as
then in effect, includes an untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances then
existing.

 

 

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(i)      Cause all such Registrable Securities registered pursuant hereunder to
be listed on each securities exchange or nationally recognized quotation system
on which similar securities issued by the Company are then listed.

1.4               Information From Holders. It shall be a condition precedent to
the obligations of the Company to take any action pursuant to this Section 1
with respect to the Registrable Securities of any selling Holder that such
Holder shall furnish to the Company such information regarding itself, the
Registrable Securities held by it, and the intended method of disposition of
such securities as shall be required to effect the registration of such Holder’s
Registrable Securities.

1.5               Expenses of Registration. All expenses other than underwriting
discounts and commissions incurred in connection with registrations, filings or
qualifications pursuant to Section 1.2, including (without limitation) all
registration, filing and qualification fees, printers’ and accounting fees, fees
and disbursements of counsel for the Company, shall be borne by the Company;
provided that the Company shall not be required to pay for the fees and
disbursements of counsel for the selling Holders except for up to $15,000 in
fees to one counsel reasonably acceptable to all the Investors.

1.6               Delay of Registration. No Holder shall have any right to
obtain or seek an injunction restraining or otherwise delaying any such
registration as the result of any controversy that might arise with respect to
the interpretation or implementation of this Section 1.

1.7               Indemnification. In the event any Registrable Securities are
included in a registration statement under this Section 1:

(a)                To the extent permitted by law, the Company will indemnify
and hold harmless each Holder, any underwriter (as defined in the Securities
Act) for such Holder, each officer, director, member, agent and Affiliated Fund
of such Holder, and each person, if any, who controls such Holder or underwriter
within the meaning of the Securities Act or the Exchange Act, against any
losses, claims, damages, or liabilities (joint or several) to which they may
become subject under the Securities Act, the Exchange Act or other federal or
state law, insofar as such losses, claims, damages, or liabilities (or actions
in respect thereof) arise out of or are based upon any of the following
statements, omissions or violations (collectively a “Violation”): (i) any untrue
statement or alleged untrue statement of a material fact contained in such
registration statement, including any preliminary prospectus or final prospectus
contained therein or any amendments or supplements thereto, (ii) the omission or
alleged omission to state therein a material fact required to be stated therein,
or necessary to make the statements therein not misleading, or (iii) any
violation or alleged violation by the Company of the Securities Act, the
Exchange Act, any state securities law or any rule or regulation promulgated
under the Securities Act, the Exchange Act or any state securities law; and the
Company will pay to each such Holder, underwriter or controlling person, as
incurred, any legal or other expenses reasonably incurred by them in connection
with investigating or defending any such loss, claim, damage, liability, or
action; provided, however, that the indemnity agreement contained in this
subsection 1.7(a) shall not apply to amounts paid in settlement of any such
loss, claim, damage, liability, or action if such settlement is effected without
the consent of the Company (which consent shall not be unreasonably withheld),
nor shall the Company be liable to any Holder, underwriter, officer, director,
member, agent, Affiliated Fund or controlling person for any such loss, claim,
damage, liability, or action to the extent that it arises out of or is based
upon a Violation which occurs in reliance upon and in conformity with written
information furnished expressly for use in connection with such registration by
any such Holder, underwriter, officer, director, member, agent, Affiliated Fund
or controlling person.

 

 

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(b)               To the extent permitted by law, each selling Holder will
indemnify and hold harmless the Company, each of its directors, each of its
officers who has signed the registration statement, each person, if any, who
controls the Company within the meaning of the Securities Act, any underwriter,
any other Holder selling securities in such registration statement and any
controlling person of any such underwriter or other Holder, against any losses,
claims, damages, or liabilities (joint or several) to which any of the foregoing
persons may become subject, under the Securities Act, the Exchange Act or other
federal or state law, insofar as such losses, claims, damages, or liabilities
(or actions in respect thereto) arise out of or are based upon any Violation, in
each case to the extent (and only to the extent) that such Violation occurs in
reliance upon and in conformity with written information furnished by such
Holder expressly for use in connection with such registration; and each such
Holder will pay, as incurred, any legal or other expenses reasonably incurred by
any person intended to be indemnified pursuant to this subsection 1.7(b), in
connection with investigating or defending any such loss, claim, damage,
liability, or action; provided, however, that the indemnity agreement contained
in this subsection 1.7(b) shall not apply to amounts paid in settlement of any
such loss, claim, damage, liability or action if such settlement is effected
without the consent of the Holder, which consent shall not be unreasonably
withheld; provided, that in no event shall any indemnity under this
subsection 1.7(b) exceed the net proceeds from the offering received by such
Holder, except in the case of willful fraud by such Holder.

(c)                Promptly after receipt by an indemnified party under this
Section 1.7 of notice of the commencement of any action (including any
governmental action), such indemnified party will, if a claim in respect thereof
is to be made against any indemnifying party under this Section 1.7, deliver to
the indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties; provided, however, that an indemnified party
(together with all other indemnified parties which may be represented without
conflict by one counsel) shall have the right to retain one separate counsel,
with the reasonable fees and expenses to be paid by the indemnifying party, if
representation of such indemnified party by the counsel retained by the
indemnifying party would be inappropriate due to actual or potential differing
interests between such indemnified party and any other party represented by such
counsel in such proceeding. The failure to deliver written notice to the
indemnifying party within a reasonable time of the commencement of any such
action, if prejudicial to its ability to defend such action, shall relieve such
indemnifying party of any liability to the indemnified party under this
Section 1.7, but the omission so to deliver written notice to the indemnifying
party will not relieve it of any liability that it may have to any indemnified
party otherwise than under this Section 1.7.

(d)               If the indemnification provided for in this Section 1.7 is
held by a court of competent jurisdiction to be unavailable to an indemnified
party with respect to any loss, liability, claim, damage or expense referred to
therein, then the indemnifying party, in lieu of indemnifying such indemnified
party hereunder, shall contribute to the amount paid or payable by such
indemnified party as a result of such loss, liability, claim, damage, or expense
in such proportion as is appropriate to reflect the relative fault of the
indemnifying party on the one hand and of the indemnified party on the other in
connection with the statements or omissions that resulted in such loss,
liability, claim, damage or expense as well as any other relevant equitable
considerations; provided, that in no event shall any contribution by a Holder
under this subsection 1.7(d) exceed the net proceeds from the offering received
by such Holder, except in the case of willful fraud by such Holder. The relative
fault of the indemnifying party and of the indemnified party shall be determined
by reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission or alleged omission to state a
material fact relates to information supplied by the indemnifying party or by
the

 

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indemnified party and the parties’ relative intent, knowledge, access to
information, and opportunity to correct or prevent such statement or omission.

(e)                The obligations of the Company and Holders under this
Section 1.7 shall survive the completion of any registration of Registrable
Securities in a registration statement under this Section 1, and otherwise.

1.8

Reports Under the Exchange Act.

(a)              With a view to making available to the Holders the benefits of
Rule 144 promulgated under the Securities Act and any other rule or regulation
of the SEC that may at any time permit a Holder to sell securities of the
Company to the public without registration or pursuant to a registration on
Form S-1 or S-2, the Company agrees, subject to the limitations of Section
1.8(b) below, to:

(i)              make and keep public information available, as those terms are
understood and defined in SEC Rule 144, so long as the Company remains subject
to the periodic reporting requirements under Sections 13 or 15(d) of the
Exchange Act;

(ii)             take such action, including the voluntary registration of its
Common Stock under Section 12 of the Exchange Act, as is necessary to enable the
Holders to utilize Form S-1 or S-2 for the sale of their Registrable Securities;

(iii)           file with the SEC in a timely manner all reports and other
documents required of the Company under the Securities Act and the Exchange Act;
and

(iv)            furnish to any Holder upon request, so long as the Holder owns
any Registrable Securities, (A) a written statement by the Company that it has
complied with the reporting requirements of SEC Rule 144, the Securities Act and
the Exchange Act, or that it qualifies as a registrant whose securities may be
resold pursuant to Form S-1 or S-2, (B) a copy of the most recent annual or
quarterly report of the Company and such other reports and documents so filed by
the Company, and (C) such other information as may be reasonably requested in
availing any Holder of any rule or regulation of the SEC that permits the
selling of any such securities without registration or pursuant to such form.

(b)             Notwithstanding any of the foregoing in Section 1.8(a) above,
the Company and the Investors acknowledge and agree that, as of the date of this
Agreement, the Company does not have an independent registered public accounting
firm retained and is therefore currently unable to comply with the periodic
reporting requirements of the Exchange Act. Within forty-five (45) days of the
date that the Company retains a new independent registered public accounting
firm, the Company agrees to file any interim reports that are late as a result
of the foregoing. The agreements of the Company in Section 1.8(a) are explicitly
limited by this Section 1.8(b).

1.9               Assignment of Registration Rights. The rights to cause the
Company to register Registrable Securities pursuant to this Section 1 may be
assigned (but only with all related obligations) by a Holder to a transferee or
assignee (i) of at least one million (1,000,000) shares of such securities
(subject to adjustment for stock splits, stock dividends, reclassification or
the like) (or if the transferring Holder owns less than one million (1,000,000)
shares of such securities, then all Registrable Securities held by the
transferring Holder), (ii) that is a subsidiary, parent, partner, limited
partner, retired partner, member, retired member or stockholder of a Holder, or
(iii) that is an Affiliated Fund, provided that the Company is, within a
reasonable time after such transfer, furnished with written notice of the

 

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name and address of such transferee or assignee and the securities with respect
to which such registration rights are being assigned; and provided, further,
that such assignment shall be effective only if the transferee agrees to be
bound by this Agreement and immediately following such transfer the further
disposition of such securities by the transferee or assignee is restricted under
the Securities Act. For the purposes of determining the number of shares of
Registrable Securities held by a transferee or assignee, the holdings of
transferees and assignees of (x) a partnership who are partners or retired
partners of such partnership or (y) a limited liability company who are members
or retired members of such limited liability company (including Immediate Family
Members of such partners or members who acquire Registrable Securities by gift,
will or intestate succession) shall be aggregated together and with the
partnership or limited liability company; provided that all assignees and
transferees who would not qualify individually for assignment of registration
rights shall have a single attorney-in-fact for the purpose of exercising any
rights, receiving notices or taking any action under Section 1.

1.10             Termination of Registration Rights. No Holder shall be entitled
to exercise any right provided for in this Section 1 after the earlier of
(i) the second (2nd) anniversary of the effective date of the registration
statement filed pursuant to this Section 1, (ii) at such time as Rule 144 or
another similar exemption under the Securities Act is available for the sale of
all of the Holders' shares during a three-month period without registration, or
(iii) upon termination of the entire Agreement, as provided in Section 4.1.

2.

Covenants of the Company.

2.1               Nomination of Sunra Director. Subject to the terms and
conditions specified in Section 2.2, the Company hereby agrees to nominate to
the Company’s Board of Directors at any meeting of the shareholders of the
Company at which members of the Board of Directors of the Company are to be
elected, or whenever members of the Board of Directors are to be elected by
written consent, or in any proxy statement or similar communication to the
shareholders of the Company relating to the election of members of the Board of
Directors, the individual nominated by Sunra.

2.2               Termination of Covenants. The covenants set forth in
Section 2.1 shall terminate and be of no further force or effect (i) immediately
following the date Sunra ceases to hold more than five percent (5%) of the fully
diluted capitalization of the Company (assuming full conversion and exercise of
all convertible or exercisable securities and including shares of Common Stock
issuable to employees, consultants or directors pursuant to a stock option plan,
restricted stock plan, or other stock plan approved by the Board of Directors),
or (ii) upon termination of the entire Agreement as provided in Section 4.1.

3.  Voting Agreement. Each of the Investors, Orca Bay, Madrona and Matinicus
shall vote or act with respect to any shares of the Company’s capital stock or
other securities then held by them or their respective affiliates at or in
connection with the Company’s 2005 annual shareholder meeting so as to approve
(i) the elimination of the provisions in the Company’s Bylaws and Restated
Articles providing for a staggered Board of Directors (ii) to approve the
amendment of the Company’s Bylaws and Restated Articles to provide for
cumulative voting for members of the Company’s Board of Directors, and (iii) to
approve an increase in the number of shares authorized for grant under the
Company’s equity incentive plan.

 

 

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4.

Miscellaneous.

4.1               Termination. This Agreement shall terminate, and have no
further force and effect, when the Company shall consummate a transaction or
series of related transactions deemed to be a liquidation, dissolution or
winding up of the Company pursuant to the Restated Articles.

4.2               Entire Agreement. Except for that certain Investor Rights
Agreement dated as of February 14, 2000 by and among the Company and certain
parties listed on Exhibit A thereto (as amended to date, the “2000 IRA”), this
Agreement constitutes the entire agreement between the parties hereto pertaining
to the subject matter hereof, and any and all other written or oral agreements
relating to the subject matter hereof existing between the parties hereto, other
than the 2000 IRA, are expressly canceled.

4.3               Successors and Assigns. Except as otherwise provided in this
Agreement, the terms and conditions of this Agreement shall inure to the benefit
of and be binding upon the respective permitted successors and assigns of the
parties (including the permitted transferees of any of the Warrants or the New
Notes, or any Common Stock issued upon conversion thereof). Nothing in this
Agreement, express or implied, is intended to confer upon any party other than
the parties hereto or their respective successors and assigns any rights,
remedies, obligations, or liabilities under or by reason of this Agreement,
except as expressly provided in this Agreement.

4.4               Amendments and Waivers. Any term of this Agreement may be
amended or waived only with the written consent of the Company and the holders
of a majority of the Registrable Securities then outstanding. Notwithstanding
the foregoing, this Agreement may be amended without the written consent of any
other party for the sole purpose of including additional purchasers of New Notes
and Warrants under the New Purchase Agreement, as may be amended from time to
time, as “Investors” and “Holders.” Any amendment or waiver effected in
accordance with this paragraph shall be binding upon each party to the
Agreement, whether or not such party has signed such amendment or waiver, each
future holder of all such Registrable Securities, and the Company; provided,
that if such amendment materially and adversely affects the rights of Sunra as
set forth in Section 2.1, such amendment will require the approval of Sunra;
provided further, however, that in the event that such amendment or waiver
adversely affects the obligations and/or rights of an Investor in a different
manner than the other Investors, such amendment or waiver shall also require the
written consent of such Investor.

4.5               Notices. Unless otherwise provided, any notice required or
permitted by this Agreement shall be in writing and shall be deemed sufficient
upon delivery, when delivered personally or by overnight courier or sent by
facsimile, or 48 hours after being deposited in the U.S. mail, as certified or
registered mail, with postage prepaid, and addressed to the party to be notified
at such party’s address or facsimile number as set forth on the signature pages
hereto or as subsequently modified by written notice.

4.6               Severability. If one or more provisions of this Agreement are
held to be unenforceable under applicable law, such provision shall be excluded
from this Agreement, and the balance of the Agreement shall be interpreted as if
such provision were so excluded and shall be enforceable in accordance with its
terms.

4.7               Governing Law. This Agreement and all acts and transactions
pursuant hereto shall be governed, construed and interpreted in accordance with
the laws of the State of Washington, without giving effect to principles of
conflicts of laws.

 

 

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4.8               Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.

4.9               Titles and Subtitles. The titles and subtitles used in this
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.

4.10             Aggregation of Stock and Principal Balances. All shares of the
Common Stock issued pursuant to the New Purchase Agreement or issued or issuable
upon conversion of the Series A Preferred, the Series B Debentures and the New
Notes held or hereafter acquired by affiliated entities or persons shall be
aggregated together for the purpose of determining the availability of any
rights under this Agreement.

4.11             No Revocation. The voting agreements contained herein are
coupled with an interest and may not be revoked during the term of this
Agreement.

[Remainder of This Page Intentionally Left Blank]

 

-10-

 

 

 

The parties have executed this Investor Rights Agreement as of the date first
above written.

 

COMPANY:

PHOTOWORKS, INC.

a Washington corporation

 

By: /s/ Philippe Sanchez

Name: Philippe Sanchez

Title: President and Chief Executive Officer

Address:

PhotoWorks, Inc.

1260 16th Avenue West

Seattle, Washington 98119

Attn: Chief Executive Officer

Facsimile:

(206) 284-8732

 

SIGNATURE PAGE TO PHOTOWORKS, INC. INVESTOR RIGHTS AGREEMENT

 

 

 

INVESTORS:

SUNRA CAPITAL HOLDINGS, LTD.

 

By:

/s/ Joseph Waechter

 

Name:

Joseph Waechter

 

Title:

President

 

Address:

50 California Street

 

 

Suite 1500

 

 

San Francisco, CA 94111

 

 

Facsimile: 425-258-0982

 

 

SIGNATURE PAGE TO PHOTOWORKS, INC. INVESTOR RIGHTS AGREEMENT

 

 

 

ORCA BAY CAPITAL CORPORATION

 

By: /s/ Stanley B. MaCammon_______

Name: Stanley B. MaCammon

 

Title: President

 

Address:

PO Box 21749

 

 

Seattle, WA 98111

 

THE TAHOMA FUND, L.L.C.

 

By: /s/ Ross K. Chapin____

Name: Ross K. Chapin

 

Title: Orca Bay Partners, Managing Member

Address:

1301 First Avenue, Suite 201

 

Seattle, WA 98101

 

 

Facsimile:

206-689-2407

 

 

SIGNATURE PAGE TO PHOTOWORKS, INC. INVESTOR RIGHTS AGREEMENT

 

 

 

MADRONA VENTURE FUND I-A, L.P.

 

By: /s/ Paul Goodrich

Name: Paul Goodrich

 

Title: Managing Director of Madrona Investment

 

Partners LLC, Its General Partner

 

 

Address:

1000 2nd Ave #3700

 

Seattle, WA 98104

 

Facsimile:

206-674-8703

 

 

MADRONA VENTURE FUND I-B, L.P.

 

By: /s/ Paul Goodrich

Name: Paul Goodrich

 

Title: Managing Director of Madrona Investment

 

Partner LLC, Its General Partner

 

 

Address:

1000 2nd Ave #3700

 

Seattle, WA 98104

 

Facsimile:

206-674-8703

 

 

MADRONA MANAGING DIRECTOR FUND, LLC

 

By: /s/ Paul Goodrich

Name: Paul Goodrich

 

Title: Managing Director

 

Address:

1000 2nd Ave #3700

 

Seattle, WA 98104

 

Facsimile:

206-674-8703

 

 

SIGNATURE PAGE TO PHOTOWORKS, INC. INVESTOR RIGHTS AGREEMENT

 

 

 

MATINICUS LP

 

By: /s/ Edward Holl

Name: Edward Holl

 

Title: Managing Member

Address:

51 West 95th Street

 

 

New York, NY 10025

 

Facsimile:

415-482-7837

 

 

SIGNATURE PAGE TO PHOTOWORKS, INC. INVESTOR RIGHTS AGREEMENT

 

 

 

EXHIBIT A

 

INVESTORS

 

Name

Source of Shares

No. of Shares of Registrable Securities*

SUNRA CAPITAL HOLDINGS, LTD.

New Note

18,552,875

 

Warrant

1,904,762

_________

*Assumes conversion of outstanding principal balance and accrued interest as of
the date hereof.

 

 

A1