Exhibit 10.39
CYBERONICS, INC,
NOTICE OF STOCK OPTION GRANT
Shawn Lunney
     You have been granted an option (the “Option”) to purchase Common Stock of
Cyberonics, Inc (the “Company”) as follows:

             
 
  Date of Grant:       November 1, 1996
 
           
 
  Exercise Price:       $3,0625 per share
 
           
 
  Number of Shares Subject to Option:       104,750 
 
           
 
  Type of Option:       ___ Incentive Stock Option
 
          ___ Nonstatutory Stock Option
 
           
 
  Vesting Start Date.       November 1,1996
 
           
 
  Expiration Date:       Tenth Anniversary of Date of Grant
 
           
 
  Exercise Schedule:       The Option shall be exercisable at any time prior to
the Expiration Date or earlier termination as to shares which are vested in
accordance with the Vesting Schedule below.

     Vesting Schedule: For so long as the Optionee shall continue to be a
Service Provider, this Option shall vest cumulatively as follows:
     A. 6/48ths of the Shares subject to the Option shall vest six months
following the Vesting Start Date set forth above, and l/48th of the Shares
subject to the Option shall vest on the first day of each month thereafter.
     B. In addition to the foregoing, vesting of this Option will accelerate,
and this Option will become exercisable, as follows:
          (i) in the event that the Food and Drug Administration (“FDA”) Panel
recommends approval of the Company’s pending Pre-Market Approval (“PMA”)
Application for indications and with labeling requirements substantially as
requested by the Company, then twenty-five percent (25%) of the Shares subject
to this Option shall automatically vest and become exercisable;
          (ii) in the event that the FDA grants final approval for the Company’s
pending Pre-Market Approval (“PMA”) Application for indications and with
labeling requirements substantially

 

--------------------------------------------------------------------------------

 

as requested by the Company, then twenty-five percent (25%) of the Shares
subject to this Option shall automatically vest and become exercisable;
          (iii) For each month in calendar 1997 in which total net sales exceed
Five Hundred Thousand Dollars ($500,000), two percent (2%) of the Shares subject
to this Option shall automatically vest and become exercisable; and
          (iv) For each month in calendar 1998 in which total net sales exceed
One Million Dollars ($1,000,000), two percent (2%) of the Shares subject to this
Option shall automatically vest and become exercisable.
     With respect to paragraphs (i) and (ii) above, any question as to whether
the indications covered in a PMA or labelling requirements imposed by the FDA
are “substantially as requested by the Company” shall be determined by the Board
of Directors of the Company, whose determination will be final and binding on
the Company and the Optionee.
     Termination Period. Option may be exercised for up to 90 days after
termination of employment or consulting relationship except as set out in
Sections 7 and 8 of the Stock Option Agreement (but in no event later than the
Expiration Date).
     OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO THE
OPTION HEREOF IS EARNED ONLY BY CONTINUING CONSULTANCY OR EMPLOYMENT AT THE WILL
OF THE COMPANY (NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED THIS OPTION OR
ACQUIRING SHARES HEREUNDER) OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT
NOTHING IN THIS AGREEMENT, NOR IN THE COMPANY’S STOCK OPTION PLAN WHICH IS
INCORPORATED HEREIN BY REFERENCE, SHALL CONFER UPON OPTIONEE ANY RIGHT WITH
RESPECT TO CONTINUATION OF EMPLOYMENT OR CONSULTANCY BY THE COMPANY, NOR SHALL
IT INTERFERE IN ANY WAY WITH OPTIONEE’S OR THE COMPANY’S RIGHT TO TERMINATE
OPTIONEE’S EMPLOYMENT OR CONSULTANCY RELATIONSHIP AT ANY TIME, WITH OR WITHOUT
CAUSE.
     By your signature and the signature of the Company’s representative below,
you and the Company agree that this option is granted under and governed by the
terms and conditions of the Company’s 1988 Incentive Stock Plan and the Stock
Option Agreement, all of which are attached and made a part of this document.

                      OPTIONEE:       Cyberonics, Inc.    
 
                    /s/ Shawn Lunney       By:   /s/ Robert P. Cummins          
            Shawn Lunney                
 
                   
Date:
  1/21/97       Title:   CEO    
 
                   
 
          Date:   1/21/97    

-2-

--------------------------------------------------------------------------------

 

Cyberonics, Inc.
STOCK OPTION AGREEMENT
     1. Grant of Option. Cyberonics, Inc., a Delaware corporation (the
“Company”), hereby grants to the Optionee named in the Notice of Grant (the
“Optionee”), an option (the “Option”) to purchase a total number of shares of
Common Stock (the “Shares”) set forth in the Notice of Grant, at the exercise
price per share set forth in the Notice of Grant (the “Exercise Price”) subject
to the terms, definitions and provisions of the Company’s 1988 Incentive Stock
Plan (the “Plan”) which is incorporated herein by reference Unless otherwise
defined herein, the terms defined in the Plan shall have the same defined
meanings in this Option.
          If designated an Incentive Stock Option, this Option is intended to
qualify as an Incentive Stock Option as defined in Section 422 of the Code.
     2. Adjustments for Stock Splits,Recapitalization.
          (a) The Exercise Price and number of Shares subject to this Option (as
set forth on the Notice of Grant) shall be subject to adjustment as follows: If
the Company at any time (i) sub-divides (by any stock split, stock dividend or
otherwise) the Common Stock into a greater number of shares, the Exercise Price
in effect immediately prior to such subdivision will be proportionately reduced
and the number of Shares issuable shall be proportionately increased, and
(ii) if the Company at any time combines (by reverse stock split or otherwise)
the Common Stock into a smaller number of shares, the Exercise Price in effect
immediately prior to such combination will be proportionately increased and the
number of Shares issuable shall be proportionately decreased.
          (b) If at any time while this Option is outstanding there shall be any
reclassification or conversion of the Common Stock into another class of
securities (other than a subdivision or combination of shares provided for in
the preceding paragraph), the Optionee shall thereafter be entitled to receive,
during the term hereof and upon payment of the Exercise Price, the number of
shares of stock to which a holder of the Common Stock would have been entitled
upon such reclassification or conversion had the Optionee exercised this Option
immediately prior to such reclassification or conversion,
     3. Exercise of Option. This Option shall be exercisable during its term in
accordance with the Exercise Schedule set out in the Notice of Grant and with
the provisions of Section 8(b) of the Plan as follows.
          (a) Right to Exercise
               (i) This Option may not be exercised for a fraction of a share.
               (ii) In the event of Optionee’s death, disability or other
termination of employment, the exercisability of the Option is governed by
Sections 6, 7 and 8 below

 

--------------------------------------------------------------------------------

 

               (iii) In no event may this Option be exercised after the
Expiration Date of this Option as set forth in the Notice of Grant.
          (b) Method of Exercise. This Option shall be exercisable by execution
and delivery of the Exercise Notice and Stock Purchase Agreement (the “Exercise
Notice”) in the form attached as Exhibit A Such written notice shall be signed
by the Optionee and shall be delivered in person or by certified mail to the
Secretary of the Company. The written notice shall be accompanied by payment of
the Exercise Price. This Option shall be deemed to be exercised upon receipt by
the Company of such written notice accompanied by the Exercise Price.
     4. Method of Payment. Payment of the Exercise Price shall be by:
          (i) cash; or
          (ii) check, or
          (iii) delivery of a properly executed exercise notice together with
such other documentation as the Administrator and the broker, if applicable,
shall require to effect an exercise of the Option and immediate sale of the
shares through a broker which provides for delivery to the Company from the sale
or loan proceeds of the exercise price; or
          (iv) any combination of the foregoing methods of payment.
     5. Restrictions on Exercise. This Option may not be exercised if the
issuance of such Shares upon such exercise or the method of payment of
consideration for such shares would constitute a violation of any applicable
federal or state securities or other law or regulation, including the
requirements of any stock exchange upon which the Shares may then be listed and
including any rule under Part 207 of Title 12 of the Code of Federal Regulations
(“Regulation G”) as promulgated by the Federal Reserve Board. As a condition to
the exercise of this Option, the Company may require Optionee to make any
representation and warranty to the Company as may be required by any applicable
law or regulation.
     6. Termination of Relationship. In the event of termination of Optionee’s
consulting relationship or Continuous Status as an Employee, Optionee may, to
the extent otherwise so entitled at the date of such termination (the
“Termination Date”), exercise this Option during the Termination Period set out
in the Notice of Grant. To the extent that Optionee was not entitled to exercise
this Option at the date of such termination, or if Optionee does not exercise
this Option within the time specified herein, the Option shall terminate.
     7. Disability of Optionee. Notwithstanding the provisions of Section 6
above, in the event of termination of an Optionee’s consulting relationship or
Continuous Status as an Employee as a result of total and permanent disability
(as defined in Section 22(e)(3) of the Code), Optionee may, but only within
twelve (12) months from the date of termination of employment (but in no event
later than the Expiration Date of this Option as set forth in the Notice of
Grant), exercise the Option to the extent otherwise so entitled at the date of
such termination To the extent that Optionee was not entitled to exercise the
Option at the date of termination, or if Optionee does not exercise such

-2-

--------------------------------------------------------------------------------

 

Option (to the extent otherwise so entitled) within the time specified herein,
the Option, shall terminate.
     8. Death of Optionee. In the event of the death of Optionee during the term
of this Option and while an Employee or Consultant or within ninety (90) days
following termination of Optionee’s employment/consultancy relationship with the
Company, this Option may be exercised at any time within twelve (12) months
following the date of death (but in no event later than the Expiration Date), by
Optionee’s estate or by a person who acquired the right to exercise the Option
by bequest or inheritance, but only to the extent the Optionee could exercise
the Option at the date of death.
     9. Non-Transferability of Option. This Option may not be transferred in any
manner otherwise than by will or by the laws of descent or distribution and may
be exercised during the lifetime of Optionee only by him. The terms of this
Option shall be binding upon the executors, administrators, heirs, successors
and assigns of the Optionee.
     10. Term of Option. This Option may be exercised only prior to the
Expiration Date set out in the Notice of Grant, and may be exercised during such
term only in accordance with the Plan and the terms of this Option. The
limitations set out in Section 7 of the Plan regarding Options designated as
Incentive Stock Options and Options granted to more than ten percent (10%)
shareholders shall apply to this Option.
     11. Tax Consequences. Set forth below is a brief summary as of the date of
this Option of some of the federal tax consequences of exercise of this Option
and disposition of the Shares. THIS SUMMARY IS NECESSARILY INCOMPLETE, AND THE
TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE OPTIONEE SHOULD CONSULT A TAX
ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE SHARES.
          (a) Exercise of ISO. If this Option qualifies as an ISO, there will be
no regular federal income tax liability upon the exercise of the Option,
although the excess, if any, of the fair market value of the Shares on the date
of exercise over the Exercise Price will be treated as an adjustment to the
alternative minimum tax for federal tax purposes and may subject the Optionee to
the alternative minimum tax in the year of exercise.
          (b) Exercise of Nonqualified Stock Option. If this Option does not
qualify as an ISO, there may be a regular federal income tax liability upon the
exercise of the Option. The Optionee will be treated as having received
compensation income (taxable at ordinary income tax rates) equal to the excess,
if any, of the fair market value of the Shares on the date of exercise over the
Exercise Price. If Optionee is an employee, the Company will be required to
withhold from Optionee’s compensation or collect from Optionee and pay to the
applicable taxing authorities an amount equal to a percentage of this
compensation income at the time of exercise.
          (c) Disposition of Shares. In the case of an NSO, if Shares are held
for at least one year, any gain realized on disposition of the Shares will be
treated as long-term capital gain for federal income tax purposes. In the case
of an ISO, if Shares transferred pursuant to the Option are held for at least
one year after exercise and are disposed of at least two years after the Date of
Grant,

-3-

--------------------------------------------------------------------------------

 

any gain realized on disposition of the Shares will also be treated as long-term
capital gain for federal and income tax purposes If Shares purchased under an
ISO are disposed of within such one-year period or within two years after the
Date of Grant, any gain realized on such disposition will be treated as
compensation income (taxable at ordinary income rates) to the extent of the
excess, if any, of the fair market value of the Shares on the date of exercise
over the Exercise Price.
          (d) Notice of Disqualifying Disposition of ISO Shares. If this Option
is an ISO, and if Optionee sells or otherwise disposes of any of the Shares
acquired pursuant to this Option on or before the later of (1) the date two
years after the Date of Grant, or (2) the date one year after exercise of this
Option, the Optionee shall immediately notify the Company in writing of such
disposition. Optionee agrees that Optionee may be subject to income tax
withholding by the Company on the compensation income recognized by the Optionee
from the early disposition by payment in cash or out of the current earnings
paid to the Optionee.
     12. Change of Control. In the event of a Change of Control (as defined
below), this Option shall be exercisable as in accordance with the following
notwithstanding anything to the contrary set forth elsewhere herein:
          (a) In the event that Options under the Plan are not Assumed, as
defined below, by the successor corporation (or the parent or subsidiary of such
successor), this Option shall be exercisable as to all shares, whether or not
vested as provided in the Notice of Grant attached hereto.
          (b) In the event of a Change of Control in which (i) the Option is
Assumed (or the parent or a subsidiary of the successor) this option shall be
exercisable as to a number of shares equal to 2.5 times the number of shares
actually vested as of the date of closing of the Change of Control (but in no
event as to a number of shares greater than the number of shares set forth on
the Notice of Grant)
          (c) For purposes of this Section 12, “Change of Control” shall mean a
corporate reorganization of the Company which results in the then current
shareholders of the Company owning less than 50% of the equity securities of the
surviving company, or the sale of all or substantially all of the assets of the
Company.
          (d) For purposes of this Section 12, an Option granted under the Plan
shall be deemed to be Assumed if, following a Change of Control, the Option
confers the right to purchase, for each Share subject to the Option immediately
prior to the Change of Control, the consideration (whether stock, cash or other
securities or property) received in the Change of Control by holders of Common
Stock for each Share held on the effective date of the transaction (and if such
holders were offered a choice of consideration, the type of consideration chosen
by the holders of a majority of the outstanding Shares); provided, however, that
if such consideration received in the Change of Control was not solely Common
Stock of the successor corporation or its parent, the Board may, with the
consent of the successor corporation and the participant, provide for the
consideration to be received upon exercise of the Option to be solely Common
Stock of the successor corporation or its parent equal in Fair Market Value to
the per share consideration received by holders of Common Stock in the Change of
Control.

-4-

--------------------------------------------------------------------------------

 

     13. Certain Business Combinations. In the event it is determined by the
Board of Directors, upon receipt of a written opinion of the Company’s
independent public accountants, that the enforcement of any Section or
subsection of this Agreement, including, but not limited to, Section 12 hereof,
which allows for the acceleration of vesting of options to purchase shares of
the Company’s common stock in connection with a Change of Control, would
preclude accounting for any proposed business combination of the corporation
involving a Change of Control as a pooling of interests, and the Board otherwise
desires to approve such a proposed business transaction which requires as a
condition to the closing of such transaction that it be accounted for as a
pooling of interests, that any such Section or subsection of this Agreement
shall be null and void.
     OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO THE
OPTION HEREOF IS EARNED ONLY BY CONTINUING CONSULTANCY OR EMPLOYMENT AT THE WILL
OF THE COMPANY (NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED THIS OPTION OR
ACQUIRING SHARES HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT
NOTHING IN THIS AGREEMENT, NOR IN THE COMPANY’S STOCK OPTION PLAN WHICH IS
INCORPORATED HEREIN BY REFERENCE, SHALL CONFER UPON OPTIONEE ANY RIGHT WITH
RESPECT TO CONTINUATION OF EMPLOYMENT OR CONSULTANCY BY THE COMPANY, NOR SHALL
IT INTERFERE IN ANY WAY WITH HIS OR HER RIGHT OR THE COMPANY’S RIGHT TO
TERMINATE HIS OR HER EMPLOYMENT OR CONSULTANCY AT ANY TIME, WITH OR WITHOUT
CAUSE.

-5-

--------------------------------------------------------------------------------

 

EXHIBIT A
EXERCISE NOTICE AND STOCK PURCHASE AGREEMENT
Cyberonics, Inc.
17448 Highway 3, Suite 100
Webster, Texas 77598
Attention: Secretary
     1. Exercise of Option. Effective as of today,                             
                       , 19      , the undersigned (“Optionee”) hereby elects to
exercise Optionee’s option to purchase                         shares of the
Common Stock (the “Shares”) of Cyberonics, Inc. (the “Company”) under and
pursuant to the Company’s 1988 Incentive Stock Plan, as amended (the “Plan”) and
the [       ] Incentive [      ] Nonqualified Stock Option Agreement dated
                      (the “Option Agreement”).
     2. Representations of Optionee.
          (a) Optionee acknowledges that Optionee has received, read and
understood the Plan and the Option Agreement and agrees to abide by and be bound
by their terms and conditions.
          (b) Optionee understands that Optionee may suffer adverse tax
consequences as a result of Optionee’s purchase or disposition of the Shares.
Optionee represents that Optionee has consulted with any tax consultants
Optionee deems advisable in connection with the purchase or disposition of the
Shares and that Optionee is not relying on the Company for any tax advice.
     3. Rights as Shareholder. Subject to the terms and conditions of this
Agreement, Optionee shall have all of the rights of a shareholder of the Company
with respect to the Shares from and after the date that Optionee delivers full
payment of the Exercise Price until such time as Optionee disposes of the
Shares.
     4. Successors and Assigns. The Company may assign any of its rights under
this Agreement to single or multiple assignees, and this Agreement shall inure
to the benefit of the successors and assigns of the Company. Subject to the
restrictions on transfer herein set forth, this Agreement shall be binding upon
Optionee and his or her heirs, executors, administrators, successors and
assigns.
     5. Arbitration. Any dispute or claim arising out of or in connection with
this Agreement shall be settled by binding arbitration. Any such arbitration
shall be conducted in accordance with the Rules of Conciliation and Arbitration
of the American Arbitration Association and shall take place in Webster, Texas
The arbitration shall be conducted by one arbitrator; provided that if the
parties cannot agree on a single arbitrator, then the arbitration shall be
conducted by a panel of three arbitrators, one selected by each party and the
third selected by the other two arbitrators. The determination of the
arbitrator(s) shall be final and binding upon the parties.
     6. Governing Law; Severability. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE EXCLUDING THAT
BODY OF LAW PERTAINING TO CONFLICTS OF

 

--------------------------------------------------------------------------------

 

LAW. Should any provision of this Agreement be determined by a court of law to
be illegal or unenforceable, the other provisions shall nevertheless remain
effective and shall remain enforceable
     7. Notices. Any notice required or permitted hereunder shall be given in
writing and shall be deemed effectively given upon personal delivery or upon
deposit in the United States mail by certified mail, with postage and Fees
prepaid, addressed to the other party at its address as shown below beneath its
signature, or to such other address as such party may designate in writing from
time to time to the other party
     8. Further Instruments. The parties agree to execute such further
instruments and to take such further action as may be reasonably necessary to
carry out the purposes and intent of this Agreement.
     9. Delivery of Payment. Optionee herewith delivers to the Company the full
Exercise Price for the Shares.
     10. Entire Agreement. The Plan and Notice of Grant/Option Agreement are
incorporated herein by reference. This Agreement, the Plan and the Notice of
Grant/Option Agreement constitute the entire agreement of the parties and
supersede in their entirety ail prior undertakings and agreements of the company
and optionee with respect to the subject matter hereof.

                  Submitted by:       Accepted by:
 
                OPTIONEE:       Cyberonics, Inc
 
               
 
      By:        
 
Shawn Lunney
         
 
   
 
      Its:        
 
               
 
                Address:       Address:
 
                        17448 Highway 3, Suite 100                          
Webster, Texas 77598
 
               

-2-