Exhibit 10.4

August 10, 2010

Dr. Kent A. Murphy, Ph.D.

c/o Luna Innovations Incorporated

1 Riverside Circle, Suite 400

Roanoke, VA 24016

Dear Kent:

Reference is made to that certain Amended and Restated Investor Rights
Agreement, dated as of January 13, 2010 (the “Rights Agreement”), by and among
Luna Innovations Incorporated, a Delaware corporation (the “Company”), Carilion
Clinic and certain other stockholders of the Company, including you. The purpose
of this side letter agreement (this “Letter Agreement”) is to confirm our mutual
agreement and understanding with respect to your registration rights under the
Rights Agreement following the cessation of your role as the Chief Executive
Officer of the Company. Specifically, the Company and you (hereinafter, “Dr.
Murphy”) agree as follows:

1. All capitalized terms not defined in this Letter Agreement shall have the
respective meanings ascribed to them in the Rights Agreement.

2. This Letter Agreement is effective as of the date hereof.

3. Beginning the date hereof, and through the period ending at the close of
business on December 31, 2011 (the “Restricted Period”), Dr. Murphy hereby
agrees that he shall not (a) make any permitted transfers of Registrable
Securities in accordance with Rule 144 under the Securities Act as otherwise
permitted under Section 2.8(b) of the Rights Agreement, (b) exercise any of his
rights as an “Initiating Holder” under Section 2.1 of the Rights Agreement or
(c) exercise any of his rights as a “Holder” under Section 2.1 or 2.3 of the
Rights Agreement; provided, however, that Dr. Murphy may request one Form S-3
registration pursuant to, and in accordance with, Section 2.3 and other relevant
provisions of the Rights Agreement during the Restricted Period for the
registration of up to 800,000 shares of Common Stock (the “Eligible Shares”)
then held by Dr. Murphy (such registration the “Special Registration”). For the
avoidance of doubt, the parties acknowledge and agree that a Special
Registration may include a “shelf” registration on Form S-3 relating to the
offer and sale of all or any portion of the Eligible Shares from time to time
pursuant to Rule 415 under the Securities Act.

4. If Dr. Murphy requests the Special Registration, Dr. Murphy may not transfer
any Registrable Securities pursuant to the registration statement (the “Special
Registration Statement”) filed in connection with the Special Registration if,
in the Company’s good faith and reasonable judgment, such disposition by
Dr. Murphy would be reasonably likely to jeopardize the Company’s eligibility to
receive award funding under the U.S. Small Business Administration’s Small
Business Innovation Research (SBIR) program, as set forth in 13 C.F.R. 121 as in
effect from time to time; provided, however, that this limitation shall cease to
apply if the Company ceases to be eligible to receive award funding under the
SBIR program for any reason other than as a result of actions taken by
Dr. Murphy. The plan of distribution section of the Special Registration
Statement shall describe the limitations on transfer set forth in this paragraph
4.

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5. During the Restricted Period, if Dr. Murphy desires or proposes to make any
non-registered sale, assignment, transfer or other disposition to any natural
person who is a U.S. citizen of all or any portion of his Restricted Securities,
or any beneficial interest therein (e.g., pursuant to Section 2.8(a)(ii) of the
Rights Agreement), the Company hereby agrees to (a) use its commercially
reasonable efforts to cooperate in providing information reasonably requested by
the proposed transferee in connection with his or her due diligence
investigation of the Company and (b) not unreasonably object to the proposed
transfer; provided, however, that if the Company shall cease to be eligible to
receive award funding under the SBIR program for any reason other than as a
result of actions taken by Dr. Murphy, the Company’s obligations under this
paragraph 5 shall extend to any other transferee the proposed transfer to whom
would be permissible under Section 2.8(a)(ii) of the Rights Agreement, so long
as Dr. Murphy has complied with the provisions of that section.

6. Notwithstanding anything in the Rights Agreement or herein, Dr. Murphy hereby
agrees that he will not, without the consent of the Company, take any action
intended or reasonably likely to cause any Registrable Securities to be
transferred to (X) any current or potential competitor of the Company or (Y) any
party Dr. Murphy actually knows is intending to effect a Change of Control of
the Company.

7. The parties hereto acknowledge their mutual understanding that Section 3.14
of the Rights Agreement is not intended to permit the Company to alter the
contractual rights of Dr. Murphy under the Rights Agreement, as modified by this
Letter Agreement, by amendment of the Company’s Bylaws or its Amended and
Restated Certificate of Incorporation. Without limiting the foregoing sentence,
Dr. Murphy and the Company agree to act in good faith not to circumvent or
otherwise frustrate the purpose and intent of this Letter Agreement.

8. Other than as set forth in this Letter Agreement, all of the terms and
conditions of the Rights Agreement are and shall continue in full force and
effect. This Letter Agreement and the Rights Agreement collectively constitute
the entire understanding of the parties with respect to the subject matter
hereof and thereof and supersede any prior understanding, oral or written,
between or among the parties (including the Second Amended and Restated Stock
Sale Restriction Agreement dated as of February 27, 2008 by and between the
Company and Dr. Murphy) with respect thereto. To the extent there is a conflict
between the terms of this Letter Agreement and the terms of the Rights
Agreement, this Letter Agreement shall control.

9. Each party hereto agrees to execute and deliver, by the proper exercise of
its entity or individual powers, all such other and additional instruments and
documents and do all such other acts and things as may be necessary to more
fully effectuate this Letter Agreement.

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

11. This Letter Agreement may be modified or amended only by a writing signed by
each party hereto and may be waived only in a writing signed by the party or
parties making such waiver.

12. This Letter Agreement shall be governed by and construed in accordance with
the internal, substantive laws of the Commonwealth of Virginia, without regard
to the conflicts of laws principles thereof.

If the foregoing accurately reflects our agreement with respect to the matters
addressed above, please so indicate by signing below.

Sincerely,

LUNA INNOVATIONS INCORPORATED

 

By:  

/s/ Dale Messick

Name:   Dale Messick Title:   Interim President and Chief Operating Officer

/s/ Kent A. Murphy, Ph.D.

KENT A. MURPHY, PH.D

[Counterpart Signature Page to Letter Agreement]