Exhibit 10.5

RED HAT, INC.

Red Hat, Inc. 2004 Long-Term Incentive Plan

Non-Qualified Stock Option Agreement for Directors

Cover Sheet

Red Hat, Inc., a Delaware corporation, hereby grants as of the date below (the
“Grant Date”) to the person named below (the “Director”) and the Director hereby
accepts, an option to purchase the number of shares (the “Option Shares”) listed
below of the Company’s common stock, $.0001 par value per share, at the exercise
price per share and with a vesting start date (the “Vesting Start Date”) listed
below, such option to be on the terms and conditions specified in the Red Hat,
Inc. 2004 Long-Term Incentive Plan and in the attached Exhibit A.

 

Director Name:

 

   **

Grant Date:

 

   **

Vesting Start Date:

 

   **

Number of Option Shares:

 

   **

Exercise Price Per Share:

 

$ **

IN WITNESS WHEREOF, the Company and the Director have caused this instrument to
be executed as of the Grant Date set forth above.

 

 

    RED HAT, INC. (Director Signature)     1801 Varsity Drive     Raleigh, North
Carolina 27606

 

    By:  

 

(Street Address)     Name:       Title:  

 

      (City/State/Zip Code)      

PLEASE RETURN ONE SIGNED COVER SHEET

TO EMILY DEL TORO/ LEGAL DEPT.

CENTENNIAL CAMPUS

FAX NUMBER (919) 754-3715

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

EXHIBIT A

RED HAT, INC.

Red Hat, Inc. 2004 Long-Term Incentive Plan

Non-Qualified Stock Option Agreement for Directors

Terms and Conditions

1. Grant under Red Hat, Inc. 2004 Long-Term Incentive Plan. This option is
granted pursuant to and is subject to and governed by the Company’s 2004
Long-Term Incentive Plan (the “Plan”) and, unless the context otherwise
requires, terms used herein shall have the same meaning as in the Plan or shall
be defined as on the cover sheet attached hereto. Determinations made in
connection with this option pursuant to the Plan shall be governed by the Plan
as it exists on the Grant Date.

2. Grant as Non-Qualified Stock Option. This option is a non-qualified stock
option and is not intended to qualify as an incentive stock option under
Section 422 of the Code.

3. Vesting of Option if Service Continues. All of the Option Shares initially
shall be unvested shares. For so long as the Director maintains continuous
service to the Company or its Subsidiaries or Affiliates as a director
throughout the period beginning on the Grant Date and ending on the vesting date
set forth below, the Option Shares shall become vested according to the schedule
set forth below and the Director may exercise this option as to any vested
shares, subject to Sections 4 and 5 hereof:

 

Vesting Date

  

Number of Vested Shares

One year from the Vesting Start Date (the “Anniversary Date”)   

331/3% of the Option Shares

On the last day of each subsequent three-month period following the Anniversary
Date   

81/3% of the Option Shares

 

-1-

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

Notwithstanding the foregoing, the Committee may, in its discretion, accelerate
the date that any installment of this option becomes exercisable; provided that
no installment of the option shall vest prior to the Anniversary Date. The
foregoing rights are cumulative and (subject to Sections 4 or 5 hereof if the
Director ceases service) may be exercised only before the date (the “Final
Exercise Date”) which is five years from the Grant Date.

4. Termination of Service. Except as provided in Appendix A, if the Director’s
service as a director ceases for any reason, no further installments of this
option shall become exercisable, and this option shall expire (may no longer be
exercised) after the passage of three months from the termination of the
Director’s service, but in no event later than the Final Exercise Date. For
purposes hereof, service shall not be considered as having terminated during any
leave of absence if such leave of absence has been approved in writing by the
Company; in the event of such leave of absence, vesting of this option shall be
suspended (and the period of the leave of absence shall be added to all vesting
dates) unless otherwise determined by the Company. This option shall not be
affected by any change in the type of service the Director has within or among
the Company and its Subsidiaries or Affiliates so long as the Director
continuously maintains service with the Company.

5. Death; Disability.

(a) Death. If the Director dies while maintaining service with the Company, this
option may be exercised, to the extent otherwise exercisable on the date of his
or her death, by the Director’s estate, personal representative or beneficiary
to whom this option has been transferred pursuant to Section 9, only at any time
within one (1) year after the date of death, but not later than the Final
Exercise Date.

(b) Disability. If the Director’s service with the Company terminates by reason
of his or her disability, this option may be exercised, to the extent otherwise
exercisable on the date of termination of service, only at any time within 180
days after such termination of service, but not later than the Final Exercise
Date. For purposes hereof, “disability” means “permanent and total disability”
as defined in Section 22(e)(3) of the Code.

6. Partial Exercise. This option may be exercised in part at any time and from
time to time within the above limits, except that this option may not be
exercised for a fraction of a share.

7. Payment of Exercise Price.

(a) Payment Options. The exercise price shall be paid by one or any combination
of the following forms of payment that are applicable to this option:

(i) in cash, or by check payable to the order of the Company; or

(ii) delivery of an irrevocable and unconditional undertaking, satisfactory in
form and substance to the Company, by a creditworthy broker to deliver promptly
to the Company sufficient funds to pay the exercise price, or delivery by the
Director to the

 

-2-

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

Company of a copy of irrevocable and unconditional instructions, satisfactory in
form and substance to the Company, to a creditworthy broker to deliver promptly
to the Company cash or a check sufficient to pay the exercise price; or

(iii) subject to Section 7(b) below and in accordance with procedures
established by the Committee, provided the Shares are then traded on a national
securities exchange or on the Nasdaq Stock Market (or successor trading system),
by delivery of Shares having a Fair Market Value equal as of the date of
exercise to the exercise price.

(b) Limitations on Payment by Delivery of Shares. The Director may not pay any
part of the exercise price hereof by transferring Shares to the Company unless
such Shares have been owned by the Director free of any substantial risk of
forfeiture for at least six months.

8. Method of Exercising Option. Subject to the terms and conditions of this
Agreement, this option may be exercised by written notice to the Company or to
such transfer agent as the Company shall designate. Such notice shall state the
election to exercise this option and the number of Option Shares for which it is
being exercised and shall be signed by the person or persons so exercising this
option. Such notice shall be accompanied by payment of the full exercise price
of such shares or evidence of satisfaction of the alternative payment methods
set forth on Section 7, and the Company shall deliver a certificate or
certificates representing such Shares as soon as practicable after the notice
shall be received. Such certificate or certificates shall be registered in the
name of the person or persons so exercising this option (or, if this option
shall be exercised by the Director and if the Director shall so request in the
notice exercising this option, shall be registered in the name of the Director
and another person jointly, with right of survivorship). In the event this
option shall be exercised, pursuant to Section 5 hereof, by any person or
persons other than the Director, such notice shall be accompanied by appropriate
proof of the right of such person or persons to exercise this option.

9. Option Not Transferable. This option is not transferable or assignable except
by will or by the laws of descent and distribution. During the Director’s
lifetime only the Director can exercise this option.

10. No Obligation to Exercise Option. The grant and acceptance of this option
imposes no obligation on the Director to exercise it.

11. No Obligation to Continue Service. Neither the Plan, this Agreement, nor the
grant of this option imposes any obligation on the Company, its Subsidiaries or
Affiliates to continue a service relationship with the Director.

12. No Rights as Stockholder until Exercise. The Director shall have no rights
as a stockholder with respect to the Option Shares until such time as the
Director has exercised this option by delivering a notice of exercise and has
paid in full the purchase price for the shares so exercised in accordance with
Section 8. Except as is expressly provided in the Plan with respect to certain
changes in the capitalization of the Company, no adjustment shall be made for
dividends or similar rights for which the record date is prior to such date of
exercise.

 

-3-

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

13. Adjustment for Capital Changes. The Plan contains provisions covering the
treatment of options in a number of contingencies such as stock split and
mergers. Provisions in the Plan for such adjustment are hereby made applicable
hereunder and are incorporated herein by reference.

14. Change in Control. Provisions regarding a Change in Control are set forth on
Appendix A.

15. Taxes. The Director has reviewed with the Director’s own tax advisors the
federal, state, local and foreign tax consequences of this investment and the
transactions contemplated by this Agreement. The Director is relying solely on
such advisors and not on any statements or representations of the Company or any
of its agents. The Director understands that the Director (and not the Company)
shall be responsible for the Director’s own tax liability that may arise as a
result of this investment or the transactions contemplated by this Agreement.

16. Lock-up Agreement. The Director agrees that in the event that the Company
effects an underwritten public offering of Shares registered under the
Securities Act, the Option Shares may not be sold, offered for sale or otherwise
disposed of, directly or indirectly, without the prior written consent of the
managing underwriter(s) of the offering, for such period of time after the
execution of an underwriting agreement in connection with such offering that all
of the Company’s then directors and optionee officers agree to be similarly
bound.

17. Provision of Documentation to Director. By executing this Agreement the
Director acknowledges receipt of a copy of this Agreement (including the cover
sheet) and a copy of the Plan.

18. Miscellaneous.

(a) Notices. All notices hereunder shall be in writing and shall be deemed given
when sent by certified or registered mail, postage prepaid, return receipt
requested, if to the Director, to the address set forth on the cover sheet or at
the most recent address shown on the records of the Company, and if to the
Company, to the Company’s principal office, attention of the Corporate
Secretary.

(b) Fractional Shares. If this option becomes exercisable for a fraction of a
share because of the adjustment provisions contained in the Plan, such fraction
shall be rounded down to the nearest whole share.

(c) Entire Agreement; Modification. This Agreement (including the cover sheet)
and the Plan constitutes the entire agreement between the parties relative to
the subject matter hereof, and supersedes all proposals, written or oral, and
all other communications between the parties relating to the subject matter of
this Agreement. This Agreement may be modified, amended or rescinded only by a
written agreement executed by both parties, except that (i) to the extent there
would not be adverse accounting consequences to the Company or adverse tax
consequences to the Director under Section 409A of the Code, the Committee may
amend this Agreement without the consent of the Director, to provide for the
settlement of any

 

-4-

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

exercise of this option (in whole or in part) by delivering Shares, the Fair
Market Value of which is equal to the increase in the Fair Market Value of the
Option Shares on the exercise date of the option over the aggregate exercise
price of such Option Shares, and (ii) if the Committee determines that the award
terms could result in adverse tax consequences to the Director, the Committee
may amend this Agreement without the consent of the Director in order to
minimize or eliminate such tax treatment.

(d) Severability. The invalidity, illegality or unenforceability of any
provision of this Agreement shall in no way affect the validity, legality or
enforceability of any other provision.

(e) Successors and Assigns. This Agreement shall be binding upon and inure to
the benefit of the parties hereto and their respective successors and assigns,
subject to the limitations set forth in Section 9 hereof.

(f) Governing Law. This Agreement shall be governed by and interpreted in
accordance with the laws of the Delaware, without giving effect to the
principles of the conflicts of laws thereof.

 

-5-

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

APPENDIX A

In the event the Director has continuously served as a director through a Change
in Control event, all of the Options shall become vested.

For purposes of this Agreement:

“Change in Control” means the occurrence of any one of the following events:

(i) individuals who, on the Grant Date, constitute the Board (the “Incumbent
Directors”) cease for any reason to constitute at least a majority of the Board,
provided that any person becoming a director subsequent to the initial public
offering whose election or nomination for election was approved by a vote of at
least a majority of the Directors then on the Board (either by a specific vote
or by approval of the proxy statement of the Company in which such person is
named as a nominee for director, without written objection to such nomination)
shall be an Incumbent Director; provided, however, that no individual initially
elected or nominated as a director of the Company as a result of an actual or
threatened election contest with respect to directors or as a result of any
other actual or threatened solicitation of proxies by or on behalf of any person
other than the Board shall be deemed to be an Incumbent Director;

(ii) any “person” (as such term is defined in the Exchange Act and as used in
Sections 13(d)(3) and 14(d)(2) of the Exchange Act) is or becomes a “beneficial
owner” (as defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of securities of the Company representing 35% or more of the
combined voting power of the Company’s then outstanding securities eligible to
vote for the election of the Board (the “Company Voting Securities”); provided,
however, that the event described in this paragraph (ii) shall not be deemed to
be a Change in Control by virtue of any of the following acquisitions: (A) by
the Company or any Subsidiary, (B) by any employee benefit plan (or related
trust) sponsored or maintained by the Company or any Subsidiary, (C) by any
underwriter temporarily holding securities pursuant to an offering of such
securities, (D) pursuant to a Non-Qualifying Transaction, as defined in
paragraph (iii), or (E) by any person of Voting Securities from the Company, if
a majority of the Incumbent Board approves in advance the acquisition of
beneficial ownership of 35% or more of Company Voting Securities by such person;

(iii) the consummation of a merger, consolidation, statutory share exchange,
reorganization or similar form of corporate transaction involving the Company or
any of its subsidiaries that requires the approval of the Company’s
stockholders, whether for such transaction or the issuance of securities in the
transaction (a “Business Combination”), unless immediately following such
Business Combination: (A) more than 40% of the total voting power of (x) the
corporation resulting from such Business Combination (the “Surviving
Corporation”), or (y) if applicable, the ultimate parent corporation that
directly or indirectly has beneficial ownership of 100% of the voting securities
eligible to elect directors of the Surviving Corporation (the “Parent
Corporation”), is represented by Company Voting Securities that were outstanding
immediately prior to such Business Combination (or, if applicable, is
represented by shares into which such Company Voting Securities were converted
pursuant to such Business

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

Combination), and such voting power among the holders thereof is in
substantially the same proportion as the voting power of such Company Voting
Securities among the holders thereof immediately prior to the Business
Combination, (B) no person (other than any employee benefit plan (or related
trust) sponsored or maintained by the Surviving Corporation or the Parent
Corporation), is or becomes the beneficial owner, directly or indirectly, of 35%
or more of the total voting power of the outstanding voting securities eligible
to elect directors of the Parent Corporation (or, if there is no Parent
Corporation, the Surviving Corporation) and (C) at least half of the members of
the board of directors of the Parent Corporation (or, if there is no Parent
Corporation, the Surviving Corporation) following the consummation of the
Business Combination were Incumbent Directors at the time of the Board’s
approval of the execution of the initial agreement providing for such Business
Combination (any Business Combination which satisfies all of the criteria
specified in (A), (B) and (C) above shall be deemed to be a “Non-Qualifying
Transaction”);

(iv) the stockholders of the Company approve a plan of complete liquidation or
dissolution of the Company or the consummation of a sale of all or substantially
all of the Company’s assets; or

(v) the occurrence of any other event that the Board determines by a duly
approved resolution constitutes a Change in Control.

Notwithstanding the foregoing, a Change in Control shall not be deemed to occur
solely because any person acquires beneficial ownership of more than 35% of the
Company Voting Securities as a result of the acquisition of Company Voting
Securities by the Company which reduces the number of Company Voting Securities
outstanding; provided, that if after such acquisition by the Company such person
becomes the beneficial owner of additional Company Voting Securities that
increases the percentage of outstanding Company Voting Securities beneficially
owned by such person, a Change in Control of the Company shall then occur.