Exhibit 10.4

NOVAN, INC.

NON-EMPLOYEE DIRECTOR COMPENSATION POLICY

AS AMENDED BY THE BOARD OF DIRECTORS, JUNE 5, 2017

Non-employee members of the board of directors (the “Board”) of Novan, Inc. (the
“Company”) shall be eligible to receive cash and equity compensation as set
forth in this Non-Employee Director Compensation Policy (this “Policy”). The
cash and equity compensation described in this Policy shall be paid or be made,
as applicable, automatically and without further action of the Board, to each
member of the Board who is not an employee of the Company or any parent or
subsidiary of the Company (each, a “Non-Employee Director”), who may be eligible
to receive such cash or equity compensation, unless such Non-Employee Director
declines the receipt of such cash or equity compensation by written notice to
the Company. This Policy shall become effective on the date (the “Effective
Date”) of the Company’s initial public offering (the “IPO”) and shall remain in
effect until it is revised or rescinded by further action of the Board. This
Policy may be amended, modified or terminated by the Board at any time in its
sole discretion. The terms and conditions of this Policy shall supersede any
prior cash and/or equity compensation arrangements for service as a member of
the Board between the Company and any of its Non-Employee Directors and between
any subsidiary of the Company and any of its non-employee directors. No
Non-Employee Director shall have any rights hereunder, except with respect to
equity awards granted pursuant to the Policy.

1. Cash Compensation.

(a) Annual Retainers. Each Non-Employee Director shall receive an annual
retainer of $35,000 for service on the Board.

(b) Additional Annual Retainers. In addition, a Non-Employee Director shall
receive the following annual retainers:

(i) Chairman of the Board. A Non-Employee Director serving as Chairman of the
Board shall receive an additional annual retainer of $25,000 for such service.

(ii) Audit Committee. A Non-Employee Director serving as Chairperson of the
Audit Committee shall receive an additional annual retainer of $15,000 for such
service. A Non-Employee Director serving as a member of the Audit Committee
(other than the Chairperson) shall receive an additional annual retainer of
$7,500 for such service.

(iii) Compensation Committee. A Non-Employee Director serving as Chairperson of
the Compensation Committee shall receive an additional annual retainer of
$12,500 for such service. A Non-Employee Director serving as a member of the
Compensation Committee (other than the Chairperson) shall receive an additional
annual retainer of $6,250 for such service.

(iv) Nominating and Corporate Governance Committee. A Non-Employee Director
serving as Chairperson of the Nominating and Corporate Governance Committee
shall receive an additional annual retainer of $10,000 for such service. A
Non-Employee Director serving as a member of the Nominating and Corporate
Governance Committee (other than the Chairperson) shall receive an additional
annual retainer of $5,000 for such service.

(v) Lead Director. A Non-Employee Director serving as Lead Director shall
receive an additional annual retainer of $15,000 for such service.  

(c) Payment of Retainers. The annual retainers described in Sections 1(a) and
1(b) shall be earned on a quarterly basis based on a calendar quarter and shall
be paid by the Company in arrears not later than the fifteenth day following the
end of each calendar quarter. In the event a Non-Employee Director does not
serve as a Non-Employee Director, or in the applicable positions described in
Section 1(b), for an entire calendar quarter, such Non-Employee Director shall
receive a prorated portion of the retainer(s) otherwise payable to such
Non-Employee Director for such calendar quarter pursuant to Section 1(b), with
such prorated portion determined by multiplying such otherwise payable
retainer(s) by a fraction, the numerator of which is the number of days during
which the Non-Employee

 

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Director serves as a Non-Employee Director or in the applicable positions
described in Section 1(b) during the applicable calendar quarter and the
denominator of which is the number of days in the applicable calendar quarter.

2. Equity Compensation. Non-Employee Directors shall be granted the equity
awards described below. The awards described below shall be granted under and
shall be subject to the terms and provisions of the Company’s 2016 Incentive
Award Plan or any other applicable Company equity incentive plan then-maintained
by the Company (the “Equity Plan”) and shall be granted subject to the execution
and delivery of award agreements, including attached exhibits, in substantially
the forms previously approved by the Board. All applicable terms of the Equity
Plan apply to this Policy as if fully set forth herein, and all equity grants
hereunder are subject in all respects to the terms of the Equity Plan.

(a) IPO Awards. Each Non-Employee Director who (i) serves on the Board as of the
date the IPO price of the shares of the Company’s common stock, par value
$0.0001 per share (“Common Stock”) is established in connection with the
Company’s IPO (the “Pricing Date”) and (ii) will continue to serve as a
Non-Employee Director immediately following the Pricing Date shall be
automatically granted, on the Pricing Date, an option to purchase the number of
shares of the Company’s common stock (at a per-share exercise price equal to the
IPO price) that have an aggregate fair market value on the date of grant of
$100,000 (as determined in accordance with FASB Accounting Standards
Codification Topic 718 (“ASC 718”)) (with the number of shares of Common Stock
underlying each such award subject to adjustment as provided in the Equity
Plan). The awards described in this Section 2(a) shall be referred to herein as
the “IPO Awards”).

(b) Annual Awards. A Non-Employee Director who (i) serves on the Board as of the
date of any annual meeting of the Company’s stockholders (an “Annual Meeting”)
after the Effective Date and (ii) will continue to serve as a Non-Employee
Director immediately following such Annual Meeting shall be automatically
granted, on the date of such Annual Meeting, an option to purchase the number of
shares of the Company’s common stock (at a per-share exercise price equal to the
closing price per share of the Company’s common stock on the date of such annual
meeting (or on the last preceding trading day if the date of the annual meeting
is not a trading day) that have an aggregate fair value on the date of grant of
$100,000 (as determined in accordance with ASC 718) (with the number of shares
of Common Stock underlying each such award subject to adjustment as provided in
the Equity Plan). The awards described in this Section 2(b) shall be referred to
as the “Annual Awards.” Notwithstanding the foregoing, the Board in its sole
discretion may determine that the Annual Awards for any year be granted in the
form of restricted stock units with equivalent value on the date of grant (with
the number of shares of Common Stock underlying each such award subject to
adjustment as provided in the Equity Plan). For the avoidance of doubt, a
Non-Employee Director elected for the first time to the Board at an Annual
Meeting shall only receive an Annual Award in connection with such election, and
shall not receive any Initial Award (as defined below) on the date of such
Annual Meeting as well.

(c) Initial Awards. Except as otherwise determined by the Board, each
Non-Employee Director who is initially elected or appointed to the Board after
the Pricing Date on any date other than the date of an Annual Meeting shall be
automatically granted, on the date of such Non-Employee Director’s initial
election or appointment (such Non-Employee Director’s “Start Date”), an option
to purchase shares of the Company’s common stock (at a per-share exercise price
equal to the [closing price per share of the Company’s common stock on the date
of such annual meeting (or on the last preceding trading day if the date of the
annual meeting is not a trading day)] that have an aggregate fair value on such
Non-Employee Director’s Start Date equal to the product of (i) $100,000 (as
determined in accordance with ASC 718), and (ii) a fraction, the numerator of
which is (x) 365 minus (y) the number of days in the period beginning on the
date of the Annual Meeting immediately preceding such Non-Employee Director’s
Start Date (or, if no such Annual Meeting has occurred, the effective date of
the Company’s IPO) and ending on such Non-Employee Director’s Start Date and the
denominator of which is 365 (with the number of shares of Common Stock
underlying each such award subject to adjustment as provided in the Equity
Plan). The awards described in this Section 2(c) shall be referred to as
“Initial Awards.” Notwithstanding the foregoing, the Board in its sole
discretion may determine that the Initial Award for any Non-Employee Director be
granted in the form of restricted stock units with equivalent value on the date
of grant (with the number of shares of Common Stock underlying each such award
subject to adjustment as provided in the Equity Plan). For the avoidance of
doubt, no Non-Employee Director shall be granted more than one Initial Award.

 

Novan, Inc.

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(d) Termination of Service of Employee Directors. Members of the Board who are
employees of the Company or any parent or subsidiary of the Company who
subsequently terminate their service with the Company and any parent or
subsidiary of the Company and remain on the Board will not receive an Initial
Award pursuant to Section 2(c) above, but to the extent that they are otherwise
eligible, will be eligible to receive, after termination from service with the
Company and any parent or subsidiary of the Company, Annual Awards as described
in Section 2(b) above.

(e) Vesting of Awards Granted to Non-Employee Directors. Each IPO Award, Annual
Award and Initial Award shall vest and become exercisable in four equal
quarterly installments, such that each such award shall be fully vested and
exercisable on the first anniversary of the date of grant, subject to the
Non-Employee Director’s continued service on the Board as a Non-Employee
Director through each applicable vesting date. No portion of an IPO Award,
Annual Award or Initial Award that is unvested or unexercisable at the time of a
Non-Employee Director’s termination of service on the Board as a Non-Employee
Director shall become vested and exercisable thereafter. All of a Non-Employee
Director’s IPO Awards, Annual Awards and Initial Awards shall vest in full
immediately prior to the occurrence of a Change in Control (as defined in the
Equity Plan), to the extent outstanding at such time.

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Novan, Inc.

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