EX10.4

FORM OF PERFORMANCE ADJUSTED
RESTRICTED STOCK UNIT AWARD AGREEMENT
.
THIS AGREEMENT is entered into and effective as of __________, 20__ (the “Date
of Grant”), by and between Sleep Number Corporation (the “Company”) and    (the
“Grantee”).
Unless defined in this Agreement, capitalized terms used in this Agreement shall
have the meanings established in the Sleep Number Corporation 2020 Equity
Incentive Plan (the “Plan”).
The Company has adopted the Plan, which authorizes the grant of Restricted Stock
Unit Awards to Employees, Non-Employee Directors, and Consultants. The Company
desires to give the Grantee a proprietary interest in the Company and its
Subsidiaries in recognition of the Grantee’s contributions and as an added
incentive to advance the interests of the Company and its Subsidiaries by
granting to the Grantee a Restricted Stock Unit Award pursuant to the Plan.
Accordingly, the parties agree as follows:
1. Grant of Award Units and Performance Adjustments.
1.1 Grant of Award Units. The Company hereby grants to the Grantee a Restricted
Stock Unit Award (the “Award”) consisting of __________ units (the “Award
Units”) that will be settled in shares of the Company’s common stock, par value
$0.01 per share (the “Common Stock”), subject to the terms, conditions, and
restrictions set forth below and in the Plan. Reference in this Agreement to the
Award Units or the Adjusted Award Units (as defined in Section 1.2 of this
Agreement) will be deemed to include the Dividend Proceeds (as defined in
Section 3.3 of this Agreement) with respect to such Award Units or Adjusted
Award Units as provided in Section 3.3 of this Agreement.
1.2 Performance Adjustments. The number of Award Units granted hereunder is
subject to adjustment based on the Company’s level of achievement versus annual
Net Sales growth goals and annual NOP growth goals for the 20__, 20__, and 20__
fiscal years (the “Performance Period”). (For purposes of this Agreement, “NOP”
will be defined as Net Operating Income). The Net Sales growth goals and NOP
growth goals will be equally weighted.
The annual Net Sales growth goals, the annual NOP growth goals and the
corresponding performance adjustment multiples are as follows:

Annual Growth Goals
Over the Performance Period (20__ thru 20__ fiscal years)Payout – as Multiple of
Award Units to VestNet Sales (50%)NOP
(50%)Threshold__%__%0.5XTarget__%__%1.0XMaximum__%__%2.0X

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The calculation of the “Adjusted Award Units” based on performance versus these
growth goals will be determined as follows:
(a) The Company’s actual annual growth will be measured for each of the two (2)
performance goals and for each of the three (3) fiscal years of the Performance
Period;
(b) A payout multiple will be determined for each performance goal and for each
fiscal year, based on interpolation between the performance goals in the
foregoing table (performance relative to a performance goal that is below the
threshold for a fiscal year will result in a payout multiple of zero (0) for
that performance goal for that fiscal year); and
(c) The mean, or average, of the resulting six (6) payout multiples will be
applied to the number of Award Units to determine the number of “Adjusted Award
Units.”
For example, if the annual Net Sales growth rate in 20__ is __%, the multiple
for that performance goal for that year will be 1.0X; and if the annual NOP
growth rate in 20__ is __%, the multiple for that performance goal for that year
will be 1.5X. Similar multiples will be determined for each performance goal and
for each of the following fiscal years. The resulting six (6) payout multiples
will then be averaged to determine the final payout multiple. This final payout
multiple times the number of Award Units originally granted results in the
number of Adjusted Award Units that would vest, subject to all of the other
proration and vesting provisions set forth in this Agreement.
In order to reduce the potential impact of volatility in NOP results, the annual
NOP percentage growth rate will not in any case be determined from a base NOP
level that is less than 50% of the 20__ NOP level. For example, if 20__ NOP is
less than 50% of the 20__ NOP level, then the annual NOP percentage growth rate
for 20__ will be determined from a base of 50% of the 20__ NOP level, rather
than from the actual 20__ NOP level.
The “Adjusted Award Units” will be subject to reduction for failure to generate
Return on Invested Capital (“ROIC”) that exceeds Weighted Average Cost of
Capital by at least __ basis points (“bps”), as outlined in the table below. The
measurement will be based on an average of the basis points difference between
annual ROIC and WACC for the three fiscal years 20__, 20__, and 20__.
ROIC Basis Points difference versus WACC
(e.g., ROIC of 12% vs. WACC of 10% = +200 bps)
Reduction to Final Payout__ bps or lower -20% of target award__ to __ bps-15% of
target award__ to __ bps-10% of target award__ to __ bps-5% of target award__
bps or greaterNo reduction

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For the purpose of this calculation, ROIC shall be defined as detailed in the
annual 10-K disclosure.
For the purpose of this calculation, WACC shall be defined as detailed in
Attachment A.
The Company’s actual performance relative to the performance goals set forth
above and the calculation of the Adjusted Award Units shall be determined by the
Management Development and Compensation Committee (the “Committee”) of the Board
of Directors following the conclusion of the Performance Period. The Committee’s
determination shall be final and conclusive for all purposes under this
Agreement. The number of Award Units resulting after adjustment as described
above will be referred to herein as the “Adjusted Award Units.”
1.3 Restrictive Covenant Agreement. In consideration for the grant of this
Award, the Grantee agrees to execute and be bound by the terms of the Employee
Inventions, Confidentiality, Non-Compete and Mutual Arbitration Agreement (the
“Non-Compete Agreement”) attached hereto, and the Grantee acknowledges that the
Grantee’s failure to execute the Non-Compete Agreement will cause this Award to
automatically terminate and be forfeited without any further action.
2. Grant Restriction.
2.1 Restriction and Forfeiture. The Grantee’s right to the Award Units or the
Adjusted Award Units and the shares of Common Stock issuable under the Award
Units or Adjusted Award Units will be subject to the Grantee remaining in
continuous employment or service with the Company or any Subsidiary for a period
of three (3) years (the “Vesting Period”) following the Date of Grant; provided,
however, that such employment or service period restrictions (the
“Restrictions”) will lapse and terminate prior to end of the Vesting Period as
set forth in Section 2.2 below (or as otherwise set forth in the Plan for any
circumstance not contemplated by the terms of Section 2.2).
2.2 Death, Disability, or other Termination of Employment or Service.
(a) Death. In the event that the Grantee’s employment or service is terminated
prior to the end of the Vesting Period due to the Grantee’s death, the
Restrictions applicable to the Award Units or Adjusted Award Units will
immediately lapse and terminate, and the shares of Common Stock to be issued in
settlement of the Award Units will be issued within 90 days of the Grantee’s
death, with the performance adjustment determination related to any incomplete
fiscal year(s) within the Performance Period deemed to be satisfied at the
target level, with no reduction based on ROIC performance.
(b) Disability. In the event that the Grantee’s employment or service is
terminated prior to the end of the Vesting Period due to the Grantee’s
Disability, the Grantee will become fully vested in the Award Units pending
completion of the Performance Period and final determination of the Adjusted
Award Units. The shares of Common Stock to be issued in settlement of the
Adjusted Award Units will be retained
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and held by the Company pending the final determination of the Adjusted Award
Units and will be issued within 90 days of the end of the Vesting Period.
(c) Termination Due to Retirement.
(i) In the event that the Grantee’s employment or other service is terminated
prior to the end of the Vesting Period by reason of the Grantee’s retirement at
or beyond age fifty-five (55) and the Grantee has five (5) or more years of
service with the Company prior to such retirement, the Grantee will become
vested in a pro rata portion of Award Units based on the number of calendar days
elapsed in the Vesting Period as of the date of retirement (e.g., If the Grantee
was granted 1,200 Award Units, and if retirement occurs 730 calendar days into
the 1,095 calendar days vesting period, then the Grantee will become vested with
respect to an aggregate of 800 Award Units and the remaining 400 Award Units
will immediately terminate and be forfeited without notice of any kind) pending
completion of the Performance Period and final determination of the Adjusted
Award Units.
(ii) In the event that the Grantee’s employment or other service with the
Company and all Subsidiaries is terminated prior to the end of the Vesting
Period by reason of the Grantee’s retirement prior to age fifty-five (55) or the
Grantee has fewer than five (5) years of service with the Company prior to
retirement, all rights of the Grantee under the Plan and this Agreement relating
to all Award Units with respect to which the Restrictions have not lapsed will
immediately terminate and be forfeited without notice of any kind.
(iii) In the event that the Grantee’s employment or other service with the
Company and all Subsidiaries is terminated prior to the end of the Vesting
Period by reason of the Grantee’s retirement at or beyond age sixty (60) and the
Grantee has five (5) or more years of service with the Company prior to
retirement, the Grantee will become fully vested in the Award Units pending
completion of the Performance Period and final determination of the Adjusted
Award Units if the following criteria are met: a) Grantee provides written
notice of Grantee’s intention to retire one year before Grantee’s actual
retirement date, and b) Grantee’s actual retirement date is at least one year
after the Date of Grant.
(iv) The shares of Common Stock to be issued in settlement of the Adjusted Award
Units pursuant to paragraphs (i) or (iii) above will be retained and held by the
Company pending the final determination of the Adjusted Award Units and will be
issued within 90 days of the end of the Vesting Period.
(d) Termination for Reasons other than Death, Disability, or Retirement. In the
event the Grantee’s employment or other service with the Company and all
Subsidiaries is terminated prior to the end of the Vesting Period for any reason
other than death, Disability, or retirement as provided above, or if the Grantee
is in the employ or service of a Subsidiary and the Subsidiary ceases to be a
Subsidiary of the Company (unless the Grantee continues in the employ or service
of the Company or another Subsidiary), all rights of the Grantee under this
Agreement relating to Award Units with
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respect to which the Restrictions have not lapsed will immediately terminate and
be forfeited without notice of any kind.
3. Issuance of Shares.
3.1 Timing. Vested Award Units or Adjusted Award Units shall be converted to
shares of Common Stock on a one-for-one basis, and such shares shall be issued
as soon as reasonably possible, but not more than 90 days, after the end of the
Vesting Period, subject to the provisions set forth above applicable to vesting
events that occur prior to the end of the Vesting Period.
3.2 Limitations on Transfer. Award Units or Adjusted Award Units will not be
assignable or transferable by the Grantee, either voluntarily or involuntarily,
and may not be subjected to any lien, directly or indirectly, by operation of
law or otherwise. Any attempt to transfer, assign, or encumber the Award Units
or Adjusted Award Units, other than in accordance with this Agreement and the
Plan, will be null and void and will void the Award, and all Award Units or
Adjusted Award Units for which the Restrictions have not lapsed will be
forfeited and immediately returned to the Company.
3.3 Dividends and Other Distributions. The Award Units are being granted with an
equal number of dividend equivalents. Accordingly, the Grantee is entitled to
receive an additional award unit with a value equal to any dividends or
distributions (including, without limitation, any cash dividends, stock
dividends or dividends in kind, the proceeds of any stock split, or the proceeds
resulting from any changes or exchanges described in Section 6 of this
Agreement, all of which are referred to herein collectively as the “Dividend
Proceeds”) that are paid or payable with respect to one share of Common Stock
for each Award Unit, which will be subject to the same rights, restrictions, and
performance adjustments under this Agreement as the Award Units to which such
dividends or distributions relate. The number of additional award units to be
received as dividend equivalents for each Award Unit shall be determined by
dividing the cash dividend per share by the Fair Market Value of one share of
Common Stock on the dividend or distribution payment date. All such additional
award units received as dividend equivalents will be subject to the same
restrictions and performance adjustments as the Award Units to which such
Dividend Proceeds relate.
3.4 Fractional Shares. The Grantee acknowledges that the Company will not issue
or deliver fractional shares of Common Stock under this Agreement. All
fractional shares will be rounded up to the nearest whole share.
4. Rights of Grantee.
4.1 Employment or Service. Nothing in this Agreement will interfere with or
limit in any way the right of the Company or any Subsidiary to terminate the
employment or service of the Grantee at any time, nor confer upon the Grantee
any right to continue in the employment or service with the Company or any
Subsidiary at any particular position or rate of pay or for any particular
period of time.
4.2 Rights as a Shareholder. The Grantee will have no rights as a shareholder
until the Grantee becomes the holder of record of shares of Common Stock issued
in settlement of the
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Adjusted Award Units. As soon as reasonably possible after the satisfaction of
any conditions to the effective issuance of shares of Common Stock in settlement
of the Adjusted Award Units, the shares will be issued by the Company.
5. Withholding Taxes. The Company is entitled to (i) withhold and deduct from
future wages of the Grantee (or from other amounts that may be due and owing to
the Grantee from the Company), or to withhold from the shares of Common Stock
that would otherwise be determined to be paid to the Company out of Dividend
Proceeds, or make other arrangements for the collection of all amounts the
Company determines are legally required to satisfy any federal, state, or local
withholding and employment-related tax requirements attributable to the receipt
of the Award, the receipt of dividends or distributions on Award Units or
Adjusted Award Units, or the lapse or termination of the Restrictions applicable
to Award Units or Adjusted Award Units, or (ii) require the Grantee promptly to
remit the amount of such withholding to the Company. In the event that the
Company is unable to withhold such amounts, for whatever reason, the Grantee
agrees to pay to the Company an amount equal to the amount the Company would
otherwise be required to withhold under federal, state, or local law.
6. Adjustments. In the event of any reorganization, merger, consolidation,
recapitalization, liquidation, reclassification, stock dividend, stock split,
combination of shares, rights offering, or divestiture (including a spin-off),
or any other change in the corporate structure or shares of the Company, the
Committee (or, if the Company is not the surviving corporation in any such
transaction, the board of directors of the surviving corporation), in order to
prevent dilution or enlargement of the rights of the Grantee, will make
appropriate adjustment (which determination will be conclusive) as to the number
and kind of securities or other property (including cash) subject to this Award.
7. Subject to Plan. The Award and the Award Units granted pursuant to this
Agreement have been granted under the Plan and, except as otherwise expressly
provided in this Agreement, are subject to all of the terms and conditions of
the Plan. In addition, the Grantee, by execution hereof, acknowledges having
received a copy of the Plan and acknowledges that the Company, or a third party
vendor designated by the Company, may deliver to the Grantee any documents
related to the Grantee’s participation in the Plan by electronic means,
including through email, the Company’s website, and through the website of the
third party vendor designated by the Company.  The provisions of this Agreement
will be interpreted as to be consistent with the Plan, and any ambiguities in
this Agreement will be interpreted by reference to the Plan. In the event that
any provision of this Agreement is not authorized under the Plan, the terms of
the Plan will prevail.
8. Forfeiture, Clawback or Recoupment. This Award is subject to the forfeiture
and clawback provisions pursuant to the Plan. Additionally, the Grantee may be
subject to the Company’s policy regarding clawback and forfeiture of certain
compensation, as in effect at such time. In addition to the other rights of the
Committee under the Plan, if Grantee is determined by the Committee, acting in
its sole discretion, to have taken any action that would constitute Adverse
Action or Cause or that is subject to any other or additional “clawback,”
forfeiture, or recoupment policy adopted by the Company, either prior to or
after the date of this Agreement, or to have violated the Non-Compete Agreement,
as defined in Section 1.3, (i) all of Grantee’s rights under the Plan and any
agreements evidencing an award granted under the Plan, including
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this Agreement evidencing this Award, then held by Grantee shall terminate and
be forfeited upon the effectiveness of such Committee action, and without notice
of any kind, and (ii) the Committee, in its sole discretion may require Grantee
to surrender and return, transfer, or assign to the Company all or any portion
of the shares of Common Stock received, or to disgorge all or any profits or any
other economic value (however defined by the Committee) made or realized by
Grantee or Grantee’s affiliate, during the period beginning one (1) year prior
to your termination of employment or service with the Company, in connection
with any awards granted under the Plan, including this Award, or any shares of
Common Stock issued upon the exercise or vesting of any awards, including this
Award. This Section 8 shall not apply and shall automatically become void ab
initio following a Change of Control.
9. Miscellaneous.

9.1 Binding Effect. This Agreement will be binding upon the heirs, executors,
administrators, and successors of the parties to this Agreement.
9.2 Governing Law. This Agreement and all rights and obligations under this
Agreement will be construed in accordance with the Plan and governed by the laws
of the State of Minnesota, without regard to conflicts of laws provisions. Any
legal proceeding related to this Agreement will be brought in an appropriate
Minnesota court, and the parties to this Agreement consent to the exclusive
jurisdiction of the court for this purpose.
9.3 Entire Agreement. This Agreement and the Plan set forth the entire agreement
and understanding of the parties to this Agreement with respect to the grant and
vesting of this Award and the administration of the Plan and supersede all prior
agreements, arrangements, plans, and understandings relating to the grant and
vesting of this Award and the administration of the Plan.
9.4 Amendment and Waiver. Other than as provided in the Plan, this Agreement may
be amended, waived, modified, or canceled only by a written instrument executed
by the parties to this Agreement or, in the case of a waiver, by the party
waiving compliance.
9.5 Code Section 409A. Payments of amounts under this Agreement are intended to
comply with the requirements of Code section 409A, and this Agreement shall in
all respects be administered and construed to give effect to such intent. The
Committee, in its sole discretion, may accelerate or delay distribution of any
shares in payment of amounts due under this Agreement if and to the extent
allowed under Code section 409A.

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The parties hereto have executed this Agreement effective the day and year first
above written.
SLEEP NUMBER CORPORATION
        image012.jpg [image012.jpg]
        Shelly Ibach
        President and CEO

By execution of this Agreement, GRANTEE
the Grantee acknowledges having
received a copy of the Plan.       
        (Signature)

             
(Name and Address)
             

____________________________________

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ATTACHMENT A: Definition for the Company’s Weighted Average Cost of Capital
(WACC)
Formula:
image111.jpg [image111.jpg] image21.jpg [image21.jpg]
  D = Market value of all debt
  E = Market value of all common stock
  V = D + E = Market value of the entire firm
 image31.jpg [image31.jpg] = Cost of debt
  image41.jpg [image41.jpg] = Cost of equity
  T = Marginal corporate tax rate
WACC is an approximation of the average rate of return a company expects to
compensate all of its different investors. The WACC formula and key assumptions
used in the Company’s WACC calculation are outlined below:
 The market value of all debt reflects the capitalization of our operating
leases as debt, plus any other outstanding debt. We calculate our capitalized
operating lease obligations as part of our Return on Invested Capital (ROIC)
calculation. The market value of all debt (including capitalized operating lease
obligations) for each fiscal year within the Performance Period will equal the
amounts included in our publicly reported ROIC calculations
 The market value of all common stock for each fiscal year within the
Performance Period is calculated based on the 5-quarter average (the first day
of the first quarter and the last day of each of the 4 quarters) of our common
shares outstanding multiplied by the respective closing share price at the end
of each quarter
 Cost of debt is the effective interest rate a company would pay for its debt.
Our research indicates our debt would receive a rating of approximately BB
(high-yield corporate debt). We base our cost of debt on the FlNRA/Bloomberg
Active U.S. High Yield Corporate Bond Index rates computed on a five-quarter
average (the first day of the first quarter and the last day of each of the 4
quarters) for each fiscal year within the Performance Period as reported on
Bloomberg.com
 Cost of equity
o Risk-free rate is the theoretical rate of return of an investment with no risk
of financial loss. In practice, a bond issued by a government with a negligible
risk of default is used. We base our risk-free rate on the average daily 10-year
U.S. treasury bill rate during each fiscal year within the Performance Period
o Risk premium is the return in excess of the risk-free rate that an investment
(as adjusted for risk) is expected to yield. We use the risk premium by
industry/sector as annually reported by the Stern School of Business at New York
University. For the purposes of this calculation, we use the average of the
annual risk premium estimates for the Furniture/Home Furnishings and Retail
(Special Lines) industry sectors for the period that most closely corresponds to
each fiscal year within the Performance Period
 Marginal corporate tax rate is our effective tax rate before discrete
adjustments for each fiscal year within the Performance Period
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If any benchmark or index referenced above is unavailable at the time of the
performance measurement, we will substitute with a substantially similar
benchmark or index approved by the Compensation Committee
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