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

 
Exhibit 10.3

 
SMART ONLINE, INC.
NONQUALIFIED STOCK OPTION AGREEMENT
 

THIS NONQUALIFIED STOCK OPTION AGREEMENT, made and entered into as of the ___
day of __________, 200__, by and between Smart Online, Inc., a Delaware
corporation (the “Company”), and _____________ (the “Participant”).

WHEREAS, the committee appointed under the Smart Online, Inc. Equity
Compensation Plan (the “Committee”) granted Participant an option to purchase
shares of the Company’s Common Stock, $0.0001 par value per share (the “Common
Stock”), pursuant to the Smart Online, Inc. 2004 Equity Compensation Plan (the
“Plan”) (capitalized terms used herein shall have the meanings set out in the
Plan unless otherwise specified in this Agreement); and

WHEREAS, this Agreement evidences the grant of such option.

NOW, THEREFORE, in consideration of the foregoing, of the mutual promises set
forth below and of other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto, intending to
be legally bound, agree as follows:

1.    Grant of Option. The Committee hereby grants Participant an option to
purchase from the Company, during the period specified in Section 2 of this
Agreement, a total of ____________thousand (xx,000) shares of Stock, at the
purchase price of ____________ cents ($0.xx) per share (the “Purchase Price”),
in accordance with the terms and conditions stated in this Agreement. The
Purchase Price represents the fair market value of the Stock on the date of this
Agreement, and under no circumstances shall the Purchase Price ever be less than
such fair market value on the date of this Agreement. The shares of Stock
subject to the option granted hereby are referred to below as the “Shares,” and
the option to purchase such Shares is referred to below as the “Option”.

2.    Vesting and Exercise of Option. The Option shall vest and become
exercisable in increments in accordance with the four-year schedule set forth
below, provided that the Option shall vest and become exercisable with respect
to an increment as specified only if Participant [is employed] [is a Director]
[is a consultant] [is _________________ (other)] with the Company on the
specified date for such increment:
 
(a)    on the first year anniversary of the Grant Date, the Option shall vest
and become exercisable with respect to ___________ percent (_______%) of the
Shares; and

(b)    on each the last day of each month following the first annual anniversary
thereafter, the Option shall vest and become exercisable with respect to an
additional _______________ percent (__________%) of the Shares.

1

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

[NOTE: For some Consultants vesting might be based on completing projects.]

The schedule set forth above is cumulative, so that Shares as to which the
Option has become vested and exercisable on and after a date indicated by the
schedule may be purchased pursuant to exercise of the Option at any subsequent
date prior to termination of the Option. The Option may be exercised at any time
and from time to time to purchase up to the number of Shares as to which it is
then vested and exercisable.

Notwithstanding the foregoing, the Option shall vest and become exercisable, to
the extent not already vested and exercisable, upon a Change of Control or a
Corporate Reorganization, if the Company shall send Participant prior written
notice of the effectiveness of such event and the last day on which Participant
may exercise the Option. Participant may, upon compliance with all of the terms
of this Agreement and the Plan, purchase any or all of the Shares with respect
to which the Option is vested and exercisable on or prior to the last day
specified in such notice, and, to the extent the Option is not exercised, it
shall terminate at 5:00 P.M., eastern standard time, on the last day specified
in such notice. The last day specified in the notice shall not be less than
twenty (20) days after the date of the notice.

3.    Termination of Option. The Option shall remain exercisable as specified in
Section 2 above until the earliest to occur of the dates specified below, upon
which date the Option shall terminate:

(a)    the date all of the Shares are purchased pursuant to the terms of this
Agreement;

(b)    in the event of Participant’s death or disability prior to Termination of
Service of Participant, the Option shall remain exercisable until one year
following the Participant’s death or disability;

(c)    upon expiration of ninety (90) days following the Participant ceasing to
have the status of consultant to the Company, provided that in the event of the
Participant’s death or disability during such ninety (90) day period the Option
shall remain exercisable for ninety (90) days following the Participant’s death
or disability; or [NOTE: PARAGRAPHS (d) AND (e) MAY NOT BE APPROPRIATE IN SOME
CIRCUMSTANCES, SUCH AS WHERE A CONSULTANT IS ONLY WORKING ON A SPECIFIC PROJECT]

(d)    at 5:00 P.M., eastern standard time, on the last date specified in the
notice described in Section 2 above, in the event of a Change of Control or
Corporate Reorganization, except to the extent that the Option is assumed by the
surviving entity or an affiliate thereof in connection with such Change in
Control or Corporate Reorganization; or

(e)    the ten year anniversary of the Grant Date at 5:00 P.M., eastern standard
time.

2

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

Upon its termination, the Option shall have no further force or effect and
Participant shall have no further rights under the Option or to any Shares which
have not been purchased pursuant to prior exercise of the Option.

4.    Manner of Exercise of Option.

(a)    The Option may be exercised only by (i) Participant’s completion,
execution and delivery to the Company of a notice of exercise and, if required
by the Company, an “investment letter” as supplied by the Company confirming
Participant’s representations and warranties in Section 16 of this Agreement,
including the representation that Participant is acquiring the Shares for
investment only and not with a view to the resale or other distribution thereof,
and (ii) the payment to the Company, pursuant to the terms of this Agreement, of
an amount equal to the Purchase Price multiplied by the number of Shares being
purchased as specified in Participant’s notice of exercise. Participant’s notice
of exercise shall be given in the manner specified in Section 11 but any
exercise of the Option shall be effective only when the items required by the
preceding sentence are actually received by the Company. The notice of exercise
and the “investment letter” may be in the form set forth in Exhibit A attached
to this Agreement. Payment of the aggregate Purchase Price for Shares
Participant has elected to purchase shall be made by cash or good check.
Notwithstanding anything to the contrary in this Agreement, the Option may be
exercised only if compliance with all applicable federal and state securities
laws can be effected.

(b)    Subject to the provisions of Section 3.7 of the Plan, upon any exercise
of the Option by Participant or as soon thereafter as is practicable, the
Company shall issue and deliver to Participant a certificate or certificates
evi-dencing such number of Shares as Participant has then elected to purchase.
Such certificate or certificates shall be registered in the name of Participant
and shall bear the legend specified in Section 16 of this Agreement and any
legend required by any federal or state securities laws and by the state in
which the Company is incorporated.

5. Definitions; Authority of Committee.

(a)    A “Change in Control” shall be deemed to have occurred if, after the
class of stock then subject to this Agreement becomes publicly traded, (i) the
direct or indirect beneficial ownership (within the meaning of Section 13(d) of
the Act and Regulation 13D thereunder) of fifty percent (50%) or more of the
class of securities then subject to this Agreement is acquired or becomes held
by any person or group of persons (within the meaning of Section 13(d)(3) of the
Act), but excluding the Company and any employee benefit plan sponsored or
maintained by the Company, or (ii) assets or earning power constituting more
than fifty percent (50%) of the assets or earning power of the Company and its
subsidiaries (taken as a whole) is sold, mortgaged, leased or otherwise
transferred, in one or more transactions not in the ordinary course of the
Company’s business, to any such person or group of persons; provided, however,
that a Change in Control shall not be deemed to have occurred upon an investment
by one or more venture capital funds, Small Business Investment Companies (as
defined in the Small Business Investment Act of 1958, as

3

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

amended) or similar financial investors. For the purposes of this Agreement, the
class of stock then subject to this Agreement shall be deemed to be “publicly
traded” if such stock is listed or admitted to unlisted trading privileges on a
national securities exchange or as to which sales or bid and offer quotations
are reported in the automated system operated by the National Association of
Securities Dealers, Inc.

(b)    A “Corporate Reorganization” means the happening of any one (1) of the
following events: (i) the dissolution or liquidation of the Company; (ii) a
capital reorganization, merger or consolidation involving the Company, unless
(A) the transaction involves only the Company and one or more of the Company’s
parent corporation and wholly-owned (excluding interests held by employees,
officers and directors) subsidiaries; or (B) the shareholders who had the power
to elect a majority of the board of directors of the Company immediately prior
to the transaction have the power to elect a majority of the board of directors
of the surviving entity immediately following the transaction; (iii) the sale of
all or substantially all of the assets of the Company to another corporation,
person or business entity; or (iv) an acquisition of Company stock, unless the
shareholders who had the power to elect a majority of the board of directors of
the Company immediately prior to the acquisition have the power to elect a
majority of the board of directors of the Company immediately following the
transaction; provided, however, that a Corporate Reorganization shall not be
deemed to have occurred upon an investment by one or more venture capital funds,
Small Business Investment Companies (as defined in the Small Business Investment
Act of 1958, as amended) or similar financial investors.

(c)    “Termination of Service” shall have the meaning defined in the Plan.
 
(d)    All determinations made by the Committee with respect to the
interpretation, construction and application of any provision of this Agreement
shall be final, conclusive and binding on the parties.

6.    Rights Prior to Exercise. Participant will have no rights as a shareholder
with respect to the Shares except to the extent that Participant has exercised
the Option and has been issued and received delivery of a certificate or
certificates evidencing the Shares so purchased.

7.    Sale or Other Disposition by Majority Interest. Participant hereby
irrevocably appoints the Company and its President, or either of them, as
Participant’s agents and attor-neys-in-fact, with full power of substitution for
and in Partic-ipant’s name, to sell, exchange, transfer or otherwise dispose of
all or a portion of Participant’s Shares and to do any and all things and to
execute any and all documents and instruments (including, without limitation,
any stock transfer powers) in connection therewith, such powers of attorney not
to become operable until such time as the holder or holders of a majority of the
issued and outstanding shares of Stock of the Company sell, exchange, transfer
or otherwise dispose of, or contract to sell, exchange, transfer or otherwise
dispose of, all or a majority of the issued and outstanding shares of Stock of
the Company. Any sale, exchange, transfer or other disposition of all or a
portion of Participant’s Shares pursuant to the foregoing powers of

4

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

attorney shall be made upon substantially the same terms and conditions
(including sale price per share) applicable to a sale, exchange, transfer or
other disposition of shares of Stock of the Company owned by the holder or
holders of a majority of the issued and outstanding shares of Stock of the
Company. For purposes of determining the sale price per share of the Shares
under this Section 7, there shall be excluded the consideration (if any) paid or
payable to the holder or holders of a majority of the issued and outstanding
shares of Common Stock of the Company in connection with any employment,
consulting, noncompetition or similar agreements which such holder or holders
may enter into in connection with or subsequent to such sale, transfer, exchange
or other disposition. The foregoing power of attorney shall not impose or be
deemed to impose any fiduciary duty or any other duty (except as set forth in
this Section 7) or obligation on either the Company or its President, shall be
irrevocable and coupled with an interest and shall not terminate by operation of
law, whether by the death, bankruptcy or adjudication of incompetence or
insanity of Participant or the occurrence of any other event.

8.    Engagement of Participant. Nothing in this Agreement shall be construed as
constituting a commitment, guarantee, agreement or understanding of any kind or
nature that the Company shall continue to engage Participant as a consultant,
nor shall this Agreement affect in any way the right of the Company to terminate
the engagement of Participant at any time and for any reason, except as
otherwise provided in any written consulting agreement between the Company and
Participant.

9.    Burden and Benefit; Company. This Agreement shall be binding upon, and
shall inure to the benefit of, the Company and Participant, and their respective
heirs, personal and legal representatives, successors and assigns. As used in
this Section 9, the term the “Company” shall also include any corporation which
is the parent or a subsidiary of the Company or any corporation or entity which
is an affiliate of the Company by virtue of common (although not identical)
owner-ship, and for which Participant is providing services in any form during
Participant’s employment with the Company or any such other corporation or
entity. Participant hereby consents to the enforcement of any and all of the
provisions of this Agreement by or for the benefit of the Company and any such
other corpo-ration or entity.

10.    Entire Agreement. This Agreement and the Plan under which it is issued
contain the entire agreement between the parties with respect to the subject
matter hereof and supersedes all prior agreements or understandings, oral or
written, with respect to the subject matter herein. Participant accepts the
Option in full satisfaction of any and all obligations of the Company to grant
stock options to Participant as of the date hereof.

11.    Notices. Any and all notices under this Agreement shall be in writing,
and sent by hand delivery or by certified or registered mail (return receipt
requested and first-class postage prepaid), in the case of the Company, to its
principal executive offices to the attention of the President, and, in the case
of Participant, to Participant’s address as shown on the Company’s records.
 

5

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

12.    Governing Law. This Agreement shall be construed and enforced in
accordance with the laws of the state in which the Company is incorporated,
without reference to its conflicts of laws rules or the principles of the choice
of law.

13.    Modifications. No change or modification of this Agreement shall be valid
unless the same is in writing and signed by the parties hereto.

14.    Terms and Conditions of Plan. The terms and conditions included in the
Plan, the receipt of a copy of which Participant hereby acknowledges by
execution of this Agreement, are incorpo-rated by reference herein, and to the
extent that any conflict may exist between any term or provision of this
Agreement and any term or provision of the Plan, such term or provision of the
Plan shall control.

15.    Stock Legend. All certificates for Shares issued by the Company to
Participant or Participant’s successors and assigns or to any other person
becoming a signatory to this Agreement shall be endorsed with legends in
substantially the following form, and any transfer agent of the Company may be
instructed to require compliance with all legends on such certificates:

   
The shares represented by this Certificate have not been registered under the
Securities Act of 1933, as amended (the “Act”), or any state securities law.
Accordingly, the shares represented by this Certificate may not be sold, offered
for sale, transferred, pledged or hypothecated without an effective registration
statement for such shares under the Act or applicable state securities law or an
opinion of counsel satisfactory to the Company that registration is not required
under the Act or any applicable state securities law.

 
16.    Covenants and Representations and Covenants of Participant.

Participant represents, warrants, covenants and agrees with the Company as
follows:

(a)    The Option is being received for Participant’s own account without the
participation of any other person, with the intent of holding the Option and the
Shares issuable pursuant thereto for investment and without the intent of
participating, directly or indirectly, in a distribution of the Shares and not
with a view to, or for resale in connection with, any distribution of the Shares
or any portion thereof.

(b)    Participant is not acquiring the Option or any Shares based upon any
representation, oral or written, by any person with respect to the future value
of, or income from, the Shares, but rather upon an independent examination and
judgment as to the prospects of the Company.

6

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

(c)    Participant has had the opportunity to ask questions of and receive
answers from the Company and its executive officers and to obtain all
information necessary for Participant to make an informed decision with respect
to the investment in the Company represented by the Option and any Shares issued
upon its exercise.

(d)    Participant is able to bear the economic risk of any investment in the
Shares, including the risk of a complete loss of the investment, and Participant
acknowledges that Participant must continue to bear the economic risk of any
investment in Shares received upon exercise of the Option for an indefinite
period.

(e)    Participant understands and agrees that the Shares subject to the Option
may be issued and sold to Participant without registration under any state or
federal laws relating to the registration of securities and in that event will
be issued and sold in reliance on exemptions from registration under appropriate
state and federal laws.

(f)    Shares issued to Participant upon exercise of the Option will not be
offered for sale, sold or transferred by Participant other than pursuant to: (i)
an effective registration under applicable state securities laws or in a
transaction which is otherwise in compliance with those laws; (ii) an effective
registration under the Securities Act of 1933, or a transaction otherwise in
compliance with such Act; and (iii) evidence satisfactory to the Company of
compliance with all applicable state and federal securities laws. The Company
shall be entitled to rely upon an opinion of counsel satisfactory to it with
respect to compliance with the foregoing laws.

(g)    The Company will be under no obligation to register the Shares issuable
pursuant to the Option or to comply with any exemption available for sale of the
Shares by Participant without registration, and the Company is under no
obligation to act in any manner so as to make Rule 144 promulgated under the
Securities Act of 1933 available with respect to any sale of the Shares by
Participant.
 
(h)    Participant has not relied upon the Company with respect to any tax
consequences related to the grant or exercise of this Option, or the disposition
of Shares purchased pursuant to its exercise. Participant acknowledges that, as
a result of the grant and/or exercise of the Option, Participant may incur a
substantial tax liability. Participant assumes full responsibility for all such
consequences and the filing of all tax returns and elections Participant may be
required or find desirable to file in connection therewith. In the event any
valuation of the Option or Shares purchased pursuant to its exercise must be
made under federal or state tax laws and such valuation affects any return or
election of the Company, Participant agrees that the Company may determine such
value and that Participant will observe any determination so made by the Company
in all returns and elections filed by Participant. In the event the Company is
required by applicable law to collect any withholding, payroll or similar taxes
by reason of the grant or any exercise of the Option, Participant agrees that
the Company may withhold such taxes from any monetary amounts otherwise payable
by the Company to Participant and that, if such amounts are insufficient to
cover the taxes required to be collected by the Company, Participant will pay to
the Company such additional amounts as are required.

7

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

(i)    The agreements, representations, warranties and covenants made by
Participant herein with respect to the Option shall also extend to and apply to
all of the Shares issued to Participant from time to time pursuant to exercise
of the Option. Acceptance by Participant of any certificate representing Shares
shall constitute a confirmation by Participant that all such agreements,
representations, warranties and covenants made herein shall be true and correct
at that time.

(j)    In the event any underwriter of securities of the Company requests
Participant to sign any agreement restricting resale of the Shares in connection
with any public offering by the Company, Participant agrees to sign such
agreement, provided the officers of the Company have signed an agreement no less
restrictive. The Company may instruct its transfer agent not to transfer the
Shares if requested by an underwriter as described above.

(k)    Participant hereby agrees to comply with any plan, policy or other
document of the Company approved by the Board of Directors of the Company to
ensure compliance with securities laws, rules and regulations both during the
term of employment of Participant and for one (1) year thereafter. The Company
may impose stop-transfer restrictions with respect to Shares acquired upon
exercise of the Options to enforce this provision.

(The remainder of this page is intentionally left blank.)

8

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

IN WITNESS WHEREOF, the parties hereto have caused this Award Agreement to be
executed effective as of the day and year first above written.

SMART ONLINE, INC.

 

By:_____________________________________
Print Name:

PARTICIPANT:

_________________________________
Print Name:

9

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

EXHIBIT A

Attention: Equity Compensation Plan Committee
Smart Online, Inc.
Post Office Box 12794
Research Triangle Park, North Carolina 27709-2794

Re: Exercise of Nonqualified Stock Option

Dear Committee Members:

Pursuant to the terms and conditions of that certain Nonqualified Stock Option
Agreement dated as of ____________, 20__ (the “Agreement”) between _________ and
Smart Online, Inc. (the “Company”), I desire to purchase _______________ Shares
of the Stock of the Company and hereby tender payment in full for such Shares in
accordance with the terms of the Agreement.

I hereby reaffirm that the representations and warranties made in Section 17 of
the Agreement are true and correct on the date hereof as if made on the date
hereof.

Very truly yours,

Print Name:

Date: __________________________