Exhibit
10.5


 


ARYX
THERAPEUTICS, INC.

2007 EQUITY INCENTIVE PLAN


 


ADOPTED
BY THE BOARD OF DIRECTORS:  JULY 18, 2007


APPROVED
BY THE STOCKHOLDERS:  OCTOBER 22, 2007


TERMINATION
DATE:  JULY 17, 2017


 


1.                                      GENERAL.


 


(a)                                  Eligible Stock Award Recipients. The
persons eligible to receive Stock Awards are Employees, Directors and
Consultants.


 


(b)                                  Available Stock Awards. The Plan
provides for the grant of the following Stock Awards: (i) Incentive Stock
Options, (ii) Nonstatutory Stock Options, (iii) Restricted Stock Awards, (iv)
Restricted Stock Unit Awards, (v) Stock Appreciation Rights, (vi) Performance
Stock Awards, and (vii) Other Stock Awards.


 


(c)                                  Purpose. The Company, by means of
the Plan, seeks to secure and retain the services of the group of persons
eligible to receive Stock Awards as set forth in Section 1(a), to provide
incentives for such persons to exert maximum efforts for the success of the
Company and any Affiliate and to provide a means by which such eligible
recipients may be given an opportunity to benefit from increases in value of
the Common Stock through the granting of Stock Awards.


 


2.                                      ADMINISTRATION.


 


(a)                                  Administration
by Board. The Board shall administer the Plan unless and until the Board
delegates administration of the Plan to a Committee or Committees, as provided
in Section 2(c).


 


(b)                                  Powers
of Board. The Board shall have the power, subject to, and within the
limitations of, the express provisions of the Plan:


 


(i)                                    To
determine from time to time (A) which of the persons eligible under the Plan
shall be granted Stock Awards; (B) when and how each Stock Award shall be
granted; (C) what type or combination of types of Stock Award shall be granted;
(D) the provisions of each Stock Award granted (which need not be identical),
including the time or times when a person shall be permitted to receive cash or
Common Stock pursuant to a Stock Award; and (E) the number of shares of Common
Stock with respect to which a Stock Award shall be granted to each such person.


 


(ii)                                To
construe and interpret the Plan and Stock Awards granted under it, and to
establish, amend and revoke rules and regulations for its administration. The
Board, in the exercise of this power, may correct any defect, omission or
inconsistency in the Plan or in any Stock Award Agreement, in a manner and to
the extent it shall deem necessary or expedient to make the Plan or Stock Award
fully effective.


 


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(iii)                            To
settle all controversies regarding the Plan and Stock Awards granted under it.


 


(iv)                               To
accelerate the time at which a Stock Award may first be exercised or the time
during which a Stock Award or any part thereof will vest in accordance with the
Plan, notwithstanding the provisions in the Stock Award stating the time at
which it may first be exercised or the time during which it will vest.


 


(v)                                   To
effect, at any time and from time to time, with the consent of any adversely
affected Participant, (1) the reduction of the exercise price of any
outstanding Option or the strike price of any outstanding Stock Appreciation
Right; (2) the cancellation of any outstanding Option or Stock Appreciation
Right and the grant in substitution therefor of (a) a new Option or Stock
Appreciation Right under the Plan or another equity plan of the Company
covering the same or different number of shares of Common Stock, (b) a
Restricted Stock Award, (c) a Restricted Stock Unit Award, (d) an Other Stock
Award, (e) cash, and/or (f) other valuable consideration as determined by the
Board in its sole discretion; or (3) any other action that is treated as a
repricing under generally accepted accounting principles.


 


(vi)                               To suspend or terminate the Plan at
any time. Suspension or termination of the Plan shall not impair rights and
obligations under any Stock Award granted while the Plan is in effect except
with the written consent of the affected Participant.


 


(vii)                           To
amend the Plan in any respect the Board deems necessary or advisable,
including, without limitation, relating to Incentive Stock Options and certain
nonqualified deferred compensation under Section 409A of the Code and/or to
bring the Plan or Stock Awards granted under the Plan into compliance
therewith, subject to the limitations, if any, of applicable law. However,
except as provided in Section 9(a) relating to Capitalization Adjustments, stockholder approval shall be required for
any amendment of the Plan that either (i) materially increases the number of
shares of Common Stock available for issuance under the Plan, (ii) materially
expands the class of individuals eligible to receive Stock Awards under the
Plan, (iii) materially increases the benefits accruing to Participants under
the Plan or materially reduces the price at which shares of Common Stock may be
issued or purchased under the Plan, (iv) materially extends the term of the
Plan, or (v) expands the types of Stock Awards available for issuance under the
Plan, but in each of (i) through (v) only to the extent required by applicable
law or listing requirements. Except as provided above, rights under any
Stock Award granted before amendment of the Plan shall not be impaired by any
amendment of the Plan unless (i) the Company requests the consent of the
affected Participant, and (ii) such Participant consents in writing.


 


(viii)                       To submit any amendment to the Plan
for stockholder approval, including, but not limited to, amendments to the Plan
intended to satisfy the requirements of (i) Section 162(m) of the Code and the
regulations thereunder regarding the exclusion of performance-based compensation
from the limit on corporate deductibility of compensation paid to Covered
Employees, (ii) Section 422 of the Code regarding Incentive Stock Options, or
(iii) Rule 16b-3.


 


(ix)                              To
approve forms of Stock Award Agreements for use under the Plan and to amend the
terms of any one or more Stock Awards, including, but not limited to,
amendments 


 


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to provide terms more
favorable than previously provided in the Stock Award Agreement, subject to any
specified limits in the Plan that are not subject to Board discretion; provided however, that, the rights under any Stock Award
shall not be impaired by any such amendment unless (i) the Company requests the
consent of the affected Participant, and (ii) such Participant consents in
writing. Notwithstanding the foregoing, subject to the limitations of
applicable law, if any, the Board may amend the terms of any one or more Stock
Awards without the affected Participant’s consent if necessary to maintain the
qualified status of the Stock Award as an Incentive Stock Option or to bring
the Stock Award into compliance with Section 409A of the Code and the related
guidance thereunder.


 


(x)                                  Generally,
to exercise such powers and to perform such acts as the Board deems necessary or
expedient to promote the best interests of the Company and that are not in
conflict with the provisions of the Plan or Stock Awards.


 


(xi)                              To
adopt such procedures and sub-plans as are necessary or appropriate to permit
participation in the Plan by Employees, Directors or Consultants who are
foreign nationals or employed outside the United States.


 


(c)                                  Delegation
to Committee.


 


(i)                                    General. The Board may delegate
some or all of the administration of the Plan to a Committee or Committees. If
administration is delegated to a Committee, the Committee shall have, in
connection with the administration of the Plan, the powers theretofore
possessed by the Board that have been delegated to the Committee, including the
power to delegate to a subcommittee of the Committee any of the administrative
powers the Committee is authorized to exercise (and references in the Plan to
the Board shall thereafter be to the Committee or subcommittee), subject,
however, to such resolutions, not inconsistent with the provisions of the Plan,
as may be adopted from time to time by the Board. The Board may retain the
authority to concurrently administer the Plan with the Committee and may, at
any time, revest in the Board some or all of the powers previously delegated.


 


(ii)                                Section 162(m) and Rule 16b-3 Compliance. In
the sole discretion of the Board, the Committee may consist solely of two or
more Outside Directors, in accordance with Section 162(m) of the Code, or
solely of two or more Non-Employee Directors, in accordance with Rule 16b-3. In
addition, the Board or the Committee, in its sole discretion, may (A) delegate
to a Committee who need not be Outside Directors the authority to grant Stock
Awards to eligible persons who are either (I) not then Covered Employees and
are not expected to be Covered Employees at the time of recognition of income
resulting from such Stock Award, or (II) not persons with respect to whom the
Company wishes to comply with Section 162(m) of the Code, or (B) delegate to a
Committee who need not be Non-Employee Directors the authority to grant Stock
Awards to eligible persons who are not then subject to Section 16 of the
Exchange Act.


 


(d)                                  Delegation to Officers. The Board
may delegate to one or more Officers the authority to do one or both of the
following (i) designate Officers and Employees of the Company or any of its
Subsidiaries to be recipients of Options (and, to the extent permitted by
Delaware law, other Stock Awards) and the terms thereof, and (ii) determine the
number of 


 


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shares of Common Stock to
be subject to such Stock Awards granted to such Officers and Employees; provided, however, that the Board
resolutions regarding such delegation shall specify the total number of shares
of Common Stock that may be subject to the Stock Awards granted by such
Officers and that such Officer may not grant a Stock Award to himself or
herself. Notwithstanding anything to the contrary in this Section 2(d), the
Board may not delegate to an Officer authority to determine the Fair Market
Value of the Common Stock pursuant to Section 13(u)(iii).


 


(e)                                  Effect of Board’s Decision. All
determinations, interpretations and constructions made by the Board in good
faith shall not be subject to review by any person and shall be final, binding
and conclusive on all persons.


 


3.                                      SHARES
SUBJECT TO THE PLAN.


 


(a)                                  Share
Reserve. Subject to the provisions of Section 9(a) relating to
Capitalization Adjustments, the aggregate number of shares of Common Stock that
may be issued pursuant to Stock Awards under the Plan shall not exceed 650,000
shares of Common Stock. In addition, the number of shares of Common Stock
available for issuance under the Plan shall automatically increase on January
1st of each year commencing in 2008 and ending on (and including) January 1,
2017, in an amount equal to the lesser of (i) four percent (4%) of the total
number of shares of Common Stock outstanding on December 31st of the preceding
calendar year, or (ii) a lesser number of shares of Common Stock determined by
the Board of Directors prior to the first day of any calendar year. Shares may
be issued in connection with a merger or acquisition as permitted by Nasdaq
Rule 4350(i)(1)(A)(iii) or, if applicable, NYSE Listed Company Manual Section
303A.08, or AMEX Company Guide Section 711 and such issuance shall not reduce
the number of shares available for issuance under the Plan.


 


(b)                                  Reversion
of Shares to the Share Reserve. If any (i) Stock Award shall for any reason
expire or otherwise terminate, in whole or in part, without having been
exercised in full, (ii) shares of Common Stock issued to a Participant pursuant
to a Stock Award are forfeited back to or repurchased by the Company because of
the failure to meet a contingency or condition required for the vesting of such
shares, (iii) a Stock Award is settled in cash, (iv) if any shares of Common
Stock are cancelled in accordance with the cancellation and regrant provisions
of Section 2(b)(v), then the shares of Common Stock not issued under such Stock
Award, or forfeited to or repurchased by the Company, shall revert to and again
become available for issuance under the Plan. If any shares subject to a Stock
Award are not delivered to a Participant because such shares are withheld for
the payment of taxes or the Stock Award is exercised through a reduction of
shares subject to the Stock Award (i.e.,
“net exercised”) or an appreciation distribution in respect of a Stock
Appreciation right is paid in shares of Common Stock, the number of shares
subject to the Stock Award that are not delivered to the Participant shall
remain available for subsequent issuance under the Plan. If the exercise price
of any Stock Award is satisfied by tendering shares of Common Stock held by the
Participant (either by actual delivery or attestation), then the number of
shares so tendered shall remain available for issuance under the Plan.


 


(c)                                  Incentive
Stock Option Limit. Subject to the provisions of Section 9(a) relating to
Capitalization Adjustments, the aggregate maximum number of shares of Common
Stock that


 


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may be issued pursuant to
the exercise of Incentive Stock Options shall be 6,666,666 shares of Common
Stock.


 


(d)                                  Source
of Shares. The stock issuable under the Plan shall be shares of authorized
but unissued or reacquired Common Stock, including shares repurchased by the
Company on the open market.


 


4.                                      ELIGIBILITY.


 


(a)                                  Eligibility
for Specific Stock Awards. Incentive Stock Options may be granted only to
employees of the Company or a “parent corporation” or “subsidiary corporation”
thereof (as such terms are defined in Sections 424(e) and 424(f) of the Code). Stock
Awards other than Incentive Stock Options may be granted to Employees,
Directors and Consultants.


 


(b)                                  Ten
Percent Stockholders. A Ten Percent Stockholder shall not be granted an
Incentive Stock Option unless the exercise price of such Option is at least one
hundred ten percent (110%) of the Fair Market Value of the Common Stock on the
date of grant and the Option is not exercisable after the expiration of five
(5) years from the date of grant.


 


(c)                                  Section 162(m) Limitation. Subject
to the provisions of Section 9(a) relating to Capitalization Adjustments, at
such time as the Company may be subject to the applicable provisions of Section
162(m) of the Code, no Employee shall be eligible to be granted during any
calendar year Stock Awards whose value is determined by reference to an
increase over an exercise or strike price of at least one hundred percent
(100%) of the Fair Market Value of the Common Stock on the date the Stock Award
is granted covering more than 666,666 shares of Common Stock.


 


(d)                                  Consultants. A Consultant shall be
eligible for the grant of a Stock Award only if, at the time of grant, a Form
S-8 Registration Statement under the Securities Act (“Form S-8”) is available to register
either the offer or the sale of the Company’s securities to such Consultant.


 


5.                                      OPTION
PROVISIONS.


 


Each Option shall be in such form and shall contain
such terms and conditions as the Board shall deem appropriate. All Options
shall be separately designated Incentive Stock Options or Nonstatutory Stock
Options at the time of grant, and, if certificates are issued, a separate
certificate or certificates shall be issued for shares of Common Stock
purchased on exercise of each type of Option. If an Option is not specifically
designated as an Incentive Stock Option, then the Option shall be a
Nonstatutory Stock Option. The provisions of separate Options need not be
identical; provided, however,
that each Option Agreement shall conform to (through incorporation of
provisions hereof by reference in the Option Agreement or otherwise) the
substance of each of the following provisions:


 


(a)                                  Term.
Subject to the provisions of Section 4(b) regarding Ten Percent Stockholders,
no Option shall be exercisable after the expiration of ten (10) years from the
date of its grant or such shorter period specified in the Option Agreement.


 


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(b)                                  Exercise
Price. Subject to the provisions of Section 4(b) regarding Ten Percent
Stockholders, the exercise price of each Option shall be not less than one
hundred percent (100%) of the Fair Market Value of the Common Stock subject to
the Option on the date the Option is granted. Notwithstanding the foregoing, an
Option may be granted with an exercise price lower than one hundred percent
(100%) of the Fair Market Value of the Common Stock subject to the Option if
such Option is granted pursuant to an assumption or substitution for another
option in a manner consistent with the provisions of Section 424(a) of the Code
(whether or not such options are Incentive Stock Options).


 


(c)                                  Consideration.
The purchase price of Common Stock acquired pursuant to the exercise of an
Option shall be paid, to the extent permitted by applicable law and as
determined by the Board in its sole discretion, by any combination of the
methods of payment set forth below. The Board shall have the authority to grant
Options that do not permit all of the following methods of payment (or
otherwise restrict the ability to use certain methods) and to grant Options
that require the consent of the Company to utilize a particular method of
payment. The methods of payment permitted by this Section 5(c) are:


 


(i)                                    by
cash, check, bank draft or money order payable to the Company;


 


(ii)                                pursuant
to a program developed under Regulation T as promulgated by the Federal Reserve
Board that, prior to the issuance of the stock subject to the Option, results
in either the receipt of cash (or check) by the Company or the receipt of
irrevocable instructions to pay the aggregate exercise price to the Company
from the sales proceeds;


 


(iii)                            by
delivery to the Company (either by actual delivery or attestation) of shares of
Common Stock;


 


(iv)                               by
a “net exercise” arrangement pursuant to which the Company will reduce the
number of shares of Common Stock issuable upon exercise by the largest whole
number of shares with a Fair Market Value that does not exceed the aggregate
exercise price; provided, however,
the Company shall accept a cash or other payment from the Participant to the
extent of any remaining balance of the aggregate exercise price not satisfied
by such reduction in the number of whole shares to be issued; provided, further, that shares of Common
Stock will no longer be subject to an Option and will not be exercisable
thereafter to the extent that (A) shares issuable upon exercise are reduced to
pay the exercise price pursuant to the “net exercise,” (B) shares are delivered
to the Participant as a result of such exercise, and (C) shares are withheld to
satisfy tax withholding obligations;  or


 


(v)                                   according
to a deferred payment or similar arrangement with the Optionholder; provided, however, that interest shall
compound at least annually and shall be charged at the minimum rate of interest
necessary to avoid (i) the imputation of interest income to the Company and
compensation income to the Optionholder under any applicable provisions of the
Code, and (ii) the classification of the Option as a liability for financial
accounting purposes; or


 


(vi)                               in
any other form of legal consideration that may be acceptable to the Board in
its sole discretion and permissible under applicable law.


 


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(d)                                  Transferability
of Options. The Board may, in its sole discretion, impose such limitations
on the transferability of Options as the Board shall determine. In the absence
of such a determination by the Board to the contrary, the following restrictions
on the transferability of Options shall apply:


 


(i)                                    Restrictions
on Transfer. An Option shall not be transferable except by will or by the
laws of descent and distribution and shall be exercisable during the lifetime
of the Optionholder only by the Optionholder; provided,
however, that the Board may, in its sole discretion, permit transfer
of the Option in a manner that is not prohibited by applicable tax and
securities laws upon the Optionholder’s request.


 


(ii)                                Domestic
Relations Orders. Notwithstanding the foregoing, an Option may be
transferred pursuant to a domestic relations order, provided,
however, that if an Option is an Incentive Stock Option, such Option
may be deemed to be a Nonstatutory Stock Option as a result of such transfer.


 


(iii)                            Beneficiary
Designation. Notwithstanding the foregoing, the Optionholder may, by
delivering written notice to the Company, in a form provided by or otherwise
satisfactory to the Company and any broker designated by the Company to effect
Option exercises, designate a third party who, in the event of the death of the
Optionholder, shall thereafter be entitled to exercise the Option. In the
absence of such a designation, the executor or administrator of the
Optionholder’s estate shall be entitled to exercise the Option.


 


(e)                                  Vesting
of Options Generally. The total number of shares of Common Stock subject to
an Option may vest and therefore become exercisable in periodic installments
that may or may not be equal. The Option may be subject to such other terms and
conditions on the time or times when it may or may not be exercised (which may
be based on the satisfaction of Performance Goals or other criteria) as the
Board may deem appropriate. The vesting provisions of individual Options may
vary. The provisions of this Section 5(e) are subject to any Option provisions
governing the minimum number of shares of Common Stock as to which an Option
may be exercised.


 


(f)                                    Termination of Continuous Service. In
the event that an Optionholder’s Continuous Service terminates (other than upon
the Optionholder’s death or Disability), the Optionholder may exercise his or
her Option (to the extent that the Optionholder was entitled to exercise such
Option as of the date of termination of Continuous Service) but only within such
period of time ending on the earlier of (i) the date three (3) months following
the termination of the Optionholder’s Continuous Service (or such longer or
shorter period specified in the Option Agreement), or (ii) the expiration of
the term of the Option as set forth in the Option Agreement. If, after
termination of Continuous Service, the Optionholder does not exercise his or
her Option within the time specified herein or in the Option Agreement (as
applicable), the Option shall terminate.


 


(g)                                 Extension of Termination Date. An
Optionholder’s Option Agreement may provide that if the exercise of the Option
following the termination of the Optionholder’s Continuous Service (other than
upon the Optionholder’s death or Disability) would be prohibited at any time
solely because the issuance of shares of Common Stock would violate the


 


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registration requirements
under the Securities Act, then the Option shall terminate on the earlier of (i)
the expiration of a period of three (3) months after the termination of the
Optionholder’s Continuous Service during which the exercise of the Option would
not be in violation of such registration requirements, or (ii) the expiration
of the term of the Option as set forth in the Option Agreement.


 


(h)                                 Disability of Optionholder. In the
event that an Optionholder’s Continuous Service terminates as a result of the
Optionholder’s Disability, the Optionholder may exercise his or her Option (to
the extent that the Optionholder was entitled to exercise such Option as of the
date of termination of Continuous Service), but only within such period of time
ending on the earlier of (i) the date twelve (12) months following such
termination of Continuous Service (or such longer or shorter period specified
in the Option Agreement), or (ii) the expiration of the term of the Option as
set forth in the Option Agreement. If, after termination of Continuous Service,
the Optionholder does not exercise his or her Option within the time specified
herein or in the Option Agreement (as applicable), the Option shall terminate.


 


(i)                                    Death of Optionholder. In the
event that (i) an Optionholder’s Continuous Service terminates as a result of
the Optionholder’s death, or (ii) the Optionholder dies within the period (if
any) specified in the Option Agreement after the termination of the
Optionholder’s Continuous Service for a reason other than death, then the
Option may be exercised (to the extent the Optionholder was entitled to
exercise such Option as of the date of death) by the Optionholder’s estate, by
a person who acquired the right to exercise the Option by bequest or
inheritance or by a person designated to exercise the option upon the
Optionholder’s death, but only within the period ending on the earlier of (i)
the date eighteen (18) months following the date of death (or such longer or
shorter period specified in the Option Agreement), or (ii) the expiration of
the term of such Option as set forth in the Option Agreement. If, after the
Optionholder’s death, the Option is not exercised within the time specified
herein or in the Option Agreement (as applicable), the Option shall terminate.


 


(j)                                    Non-Exempt Employees. No Option
granted to an Employee who is a non-exempt employee for purposes of the Fair
Labor Standards Act shall be first exercisable for any shares of Common Stock
until at least six months following the date of grant of the Option. The
foregoing provision is intended to operate so that any income derived by a
non-exempt employee in connection with the exercise or vesting of an Option
will be exempt from his or her regular rate of pay.


 


6.                                      PROVISIONS
OF STOCK AWARDS OTHER THAN OPTIONS.


 


(a)                                  Restricted
Stock Awards. Each Restricted Stock Award Agreement shall be in such form
and shall contain such terms and conditions as the Board shall deem appropriate.
To the extent consistent with the Company’s Bylaws, at the Board’s election,
shares of Common Stock may be (x) held in book entry form subject to the
Company’s instructions until any restrictions relating to the Restricted Stock
Award lapse; or (y) evidenced by a certificate, which certificate shall be
held in such form and manner as determined by the Board. The terms and
conditions of Restricted Stock Award Agreements may change from time to time,
and the terms and conditions of separate Restricted Stock Award Agreements need
not be identical, provided, however,
that each Restricted Stock Award Agreement shall conform to (through
incorporation 


 


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of the provisions hereof
by reference in the agreement or otherwise) the substance of each of the
following provisions:


 


(i)                                    Consideration.
A Restricted Stock Award may be awarded in consideration for (A) cash, check,
bank draft or money order payable to the Company; (B) past or future services
actually or to be rendered to the Company or an Affiliate; or (C) any other
form of legal consideration that may be acceptable to the Board in its sole
discretion and permissible under applicable law.


 


(ii)                                Vesting.
Shares of Common Stock awarded under a Restricted Stock Award Agreement may be
subject to forfeiture to the Company in accordance with a vesting schedule to
be determined by the Board.


 


(iii)                            Termination
of Participant’s Continuous Service. In the event a Participant’s
Continuous Service terminates, the Company may receive via a forfeiture
condition or a repurchase right, any or all of the shares of Common Stock held
by the Participant which have not vested as of the date of termination of
Continuous Service under the terms of the Restricted Stock Award Agreement.


 


(iv)                               Transferability. Rights to acquire shares of Common Stock
under the Restricted Stock Award Agreement shall be transferable by the
Participant only upon such terms and conditions as are set forth in the
Restricted Stock Award Agreement, as the Board shall determine in its sole
discretion, so long as Common Stock awarded under the Restricted Stock Award
Agreement remains subject to the terms of the Restricted Stock Award Agreement.


 


(b)                                  Restricted
Stock Unit Awards. Each Restricted Stock Unit Award Agreement shall be in
such form and shall contain such terms and conditions as the Board shall deem
appropriate. The terms and conditions of Restricted Stock Unit Award Agreements
may change from time to time, and the terms and conditions of separate
Restricted Stock Unit Award Agreements need not be identical, provided, however, that each Restricted
Stock Unit Award Agreement shall conform to (through incorporation of the
provisions hereof by reference in the agreement or otherwise) the substance of
each of the following provisions:


 


(i)                                    Consideration. At the time of
grant of a Restricted Stock Unit Award, the Board will determine the
consideration, if any, to be paid by the Participant upon delivery of each
share of Common Stock subject to the Restricted Stock Unit Award. The
consideration to be paid (if any) by the Participant for each share of Common
Stock subject to a Restricted Stock Unit Award may be paid in any form of legal
consideration that may be acceptable to the Board in its sole discretion and
permissible under applicable law.


 


(ii)                                Vesting. At the time of the grant
of a Restricted Stock Unit Award, the Board may impose such restrictions or
conditions to the vesting of the Restricted Stock Unit Award as it, in its sole
discretion, deems appropriate.


 


(iii)                            Payment. A Restricted Stock Unit
Award may be settled by the delivery of shares of Common Stock, their cash
equivalent, any combination thereof or in any other form of consideration, as
determined by the Board and contained in the Restricted Stock Unit Award
Agreement.


 


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(iv)                               Additional Restrictions. At the
time of the grant of a Restricted Stock Unit Award, the Board, as it deems
appropriate, may impose such restrictions or conditions that delay the delivery
of the shares of Common Stock (or their cash equivalent) subject to a
Restricted Stock Unit Award to a time after the vesting of such Restricted
Stock Unit Award.


 


(v)                                   Dividend Equivalents. Dividend
equivalents may be credited in respect of shares of Common Stock covered by a
Restricted Stock Unit Award, as determined by the Board and contained in the
Restricted Stock Unit Award Agreement. At the sole discretion of the Board,
such dividend equivalents may be converted into additional shares of Common
Stock covered by the Restricted Stock Unit Award in such manner as determined
by the Board. Any additional shares covered by the Restricted Stock Unit Award
credited by reason of such dividend equivalents will be subject to all the
terms and conditions of the underlying Restricted Stock Unit Award Agreement to
which they relate.


 


(vi)                               Termination
of Participant’s Continuous Service. Except as otherwise provided in the
applicable Restricted Stock Unit Award Agreement, such portion of the
Restricted Stock Unit Award that has not vested will be forfeited upon the
Participant’s termination of Continuous Service.


 


(vii)                           Compliance with Section 409A of the Code. Notwithstanding
anything to the contrary set forth herein, any Restricted Stock Unit Award
granted under the Plan that is not exempt from the requirements of Section 409A
of the Code shall incorporate terms and conditions necessary to avoid the
consequences of Section 409A(a)(1) of the Code. Such restrictions, if any,
shall be determined by the Board and contained in the Restricted Stock Unit
Award Agreement evidencing such Restricted Stock Unit Award.


 


(c)                                  Stock
Appreciation Rights. Each Stock Appreciation Right Agreement shall be in
such form and shall contain such terms and conditions as the Board shall deem
appropriate. Stock Appreciation Rights may be granted as stand-alone Stock
Awards or in tandem with other Stock Awards. The terms and conditions of Stock
Appreciation Right Agreements may change from time to time, and the terms and
conditions of separate Stock Appreciation Right Agreements need not be
identical; provided, however,
that each Stock Appreciation Right Agreement shall conform to (through
incorporation of the provisions hereof by reference in the agreement or
otherwise) the substance of each of the following provisions:


 


(i)                                    Term.
No Stock Appreciation Right shall be exercisable after the expiration of
ten (10) years from the date of its grant or such shorter period specified in
the Stock Appreciation Right Agreement.


 


(ii)                                Strike Price. Each Stock
Appreciation Right will be denominated in shares of Common Stock equivalents. The
strike price of each Stock Appreciation Right shall not be less than one
hundred percent (100%) of the Fair Market Value of the Common Stock equivalents
subject to the Stock Appreciation Right on the date of grant.


 


(iii)                            Calculation of Appreciation. The
appreciation distribution payable on the exercise of a Stock Appreciation Right
will be not greater than an amount equal to the excess of (A) the aggregate
Fair Market Value (on the date of the exercise of the Stock Appreciation 


 


10

















 


Right) of a number of
shares of Common Stock equal to the number of share of Common Stock equivalents
in which the Participant is vested under such Stock Appreciation Right, and
with respect to which the Participant is exercising the Stock Appreciation
Right on such date, over (B) the strike price.


 


(iv)                               Vesting. At the time of the grant
of a Stock Appreciation Right, the Board may impose such restrictions or
conditions to the vesting of such Stock Appreciation Right as it, in its sole
discretion, deems appropriate.


 


(v)                                   Exercise. To exercise any
outstanding Stock Appreciation Right, the Participant must provide written
notice of exercise to the Company in compliance with the provisions of the
Stock Appreciation Right Agreement evidencing such Stock Appreciation Right.


 


(vi)                               Payment. The appreciation
distribution in respect of a Stock Appreciation Right may be paid in Common
Stock, in cash, in any combination of the two or in any other form of
consideration, as determined by the Board and set forth in the Stock
Appreciation Right Agreement evidencing such Stock Appreciation Right.


 


(vii)                           Termination of Continuous Service. In
the event that a Participant’s Continuous Service terminates, the Participant
may exercise his or her Stock Appreciation Right (to the extent that the
Participant was entitled to exercise such Stock Appreciation Right as of the
date of termination of Continuous Service) but only within such period of time
ending on the earlier of (A) the date three (3) months following the
termination of the Participant’s Continuous Service (or such longer or shorter
period specified in the Stock Appreciation Right Agreement), or (B) the
expiration of the term of the Stock Appreciation Right as set forth in the
Stock Appreciation Right Agreement. If, after termination of Continuous
Service, the Participant does not exercise his or her Stock Appreciation Right
within the time specified herein or in the Stock Appreciation Right Agreement
(as applicable), the Stock Appreciation Right shall terminate.


 


(viii)                       Compliance
with Section 409A of the Code. Notwithstanding anything to the contrary set
forth herein, any Stock Appreciation Rights granted under the Plan that are not
exempt from the requirements of Section 409A of the Code shall incorporate
terms and conditions necessary to avoid the consequences described in Section
409A(a)(1) of the Code. Such restrictions, if any, shall be determined by the
Board and contained in the Stock Appreciation Right Agreement evidencing such
Stock Appreciation Right.


 


(d)                                  Performance Stock Awards. A
Performance Stock Award is either a Restricted Stock Award or Restricted Stock
Unit Award that may be granted or may vest based upon the attainment during a
Performance Period of certain Performance Goals. A Performance Stock Award may,
but need not, require the completion of a specified period of Continuous Service.
The length of any Performance Period, the Performance Goals to be achieved
during the Performance Period, and the measure of whether and to what degree
such Performance Goals have been attained shall be conclusively determined by
the Committee in its sole discretion. The maximum benefit to be received by any
Participant in a calendar year attributable to Performance Stock Awards
described in this Section 6(d) shall not exceed the value of 666,666 shares of
Common Stock. In addition, to the extent permitted by applicable law and the
applicable Award 


 


11

















 


Agreement, the Board may
determine that cash may be used in payment of Performance Stock Awards.


 


(e)                                  Other Stock Awards. Other forms of
Stock Awards valued in whole or in part by reference to, or otherwise based on,
Common Stock may be granted either alone or in addition to Stock Awards
provided for under Section 5 and the preceding provisions of this Section 6. Subject
to the provisions of the Plan, the Board shall have sole and complete authority
to determine the persons to whom and the time or times at which such Other
Stock Awards will be granted, the number of shares of Common Stock (or the cash
equivalent thereof) to be granted pursuant to such Other Stock Awards and all
other terms and conditions of such Other Stock Awards.


 


7.                                      COVENANTS
OF THE COMPANY.


 


(a)                                  Availability
of Shares. During the terms of the Stock Awards, the Company shall keep
available at all times the number of shares of Common Stock required to satisfy
such Stock Awards.


 


(b)                                  Securities
Law Compliance. The Company shall seek to obtain from each regulatory
commission or agency having jurisdiction over the Plan such authority as may be
required to grant Stock Awards and to issue and sell shares of Common Stock
upon exercise of the Stock Awards; provided, however,
that this undertaking shall not require the Company to register under the
Securities Act the Plan, any Stock Award or any Common Stock issued or issuable
pursuant to any such Stock Award. If, after reasonable efforts, the Company is
unable to obtain from any such regulatory commission or agency the authority
that counsel for the Company deems necessary for the lawful issuance and sale
of Common Stock under the Plan, the Company shall be relieved from any
liability for failure to issue and sell Common Stock upon exercise of such
Stock Awards unless and until such authority is obtained.


 


(c)                                  No
Obligation to Notify. The Company shall have no duty or obligation to any
holder of a Stock Award to advise such holder as to the time or manner of
exercising such Stock Award. Furthermore, the Company shall have no duty or
obligation to warn or otherwise advise such holder of a pending termination or
expiration of a Stock Award or a possible period in which the Stock Award may
not be exercised. The Company has no duty or obligation to minimize the tax
consequences of a Stock Award to the holder of such Stock Award.


 


8.                                      MISCELLANEOUS.


 


(a)                                  Use
of Proceeds. Proceeds from the sale of shares of Common Stock pursuant to
Stock Awards shall constitute general funds of the Company.


 


(b)                                  Corporate Action Constituting Grant of Stock
Awards. Corporate action constituting a grant by the Company of a
Stock Award to any Participant shall be deemed completed as of the date of such
corporate action, unless otherwise determined by the Board, regardless of when
the instrument, certificate, or letter evidencing the Stock Award is
communicated to, or actually received or accepted by, the Participant.


 


12

















 


(c)                                  Stockholder
Rights. No Participant shall be deemed to be the holder of, or to have any
of the rights of a holder with respect to, any shares of Common Stock subject
to such Stock Award unless and until (i) such Participant has satisfied all
requirements for exercise of the Stock Award pursuant to its terms, and (ii)
the issuance of the Common Stock pursuant to such exercise has been entered
into the books and records of the Company.


 


(d)                                  No
Employment or Other Service Rights. Nothing in the Plan, any Stock Award
Agreement or other instrument executed thereunder or in connection with any
Stock Award granted pursuant to the Plan shall confer upon any Participant any
right to continue to serve the Company or an Affiliate in the capacity in
effect at the time the Stock Award was granted or shall affect the right of the
Company or an Affiliate to terminate (i) the employment of an Employee with or
without notice and with or without cause, (ii) the service of a Consultant pursuant
to the terms of such Consultant’s agreement with the Company or an Affiliate,
or (iii) the service of a Director pursuant to the Bylaws of the Company or an
Affiliate, and any applicable provisions of the corporate law of the state in
which the Company or the Affiliate is incorporated, as the case may be.


 


(e)                                  Incentive
Stock Option $100,000 Limitation. To the extent that the aggregate Fair
Market Value (determined at the time of grant) of Common Stock with respect to
which Incentive Stock Options are exercisable for the first time by any
Optionholder during any calendar year (under all plans of the Company and any
Affiliates) exceeds one hundred thousand dollars ($100,000), the Options or
portions thereof that exceed such limit (according to the order in which they
were granted) shall be treated as Nonstatutory Stock Options, notwithstanding
any contrary provision of the applicable Option Agreement(s).


 


(f)                                    Investment
Assurances. The Company may require a Participant, as a condition of
exercising or acquiring Common Stock under any Stock Award, (i) to give written
assurances satisfactory to the Company as to the Participant’s knowledge and
experience in financial and business matters and/or to employ a purchaser
representative reasonably satisfactory to the Company who is knowledgeable and
experienced in financial and business matters and that he or she is capable of
evaluating, alone or together with the purchaser representative, the merits and
risks of exercising the Stock Award; and (ii) to give written assurances
satisfactory to the Company stating that the Participant is acquiring Common
Stock subject to the Stock Award for the Participant’s own account and not with
any present intention of selling or otherwise distributing the Common Stock. The
foregoing requirements, and any assurances given pursuant to such requirements,
shall be inoperative if (i) the issuance of the shares upon the exercise or
acquisition of Common Stock under the Stock Award has been registered under a
then currently effective registration statement under the Securities Act, or
(ii) as to any particular requirement, a determination is made by counsel for
the Company that such requirement need not be met in the circumstances under
the then applicable securities laws. The Company may, upon advice of counsel to
the Company, place legends on stock certificates issued under the Plan as such
counsel deems necessary or appropriate in order to comply with applicable
securities laws, including, but not limited to, legends restricting the
transfer of the Common Stock.


 


(g)                                 Withholding
Obligations. Unless prohibited by the terms of a Stock Award Agreement, the
Company may, in its sole discretion, satisfy any federal, state or local tax
withholding obligation relating to a Stock Award by any of the following means
(in addition to 


 


13

















 


the Company’s right to
withhold from any compensation paid to the Participant by the Company) or by a
combination of such means: (i) causing the Participant to tender a cash
payment; (ii)  withholding shares of Common Stock from the shares of
Common Stock issued or otherwise issuable to the Participant in connection with
the Stock Award; provided, however, that no shares
of Common Stock are withheld with a value exceeding the minimum amount of tax
required to be withheld by law (or such lower amount as may be necessary to
avoid classification of the Stock Award as a liability for financial accounting
purposes); (iii) withholding cash from a Stock Award settled in cash; (iv)
withholding payment from any amounts otherwise payable to the Participant; or
(v) by such other method as may be set forth in the Stock Award Agreement.


 


(h)                                 Electronic
Delivery. Any reference herein to a “written” agreement or document shall
include any agreement or document delivered electronically or posted on the
Company’s intranet.


 


(i)                                    Deferrals. To the extent permitted
by applicable law, the Board, in its sole discretion, may determine that the
delivery of Common Stock or the payment of cash, upon the exercise, vesting or
settlement of all or a portion of any Stock Award may be deferred and may
establish programs and procedures for deferral elections to be made by
Participants. Deferrals by Participants will be made in accordance with Section
409A of the Code. Consistent with Section 409A of the Code, the Board may
provide for distributions while a Participant is still an employee. The Board
is authorized to make deferrals of Stock Awards and determine when, and in what
annual percentages, Participants may receive payments, including lump sum
payments, following the Participant’s termination of employment or retirement,
and implement such other terms and conditions consistent with the provisions of
the Plan and in accordance with applicable law.


 


(j)                                    Compliance
with Section 409A. To the extent that the Board determines that any Stock
Award granted under the Plan is subject to Section 409A of the Code, the Stock
Award Agreement evidencing such Stock Award shall incorporate the terms and
conditions necessary to avoid the
consequences described in Section 409A(a)(1) of the Code. To the extent
applicable, the Plan and Stock Award Agreements shall be interpreted in
accordance with Section 409A of the Code and Department of Treasury regulations
and other interpretive guidance issued thereunder, including without limitation
any such regulations or other guidance that may be issued or amended after the
Effective Date. Notwithstanding any provision of the Plan to the contrary, in
the event that following the Effective Date the Board determines that any Stock
Award may be subject to Section 409A of the Code and related Department of
Treasury guidance (including such Department of Treasury guidance as may be
issued after the Effective Date), the Board may adopt such amendments to the
Plan and the applicable Stock Award Agreement or adopt other policies and
procedures (including amendments, policies and procedures with retroactive
effect), or take any other actions, that the Board determines are necessary or appropriate
to (1) exempt the Stock Award from Section 409A of the Code and/or preserve the
intended tax treatment of the benefits provided with respect to the Stock
Award, or (2) comply with the requirements of Section 409A of the Code and
related Department of Treasury guidance.


 


14

















 


9.                                      ADJUSTMENTS
UPON CHANGES IN COMMON STOCK; CORPORATE TRANSACTIONS.


 


(a)                                  Capitalization
Adjustments. In the event of a Capitalization Adjustment, the Board shall
appropriately and proportionately adjust: (i) the class(es) and maximum number
of securities subject to the Plan pursuant to Section 3(a); (ii) the class(es)
and maximum number of securities that may be issued pursuant to the exercise of
Incentive Stock Options pursuant to Section 3(c); (iii) the class(es) and
maximum number of securities that may be awarded to any person pursuant to
Section 4(c) and 6(d); and (iv) the class(es) and number of securities and
price per share of stock subject to outstanding Stock Awards. The Board shall
make such adjustments, and its determination shall be final, binding and
conclusive.


 


(b)                                  Dissolution
or Liquidation. Except as otherwise provided in a Stock Award Agreement, in
the event of a dissolution or liquidation of the Company, all outstanding Stock
Awards (other than Stock Awards consisting of vested and outstanding shares of
Common Stock not subject to a forfeiture condition or the Company’s right of
repurchase) shall terminate immediately prior to the completion of such
dissolution or liquidation, and the shares of Common Stock subject to the
Company’s repurchase rights may be repurchased by the Company notwithstanding
the fact that the holder of such Stock Award is providing Continuous Service, provided, however, that the Board may, in
its sole discretion, cause some or all Stock Awards to become fully vested,
exercisable and/or no longer subject to repurchase or forfeiture (to the extent
such Stock Awards have not previously expired or terminated) before the
dissolution or liquidation is completed but contingent on its completion.


 


(c)                                  Corporate
Transaction. The following provisions shall apply to Stock Awards in the
event of a Corporate Transaction unless otherwise provided in a written
agreement between the Company or any Affiliate and the holder of the Stock
Award:


 


(i)                                    Stock Awards May Be Assumed. In
the event of a Corporate Transaction, any surviving corporation or acquiring
corporation (or the surviving or acquiring corporation’s parent company) may
assume or continue any or all Stock Awards outstanding under the Plan or may
substitute similar stock awards for Stock Awards outstanding under the Plan
(including, but not limited to, awards to acquire the same consideration paid
to the stockholders of the Company pursuant to the Corporate Transaction), and
any reacquisition or repurchase rights held by the Company in respect of Common
Stock issued pursuant to Stock Awards may be assigned by the Company to the
successor of the Company (or the successor’s parent company, if any), in connection
with such Corporate Transaction. A surviving corporation or acquiring
corporation may choose to assume or continue only a portion of a Stock Award or
substitute a similar stock award for only a portion of a Stock Award. The terms
of any assumption, continuation or substitution shall be set by the Board in
accordance with the provisions of Section 2(b).


 


(ii)                                Stock Awards Held by Current Participants. In
the event of a Corporate Transaction in which the surviving corporation or
acquiring corporation (or its parent company) does not assume or continue any
or all outstanding Stock Awards or substitute similar stock awards for such
outstanding Stock Awards, then with respect to Stock Awards that have not been
assumed, continued or substituted and that are held by Participants whose
Continuous Service has not terminated prior to the effective time of the
Corporate Transaction (referred to as


 


15

















 


the “Current Participants”),
the vesting of such Stock Awards (and, if applicable, the time at which such
Stock Awards may be exercised) shall (contingent upon the effectiveness of the
Corporate Transaction) be accelerated in full to a date prior to the effective
time of such Corporate Transaction as the Board shall determine (or, if the
Board shall not determine such a date, to the date that is five (5) days prior
to the effective time of the Corporate Transaction), and such Stock Awards
shall terminate if not exercised (if applicable) at or prior to the effective
time of the Corporate Transaction, and any reacquisition or repurchase rights
held by the Company with respect to such Stock Awards shall lapse (contingent
upon the effectiveness of the Corporate Transaction).


 


(iii)                            Stock Awards Held by Former Participants. In
the event of a Corporate Transaction in which the surviving corporation or
acquiring corporation (or its parent company) does not assume or continue any
or all outstanding Stock Awards or substitute similar stock awards for such
outstanding Stock Awards, then with respect to Stock Awards that have not been
assumed, continued or substituted and that are held by persons other than
Current Participants, the vesting of such Stock Awards (and, if applicable, the
time at which such Stock Award may be exercised) shall not be accelerated and
such Stock Awards (other than a Stock Award consisting of vested and
outstanding shares of Common Stock not subject to the Company’s right of
repurchase) shall terminate if not exercised (if applicable) prior to the
effective time of the Corporate Transaction; provided,
however, that any reacquisition or repurchase rights held by the
Company with respect to such Stock Awards shall not terminate and may continue
to be exercised notwithstanding the Corporate Transaction.


 


(iv)                               Payment for Stock Awards in Lieu of Exercise.
Notwithstanding the foregoing, in the event a Stock Award will
terminate if not exercised prior to the effective time of a Corporate
Transaction, the Board may provide, in its sole discretion, that the holder of such
Stock Award may not exercise such Stock Award but will receive a payment, in
such form as may be determined by the Board, equal in value to the excess, if
any, of (i) the value of the property the holder of the Stock Award would have
received upon the exercise of the Stock Award, over (ii) any exercise price
payable by such holder in connection with such exercise.


 


(d)                                  Change
in Control. A Stock Award may be subject to additional acceleration of
vesting and exercisability upon or after a Change in Control as may be provided
in the Stock Award Agreement for such Stock Award or as may be provided in any
other written agreement between the Company or any Affiliate and the
Participant. A Stock Award may vest as to all or any portion of the shares
subject to the Stock Award (i) immediately upon the occurrence of a Change in
Control, whether or not such Stock Award is assumed, continued, or substituted
by a surviving or acquiring entity in the Change in Control, or (ii) in the
event a Participant’s Continuous Service is terminated, actually or
constructively, within a designated period following the occurrence of a Change
in Control. In the absence of such provisions, no such acceleration shall
occur.


 


10.                               TERMINATION
OR SUSPENSION OF THE PLAN.


 


(a)                                  Plan
Term. The Board may suspend or terminate the Plan at any time. Unless
terminated sooner, the Plan shall terminate on the day before the tenth (10th)
anniversary of the earlier of (i) the date the Plan is adopted by the Board, or
(ii) the date the Plan is approved by the


 


16

















 


stockholders of the
Company. No Stock Awards may be granted under the Plan while the Plan is
suspended or after it is terminated.


 


(b)                                  No
Impairment of Rights. Suspension or termination of the Plan shall not
impair rights and obligations under any Stock Award granted while the Plan is
in effect except with the written consent of the affected Participant.


 


11.                               EFFECTIVE
DATE OF PLAN.


 


The Plan shall become effective on the IPO Date (the “Effective Date”), but
no Stock Award shall be exercised (or, in the case of a Restricted Stock Award,
Restricted Stock Unit Award, or Other Stock Award shall be granted) unless and
until the Plan has been approved by the Stockholders of the Company, which
approval shall be within twelve (12) months before or after the date the Plan
is adopted by the Board.


 


12.                               CHOICE
OF LAW.


 


The law of the State of Delaware shall govern all
questions concerning the construction, validity and interpretation of this
Plan, without regard to that state’s conflict of laws rules.


 


13.                               DEFINITIONS.


 


As used in the Plan, the following definitions shall
apply to the capitalized terms indicated below:


 


(a)                                  “Affiliate” means, at the time of determination,
any “parent” or “subsidiary” of the Company as such terms are defined in Rule
405 of the Securities Act. The Board shall have the authority to determine the
time or times at which “parent” or “subsidiary” status is determined within the
foregoing definition.


 


(b)                                  “Board” means the Board of Directors of the
Company.


 


(c)                                  “Capitalization Adjustment” means any
change that is made in, or other events that occur with respect to, the Common
Stock subject to the Plan or subject to any Stock Award after the Effective
Date without the receipt of consideration by the Company (through merger,
consolidation, reorganization, recapitalization, reincorporation, stock
dividend, dividend in property other than cash, stock split, liquidating
dividend, combination of shares, exchange of shares, change in corporate
structure or other transaction not involving the receipt of consideration by
the Company). Notwithstanding the foregoing, the conversion of any convertible
securities of the Company shall not be treated as a transaction “without the
receipt of consideration” by the Company.


 


(d)                                  “Cause” means with
respect to a Participant, the occurrence of any of the following events:  (i) such Participant’s commission of any
felony or any crime involving fraud, dishonesty or moral turpitude under the
laws of the United States or any state thereof; (ii) such Participant’s
attempted commission of, or participation in, a fraud or act of dishonesty
against the Company; (iii) such Participant’s intentional, material violation
of any contract or agreement between the Participant and the Company or of any
statutory duty owed to the Company; 


 


17

















 


(iv) such Participant’s
unauthorized use or disclosure of the Company’s confidential information or
trade secrets; or (v) such Participant’s gross misconduct. The determination
that a termination of the Participant’s Continuous Service is either for Cause
or without Cause shall be made by the Company in its sole discretion. Any
determination by the Company that the Continuous Service of a Participant was
terminated with or without Cause for the purposes of outstanding Stock Awards
held by such Participant shall have no effect upon any determination of the
rights or obligations of the Company or such Participant for any other purpose.


 


(e)                                  “Change in Control” means the
occurrence, in a single transaction or in a series of related transactions, of
any one or more of the following events:


 


(i)                                    any
Exchange Act Person becomes the Owner, directly or indirectly, of securities of
the Company representing more than fifty
percent (50%) of the combined voting power of the Company’s then
outstanding securities other than by virtue of a merger, consolidation or
similar transaction. Notwithstanding
the foregoing, a Change in Control shall not be deemed to occur (A) on account
of the acquisition of securities of the Company by an investor, any affiliate
thereof or any other Exchange Act Person from the Company in a transaction or
series of related transactions the primary purpose of which is to obtain financing
for the Company through the issuance of equity securities or (B) solely because
the level of Ownership held by any Exchange Act Person (the “Subject Person”) exceeds the designated percentage
threshold of the outstanding voting securities as a result of a repurchase or
other acquisition of voting securities by the Company reducing the number of
shares outstanding, provided that if a Change in Control would occur (but for
the operation of this sentence) as a result of the acquisition of voting
securities by the Company, and after such share acquisition, the Subject Person
becomes the Owner of any additional voting securities that, assuming the
repurchase or other acquisition had not occurred, increases the percentage of
the then outstanding voting securities Owned by the Subject Person over the
designated percentage threshold, then a Change in Control shall be deemed to
occur;


 


(ii)                                there
is consummated a merger, consolidation or similar transaction involving
(directly or indirectly) the Company and, immediately after the consummation of
such merger, consolidation or similar transaction, the stockholders of the
Company immediately prior thereto do not Own, directly or indirectly, either
(A) outstanding voting securities representing more than fifty percent (50%) of the combined
outstanding voting power of the surviving Entity in such merger, consolidation
or similar transaction or (B) more than fifty
percent (50%) of the combined outstanding voting power of the parent of
the surviving Entity in such merger, consolidation or similar transaction, in
each case in substantially the same proportions as their Ownership of the
outstanding voting securities of the Company immediately prior to such
transaction;


 


(iii)                            the
stockholders of the Company approve or the Board approves a plan of complete
dissolution or liquidation of the Company, or a complete dissolution or
liquidation of the Company shall otherwise occur, except for a liquidation into
a parent corporation;


 


(iv)                               there
is consummated a sale, lease, exclusive license or other disposition of all or
substantially all of the consolidated assets of the Company and its
Subsidiaries, other than a sale, lease, license or other disposition of all or
substantially all of the consolidated assets


 


18

















 


of the Company and its
Subsidiaries to an Entity, more than fifty
percent (50%) of the combined voting power of the voting securities of
which are Owned by stockholders of the Company in substantially the same
proportions as their Ownership of the outstanding voting securities of the
Company immediately prior to such sale, lease, license or other disposition; or


 


(v)                                   individuals
who, on the date the Plan is adopted by the Board, are members of the Board
(the “Incumbent Board”)
cease for any reason to constitute at least a majority of the members of the
Board; provided, however, that if the
appointment or election (or nomination for election) of any new Board member
was approved or recommended by a majority vote of the members of the Incumbent
Board then still in office, such new member shall, for purposes of the Plan, be
considered as a member of the Incumbent Board.


 


For avoidance of doubt, the term Change in Control
shall not include a sale of assets, merger or other transaction effected
exclusively for the purpose of changing the domicile of the Company.


 


Notwithstanding the foregoing or any other provision
of the Plan, the definition of Change in Control (or any analogous term) in an
individual written agreement between the Company or any Affiliate and the
Participant shall supersede the foregoing definition with respect to Stock
Awards subject to such agreement; provided,
however, that if no definition of Change in Control or any analogous
term is set forth in such an individual written agreement, the foregoing
definition shall apply.


 


(f)                                    “Code” means the Internal Revenue Code of
1986, as amended.


 


(g)                                 “Committee” means a committee of one (1) or more
Directors to whom authority has been delegated by the Board in accordance with
Section 2(c).


 


(h)                                 “Common Stock” means the common stock of the
Company.


 


(i)                                    “Company” means ARYx Therapeutics, Inc., a
Delaware corporation.


 


(j)                                    “Consultant” means any
person, including an advisor, who is (i) engaged by the Company or an Affiliate
to render consulting or advisory services and is compensated for such services,
or (ii) serving as a member of the board of directors of an Affiliate and is
compensated for such services. However, service solely as a Director, or
payment of a fee for such service, shall not cause a Director to be considered
a “Consultant” for purposes of the Plan.


 


(k)                                “Continuous Service” means that the
Participant’s service with the Company or an Affiliate, whether as an Employee,
Director or Consultant, is not interrupted or terminated. A change in the
capacity in which the Participant renders service to the Company or an
Affiliate as an Employee, Consultant or Director or a change in the entity for
which the Participant renders such service, provided that there is no interruption
or termination of the Participant’s service with the Company or an Affiliate,
shall not terminate a Participant’s Continuous Service; provided,
however, if the Entity for which a Participant is rendering services
ceases to qualify as an “Affiliate,” as determined by the Board in its sole
discretion, such Participant’s Continuous Service shall be considered to have
terminated on the date such Entity ceases to qualify as an Affiliate. To the
extent permitted by law, the Board or the chief executive officer of the


 


19

















 


Company, in that party’s
sole discretion, may determine whether Continuous Service shall be considered
interrupted in the case of: (i) any leave of absence approved by the Board or
the chief executive officer of the Company, including sick leave, military
leave or any other personal leave; or (ii) transfers between the Company, an
Affiliate, or their successors. Notwithstanding the foregoing, a leave of
absence shall be treated as Continuous Service for purposes of vesting in a
Stock Award only to such extent as may be provided in the Company’s leave of
absence policy, in the written terms of any leave of absence agreement or
policy applicable to the Participant, or as otherwise required by law.


 


(l)                                    “Corporate Transaction” means the
occurrence, in a single transaction or in a series of related transactions, of
any one or more of the following events:


 


(i)                                    the
consummation of a sale  or other
disposition of all or substantially all, as determined by the Board in its sole
discretion, of the consolidated assets of the Company and its Subsidiaries;


 


(ii)                                the
consummation of a sale or other disposition of at least ninety percent (90%) of the outstanding securities of the Company;


 


(iii)                            the
consummation of a merger, consolidation or similar transaction following which
the Company is not the surviving corporation; or


 


(iv)                               the
consummation of a merger, consolidation or similar transaction following which
the Company is the surviving corporation but the shares of Common Stock
outstanding immediately preceding the merger, consolidation or similar
transaction are converted or exchanged by virtue of the merger, consolidation
or similar transaction into other property, whether in the form of securities,
cash or otherwise.


 


(m)                              “Covered Employee” means the chief
executive officer and the three (3) other highest compensated officers of the
Company for whom total compensation is required to be reported to stockholders
under the Exchange Act, as determined for purposes of Section 162(m) of the
Code.


 


(n)                                 “Director” means a member of the Board.


 


(o)                                  “Disability” means, with respect to a
Participant, the inability of such Participant to engage in any substantial
gainful activity by reason of any medically determinable physical or mental
impairment which can be expected to result in death or can be expected to last
for a continuous period of not less than 12 months, as provided in Section
22(e)(3) and 409A(a)(2)(c)(i) of the Code.


 


(p)                                  “Effective Date” means the effective
date of the Plan as set forth in Section 11.


 


(q)                                  “Employee” means any
person employed by the Company or an Affiliate. However, service solely as a
Director, or payment of a fee for such services, shall not cause a Director to
be considered an “Employee” for purposes of the Plan.


 


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(r)                                  “Entity” means a corporation, partnership,
limited liability company, or other entity.


 


(s)                                  “Exchange Act” means the Securities Exchange Act of
1934, as amended.


 


(t)                                    “Exchange Act Person”  means any natural person, Entity or
“group” (within the meaning of Section 13(d) or 14(d) of the Exchange Act),
except that “Exchange Act Person” shall not include (i) the Company or any
Subsidiary of the Company; (ii) any employee benefit plan of the Company or any
Subsidiary of the Company or any trustee or other fiduciary holding securities
under an employee benefit plan of the Company or any Subsidiary of the Company;
(iii) an underwriter temporarily holding securities pursuant to an offering of
such securities; (iv) an Entity Owned, directly or indirectly, by the
stockholders of the Company in substantially the same proportions as their
Ownership of stock of the Company; or (v) any natural person, Entity or “group”
(within the meaning of Section 13(d) or 14(d) of the Exchange Act) that, as of
the Effective Date, is the Owner, directly or indirectly, of securities of the
Company representing more than fifty percent (50%) of the combined voting power
of the Company’s then outstanding securities.


 


(u)                                 “Fair Market Value” means, as of any
date, the value of the Common Stock determined as follows:


 


(i)                                    If
the Common Stock is listed on any established stock exchange or traded on the
Nasdaq Global Select Market or the Nasdaq Global Market, the Fair Market Value
of a share of Common Stock shall be the closing sales price for such stock (or
the closing bid, if no sales were reported) as quoted on such exchange (or the
exchange or market with the greatest volume of trading in the Common Stock) on
the date of determination, as reported in The Wall Street Journal  or such other source as the Board deems
reliable.


 


(ii)                                If
the Common Stock is listed or traded on the Nasdaq Capital Market, the Fair
Market Value of a share of Common Stock shall be the mean between the bid and
asked prices for the Common Stock on the date of determination, as reported in The Wall Street Journal  or
such other source as the Board deems reliable. Unless otherwise provided by the
Board, if there is no closing sales price (or closing bid if no sales were
reported) for the Common Stock on the date of determination, then the Fair
Market Value shall be the mean between the bid and asked prices for the Common
Stock on the last preceding date for which such quotation exists.


 


(iii)                            In
the absence of such markets for the Common Stock, the Fair Market Value shall
be determined by the Board in good faith and in a manner that complies with
Section 409A of the Code.


 


(v)                                   “Incentive Stock Option” means an
Option which qualifies as an “incentive stock option” within the meaning of
Section 422 of the Code and the regulations promulgated thereunder.


 


(w)                                “IPO Date” means the
date of the underwriting agreement between the Company and the underwriter(s)
managing the initial public offering of the Common Stock, pursuant to which the
Common Stock is priced for the initial public offering.


 


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(x)                                  “Non-Employee Director”  means a Director who either (i) is not a current employee
or officer of the Company or an Affiliate, does not receive compensation,
either directly or indirectly, from the Company or an Affiliate for services
rendered as a consultant or in any capacity other than as a Director (except
for an amount as to which disclosure would not be required under Item 404(a) of
Regulation S-K promulgated pursuant to the Securities Act (“Regulation S-K”)),
does not possess an interest in any other transaction for which disclosure
would be required under Item 404(a) of Regulation S-K, and is not engaged in a
business relationship for which disclosure would be required pursuant to
Item 404(b) of Regulation S-K; or (ii) is otherwise considered a “non-employee
director” for purposes of Rule 16b-3.


 


(y)                                  “Nonstatutory Stock Option” means an
Option that does not qualify as an Incentive Stock Option.


 


(z)                                  “Officer” means a person who is an officer of
the Company within the meaning of Section 16 of the Exchange Act and the
rules and regulations promulgated thereunder.


 


(aa)                            “Option” means an Incentive Stock Option or a
Nonstatutory Stock Option to purchase shares of Common Stock granted pursuant
to the Plan.


 


(bb)                            “Option Agreement” means a
written agreement between the Company and an Optionholder evidencing the terms
and conditions of an Option grant. Each Option Agreement shall be subject to
the terms and conditions of the Plan.


 


(cc)                            “Optionholder” means a person to whom an Option is
granted pursuant to the Plan or, if applicable, such other person who holds an
outstanding Option.


 


(dd)                            “Other Stock Award”
means an award based in whole or in part by reference to the Common Stock which
is granted pursuant to the terms and conditions of Section 6(e).


 


(ee)                            “Other Stock Award Agreement”  means a written
agreement between the Company and a holder of an Other Stock Award evidencing
the terms and conditions of an Other Stock Award grant. Each Other Stock Award
Agreement shall be subject to the terms and conditions of the Plan.


 


(ff)                                “Outside Director” means a
Director who either (i) is not a current employee of the Company or an “affiliated
corporation” (within the meaning of Treasury Regulations promulgated under
Section 162(m) of the Code), is not a former employee of the Company or an “affiliated
corporation” who receives compensation for prior services (other than benefits
under a tax-qualified retirement plan) during the taxable year, has not been an
officer of the Company or an “affiliated corporation,” and does not receive
remuneration from the Company or an “affiliated corporation,” either directly
or indirectly, in any capacity other than as a Director, or (ii) is otherwise
considered an “outside director” for purposes of Section 162(m) of the Code.


 


(gg)                          “Own,” “Owned,” “Owner,” “Ownership”  A person or Entity
shall be deemed to “Own,” to have “Owned,” to be the “Owner” of, or to have
acquired “Ownership” of securities if such person or Entity, directly or
indirectly, through any contract, arrangement, understanding, relationship or
otherwise, has or shares voting power, which includes the power to vote or to
direct the voting, with respect to such securities.


 


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(hh)                          “Participant” means a person to whom a Stock Award
is granted pursuant to the Plan or, if applicable, such other person who holds
an outstanding Stock Award.


 


(ii)                                “Performance Criteria”
means the one or more criteria that the Board shall select for purposes of
establishing the Performance Goals for a Performance Period. The Performance
Criteria that shall be used to establish such Performance Goals may be based on
any one of, or combination of, the following: (i) earnings per share; (ii)
earnings before interest, taxes and depreciation; (iii) earnings before
interest, taxes, depreciation and amortization (EBITDA); (iv) total stockholder
return; (v) return on equity; (vi) return on assets, investment, or capital
employed; (vii) operating margin; (viii) gross margin; (ix) operating income;
(x) net income (before or after taxes); (xi) net operating income; (xii) net
operating income after tax; (xiii) pre- and after-tax income; (xiv) pre-tax
profit; (xv) operating cash flow; (xvi) sales or revenue targets; (xvii)
orders and revenue; (xviii) increases in revenue or product revenue; (xix)
expenses and cost reduction goals; (xx) improvement in or attainment of expense
levels; (xxi) improvement in or attainment of working capital levels; (xxii)
economic value added (or an equivalent metric); (xxiii) market share; (xxiv)
cash flow; (xxv) cash flow per share; (xxvi) share price performance; (xxvii)
debt reduction; (xxviii) implementation or completion of projects or processes;
(xxix) customer satisfaction; (xxx) stockholders’ equity; (xxxi) quality
measures; and (xxxii) to the extent
that a Stock Award is not intended to comply with Section 162(m) of the Code, other
measures of performance selected by the Board. Partial achievement of the
specified criteria may result in the payment or vesting corresponding to the
degree of achievement as specified in the Stock Award Agreement. The Board
shall, in its sole discretion, define the manner of calculating the Performance
Criteria it selects to use for such Performance Period.


 


(jj)                                “Performance Goals”
means, for a Performance Period, the one or more goals established by the Board
for the Performance Period based upon the satisfaction of the Performance
Criteria. Performance Goals may be based on a Company-wide basis, with respect
to one or more business units, divisions, Affiliates, or business segments, and
in either absolute terms or relative to the performance of one or more
comparable companies or the performance of one or more relevant indices. At the
time of the grant of any Stock Award, the Board is authorized to determine
whether, when calculating the attainment of Performance Goals for a Performance
Period: (i) to exclude restructuring and/or other nonrecurring charges; (ii) to
exclude exchange rate effects, as applicable, for non-U.S. dollar denominated
net sales and operating earnings; (iii) to exclude the effects of changes to
generally accepted accounting standards required by the Financial Accounting
Standards Board; (iv) to exclude the effects of any statutory adjustments to
corporate tax rates; and (v) to exclude the effects of any “extraordinary items”
as determined under generally accepted accounting principles. In addition, the
Board retains the discretion to reduce or eliminate the compensation or
economic benefit due upon attainment of Performance Goals.


 


(kk)                        “Performance Period”
means one or more periods of time, which may be of varying and overlapping
duration, as the Committee may select, over which the attainment of one or more
Performance Goals will be measured for the purpose of determining a Participant’s
right to and the payment of a Performance Stock Award.


 


(ll)                                “Performance Stock Award” means an
award of shares of Common Stock which is granted pursuant to the terms and
conditions of Section 6(d).


 


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(mm)                    “Plan” means this ARYx Therapeutics, Inc.
2007 Equity Incentive Plan.


 


(nn)                          “Restricted Stock Award”
means an award of shares of Common Stock which is granted pursuant to the terms
and conditions of Section 6(a).


 


(oo)                            “Restricted Stock Award Agreement”
means a written agreement between the Company and a holder of a Restricted
Stock Award evidencing the terms and conditions of a Restricted Stock Award
grant. Each Restricted Stock Award Agreement shall be subject to the terms and
conditions of the Plan.


 


(pp)                            “Restricted Stock Unit Award”  means a right
to receive shares of Common Stock which is granted pursuant to the terms and
conditions of Section 6(b).


 


(qq)                            “Restricted Stock Unit Award
Agreement” means a written agreement between the Company
and a holder of a Restricted Stock Unit Award evidencing the terms and
conditions of a Restricted Stock Unit Award grant. Each Restricted Stock Unit
Award Agreement shall be subject to the terms and conditions of the Plan.


 


(rr)                            “Rule 16b-3” means Rule 16b-3 promulgated under
the Exchange Act or any successor to Rule 16b-3, as in effect from time to
time.


 


(ss)                            “Securities Act” means the
Securities Act of 1933, as amended.


 


(tt)                                “Stock Appreciation Right”
means a right to receive the appreciation on Common Stock that is granted
pursuant to the terms and conditions of Section 6(c).


 


(uu)                          “Stock Appreciation Right Agreement”
means a written agreement between the Company and a holder of a Stock
Appreciation Right evidencing the terms and conditions of a Stock Appreciation
Right grant. Each Stock Appreciation Right Agreement shall be subject to the
terms and conditions of the Plan.


 


(vv)                              “Stock Award”
means any right to receive Common Stock granted under the Plan, including an
Option, a Restricted Stock Award, a Restricted Stock Unit Award, a Stock
Appreciation Right, a Performance Stock Award, or any Other Stock Award.


 


(ww)                        “Stock Award Agreement”
means a written agreement between the Company and a Participant evidencing the
terms and conditions of a Stock Award grant. Each Stock Award Agreement shall
be subject to the terms and conditions of the Plan.


 


(xx)                            “Subsidiary” means, with respect to
the Company, (i) any corporation of which more than fifty percent (50%) of the
outstanding capital stock having ordinary voting power to elect a majority of
the board of directors of such corporation (irrespective of whether, at the time,
stock of any other class or classes of such corporation shall have or might
have voting power by reason of the happening of any contingency) is at the
time, directly or indirectly, Owned by the Company, and (ii) any partnership, limited liability company or other entity
in which the Company has a direct or indirect interest (whether in the form of
voting or participation in profits or capital contribution) of more than fifty
percent (50%) .


 


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(yy)                            “Ten Percent Stockholder” means a
person who Owns (or is deemed to Own pursuant to Section 424(d) of the Code)
stock possessing more than ten percent (10%) of the total combined voting power
of all classes of stock of the Company or any Affiliate.


 


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