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*however*, that the Company may from time to time reasonably require the Executive to traveltemporarily to other locations in connection with the Company’s business.     **2.****Loyal and Conscientious Performance; Noncompetition.**          **2.1 Loyalty**. During the Executive’s employment by the Company, the Executive shall devote theExecutive’s full business energies, interest, abilities and productive time to the proper andefficient performance of the Executive’s duties under this Agreement.          **2.2 Covenant not to Compete**. Except with the prior written consent of the Board or the CEO,which shall not be unreasonably withheld, the Executive will not, during the Executive’s employmentby the Company, engage in competition with the Company and/or any of its Affiliates, eitherdirectly or indirectly, in any manner or capacity, as adviser, principal, agent, affiliate,promoter, partner, officer, director, employee, stockholder, owner, co-owner, consultant, or memberof any association or otherwise, in any phase of the business of developing, manufacturing andmarketing of products or services which are in the same field of use or which otherwise competewith the products or services or proposed products or services of the Company and/or any of itsAffiliates. For purposes of this Agreement, ***“Affiliate”***means, with respect to any specificentity, any other entity that, directly or indirectly, through one or more intermediaries,controls, is controlled by or is under common control with such specified entity.          **2.3 Agreement not to Participate in Company’s Competitors**. During any period during which theExecutive is receiving any compensation or consideration from the Company, the Executive agrees notto acquire, assume or participate in, directly or indirectly, any position, investment or interestknown by the Executive to be adverse or antagonistic to the Company, its business or prospects,financial or otherwise or in any company, person or entity that is, directly or indirectly, incompetition with the business of the Company or any of its Affiliates. Notwithstanding theforegoing, ownership by the Executive, as a passive investment, of less than two percent (2%) ofthe outstanding shares of capital stock of any corporation with one or more classes of its capitalstock listed on a national securities exchange or publicly traded on the Nasdaq Stock Market or inthe over-the-counter market shall not constitute a breach of Section 2.2 or this Section 2.3.     **3.****Compensation of the Executive.**          **3.1 Base Salary.**The Company shall pay the Executive a base salary of Three Hundred FiftyThousand Dollars ($350,000) per year, less payroll deductions and all required withholdings payablein regular periodic payments in accordance with Company policy. Such base salary shall be proratedfor any partial year of employment on the basis of a 365-day fiscal year.          **3.2 Annual Performance Bonus.**In addition to the Executive’s base salary, the Executive shallbe eligible for an annual performance bonus based upon the Executive’s and the Company’sachievement of specified objectives established by the CEO and/or the Board during the firstquarter of each year, as evaluated by the CEO and/or Board in the exercise of good faith reasonablejudgment. The target bonus for achievement of all objectives shall be forty
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percent (40%) of the Executive’s then-current base salary. Bonuses awards will be pro-ratedbased upon the number of months employed during the calendar year.     **3.3 Equity Grants**               **3.3.1*****Stock Option*****.**Upon the commencement of the Executive’s employment and subject toapproval of the Board and the terms of the Company’s 2004 Stock Equity Incentive Plan (the ***“Plan"***),the Executive will be granted a stock option under the Plan to purchase one-hundred fifty thousand(150,000) shares of the Company’s Common Stock (the ***“Option"***). To the maximum extent possible, theOption shall be an Incentive Stock Option as such term is defined in Section 422 of the InternalRevenue Code of 1986, as amended. The Option will be governed by and granted pursuant to aseparate Stock Option Agreement and the Plan. The exercise price per share of the Option will beequal to the fair market value of the Common Stock established on the date of grant, subject toapproval by the Board. Subject to Section 4.4.1 below, the Option will vest over four (4) yearsfor so long as the Executive continues to be employed by the Company, as follows: twenty-fivepercent (25%) of the shares subject to the Option shall vest on the first anniversary of theExecutive’s first day of employment with the Company, and 1/48th of the shares subjectto the Option shall vest on the same calendar day of each month thereafter.               **3.3.2*****Restricted Stock.***Upon the commencement of the Executive’s employment and subject toapproval of the Board and the terms of the Plan, the Executive will be granted twenty-five thousand(25,000) shares of the Company’s Common Stock (the ***“Restricted Stock"***), each share of which shallbe payable in future services to the Company and as such restricted until vested as describedbelow. Such Restricted Stock Award shall either be made pursuant to the Plan (and be governed byand granted pursuant to a separate Stock Issuance Agreement and the Plan) or in a separateRestricted Stock Agreement outside of the Plan, but in either case, on terms consistent with thosedescribed in this Agreement. In addition to including the terms describe herein, the terms of theagreement governing the Restricted Stock will provide the same rights and benefits to the Executivewith respect to the Restricted Stock as to stock options under the Company’s Senior ExecutiveSeverance Benefit Plan (the “Severance Terms”). Subject to Section 4.4.2 below, the RestrictedStock will vest over four (4) years for so long as the Executive continues to be employed by theCompany, as follows: twenty-five percent (25%) of the shares of Restricted Stock shall vest on thefirst anniversary of the Executive’s first day of employment with the Company, and1/48th of the shares of Restricted Stock shall vest on the same calendar day of eachmonth thereafter. Subject to Section 4 below and the Severance Terms, if the Executive ceases tobe employed by the Company while holding one or more unvested shares of Restricted Stock, thenthose shares shall be surrendered immediately to the Company for cancellation (for noconsideration), and the Executive shall have no further stockholder rights with respect to thoseshares.          **3.4 Changes to Compensation.**The Executive’s compensation will be reviewed on a regular basisby the Company and may be increased from time to time as deemed appropriate.
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          **3.5 Employment Taxes**. All of the Executive’s compensation shall be subject to customarywithholding taxes and any other employment taxes as are commonly required to be collected orwithheld by the Company.          **3.6 Relocation Benefit.**To assist the Executive with relocation costs associated with movingto the San Diego area, the Company will reimburse the Executive for reasonable costs actuallyincurred in moving household goods; the Company has selected Ace Atlas moving company as theservice provider for household goods moves. Additionally, the Company will provide up to amaximum total of fifty thousand ($50,000) dollars in reimbursement for those relocation-relatedbenefits approved in the Relocation Agreement and Policy, including a gross-up payment to offset(or partially offset) additional income and employment taxes incurred by the Executive by virtue ofreimbursement authorized in this Section 3.6. In the case of a gross up payment, the Company willgross up the employee’s salary at the lesser of the actual liability incurred or fifty percent(50%) of taxable reimbursement, or such lesser amount available within the cap. The maximumamount payable by the Company to the Executive pursuant to this Section 3.6 for relocation-relatedbenefits other than approved expenses for moving household goods shall be fifty thousand ($50,000).Refer to the Relocation Agreement and Policy to see the type of expenses included under our policyfor the moving allowance. In the event that the Executive resigns employment on or before the oneyear anniversary of the Executive’s first day of employment with the Company, the Executive shallimmediately re-pay to the Company all relocation benefits provided by this Section 3.6.          **3.7 Other Benefits.**The Executive shall also be eligible to receive all other benefitsnormally offered to full-time regular executive level employees, including, without limitation,medical insurance, dental insurance, life insurance, 401(k) plan and fifteen (15) working days paidtime off per year accruing on a bi-weekly basis, as outlined in the Company’s Employee Handbook.     **4.****Termination.**          **4.1 Termination by the Company.**The Executive’s employment by the Company shall be at will.The Executive’s employment with the Company may be terminated by the Company at any time and forany reason or no reason. Subject to the terms of the Company’s Senior Executive Severance BenefitPlan, as it may be amended from time to time (provided that any amendment shall not result in areduction of benefits as set forth in such plan as of the date hereof), which is herebyincorporated into this Agreement, in the event the Company terminates the Executive’s employment,the Company shall have no further obligation to the Executive, except for payment of earned wagesand accrued and unused paid time off earned through the date of termination, at the rate in effectat the time of termination, subject to standard deductions and withholdings, and such otherbenefits as required in such event by applicable law.          **4.2 Termination by Mutual Agreement of the Parties**. The Executive’s employment pursuant tothis Agreement may be terminated at any time upon mutual agreement in writing of the Parties. Anysuch termination of employment shall have the consequences specified in such agreement.
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          **4.3 Termination by the Executive.**The Executive’s employment by the Company shall be at will.The Executive shall have the right to resign or terminate the Executive’s employment at any timeand for any reason or no reason. Subject to the terms of the Company’s Senior Executive SeveranceBenefit Plan, as it may be amended from time to time (provided that any amendment shall not resultin a reduction of benefits as set forth in such plan as of the date hereof), in the event theExecutive resigns or terminates his employment, the Company shall have no further obligation to theExecutive, except for payment of earned wages and accrued and unused paid time off earned throughthe date of resignation or termination, at the rate in effect at the time of resignation ortermination, subject to standard deductions and withholdings, and such other benefits as requiredin such event by applicable law.          **4.4 Change in Control.**               **4.4.1 Acceleration of Vesting of Options.**Upon a ***“Change in Control”***(as defined in thePlan), all unvested shares under the Option held by the Executive immediately prior to the Changein Control shall vest; *provided, however*, that if the successor corporation (or parent thereof)assumes the Option, then fifty percent (50%) of the shares subject to the Option that are unvestedimmediately prior to the Change in Control shall vest immediately prior to the effective date ofsuch Change in Control and the remaining fifty percent (50%) of the unvested shares shall continueto vest pursuant to the schedule described in Section 3.3.1 above; *provided further, however*, thatif the Executive’s ***“Service”***(as defined in the Plan) is terminated by reason of an ***“InvoluntaryTermination”***(as defined in the Plan) within three (3) months before or within thirteen (13) monthsfollowing a Change in Control, then all unvested shares subject to the Option (whether the Optionis purported to be assumed by the successor corporation or not) shall immediately vest.               **4.4.2 Acceleration of Vesting of Restricted Stock.**Upon a Change in Control, all shares ofunvested Restricted Stock held by the Executive immediately prior to the Change in Control(***“Unvested Restricted Stock"***) shall vest; *provided, however*, that if the repurchase rights withrespect to the Unvested Restricted Stock are assigned to the successor corporation (or parentthereof) or are otherwise to continue in full force and effect pursuant to the terms of the Changein Control, then fifty percent (50%) of the Unvested Restricted Stock shall vest immediately priorto the effective date of such Change in Control and the remaining fifty percent (50%) of theUnvested Restricted Stock shall continue to vest pursuant to the schedule described in Section3.3.2 above; and *provided further, however*, that if the Executive’s Service is terminated by reasonof an Involuntary Termination within three (3) months before or within thirteen (13) monthsfollowing a Change in Control, then all unvested shares of Restricted Stock held by the Executive(whether such shares are purported to be assumed by the successor corporation or not) shallimmediately vest.     **5.****Confidential and Proprietary Information; Nonsolicitation**.          As a condition of employment, the Executive agrees to execute and abide by the ProprietaryInformation and Inventions Agreement attached hereto as Exhibit A.
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     **6.****Assignment and Binding Effect.**          This Agreement shall be binding upon and inure to the benefit of the Executive and theExecutive’s heirs, executors, personal representatives, assigns, administrators and legalrepresentatives. Because of the unique and personal nature of the Executive’s duties under thisAgreement, neither this Agreement nor any rights or obligations under this Agreement shall beassignable by the Executive. This Agreement shall be binding upon and insure to the benefit of theCompany and its successors, assigns and legal representatives.     **7.****Choice of Law.**          This Agreement is made in California. This Agreement shall be governed by and construed andinterpreted in accordance with the laws of the State of California.     **8.****Integration.**          This Agreement, the Company’s Proprietary Information and Inventions Agreement attached asExhibit A hereto, the Company’s Senior Executive Severance Benefit Plan and the Plan contain thecomplete, final and exclusive agreement of the Parties relating to the terms and conditions of theExecutive’s employment and the termination of Executive’s employment, and supersedes all prior andcontemporaneous oral and written employment agreements or arrangements between the Parties. To theextent this Agreement conflicts with the Proprietary Information and Inventions Agreement attachedas Exhibit A hereto, the Proprietary Information and Inventions Agreement shall control. To theextent this Agreement conflicts with the terms of the Employee Handbook, the Company’s SeniorExecutive Severance Benefit Plan or the Plan, this Agreement shall control.     **9.****Amendment.**          This Agreement cannot be amended or modified, except by a written agreement signed by theExecutive and the Company.     **10.****Waiver.**          No term, covenant or condition of this Agreement or any breach thereof shall be deemed waived,except with the written consent of the Party against whom the waiver is claimed, and any waiver ofany such term, covenant, condition or breach shall not be deemed to be a waiver of any preceding orsucceeding breach of the same or any other term, covenant, condition or breach.     **11.****Severability.**          The finding by a court of competent jurisdiction of the unenforceability, invalidity orillegality of any provision of this Agreement shall not render any other provision of thisAgreement unenforceable, invalid or illegal. Such court shall have the authority to modify orreplace the invalid or unenforceable term or provision with a valid and enforceable term orprovision which most accurately represents the Parties’ intention with respect to the invalid orunenforceable term or provision.
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     **12.****Interpretation; Construction.**          The headings set forth in this Agreement are for convenience of reference only and shall notbe used in interpreting this Agreement. This Agreement has been drafted by legal counselrepresenting the Company, but the Executive has been encouraged to consult with the Executive’s ownindependent counsel and tax advisors with respect to the terms of this Agreement. The Partiesacknowledge that each Party has reviewed and revised, or had an opportunity to review and revise,this Agreement, and the normal rule of construction to the effect that any ambiguities are to beresolved against the drafting party shall not be employed in the interpretation of this Agreement.     **13.****Representations and Warranties.**          The Executive represents and warrants that the Executive is not restricted or prohibited,contractually or otherwise, from entering into and performing each of the terms and covenantscontained in this Agreement, and that the Executive’s execution and performance of this Agreementwill not violate or breach any other agreements between the Executive and any other person orentity.     **14.****Counterparts.**          This Agreement may be executed in two counterparts, each of which shall be deemed an original,all of which together shall constitute one and the same instrument. Delivery of an executedcounterpart of a signature page to this Agreement by facsimile or by email of a scanned copy willbe effective as delivery of an original executed counterpart of this Agreement.     **15.****Arbitration.**          To ensure the rapid and economical resolution of disputes that may arise in connection withthe Executive’s employment with the Company, the Executive and the Company agree that any and alldisputes, claims or causes of action, in law or equity, arising from or relating to the Executive’semployment, or the termination of that employment, will be resolved pursuant to the FederalArbitration Act and to the fullest extent permitted by law, by final, binding and confidentialarbitration in San Diego, California conducted by the Judicial Arbitration and Mediation Services(***“JAMS”***), or its successors, under the then current rules of JAMS for employment disputes;*provided, however*, that the arbitrator shall: (a) have the authority to compel adequate discoveryfor the resolution of the dispute and to award such relief as would otherwise be permitted by law;and (b) issue a written arbitration decision, including the arbitrator’s essential findings andconclusions and a statement of the award. Both the Executive and the Company shall be entitled toall rights and remedies that either the Executive or the Company would be entitled to pursue in acourt of law. The Company shall pay all fees, including the arbitrator’s fee. Nothing in thisAgreement is intended to prevent either the Executive or the Company from obtaining injunctiverelief in court to prevent irreparable harm pending the conclusion of any such arbitration.
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     **16.****Trade Secrets Of Others.**          It is the understanding of both the Company and the Executive that the Executive shall notdivulge to the Company and/or its Affiliates any confidential information or trade secretsbelonging to others, including the Executive’s former employers, nor shall the Company and/or itsAffiliates seek to elicit from the Executive any such information. Consistent with the foregoing,the Executive shall not provide to the Company and/or its Affiliates, and the Company and/or itsAffiliates shall not request, any documents or copies of documents containing such information.     **17.****Advertising Waiver****.**          The Executive agrees to permit the Company and/or its Affiliates, and persons or otherorganizations authorized by the Company and/or its Affiliates, to use, publish and distributeadvertising or sales promotional literature concerning the products and/or services of the Companyand/or its Affiliates, or the machinery and equipment used in the provision thereof, in which theExecutive’s name and/or pictures of the Executive taken in the course of the Executive’s provisionof services to the Company and/or its Affiliates, appear. The Executive hereby waives and releasesany claim or right the Executive may otherwise have arising out of such use, publication ordistribution.     **18.****Indemnification****.**          The Executive shall have no liability to the Company for any loss suffered by the Company thatarises out of any action or inaction of the Executive if the Executive in good faith determinedthat such course of conduct was in the best interest of the Company, and such course of conduct didnot constitute gross negligence or willful misconduct of the Executive. The Executive shall beindemnified by the Company against losses, judgments, liabilities, expenses and amounts paid insettlement of any claims sustained by him in connection with the Company, provided that the samewere not the result of gross negligence or willful misconduct on the part of the Executive.     **In Witness Whereof**, the Parties have executed this Agreement as of the EffectiveDate.     **Ardea Biosciences, Inc.**