<PAGE>

                                                                    EXHIBIT 10.3

                              ACTIVE POWER, INC.
                         EMPLOYEE STOCK PURCHASE PLAN
                         ----------------------------

     I.    PURPOSE OF THE PLAN

           This Employee Stock Purchase Plan is intended to promote the
interests of Active Power, Inc., a Delaware corporation, by providing eligible
employees with the opportunity to acquire a proprietary interest in the
Corporation through participation in a payroll-deduction based employee stock
purchase plan designed to qualify under Section 423 of the Code.

           Capitalized terms herein shall have the meanings assigned to such
terms in the attached Appendix.

     II.   ADMINISTRATION OF THE PLAN

           The Plan Administrator shall have full authority to interpret and
construe any provision of the Plan and to adopt such rules and regulations for
administering the Plan as it may deem necessary in order to comply with the
requirements of Section 423 of the Code.  Decisions of the Plan Administrator
shall be final and binding on all parties having an interest in the Plan.

     III.  STOCK SUBJECT TO PLAN

           A.   The stock purchasable under the Plan shall be shares of
authorized but unissued or reacquired Common Stock, including shares of Common
Stock purchased on the open market.  The maximum number of shares of Common
Stock which may be issued in the aggregate under the Plan shall not exceed One
Million Eighty Thousand (1,080,000) shares.

           B.   The number of shares of Common Stock available for issuance
under the Plan shall automatically increase on the first trading day of January
each calendar year during the term of the Plan, beginning with calendar year
2001, by an amount equal to one half of one percent (0.5%) of the total number
of shares of Common Stock outstanding on the last trading day in December of the
immediately preceding calendar year, but in no event shall any such annual
increase exceed Three Hundred Twenty-Five Thousand (325,000) shares.

           C.   Should any change be made to the Common Stock by reason of any
stock split, stock dividend, recapitalization, combination of shares, exchange
of shares or other change affecting the outstanding Common Stock as a class
without the Corporation's receipt of consideration, appropriate adjustments
shall be made to the maximum number and class of securities issuable in the
aggregate under the Plan, (ii) the maximum number and class of securities by
which the share reserve is to increase automatically each calendar year, (iii)
the maximum number and class of securities purchasable per Participant and in
the aggregate on any one Purchase Date and (iv) the number and class of
securities and the price per share in effect under each outstanding purchase
right in order to prevent the dilution or enlargement of benefits thereunder.
<PAGE>

     IV.   OFFERING PERIODS

           A.   Shares of Common Stock shall be offered for purchase under the
Plan through a series of successive offering periods until such time as (i) the
maximum number of shares of Common Stock available for issuance under the Plan
shall have been purchased or (ii) the Plan shall have been sooner terminated.

           B.   Each offering period shall be of such duration (not to exceed
twenty-four (24) months) as determined by the Plan Administrator prior to the
start date of such offering period.  However, the initial offering period shall
commence at the Effective Time and terminate on the last business day in July
2002.  Subsequent offering periods shall commence as designated by the Plan
Administrator.

           C.   Each offering period shall be comprised of a series of one or
more successive Purchase Intervals.  Purchase Intervals shall run from the first
business day in February each year to the last business day in July of the same
year and from the first business day in August each year to the last business
day in January of the following year.  However, the first Purchase Interval in
effect under the initial offering period shall commence at the Effective Time
and terminate on the last business day in January 2001.

           D.   Should the Fair Market Value per share of Common Stock on any
Purchase Date within an offering period be less than the Fair Market Value per
share of Common Stock on the start date of that offering period, then that
offering period shall automatically terminate immediately after the purchase of
shares of Common Stock on such Purchase Date, and a new offering period shall
commence on the next business day following such Purchase Date.  The new
offering period shall have a duration of twenty-four (24) months, unless a
shorter duration is established by the Plan Administrator within five (5)
business days following the start date of that offering period.

     V.    ELIGIBILITY

           A.   Each individual who is an Eligible Employee on the start date of
an offering period under the Plan may enter that offering period on such start
date or on any subsequent Semi-Annual Entry Date within that offering period,
provided he or she remains an Eligible Employee.

           B.   Each individual who first becomes an Eligible Employee after the
start date of an offering period may enter that offering period on any
subsequent Semi-Annual Entry Date within that offering period on which he or she
is an Eligible Employee.

           C.   The date an individual enters an offering period shall be
designated his or her Entry Date for purposes of that offering period.

           D.   To participate in the Plan for a particular offering period, the
Eligible Employee must complete the enrollment forms prescribed by the Plan
Administrator (including a stock purchase agreement and a payroll deduction
authorization) and file such forms with the Plan Administrator (or its
designate) on or before his or her scheduled Entry Date.

                                       2
<PAGE>

     VI.   PAYROLL DEDUCTIONS

           A.   The payroll deduction authorized by the Participant for purposes
of acquiring shares of Common Stock during an offering period may be any
multiple of one percent (1%) of the Base Salary paid to the Participant during
each Purchase Interval within that offering period, up to a maximum of fifteen
percent (15%).  The deduction rate so authorized shall continue in effect
throughout the offering period, except to the extent such rate is changed in
accordance with the following guidelines:

                (i)  The Participant may, at any time during the offering
     period, reduce his or her rate of payroll deduction to become effective as
     soon as possible after filing the appropriate form with the Plan
     Administrator. The Participant may not, however, effect more than one (1)
     such reduction per Purchase Interval.

                (ii) The Participant may, prior to the commencement of any new
     Purchase Interval within the offering period, increase the rate of his or
     her payroll deduction by filing the appropriate form with the Plan
     Administrator. The new rate (which may not exceed the fifteen percent (15%)
     maximum) shall become effective on the start date of the first Purchase
     Interval following the filing of such form.

           B.   Payroll deductions shall begin on the first pay day
administratively feasible following the Participant's Entry Date into the
offering period and shall (unless sooner terminated by the Participant) continue
through the pay day ending with or immediately prior to the last day of that
offering period.  The amounts so collected shall be credited to the
Participant's book account under the Plan, but no interest shall be paid on the
balance from time to time outstanding in such account.  The amounts collected
from the Participant shall not be required to be held in any segregated account
or trust fund and may be commingled with the general assets of the Corporation
and used for general corporate purposes.

           C.   Payroll deductions shall automatically cease upon the
termination of the Participant's purchase right in accordance with the
provisions of the Plan.

           D.   The Participant's acquisition of Common Stock under the Plan on
any Purchase Date shall neither limit nor require the Participant's acquisition
of Common Stock on any subsequent Purchase Date, whether within the same or a
different offering period.

     VII.  PURCHASE RIGHTS

           A.   Grant of Purchase Right.  A Participant shall be granted a
                -----------------------
separate purchase right for each offering period in which he or she
participates.  The purchase right shall be granted on the Participant's Entry
Date into the offering period and shall provide the Participant with the right
to purchase shares of Common Stock, in a series of successive installments over
the remainder of such offering period, upon the terms set forth below.  The
Participant shall execute a stock purchase agreement embodying such terms and
such other provisions (not inconsistent with the Plan) as the Plan Administrator
may deem advisable.

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<PAGE>

           Under no circumstances shall purchase rights be granted under the
Plan to any Eligible Employee if such individual would, immediately after the
grant, own (within the meaning of Code Section 424(d)) or hold outstanding
options or other rights to purchase, stock possessing five percent (5%) or more
of the total combined voting power or value of all classes of stock of the
Corporation or any Corporate Affiliate.

           B.   Exercise of the Purchase Right.  Each purchase right shall be
                ------------------------------
automatically exercised in installments on each successive Purchase Date within
the offering period, and shares of Common Stock shall accordingly be purchased
on behalf of each Participant (other than Participants whose payroll deductions
have previously been refunded pursuant to the Termination of Purchase Right
provisions below) on each such Purchase Date.  The purchase shall be effected by
applying the Participant's payroll deductions for the Purchase Interval ending
on such Purchase Date to the purchase of whole shares of Common Stock at the
purchase price in effect for the Participant for that Purchase Date.

           C.   Purchase Price.  The purchase price per share at which Common
                --------------
Stock will be purchased on the Participant's behalf on each Purchase Date within
the offering period shall be equal to eighty-five percent (85%) of the lower of
                                                                       -----
(i) the Fair Market Value per share of Common Stock on the Participant's Entry
Date into that offering period or (ii) the Fair Market Value per share of Common
Stock on that Purchase Date.

           D.   Number of Purchasable Shares.  The number of shares of Common
                ----------------------------
Stock purchasable by a Participant on each Purchase Date during the offering
period shall be the number of whole shares obtained by dividing the amount
collected from the Participant through payroll deductions during the Purchase
Interval ending with that Purchase Date by the purchase price in effect for the
Participant for that Purchase Date. However, the maximum number of shares of
Common Stock purchasable per Participant on any one Purchase Date shall not
exceed Five Thousand Four Hundred (5,400) shares, subject to periodic
adjustments in the event of certain changes in the Corporation's capitalization.
In addition, the maximum number of shares of Common Stock purchasable in the
aggregate by all Participants on any one Purchase Date shall not exceed Two
Hundred Seventy Thousand (270,000) shares, subject to periodic adjustments in
the event of certain changes in the corporation's capitalization.

           E.   Excess Payroll Deductions.  Any payroll deductions not applied
                -------------------------
to the purchase of shares of Common Stock on any Purchase Date because they are
not sufficient to purchase a whole share of Common Stock shall be held for the
purchase of Common Stock on the next Purchase Date. However, any payroll
deductions not applied to the purchase of Common Stock by reason of the
limitation on the maximum number of shares purchasable on the Purchase Date
shall be promptly refunded.

           F.   Termination of Purchase Right.  The following provisions shall
                -----------------------------
govern the termination of outstanding purchase rights:

                (i)   A Participant may, at any time prior to the next
     scheduled Purchase Date in the offering period, terminate his or
     her outstanding purchase right by filing the appropriate form
     with the Plan Administrator (or its designate), and no further
     payroll deductions shall be collected from the Participant with

                                       4
<PAGE>

     respect to the terminated purchase right. Any payroll deductions
     collected during the Purchase Interval in which such termination
     occurs shall, at the Participant's election, be immediately
     refunded or held for the purchase of shares on the next Purchase
     Date. If no such election is made at the time such purchase right
     is terminated, then the payroll deductions collected with respect
     to the terminated right shall be refunded as soon as possible.

                (ii)  The termination of such purchase right shall be
     irrevocable, and the Participant may not subsequently rejoin the
     offering period for which the terminated purchase right was
     granted. In order to resume participation in any subsequent
     offering period, such individual must re-enroll in the Plan (by
     making a timely filing of the prescribed enrollment forms) on or
     before his or her scheduled Entry Date into that offering period.

                (iii) Should the Participant cease to remain an
     Eligible Employee for any reason (including death, disability or
     change in status) while his or her purchase right remains
     outstanding, then that purchase right shall immediately
     terminate, and all of the Participant's payroll deductions for
     the Purchase Interval in which the purchase right so terminates
     shall be immediately refunded. However, should the Participant
     cease to remain in active service by reason of an approved unpaid
     leave of absence, then the Participant shall have the right,
     exercisable up until the last business day of the Purchase
     Interval in which such leave commences, to (a) withdraw all the
     payroll deductions collected to date on his or her behalf for
     that Purchase Interval or (b) have such funds held for the
     purchase of shares on his or her behalf on the next scheduled
     Purchase Date. In no event, however, shall any further payroll
     deductions be collected on the Participant's behalf during such
     leave. Upon the Participant's return to active service (i) within
     ninety (90) days following the commencement of such leave or,
     (ii) prior to the expiration of any longer period for which such
     Participant's right to reemployment with the Corporation is
     guaranteed by either statute or contract, his or her payroll
     deductions under the Plan shall automatically resume at the rate
     in effect at the time the leave began. However, should the
     Participant's leave of absence exceed ninety (90) days and his or
     her re-employment rights not be guaranteed by either statute or
     contract, then the Participant shall be treated as a new Employee
     for purposes of the Plan and must, in order to resume
     participation in the Plan, re-enroll in the Plan (by making a
     timely filing of the prescribed enrollment forms) on or before
     his or her scheduled Entry Date into the offering period.

           G.   Change in Control.  Each outstanding purchase right shall
                -----------------
automatically be exercised, immediately prior to the effective date of any
Change in Control, by applying the payroll deductions of each Participant for
the Purchase Interval in which such Change in Control occurs to the purchase of
whole shares of Common Stock at a purchase price per share equal to eighty-five
percent (85%) of the lower of (i) the Fair Market Value per share of Common
                     -----
Stock on the Participant's Entry Date into the offering period in which such
Change in Control occurs or (ii) the Fair Market Value per share of Common Stock
immediately prior to the effective date of such Change in Control.  However, the
applicable limitation on the number of shares of

                                       5
<PAGE>

Common Stock purchasable by all Participants in the aggregate shall not apply to
any such purchase.

           The Corporation shall use its best efforts to provide at least ten
(10)-days prior written notice of the occurrence of any Change in Control, and
Participants shall, following the receipt of such notice, have the right to
terminate their outstanding purchase rights prior to the effective date of the
Change in Control.

           H.   Proration of Purchase Rights.  Should the total number of shares
                ----------------------------
of Common Stock to be purchased pursuant to outstanding purchase rights on any
particular date exceed the number of shares then available for issuance under
the Plan, the Plan Administrator shall make a pro-rata allocation of the
available shares on a uniform and nondiscriminatory basis, and the payroll
deductions of each Participant, to the extent in excess of the aggregate
purchase price payable for the Common Stock pro-rated to such individual, shall
be refunded.

           I.   Assignability.  The purchase right shall be exercisable only by
                -------------
the Participant and shall not be assignable or transferable by the Participant.

           J.   Stockholder Rights.  A Participant shall have no stockholder
                ------------------
rights with respect to the shares subject to his or her outstanding purchase
right until the shares are purchased on the Participant's behalf in accordance
with the provisions of the Plan and the Participant has become a holder of
record of the purchased shares.

     VIII. ACCRUAL LIMITATIONS

           A.   No Participant shall be entitled to accrue rights to acquire
Common Stock pursuant to any purchase right outstanding under this Plan if and
to the extent such accrual, when aggregated with (i) rights to purchase Common
Stock accrued under any other purchase right granted under this Plan and (ii)
similar rights accrued under other employee stock purchase plans (within the
meaning of Code Section 423) of the Corporation or any Corporate Affiliate,
would otherwise permit such Participant to purchase more than Twenty-Five
Thousand Dollars ($25,000) worth of stock of the Corporation or any Corporate
Affiliate (determined on the basis of the Fair Market Value per share on the
date or dates such rights are granted) for each calendar year such rights are at
any time outstanding.

           B.   For purposes of applying such accrual limitations to the
purchase rights granted under the Plan, the following provisions shall be in
effect:

                (i)  The right to acquire Common Stock under each
     outstanding purchase right shall accrue in a series of
     installments on each successive Purchase Date during the offering
     period on which such right remains outstanding.

                (ii) No right to acquire Common Stock under any
     outstanding purchase right shall accrue to the extent the
     Participant has already accrued in the same calendar year the
     right to acquire Common Stock under one (1) or more other
     purchase rights at a rate equal to Twenty-Five Thousand Dollars
     ($25,000) worth of Common Stock (determined on the basis of the
     Fair Market Value per

                                       6
<PAGE>

     share on the date or dates of grant) for each calendar year such
     rights were at any time outstanding.

           C.   If by reason of such accrual limitations, any purchase right of
a Participant does not accrue for a particular Purchase Interval, then the
payroll deductions which the Participant made during that Purchase Interval with
respect to such purchase right shall be promptly refunded.

           D.   In the event there is any conflict between the provisions of
this Article and one or more provisions of the Plan or any instrument issued
thereunder, the provisions of this Article shall be controlling.

     IX.   EFFECTIVE DATE AND TERM OF THE PLAN

           A.   The Plan was adopted by the Board on July 13, 2000 and shall
become effective at the Effective Time, provided no purchase rights granted
                                        --------
under the Plan shall be exercised, and no shares of Common Stock shall be issued
hereunder, until (i) the Plan shall have been approved by the stockholders of
the Corporation and (ii) the Corporation shall have complied with all applicable
requirements of the 1933 Act (including the registration of the shares of Common
Stock issuable under the Plan on a Form S-8 registration statement filed with
the Securities and Exchange Commission), all applicable listing requirements of
any stock exchange (or the Nasdaq National Market, if applicable) on which the
Common Stock is listed for trading and all other applicable requirements
established by law or regulation.  In the event such stockholder approval is not
obtained, or such compliance is not effected, within twelve (12) months after
the date on which the Plan is adopted by the Board, the Plan shall terminate and
have no further force or effect, and all sums collected from Participants during
the initial offering period hereunder shall be refunded.

           B. Unless sooner terminated by the Board, the Plan shall terminate
upon the earliest of (i) the last business day in July 2010, (ii) the date on
         --------
which all shares available for issuance under the Plan shall have been sold
pursuant to purchase rights exercised under the Plan or (iii) the date on which
all purchase rights are exercised in connection with a Corporate Transaction. No
further purchase rights shall be granted or exercised, and no further payroll
deductions shall be collected, under the Plan following such termination.

     X.    AMENDMENT/TERMINATION OF THE PLAN

           A.   The Board may alter, amend, suspend or terminate the Plan at any
time to become effective immediately following the close of any Purchase
Interval.  However, the Plan may be amended or terminated immediately upon Board
action, if and to the extent necessary to assure that the Corporation will not
recognize, for financial reporting purposes, any compensation expense in
connection with the shares of Common Stock offered for purchase under the Plan,
should the financial accounting rules applicable to the Plan at the Effective
Time be subsequently revised so as to require the recognition of compensation
expense in the absence of such amendment or termination.

           B.   In no event may the Board effect any of the following amendments
or revisions to the Plan without the approval of the Corporation's stockholders:
(i) increase the

                                       7
<PAGE>

number of shares of Common Stock issuable under the Plan, except for permissible
adjustments in the event of certain changes in the Corporation's capitalization,
(ii) alter the purchase price formula so as to reduce the purchase price payable
for the shares of Common Stock purchasable under the Plan or (iii) modify
eligibility requirements for participation in the Plan.

     XI.   GENERAL PROVISIONS

           A.   Nothing in the Plan shall confer upon the Participant any right
to continue in the employ of the Corporation or any Corporate Affiliate for any
period of specific duration or interfere with or otherwise restrict in any way
the rights of the Corporation (or any Corporate Affiliate employing such person)
or of the Participant, which rights are hereby expressly reserved by each, to
terminate such person's employment at any time for any reason, with or without
cause.

           B.   All costs and expenses incurred in the administration of the
Plan shall be paid by the Corporation; however, each Plan Participant shall bear
all costs and expenses incurred by such individual in the sale or other
disposition of any shares purchased under the Plan.

           C.   The provisions of the Plan shall be governed by the laws of the
State of Texas without regard to that State's conflict-of-laws rules.

                                       8
<PAGE>

                                  Schedule A
                                  ----------

                         Corporations Participating in
                         Employee Stock Purchase Plan
                           As of the Effective Time
                           ------------------------

                              Active Power, Inc.


<PAGE>

                                   APPENDIX
                                   --------


          The following definitions shall be in effect under the Plan:

          A.   Base Salary shall mean the  base salary payable to a Participant
               -----------
by one or more Participating Corporations during such individual's period of
participation in one or more offering periods under the Plan.  Such Base Salary
shall be calculated before deduction of (A) any income or employment tax
withholdings or (B) any pre-tax contributions made by the Participant to any
Code Section 401(k) salary deferral plan or any Code Section 125 cafeteria
benefit program now or hereafter established by the Corporation or any Corporate
Affiliate.  However, Base Salary shall not include any overtime payments,
bonuses, commissions, current profit-sharing distributions and other incentive-
type payments or contributions (other than Code Section 401(k) or Code Section
125 contributions) made on the Participant's behalf by the Corporation or any
Corporate Affiliate to any employee benefit or welfare plan now or hereafter
established.

          B.   Board shall mean the Corporation's Board of Directors.
               -----

          C.   Change in Control shall mean a change in ownership of the
               -----------------
Corporation pursuant to any of the following transactions:

               (i)   a merger or consolidation in which securities
     possessing more than fifty percent (50%) of the total combined
     voting power of the Corporation's outstanding securities are
     transferred to a person or persons different from the persons
     holding those securities immediately prior to such transaction,
     or

               (ii)  the sale, transfer or other disposition of all or
     substantially all of the assets of the Corporation in complete
     liquidation or dissolution of the Corporation, or

               (iii) the acquisition, directly or indirectly, by a
     person or related group of persons (other than the Corporation or
     a person that directly or indirectly controls, is controlled by
     or is under common control with the Corporation) of beneficial
     ownership (within the meaning of Rule 13d-3 of the 1934 Act) of
     securities possessing more than fifty percent (50%) of the total
     combined voting power of the Corporation's outstanding securities
     pursuant to a tender or exchange offer made directly to the
     Corporation's stockholders.

          D.   Code shall mean the Internal Revenue Code of 1986, as amended.
               ----

          E.   Common Stock shall mean the Corporation's common stock.
               ------------

          F.   Corporate Affiliate shall mean any parent or subsidiary
               -------------------
corporation of the Corporation (as determined in accordance with Code Section
424), whether now existing or subsequently established.

                                   A-1
<PAGE>

          G.   Corporation shall mean Active Power, Inc., a Delaware
               -----------
corporation, and any corporate successor to all or substantially all of the
assets or voting stock of Active Power, Inc. which shall by appropriate action
adopt the Plan.

          H.   Effective Time shall mean the time at which the Underwriting
               --------------
Agreement is executed. Any Corporate Affiliate which becomes a Participating
Corporation after such Effective Time shall designate a subsequent Effective
Time with respect to its employee-Participants.

          I.   Eligible Employee shall mean any person who is employed by a
               -----------------
Participating Corporation on a basis under which he or she is regularly expected
to render more than twenty (20) hours of service per week for more than five (5)
months per calendar year for earnings considered wages under Code Section
3401(a).

          J.   Entry Date shall mean the date an Eligible Employee first
               ----------
commences participation in the offering period in effect under the Plan.  The
earliest Entry Date under the Plan shall be the Effective Time.

          K.   Fair Market Value per share of Common Stock on any relevant date
               -----------------
shall be determined in accordance with the following provisions:

               (i)   If the Common Stock is at the time traded on the
     Nasdaq National Market, then the Fair Market Value shall be the
     closing selling price per share of Common Stock on the date in
     question, as such price is reported by the National Association
     of Securities Dealers on the Nasdaq National Market or any
     successor system. If there is no closing selling price for the
     Common Stock on the date in question, then the Fair Market Value
     shall be the closing selling price on the last preceding date for
     which such quotation exists.

               (ii)  If the Common Stock is at the time listed on any
     Stock Exchange, then the Fair Market Value shall be the closing
     selling price per share of Common Stock on the date in question
     on the Stock Exchange determined by the Plan Administrator to be
     the primary market for the Common Stock, as such price is
     officially quoted in the composite tape of transactions on such
     exchange. If there is no closing selling price for the Common
     Stock on the date in question, then the Fair Market Value shall
     be the closing selling price on the last preceding date for which
     such quotation exists.

               (iii) For purposes of the initial offering period which
     begins at the Effective Time, the Fair Market Value shall be
     deemed to be equal to the price per share at which the Common
     Stock is sold in the initial public offering pursuant to the
     Underwriting Agreement.

          L.   1933 Act shall mean the Securities Act of 1933, as amended.
               --------

          M.   Participant shall mean any Eligible Employee of a Participating
               -----------
Corporation who is actively participating in the Plan.

                                      A-2
<PAGE>

          N.   Participating Corporation shall mean the Corporation and such
               -------------------------
Corporate Affiliate or Affiliates as may be authorized from time to time by the
Board to extend the benefits of the Plan to their Eligible Employees.  The
Participating Corporations in the Plan are listed in attached Schedule A.

          O.   Plan shall mean the Corporation's Employee Stock Purchase Plan,
               ----
as set forth in this document.

          P.   Plan Administrator shall mean the committee of two (2) or more
               ------------------
Board members appointed by the Board to administer the Plan.

          Q.   Purchase Date shall mean the last business day of each Purchase
               -------------
Interval.  The initial Purchase Date shall be January 31, 2001.

          R.   Purchase Interval shall mean each successive six (6)-month period
               -----------------
within the offering period at the end of which there shall be purchased shares
of Common Stock on behalf of each Participant.

          S.   Semi-Annual Entry Date shall mean the first business day in
               ----------------------
February and August each year on which an Eligible Employee may first enter an
offering period.

          T.   Stock Exchange shall mean either the American Stock Exchange or
               --------------
the New York Stock Exchange.

          U.   Underwriting Agreement shall mean the agreement between the
               ----------------------
Corporation and the underwriter or underwriters managing the Corporation's
initial public offering of its Common Stock.

                                      A-3