EX-10.17



 






Exhibit 10.17




Vanda Pharmaceuticals Inc.




2006 Equity Incentive Plan




(As
Adopted Effective
                    
      , 2006)




 









 








TABLE OF CONTENTS




	 	 	 	 	 	 	 
	 	 	 	 	Page	 
	ARTICLE 1.
	 	INTRODUCTION	 	 	1	 
	ARTICLE 2.
	 	ADMINISTRATION	 	 	1	 
	2.1
	 	Committee Composition	 	 	1	 
	2.2
	 	Committee Responsibilities	 	 	1	 
	2.3
	 	Committee for Non-Officer Grants	 	 	2	 
	ARTICLE 3.
	 	SHARES AVAILABLE FOR GRANTS	 	 	2	 
	3.1
	 	Basic Limitation	 	 	2	 
	3.2
	 	Annual Increase in Shares	 	 	2	 
	3.3
	 	Shares Returned to Reserve	 	 	2	 
	3.4
	 	Dividend Equivalents	 	 	2	 
	ARTICLE 4.
	 	ELIGIBILITY	 	 	3	 
	4.1
	 	Incentive Stock Options	 	 	3	 
	4.2
	 	Other Grants	 	 	3	 
	ARTICLE 5.
	 	OPTIONS	 	 	3	 
	5.1
	 	Stock Option Agreement	 	 	3	 
	5.2
	 	Number of Shares	 	 	3	 
	5.3
	 	Exercise Price	 	 	3	 
	5.4
	 	Exercisability and Term	 	 	3	 
	5.5
	 	Effect of Change in Control	 	 	3	 
	5.6
	 	Modification or Assumption of Options	 	 	4	 
	5.7
	 	Buyout Provisions	 	 	4	 
	ARTICLE 6.
	 	PAYMENT FOR OPTION SHARES	 	 	4	 
	6.1
	 	General Rule	 	 	4	 
	6.2
	 	Surrender of Stock	 	 	4	 
	6.3
	 	Exercise/Sale	 	 	4	 
	6.4
	 	Promissory Note	 	 	4	 
	6.5
	 	Other Forms of Payment	 	 	4	 
	ARTICLE 7.
	 	AUTOMATIC OPTION GRANTS TO OUTSIDE DIRECTORS	 	 	5	 
	7.1
	 	Initial Grants	 	 	5	 
	7.2
	 	Annual Grants	 	 	5	 
	7.3
	 	Accelerated Exercisability	 	 	5	 
	7.4
	 	Exercise Price	 	 	5	 
	7.5
	 	Term	 	 	5	 
	7.6
	 	Affiliates of Outside Directors	 	 	5	 
	ARTICLE 8.
	 	STOCK APPRECIATION RIGHTS	 	 	5	 
	8.1
	 	SAR Agreement	 	 	5	 
	8.2
	 	Number of Shares	 	 	6	 










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	8.3
	 	Exercise Price	 	 	6	 
	8.4
	 	Exercisability and Term	 	 	6	 
	8.5
	 	Effect of Change in Control	 	 	6	 
	8.6
	 	Exercise of SARs	 	 	6	 
	8.7
	 	Modification or Assumption of SARs	 	 	6	 
	ARTICLE 9.
	 	RESTRICTED SHARES	 	 	7	 
	9.1
	 	Restricted Stock Agreement	 	 	7	 
	9.2
	 	Payment for Awards	 	 	7	 
	9.3
	 	Vesting Conditions	 	 	7	 
	9.4
	 	Voting and Dividend Rights	 	 	7	 
	ARTICLE 10.
	 	STOCK UNITS	 	 	8	 
	10.1
	 	Stock Unit Agreement	 	 	8	 
	10.2
	 	Payment for Awards	 	 	8	 
	10.3
	 	Vesting Conditions	 	 	8	 
	10.4
	 	Voting and Dividend Rights	 	 	8	 
	10.5
	 	Form and Time of Settlement of Stock Units	 	 	8	 
	10.6
	 	Death of Recipient	 	 	9	 
	10.7
	 	Creditors' Rights	 	 	9	 
	ARTICLE 11.
	 	PROTECTION AGAINST DILUTION	 	 	9	 
	11.1
	 	Adjustments	 	 	9	 
	11.2
	 	Dissolution or Liquidation	 	 	10	 
	11.3
	 	Reorganizations	 	 	10	 
	ARTICLE 12.
	 	AWARDS UNDER OTHER PLANS	 	 	11	 
	ARTICLE 13.
	 	PAYMENT OF DIRECTOR'S FEES IN SECURITIES	 	 	11	 
	13.1
	 	Effective Date	 	 	11	 
	13.2
	 	Elections to Receive NSOs, Restricted Shares or Stock Units	 	 	11	 
	13.3
	 	Number and Terms of NSOs, Restricted Shares or Stock Units	 	 	11	 
	ARTICLE 14.
	 	LIMITATION ON RIGHTS	 	 	12	 
	14.1
	 	Retention Rights	 	 	12	 
	14.2
	 	Stockholders' Rights	 	 	12	 
	14.3
	 	Regulatory Requirements	 	 	12	 
	ARTICLE 15.
	 	WITHHOLDING TAXES	 	 	12	 
	15.1
	 	General	 	 	12	 
	15.2
	 	Share Withholding	 	 	12	 
	ARTICLE 16.
	 	LIMITATION ON PAYMENTS	 	 	12	 
	16.1
	 	Scope of Limitation	 	 	12	 
	16.2
	 	Basic Rule	 	 	13	 
	16.3
	 	Reduction of Payments	 	 	13	 
	16.4
	 	Overpayments and Underpayments	 	 	13	 
	16.5
	 	Related Corporations	 	 	14	 






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	ARTICLE 17.
	 	FUTURE OF THE PLAN	 	 	14	 
	17.1
	 	Term of the Plan	 	 	14	 
	17.2
	 	Amendment or Termination	 	 	14	 
	17.3
	 	Stockholder Approval	 	 	14	 
	ARTICLE 18.
	 	DEFINITIONS	 	 	14	 
	ARTICLE 19.
	 	EXECUTION	 	 	18	 






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Vanda Pharmaceuticals Inc.




2006 Equity Incentive Plan




     ARTICLE 1. INTRODUCTION.



          The Plan was adopted by the Board effective                      ___, 2006. The purpose of the Plan is to
promote the long-term success of the Company and the creation of stockholder value by (a)
encouraging Employees, Outside Directors and Consultants to focus on critical long-range
objectives, (b) encouraging the attraction and retention of Employees, Outside Directors and
Consultants with exceptional qualifications and (c) linking Employees, Outside Directors and
Consultants directly to stockholder interests through increased stock ownership. The Plan seeks to
achieve this purpose by providing for Awards in the form of Restricted Shares, Stock Units, Options
(which may constitute ISOs or NSOs) or stock appreciation rights.




          The Plan shall be governed by, and construed in accordance with, the laws of the State of
Delaware (except their choice-of-law provisions).




     ARTICLE 2. ADMINISTRATION.



               2.1 Committee Composition. The Committee shall administer the Plan. The Committee shall
consist exclusively of two or more directors of the Company, who shall be appointed by the Board.
In addition, each member of the Committee shall meet the following requirements:




          (a) Any listing standards prescribed by the principal securities market on
which the Company’s equity securities are traded;




          (b) Such requirements as the Internal Revenue Service may establish for outside
directors acting under plans intended to qualify for exemption under section
162(m)(4)(C) of the Code;




          (c) Such requirements as the Securities and Exchange Commission may establish
for administrators acting under plans intended to qualify for exemption under Rule
16b-3 (or its successor) under the Exchange Act; and




          (d) Any other requirements imposed by applicable law, regulations or rules.



               2.2 Committee Responsibilities. The Committee shall (a) select the Employees, Outside
Directors and Consultants who are to receive Awards under the Plan, (b) determine the type, number,
vesting requirements and other features and conditions of such Awards, (c) interpret the Plan, (d)
make all other decisions relating to the operation of the Plan and (e) carry out any other duties
delegated to it by the Board. The Committee may adopt such



 









 




rules or guidelines as it deems appropriate to implement the Plan. The Committee’s
determinations under the Plan shall be final and binding on all persons.




               2.3 Committee for Non-Officer Grants. The Board may also appoint a secondary committee of the
Board, which shall be composed of one or more directors of the Company who need not satisfy the
requirements of Section 2.1. Such secondary committee may administer the Plan with respect to
Employees and Consultants who are not Outside Directors and are not considered executive officers
of the Company under section 16 of the Exchange Act, may grant Awards under the Plan to such
Employees and Consultants and may determine all features and conditions of such Awards. Within the
limitations of this Section 2.3, any reference in the Plan to the Committee shall include such
secondary committee.



     ARTICLE 3. SHARES AVAILABLE FOR GRANTS.



               3.1 Basic Limitation. Common Shares issued pursuant to the Plan may be authorized but
unissued shares or treasury shares. The aggregate number of Common Shares issued under the Plan
shall not exceed (a) 1,500,000 plus (b) the additional Common Shares described in Sections 3.2 and
3.3. The number of Common Shares that are subject to Awards outstanding at any time under the Plan
shall not exceed the number of Common Shares that then remain available for issuance under the
Plan. All Common Shares available under the Plan may be issued upon the exercise of ISOs. The
limitations of this Section 3.1 and Section 3.2 shall be subject to adjustment pursuant to Article
11.



               3.2 Annual Increase in Shares. As of the first day of each fiscal year of the Company,
commencing on January 1, 2007, the aggregate number of Common Shares that may be issued under the
Plan shall automatically increase by a number equal to the lowest of (a) 4% of the total number of
Common Shares then outstanding, (b) 1,500,000 Common Shares or (c) the number determined by the
Board.



               3.3 Shares Returned to Reserve. If Options, SARs or Stock Units are forfeited or terminate
for any other reason before being exercised or settled, then the Common Shares subject to such
Options, SARs or Stock Units shall again become available for issuance under the Plan. If SARs are
exercised, then only the number of Common Shares (if any) actually issued in settlement of such
SARs shall reduce the number available under Section 3.1 and the balance shall again become
available for issuance under the Plan. If Stock Units are settled, then only the number of Common
Shares (if any) actually issued in settlement of such Stock Units shall reduce the number available
under Section 3.1 and the balance shall again become available for issuance under the Plan. If
Restricted Shares or Common Shares issued upon the exercise of Options are reacquired by the
Company pursuant to a forfeiture provision or for any other reason, then such Common Shares shall
again become available for issuance under the Plan.



               3.4 Dividend Equivalents. Any dividend equivalents paid or credited under the Plan shall not
be applied against the number of Common Shares that may be issued under the Plan, whether or not
such dividend equivalents are converted into Stock Units.



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     ARTICLE 4. ELIGIBILITY.



               4.1 Incentive Stock Options. Only Employees who are common-law employees of the Company, a
Parent or a Subsidiary shall be eligible for the grant of ISOs. In addition, an Employee who owns
more than 10% of the total combined voting power of all classes of outstanding stock of the Company
or any of its Parents or Subsidiaries shall not be eligible for the grant of an ISO unless the
requirements set forth in section 422(c)(5) of the Code are satisfied.



               4.2 Other Grants. Only Employees, Outside Directors and Consultants shall be eligible for the
grant of Restricted Shares, Stock Units, NSOs or SARs.



     ARTICLE 5. OPTIONS.



               5.1 Stock Option Agreement. Each grant of an Option under the Plan shall be evidenced by a
Stock Option Agreement between the Optionee and the Company. Such Option shall be subject to all
applicable terms of the Plan and may be subject to any other terms that are not inconsistent with
the Plan. The Stock Option Agreement shall specify whether the Option is an ISO or an NSO. The
provisions of the various Stock Option Agreements entered into under the Plan need not be
identical. Options may be granted in consideration of a reduction in the Optionee’s other
compensation. A Stock Option Agreement may provide that a new Option will be granted automatically
to the Optionee when he or she exercises a prior Option and pays the Exercise Price in the form
described in Section 6.2.



               5.2 Number of Shares. Each Stock Option Agreement shall specify the number of Common Shares
subject to the Option and shall provide for the adjustment of such number in accordance with
Article 11. Options granted to any Optionee in a single fiscal year of the Company shall not cover
more than 500,000 Common Shares, except that Options granted to a new Employee in the fiscal year
of the Company in which his or her Service as an Employee first commences shall not cover more than
1,000,000 Common Shares. The limitations set forth in the preceding sentence shall be subject to
adjustment in accordance with Article 11.



               5.3 Exercise Price. Each Stock Option Agreement shall specify the Exercise Price; provided
that the Exercise Price shall in no event be less than 100% of the Fair Market Value of a Common
Share on the date of grant.



               5.4 Exercisability and Term. Each Stock Option Agreement shall specify the date or event when
all or any installment of the Option is to become exercisable. The Stock Option Agreement shall
also specify the term of the Option; provided that the term of an ISO shall in no event exceed 10
years from the date of grant. A Stock Option Agreement may provide for accelerated exercisability
in the event of the Optionee’s death, disability or retirement or other events and may provide for
expiration prior to the end of its term in the event of the termination of the Optionee’s Service.
Options may be awarded in combination with SARs, and such an Award may provide that the Options
will not be exercisable unless the related SARs are forfeited.



               5.5 Effect of Change in Control. The Committee may determine, at the time of granting an
Option or thereafter, that such Option shall become exercisable as to all



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or part of the Common Shares subject to such Option in the event that a Change in Control
occurs with respect to the Company or in the event that the Optionee is subject to an Involuntary
Termination after a Change in Control. However, in the case of an ISO, the acceleration of
exercisability shall not occur without the Optionee’s written consent. In addition, acceleration
of exercisability may be required under Section 11.3.




               5.6 Modification or Assumption of Options. Within the limitations of the Plan, the Committee
may modify, reprice, extend or assume outstanding options or may accept the cancellation of
outstanding options (whether granted by the Company or by another issuer) in return for the grant
of new options for the same or a different number of shares and at the same or a different exercise
price. The foregoing notwithstanding, no modification of an Option shall, without the consent of
the Optionee, alter or impair his or her rights or obligations under such Option.



               5.7 Buyout Provisions. The Committee may at any time (a) offer to buy out for a payment in
cash or cash equivalents an Option previously granted or (b) authorize an Optionee to elect to cash
out an Option previously granted, in either case at such time and based upon such terms and
conditions as the Committee shall establish.



     ARTICLE 6. PAYMENT FOR OPTION SHARES.



               6.1 General Rule. The entire Exercise Price of Common Shares issued upon exercise of Options
shall be payable in cash or cash equivalents at the time when such Common Shares are purchased,
except that the Committee at its sole discretion may accept payment of the Exercise Price in any
other form(s) described in this Article 6. However, if the Optionee is an Outside Director or
executive officer of the Company, he or she may pay the Exercise Price in a form other than cash or
cash equivalents only to the extent permitted by section 13(k) of the Exchange Act.



               6.2 Surrender of Stock. With the Committee’s consent, all or any part of the Exercise Price
may be paid by surrendering, or attesting to the ownership of, Common Shares that are already owned
by the Optionee. Such Common Shares shall be valued at their Fair Market Value on the date when
the new Common Shares are purchased under the Plan.



               6.3
Exercise/Sale. With the Committee’s consent, all or any part of the Exercise Price and
any withholding taxes may be paid by delivering (on a form prescribed by the Company) an
irrevocable direction to a securities broker approved by the Company to sell all or part of the
Common Shares being purchased under the Plan and to deliver all or part of the sales proceeds to
the Company.



               6.4 Promissory Note. With the Committee’s consent, all or any part of the Exercise Price and
any withholding taxes may be paid by delivering (on a form prescribed by the Company) a
full-recourse promissory note.



               6.5 Other Forms of Payment. With the Committee’s consent, all or any part of the Exercise
Price and any withholding taxes may be paid in any other form that is consistent with applicable
laws, regulations and rules.



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     ARTICLE 7. AUTOMATIC OPTION GRANTS TO OUTSIDE DIRECTORS.



               7.1 Initial Grants. Each Outside Director who first becomes a member of the Board after the
date of the Company’s initial public offering shall receive a one-time grant of an NSO covering
35,000 Common Shares. Such NSO shall be granted on the date when such Outside Director first joins
the Board and shall become exercisable in 48 equal monthly installments over the four-year period
commencing on the date of grant. An Outside Director who previously was an Employee shall not
receive a grant under this Section 7.1.



               7.2 Annual Grants. Upon the conclusion of each regular annual meeting of the Company’s
stockholders held in the year 2007 or thereafter, each Outside Director who will continue serving
as a member of the Board thereafter shall receive an NSO covering 15,000 Common Shares. NSOs
granted under this Section 7.2 shall become exercisable in 12 equal monthly installments over the
one-year period commencing on the date of grant. An Outside Director who previously was an
Employee shall be eligible to receive grants under this Section 7.2.



               7.3 Accelerated Exercisability. All NSOs granted to an Outside Director under this Article 7
shall also become exercisable in full in the event that:




          (a) Such Outside Director’s Service terminates because of death, or total and
permanent disability; or




          (b) The Company is subject to a Change in Control before such Outside
Director’s Service terminates.


Acceleration of exercisability may also be required by Section 11.3.




               7.4 Exercise Price. The Exercise Price under all NSOs granted to an Outside Director under
this Article 7 shall be equal to 100% of the Fair Market Value of a Common Share on the date of
grant, payable in one of the forms described in Sections 6.1, 6.2 and 6.3.



               7.5 Term. All NSOs granted to an Outside Director under this Article 7 shall terminate on the
earliest of (a) the date 10 years after the date of grant, (b) the date 12 months after the
termination of such Outside Director’s Service for any reason.



               7.6 Affiliates of Outside Directors. The Committee may provide that the NSOs that otherwise
would be granted to an Outside Director under this Article 7 shall instead be granted to an
affiliate of such Outside Director. Such affiliate shall then be deemed to be an Outside Director
for purposes of the Plan, provided that the Service-related vesting and termination provisions
pertaining to the NSOs shall be applied with regard to the Service of the Outside Director.



     ARTICLE 8. STOCK APPRECIATION RIGHTS.



               8.1 SAR Agreement. Each grant of an SAR under the Plan shall be evidenced by an SAR Agreement
between the Optionee and the Company. Such SAR shall be



5









 




subject to all applicable terms of the Plan and may be subject to any other terms that are not
inconsistent with the Plan. The provisions of the various SAR Agreements entered into under the
Plan need not be identical. SARs may be granted in consideration of a reduction in the Optionee’s
other compensation.




               8.2 Number of Shares. Each SAR Agreement shall specify the number of Common Shares to which
the SAR pertains and shall provide for the adjustment of such number in accordance with Article 11.
SARs granted to any Optionee in a single fiscal year shall in no event pertain to more than
500,000 Common Shares, except that SARs granted to a new Employee in the fiscal year of the Company
in which his or her Service as an Employee first commences shall not pertain to more than 1,000,000
Common Shares. The limitations set forth in the preceding sentence shall be subject to adjustment
in accordance with Article 11.



               8.3 Exercise Price. Each SAR Agreement shall specify the Exercise Price; provided that the
Exercise Price shall in no event be less than 100% of the Fair Market Value of a Common Share on
the date of grant.



               8.4 Exercisability and Term. Each SAR Agreement shall specify the date when all or any
installment of the SAR is to become exercisable. The SAR Agreement shall also specify the term of
the SAR. An SAR Agreement may provide for accelerated exercisability in the event of the
Optionee’s death, disability or retirement or other events and may provide for expiration prior to
the end of its term in the event of the termination of the Optionee’s Service. SARs may be awarded
in combination with Options, and such an Award may provide that the SARs will not be exercisable
unless the related Options are forfeited. An SAR may be included in an ISO only at the time of
grant but may be included in an NSO at the time of grant or thereafter. An SAR granted under the
Plan may provide that it will be exercisable only in the event of a Change in Control.



               8.5 Effect of Change in Control. The Committee may determine, at the time of granting an SAR
or thereafter, that such SAR shall become fully exercisable as to all Common Shares subject to such
SAR in the event that the Company is subject to a Change in Control or in the event that the
Optionee is subject to an Involuntary Termination after a Change in Control. In addition,
acceleration of exercisability may be required under Section 11.3.



               8.6 Exercise of SARs. Upon exercise of an SAR, the Optionee (or any person having the right
to exercise the SAR after his or her death) shall receive from the Company (a) Common Shares, (b)
cash or (c) a combination of Common Shares and cash, as the Committee shall determine. The amount
of cash and/or the Fair Market Value of Common Shares received upon exercise of SARs shall, in the
aggregate, be equal to the amount by which the Fair Market Value (on the date of surrender) of the
Common Shares subject to the SARs exceeds the Exercise Price. If, on the date when an SAR expires,
the Exercise Price under such SAR is less than the Fair Market Value on such date but any portion
of such SAR has not been exercised or surrendered, then such SAR shall automatically be deemed to
be exercised as of such date with respect to such portion.



               8.7 Modification or Assumption of SARs. Within the limitations of the Plan, the Committee may
modify, reprice, extend or assume outstanding SARs or may accept



6









 




the cancellation of outstanding SARs (whether granted by the Company or by another issuer) in
return for the grant of new SARs for the same or a different number of shares and at the same or a
different exercise price. The foregoing notwithstanding, no modification of an SAR shall, without
the consent of the Optionee, alter or impair his or her rights or obligations under such SAR.




     ARTICLE 9. RESTRICTED SHARES.



               9.1 Restricted Stock Agreement. Each grant of Restricted Shares under the Plan shall be
evidenced by a Restricted Stock Agreement between the recipient and the Company. Such Restricted
Shares shall be subject to all applicable terms of the Plan and may be subject to any other terms
that are not inconsistent with the Plan. The provisions of the various Restricted Stock Agreements
entered into under the Plan need not be identical.



               9.2 Payment for Awards. Restricted Shares may be sold or awarded under the Plan for such
consideration as the Committee may determine, including (without limitation) cash, cash
equivalents, property, full-recourse promissory notes, past services and future services. If the
Participant is an Outside Director or executive officer of the Company, he or she may pay for
Restricted Shares with a promissory note only to the extent permitted by section 13(k) of the
Exchange Act. Within the limitations of the Plan, the Committee may accept the cancellation of
outstanding options in return for the grant of Restricted Shares.



               9.3 Vesting Conditions. Each Award of Restricted Shares may or may not be subject to vesting.
Vesting shall occur, in full or in installments, upon satisfaction of the conditions specified in
the Restricted Stock Agreement. The Committee may include among such conditions the requirement
that the performance of the Company or a business unit of the Company for a specified period of one
or more fiscal years equal or exceed a target determined in advance by the Committee. The
Company’s independent auditors shall determine such performance. Such target shall be based on one
or more of the criteria set forth in Appendix A. The Committee shall identify such target not
later than the 90th day of such period. In no event shall more than 500,000 Restricted
Shares that are subject to performance-based vesting conditions be granted to any Participant in a
single fiscal year of the Company, subject to adjustment in accordance with Article 11. A
Restricted Stock Agreement may provide for accelerated vesting in the event of the Participant’s
death, disability or retirement or other events. The Committee may determine, at the time of
granting Restricted Shares or thereafter, that all or part of such Restricted Shares shall become
vested in the event that a Change in Control occurs with respect to the Company or in the event
that the Participant is subject to an Involuntary Termination after a Change in Control.



               9.4 Voting and Dividend Rights. The holders of Restricted Shares awarded under the Plan shall
have the same voting, dividend and other rights as the Company’s other stockholders. A Restricted
Stock Agreement, however, may require that the holders of Restricted Shares invest any cash
dividends received in additional Restricted Shares. Such additional Restricted Shares shall be
subject to the same conditions and restrictions as the Award with respect to which the dividends
were paid.



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     ARTICLE 10. STOCK UNITS.



               10.1 Stock Unit Agreement. Each grant of Stock Units under the Plan shall be evidenced by a
Stock Unit Agreement between the recipient and the Company. Such Stock Units shall be subject to
all applicable terms of the Plan and may be subject to any other terms that are not inconsistent
with the Plan. The provisions of the various Stock Unit Agreements entered into under the Plan
need not be identical. Stock Units may be granted in consideration of a reduction in the
recipient’s other compensation.



               10.2 Payment for Awards. To the extent that an Award is granted in the form of Stock Units,
no cash consideration shall be required of the Award recipients.



               10.3 Vesting Conditions. Each Award of Stock Units may or may not be subject to vesting.
Vesting shall occur, in full or in installments, upon satisfaction of the conditions specified in
the Stock Unit Agreement. The Committee may include among such conditions the requirement that the
performance of the Company or a business unit of the Company for a specified period of one or more
fiscal years equal or exceed a target determined in advance by the Committee. The Company’s
independent auditors shall determine such performance. Such target shall be based on one or more
of the criteria set forth in Appendix A. The Committee shall identify such target not later than
the 90th
day of such period. In no event shall more than 500,000 Stock Units that are
subject to performance-based vesting conditions be granted to any Participant in a single fiscal
year of the Company, subject to adjustment in accordance with Article 11. A Stock Unit Agreement
may provide for accelerated vesting in the event of the Participant’s death, disability or
retirement or other events. The Committee may determine, at the time of granting Stock Units or
thereafter, that all or part of such Stock Units shall become vested in the event that the Company
is subject to a Change in Control or in the event that the Participant is subject to an Involuntary
Termination after a Change in Control. In addition, acceleration of vesting may be required under
Section 11.3.



               10.4 Voting and Dividend Rights. The holders of Stock Units shall have no voting rights.
Prior to settlement or forfeiture, any Stock Unit awarded under the Plan may, at the Committee’s
discretion, carry with it a right to dividend equivalents. Such right entitles the holder to be
credited with an amount equal to all cash dividends paid on one Common Share while the Stock Unit
is outstanding. Dividend equivalents may be converted into additional Stock Units. Settlement of
dividend equivalents may be made in the form of cash, in the form of Common Shares, or in a
combination of both. Prior to distribution, any dividend equivalents that are not paid shall be
subject to the same conditions and restrictions as the Stock Units to which they attach.



               10.5 Form and Time of Settlement of Stock Units. Settlement of vested Stock Units may be made
in the form of (a) cash, (b) Common Shares or (c) any combination of both, as determined by the
Committee. The actual number of Stock Units eligible for settlement may be larger or smaller than
the number included in the original Award, based on predetermined performance factors. Methods of
converting Stock Units into cash may include (without limitation) a method based on the average
Fair Market Value of Common Shares over a series of trading days. Vested Stock Units may be
settled in a lump sum or in installments. The distribution may occur or commence when all vesting
conditions applicable to



8









 




the Stock Units have been satisfied or have lapsed, or it may be deferred to any later date.
The amount of a deferred distribution may be increased by an interest factor or by dividend
equivalents. Until an Award of Stock Units is settled, the number of such Stock Units shall be
subject to adjustment pursuant to Article 11.




               10.6 Death of Recipient. Any Stock Units Award that becomes payable after the recipient’s
death shall be distributed to the recipient’s beneficiary or beneficiaries. Each recipient of a
Stock Units Award under the Plan shall designate one or more beneficiaries for this purpose by
filing the prescribed form with the Company. A beneficiary designation may be changed by filing
the prescribed form with the Company at any time before the Award recipient’s death. If no
beneficiary was designated or if no designated beneficiary survives the Award recipient, then any
Stock Units Award that becomes payable after the recipient’s death shall be distributed to the
recipient’s estate.



               10.7 Creditors’ Rights. A holder of Stock Units shall have no rights other than those of a
general creditor of the Company. Stock Units represent an unfunded and unsecured obligation of the
Company, subject to the terms and conditions of the applicable Stock Unit Agreement.



               ARTICLE 11. PROTECTION AGAINST DILUTION.



               11.1 Adjustments. In the event of a subdivision of the outstanding Common Shares, a
declaration of a dividend payable in Common Shares or a combination or consolidation of the
outstanding Common Shares (by reclassification or otherwise) into a lesser number of Common Shares,
corresponding adjustments shall automatically be made in each of the following:




          (a) The number of Options, SARs, Restricted Shares and Stock Units available
for future Awards under Article 3;




          (b) The limitations set forth in Sections 5.2, 8.2, 9.3 and 10.3;




          (c) The number of Common Shares covered by each outstanding Option and SAR;




          (d) The Exercise Price under each outstanding Option and SAR; or




          (e) The number of Stock Units included in any prior Award that has not yet been
settled.


In the event of a declaration of an extraordinary dividend payable in a form other than Common
Shares in an amount that has a material effect on the price of Common Shares, a recapitalization, a
spin-off or a similar occurrence, the Committee shall make such adjustments as it, in its sole
discretion, deems appropriate in one or more of the foregoing. Except as provided in this Article
11, a Participant shall have no rights by reason of any issuance by the Company of stock of any
class or securities convertible into stock of any class, any subdivision or consolidation of


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 shares of stock of any class, the payment of any stock dividend or any other increase or decrease in the
number of shares of stock of any class.




               11.2 Dissolution or Liquidation. To the extent not previously exercised or settled, Options,
SARs and Stock Units shall terminate immediately prior to the dissolution or liquidation of the
Company.



               11.3 Reorganizations. In the event that the Company is a party to a merger or consolidation,
all outstanding Awards shall be subject to the agreement of merger or consolidation. Such
agreement shall provide for one or more of the following:




          (a) The continuation of such outstanding Awards by the Company (if the Company
is the surviving corporation).




          (b) The assumption of such outstanding Awards by the surviving corporation or
its parent, provided that the assumption of Options or SARs shall comply with
section 424(a) of the Code (whether or not the Options are ISOs).




          (c) The substitution by the surviving corporation or its parent of new awards
for such outstanding Awards, provided that the substitution of Options or SARs shall
comply with section 424(a) of the Code (whether or not the Options are ISOs).




          (d) Full exercisability of outstanding Options and SARs and full vesting of the
Common Shares subject to such Options and SARs, followed by the cancellation of such
Options and SARs. The full exercisability of such Options and SARs and full vesting
of such Common Shares may be contingent on the closing of such merger or
consolidation. The Optionees shall be able to exercise such Options and SARs during
a period of not less than five full business days preceding the closing date of such
merger or consolidation, unless (i) a shorter period is required to permit a timely
closing of such merger or consolidation and (ii) such shorter period still offers
the Optionees a reasonable opportunity to exercise such Options and SARs. Any
exercise of such Options and SARs during such period may be contingent on the
closing of such merger or consolidation.




          (e) The cancellation of outstanding Options and SARs and a payment to the
Optionees equal to the excess of (i) the Fair Market Value of the Common Shares
subject to such Options and SARs (whether or not such Options and SARs are then
exercisable or such Common Shares are then vested) as of the closing date of such
merger or consolidation over (ii) their Exercise Price. Such payment shall be made
in the form of cash, cash equivalents, or securities of the surviving corporation or
its parent with a Fair Market Value equal to the required amount. Such payment may
be made in installments and may be deferred until the date or dates when such
Options and SARs would have become exercisable or such Common Shares would have
vested. Such payment may be subject to



10









 







vesting based on the Optionee’s continuing Service, provided that the vesting
schedule shall not be less favorable to the Optionee than the schedule under which
such Options and SARs would have become exercisable or such Common Shares would have
vested. If the Exercise Price of the Common Shares subject to such Options and SARs
exceeds the Fair Market Value of such Common Shares, then such Options and SARs may
be cancelled without making a payment to the Optionees. For purposes of this
Subsection (e), the Fair Market Value of any security shall be determined without
regard to any vesting conditions that may apply to such security.




          (f) The cancellation of outstanding Stock Units and a payment to the
Participants equal to the Fair Market Value of the Common Shares subject to such
Stock Units (whether or not such Stock Units are then vested) as of the closing date
of such merger or consolidation. Such payment shall be made in the form of cash,
cash equivalents, or securities of the surviving corporation or its parent with a
Fair Market Value equal to the required amount. Such payment may be made in
installments and may be deferred until the date or dates when such Stock Units would
have vested. Such payment may be subject to vesting based on the Participant’s
continuing Service, provided that the vesting schedule shall not be less favorable
to the Participant than the schedule under which such Stock Units would have vested.
For purposes of this Subsection (f), the Fair Market Value of any security shall be
determined without regard to any vesting conditions that may apply to such security.



     ARTICLE 12. AWARDS UNDER OTHER PLANS.



          The Company may grant awards under other plans or programs. Such awards may be settled in the
form of Common Shares issued under this Plan. Such Common Shares shall be treated for all purposes
under the Plan like Common Shares issued in settlement of Stock Units and shall, when issued,
reduce the number of Common Shares available under Article 3.




     ARTICLE 13. PAYMENT OF DIRECTOR’S FEES IN SECURITIES.



               13.1 Effective Date. No provision of this Article 13 shall be effective unless and until the
Board has determined to implement such provision.



               13.2 Elections to Receive NSOs, Restricted Shares or Stock Units. An Outside Director may
elect to receive his or her annual retainer payments and/or meeting fees from the Company in the
form of cash, NSOs, Restricted Shares or Stock Units, or a combination thereof, as determined by
the Board. Such NSOs, Restricted Shares and Stock Units shall be issued under the Plan. An
election under this Article 13 shall be filed with the Company on the prescribed form.



               13.3 Number and Terms of NSOs, Restricted Shares or Stock Units. The number of NSOs,
Restricted Shares or Stock Units to be granted to Outside Directors in lieu of annual retainers and
meeting fees that would otherwise be paid in cash shall be calculated in a



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manner determined by the Board. The Board shall also determine the terms of such NSOs,
Restricted Shares or Stock Units.




     ARTICLE 14. LIMITATION ON RIGHTS.



               14.1 Retention Rights. Neither the Plan nor any Award granted under the Plan shall be deemed
to give any individual a right to remain an Employee, Outside Director or Consultant. The Company
and its Parents, Subsidiaries and Affiliates reserve the right to terminate the Service of any
Employee, Outside Director or Consultant at any time, with or without cause, subject to applicable
laws, the Company’s certificate of incorporation and by-laws and a written employment agreement (if
any).



               14.2 Stockholders’ Rights. A Participant shall have no dividend rights, voting rights or
other rights as a stockholder with respect to any Common Shares covered by his or her Award prior
to the time when a stock certificate for such Common Shares is issued or, if applicable, the time
when he or she becomes entitled to receive such Common Shares by filing any required notice of
exercise and paying any required Exercise Price. No adjustment shall be made for cash dividends or
other rights for which the record date is prior to such time, except as expressly provided in the
Plan.



               14.3 Regulatory Requirements. Any other provision of the Plan notwithstanding, the obligation
of the Company to issue Common Shares under the Plan shall be subject to all applicable laws, rules
and regulations and such approval by any regulatory body as may be required. The Company reserves
the right to restrict, in whole or in part, the delivery of Common Shares pursuant to any Award
prior to the satisfaction of all legal requirements relating to the issuance of such Common Shares,
to their registration, qualification or listing or to an exemption from registration, qualification
or listing.



     ARTICLE 15. WITHHOLDING TAXES.



               15.1 General. To the extent required by applicable federal, state, local or foreign law, a
Participant or his or her successor shall make arrangements satisfactory to the Company for the
satisfaction of any withholding tax obligations that arise in connection with the Plan. The
Company shall not be required to issue any Common Shares or make any cash payment under the Plan
until such obligations are satisfied.



               15.2 Share Withholding. To the extent that applicable law subjects a Participant to tax
withholding obligations, the Committee may permit such Participant to satisfy all or part of such
obligations by having the Company withhold all or a portion of any Common Shares that otherwise
would be issued to him or her or by surrendering all or a portion of any Common Shares that he or
she previously acquired. Such Common Shares shall be valued at their Fair Market Value on the date
when they are withheld or surrendered.



     ARTICLE
16. LIMITATION ON PAYMENTS.



               16.1 Scope of Limitation. This Article 16 shall apply to an Award only if:



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          (a) The independent auditors selected for this purpose by the Committee (the
“Auditors”) determine that the after-tax value of such Award to the Participant,
taking into account the effect of all federal, state and local income taxes,
employment taxes and excise taxes applicable to the Participant (including the
excise tax under section 4999 of the Code), will be greater after the application of
this Article 16 than it was before the application of this Article 16; or




          (b) The Committee, at the time of making an Award under the Plan or at any time
thereafter, specifies in writing that such Award shall be subject to this Article 16
(regardless of the after-tax value of such Award to the Participant).


If this Article 16 applies to an Award, it shall supersede any contrary provision of the Plan or of
any Award granted under the Plan.




               16.2 Basic Rule. In the event that the Auditors determine that any payment or transfer by the
Company under the Plan to or for the benefit of a Participant (a “Payment”) would be nondeductible
by the Company for federal income tax purposes because of the provisions concerning “excess
parachute payments” in section 280G of the Code, then the aggregate present value of all Payments
shall be reduced (but not below zero) to the Reduced Amount. For purposes of this Article 16, the
“Reduced Amount” shall be the amount, expressed as a present value, which maximizes the aggregate
present value of the Payments without causing any Payment to be nondeductible by the Company
because of section 280G of the Code.



               16.3 Reduction of Payments. If the Auditors determine that any Payment would be nondeductible
by the Company because of section 280G of the Code, then the Company shall promptly give the
Participant notice to that effect and a copy of the detailed calculation thereof and of the Reduced
Amount, and the Participant may then elect, in his or her sole discretion, which and how much of
the Payments shall be eliminated or reduced (as long as after such election the aggregate present
value of the Payments equals the Reduced Amount) and shall advise the Company in writing of his or
her election within 10 days of receipt of notice. If no such election is made by the Participant
within such 10-day period, then the Company may elect which and how much of the Payments shall be
eliminated or reduced (as long as after such election the aggregate present value of the Payments
equals the Reduced Amount) and shall notify the Participant promptly of such election. For
purposes of this Article 16, present value shall be determined in accordance with section
280G(d)(4) of the Code. All determinations made by the Auditors under this Article 16 shall be
binding upon the Company and the Participant and shall be made within 60 days of the date when a
Payment becomes payable or transferable. As promptly as practicable following such determination
and the elections hereunder, the Company shall pay or transfer to or for the benefit of the
Participant such amounts as are then due to him or her under the Plan and shall promptly pay or
transfer to or for the benefit of the Participant in the future such amounts as become due to him
or her under the Plan.



               16.4 Overpayments and Underpayments. As a result of uncertainty in the application of section
280G of the Code at the time of an initial determination by the Auditors hereunder, it is possible
that Payments will have been made by the Company which



13









 




should not have been made (an “Overpayment”) or that additional Payments which will not have
been made by the Company could have been made (an “Underpayment”), consistent in each case with the
calculation of the Reduced Amount hereunder. In the event that the Auditors, based upon the
assertion of a deficiency by the Internal Revenue Service against the Company or the Participant
that the Auditors believe has a high probability of success, determine that an Overpayment has been
made, such Overpayment shall be treated for all purposes as a loan to the Participant that he or
she shall repay to the Company, together with interest at the applicable federal rate provided in
section 7872(f)(2) of the Code; provided, however, that no amount shall be payable by the
Participant to the Company if and to the extent that such payment would not reduce the amount that
is subject to taxation under section 4999 of the Code. In the event that the Auditors determine
that an Underpayment has occurred, such Underpayment shall promptly be paid or transferred by the
Company to or for the benefit of the Participant, together with interest at the applicable federal
rate provided in section 7872(f)(2) of the Code.




               16.5 Related Corporations. For purposes of this Article 16, the term “Company” shall include
affiliated corporations to the extent determined by the Auditors in accordance with section
280G(d)(5) of the Code.



     ARTICLE 17. FUTURE OF THE PLAN.



               17.1 Term of the Plan. The Plan, as set forth herein, shall become effective on the date of
the Company’s initial public offering. The Plan shall remain in effect until the earlier of (a)
the date when the Plan is terminated under Section 17.2 or (b) the 10th anniversary of
the date when the Board adopted the Plan.



               17.2 Amendment or Termination. The Board may, at any time and for any reason, amend or
terminate the Plan. No Awards shall be granted under the Plan after the termination thereof. The
termination of the Plan, or any amendment thereof, shall not affect any Award previously granted
under the Plan.



               17.3 Stockholder Approval. An amendment of the Plan shall be subject to the approval of the
Company’s stockholders only to the extent required by applicable laws, regulations or rules.
However, section 162(m) of the Code may require that the Company’s stockholders approve:




     (a) The Plan not later than the first regular meeting of stockholders that
occurs in the fourth calendar year following the calendar year in which the
Company’s initial public offering occurred; and




     (b) The performance criteria set forth in Appendix A not later than the first
meeting of stockholders that occurs in the fifth year following the year in which
the Company’s stockholders previously approved such criteria.



     ARTICLE 18. DEFINITIONS.



          18.1 “Affiliate” means any entity other than a Subsidiary, if the Company and/or one or more
Subsidiaries own not less than 50% of such entity.



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          18.2 “Award” means any award of an Option, an SAR, a Restricted Share or a Stock Unit under
the Plan.



          18.3 “Board” means the Company’s Board of Directors, as constituted from time to time.



          18.4 “Cause” means:



               (a) An unauthorized use or disclosure by the Participant of the Company’s confidential
information or trade secrets, which use or disclosure causes material harm to the Company;



               (b) A material breach by the Participant of any agreement between the Participant and the
Company;



               (c) A material failure by the Participant to comply with the Company’s written policies or
rules;



               (d) The Participant’s conviction of, or plea of “guilty” or “no contest” to, a felony under
the laws of the United States or any State thereof;




               (e) The Participant’s gross negligence or willful misconduct;




               (f) A continuing failure by the Participant to perform assigned duties after receiving written
notification of such failure from the Board; or



               (g) A failure by the Participant to cooperate in good faith with a governmental or internal
investigation of the Company or its directors, officers or employees, if the Company has requested
the Participant’s cooperation.



          18.5 “Change in Control” means:




               (a) The consummation of a merger or consolidation of the Company with or into
another entity or any other corporate reorganization, if persons who were not
stockholders of the Company immediately prior to such merger, consolidation or other
reorganization own immediately after such merger, consolidation or other
reorganization 50% or more of the voting power of the outstanding securities of each
of (i) the continuing or surviving entity and (ii) any direct or indirect parent
corporation of such continuing or surviving entity;




               (b) The sale, transfer or other disposition of all or substantially all of the
Company’s assets;




               (c) A change in the composition of the Board, as a result of which fewer than
50% of the incumbent directors are directors who either:



15









 






               (i) Had been directors of the Company on the date 24 months prior to the date
of such change in the composition of the Board (the “Original Directors”); or




               (ii) Were appointed to the Board, or nominated for election to the Board, with
the affirmative votes of at least a majority of the aggregate of (A) the Original
Directors who were in office at the time of their appointment or nomination and (B)
the directors whose appointment or nomination was previously approved in a manner
consistent with this Paragraph (ii); or




               (d) Any transaction as a result of which any person is the “beneficial owner”
(as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of
securities of the Company representing at least 50% of the total voting power
represented by the Company’s then outstanding voting securities. For purposes of
this Subsection (d), the term “person” shall have the same meaning as when used in
sections 13(d) and 14(d) of the Exchange Act but shall exclude (i) a trustee or
other fiduciary holding securities under an employee benefit plan of the Company or
of a Parent or Subsidiary and (ii) a corporation owned directly or indirectly by the
stockholders of the Company in substantially the same proportions as their ownership
of the common stock of the Company.


A transaction shall not constitute a Change in Control if its sole purpose is to change the state
of the Company’s incorporation or to create a holding company that will be owned in substantially
the same proportions by the persons who held the Company’s securities immediately before such
transaction.




          18.6 “Code” means the Internal Revenue Code of 1986, as amended.



          18.7 “Committee” means a committee of the Board, as described in Article 2.



          18.8 “Common Share” means one share of the common stock of the Company.



          18.9 “Company” means Vanda Pharmaceuticals Inc., a Delaware corporation.



          18.10 “Consultant” means a consultant or adviser who provides bona fide services to the
Company, a Parent, a Subsidiary or an Affiliate as an independent contractor. Service as a
Consultant shall be considered employment for all purposes of the Plan, except as provided in
Section 4.1.



          18.11 “Employee” means a common-law employee of the Company, a Parent, a Subsidiary or an
Affiliate.



          18.12 “Exchange Act” means the Securities Exchange Act of 1934, as amended.



          18.13 “Exercise Price,” in the case of an Option, means the amount for which one Common Share
may be purchased upon exercise of such Option, as specified in the applicable Stock Option
Agreement. “Exercise Price,” in the case of an SAR, means an amount,



16









 




as specified in the applicable SAR Agreement, which is subtracted from the Fair Market Value
of one Common Share in determining the amount payable upon exercise of such SAR.




          18.14 “Fair Market Value” means the market price of Common Shares, determined by the Committee
in good faith on such basis as it deems appropriate. Whenever possible, the determination of Fair
Market Value by the Committee shall be based on the prices reported in The Wall Street
Journal. Such determination shall be conclusive and binding on all persons.



          18.15 “Involuntary Termination” means the termination of the Participant’s Service by reason
of:




               (a) The involuntary discharge of the Participant by the Company (or the Parent,
Subsidiary or Affiliate employing him or her) for reasons other than Cause; or




               (b) The voluntary resignation of the Participant following (i) a material
adverse change in his or her title, stature, authority or responsibilities with the
Company (or the Parent, Subsidiary or Affiliate employing him or her), (ii) a
material reduction in his or her base salary or (iii) receipt of notice that his or
her principal workplace will be relocated by more than 30 miles.



          18.16 “ISO” means an incentive stock option described in section 422(b) of the Code.



          18.17 “NSO” means a stock option not described in sections 422 or 423 of the Code.



          18.18 “Option” means an ISO or NSO granted under the Plan and entitling the holder to purchase
Common Shares.



          18.19 “Optionee” means an individual or estate who holds an Option or SAR.



          18.20 “Outside Director” means a member of the Board who is not an Employee. Service as an
Outside Director shall be considered employment for all purposes of the Plan, except as provided in
Section 4.1.



          18.21 “Parent” means any corporation (other than the Company) in an unbroken chain of
corporations ending with the Company, if each of the corporations other than the Company owns stock
possessing 50% or more of the total combined voting power of all classes of stock in one of the
other corporations in such chain. A corporation that attains the status of a Parent on a date
after the adoption of the Plan shall be considered a Parent commencing as of such date.



          18.22 “Participant” means an individual or estate who holds an Award.



          18.23 “Plan” means this Vanda Pharmaceuticals Inc. 2006 Equity Incentive Plan, as amended from
time to time.



17









 





          18.24 “Restricted Share” means a Common Share awarded under the Plan.



          18.25 “Restricted Stock Agreement” means the agreement between the Company and the recipient
of a Restricted Share that contains the terms, conditions and restrictions pertaining to such
Restricted Share.



          18.26 “SAR” means a stock appreciation right granted under the Plan.



          18.27 “SAR Agreement” means the agreement between the Company and an Optionee that contains
the terms, conditions and restrictions pertaining to his or her SAR.



          18.28 “Service” means service as an Employee, Outside Director or Consultant.



          18.29 “Stock Option Agreement” means the agreement between the Company and an Optionee that
contains the terms, conditions and restrictions pertaining to his or her Option.



          18.30 “Stock Unit” means a bookkeeping entry representing the equivalent of one Common Share,
as awarded under the Plan.



          18.31 “Stock Unit Agreement” means the agreement between the Company and the recipient of a
Stock Unit that contains the terms, conditions and restrictions pertaining to such Stock Unit.



          18.32 “Subsidiary” means any corporation (other than the Company) in an unbroken chain of
corporations beginning with the Company, if each of the corporations other than the last
corporation in the unbroken chain owns stock possessing 50% or more of the total combined voting
power of all classes of stock in one of the other corporations in such chain. A corporation that
attains the status of a Subsidiary on a date after the adoption of the Plan shall be considered a
Subsidiary commencing as of such date.



     ARTICLE 19. EXECUTION.




          To record the adoption of the Plan by the Board on ___, 2006, the Company has caused
its duly authorized officer to execute this document in the name of the Company.




	 	 	 	 	 
	 	Vanda Pharmaceuticals Inc. 

 	 
	 	By:  	 	 
	 	 	 	 
	 	Title:	 	 
	 





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Appendix A




Performance Criteria for Restricted Shares and Stock Units



The performance goals that may be used by the Committee for such awards may consist of: operating
profits (including EBITDA), net profits, earnings per share, profit returns and margins, revenues,
shareholder return and/or value, stock price and working capital. Performance goals may be measured
solely on a corporate, subsidiary or business unit basis, or a combination thereof. Further,
performance criteria may reflect absolute entity performance or a relative comparison of entity
performance to the performance of a peer group of entities or other external measure of the
selected performance criteria. Profit, earnings and revenues used for any performance goal
measurement may exclude: gains or losses on operating asset sales or dispositions; asset
write-downs; litigation or claim judgments or settlements; accruals for historic environmental
obligations; effect of changes in tax law or rate on deferred tax liabilities; accruals for
reorganization and restructuring programs; uninsured catastrophic property losses; the cumulative
effect of changes in accounting principles; and any extraordinary non-recurring items as described
in Accounting Principles Board Opinion No. 30 and/or in management’s discussion and analysis of
financial performance appearing in the Company’s annual report to stockholders for the applicable
year.