Exhibit 10.38**EMPLOYMENT AGREEMENT**     This Employment Agreement (the “Agreement”), entered into effective as of June15, 2006 (the “Effective Date”), by and between Cyberonics, Inc. (the “Company”)and W. Steven Jennings (“Employee”).**W1TNESSETH:**     WHEREAS, the Company desires to secure the experience, abilities and serviceof Employee by employing Employee upon the terms and conditions specified herein;and     WHEREAS, Employee is willing to enter into this Agreement upon the terms andconditions specified herein;     NOW, THEREFORE, in consideration of the premises, terms and provisions setforth herein, the mutual benefits to be gained by the performance thereof and othergood and valuable consideration, the receipt and sufficiency of which are herebyacknowledged, the parties hereto agree as follows:     SECTION 1. Employment. The Company hereby employs Employee, andEmployee hereby accepts such employment, all upon the terms and conditions setforth herein.     SECTION 2*.*Term. Subject to the terms and conditions of thisAgreement, unless sooner terminated pursuant to Section 5 of this Agreement,Employee shall be employed by the Company commencing on the Effective Date andterminating on June 1, 2009 (the “Term”). Termination of this Agreement shall notalter or impair any rights of Employee (or his beneficiaries or heirs) with respectto payments, benefits or other rights provided by the terms of this Agreement,arising before or after the end of the Term.     SECTION 3. Duties. Responsibilities and Location.     A. Capacity. Employee shall serve as the Vice President,Sales of the Company and shall report to the Chief Executive Officer of theCompany.     B. Full-Time Duties. Employee shall devote his full businesstime, attention and energies to the business of the Company.Notwithstanding anything herein to the contrary, Employee shall be allowed to (i) manageEmployee’s personal investments and affairs and, (ii) with the written consentof the Chief Executive Officer of the Company, serve on boards or committees ofcivic or charitable organizations or trade associations, provided that suchactivities do not materially interfere with his performance of the duties andresponsibilities of his position specified in Section 3.A.     C. Offices. Employee’s primary place of work shall be at theprinciple executive offices of the Company located in the greater Houston,Texas metropolitan area, but Employee shall be required to travel on abasis consistent with his position.
 

 
     SECTION 4. Compensation.     A. Base Salary During the Term, Employee shall receive anannual salary of $260,000 (the “Base Salary”) payable in accordance withthe Company’s general payroll practices. Employee’s Base Salary shall bereviewed prior to the beginning of each fiscal year of the Company forincrease in the discretion of the Compensation Committee of the Board ofDirectors (“Compensation Committee”); provided, however, that the BaseSalary, as it may be increased at any time, may not thereafter bedecreased.,     B. Annual Incentive Bonus. During the Term, Employeeshall be eligible to participate in the Annual CEO Direct Reports BonusPlan, with a target bonus of 50% of Employee’s annual Base Salary. A bonus, ifearned, shall be payable as soon as reasonably practical following the completion ofthe applicable fiscal year. Bonuses for Employee shall be based on theachievement of such Company, departmental and/or individual performance goals that maybe established for the applicable bonus year by the CompensationCommittee.     C. Annual Overachievement Bonus. During the Term, Employeeshall be eligible to participate in the Annual CEO Direct ReportsOverachievement Bonus Plan as determined by the Compensation Committee,Overachievement Bonuses shall be based on the Company’s overachievement of suchCompany, departmental and/or individual performance goals that may beestablished for the applicable bonus year by the Compensation Committee.     D. Equity Compensation. Employee will be eligible forgrants of Company stock options (the “Options”) and other equity awards inthe discretion of the Compensation Committee.     E. General Benefits. Upon satisfying applicable eligibility requirements, if any, Employee will be eligible to participate inthe Company’s qualified 401(k) plan, group health, group life insurance, accidental death and dismemberment, travel accident, long-term disability and short-termdisability plans and other welfare and similar plans and vacation policiesunder terms generally applicable to other similarly situated employees of theCompany and shall be eligible to receive all perquisites and other benefitsprovided or made available by the Company to other similarly situated executives ofthe Company.     F. Reimbursements. Employee shall be entitled to receiveprompt reimbursement by the Company in accordance with its businessreimbursement policy in effect from time to time for ail reasonable,out-of-pocket business expenses incurred by him in performing his duties under thisAgreement upon the submission by Employee of such accounts and records as may bereasonably required under the Company’s business reimbursement policy.     SECTION 5. Termination of Employment. Notwithstanding the provisionsof Section 2, Employee’s employment hereunder may terminate under any of thefollowing conditions:
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     A. Death. Employee’s employment under this Agreementshall terminate automatically upon his death.     B. Disability. Employee’s employment under this Agreementmay be terminated due to his Disability. “Disability” shall mean Employee’sinability to substantially perform his duties hereunder for any period of atleast 180 consecutive days due to a physical or mental incapacity. The date oftermination due to Disability shall be the date Employee elects to terminate hisemployment service due to such Disability or, if earlier, the date the Boarddetermines that Employee has met the definition of Disability and given writtennotice of such termination to Employee.     C. Termination by Company Without Cause. The Company mayterminate Employee’s employment hereunder without Cause (ashereinafter defined) on 30 days’ prior written notice to Employee.     D. Termination by Company for Cause. Employee’s employmenthereunder may be terminated for Cause by the Company. For purposesof this Agreement, “Cause” shall mean (i) the willful and continued failureby Employee to substantially perform Employee’s duties with the Company (otherthan any such failure resulting from Employee’s incapacity due to physical ormental illness), (ii) an act or acts of dishonesty taken by Employee andintended to result in personal enrichment of Employee at the expense of the Company,(iii) willful violation by Employee of Employee’s material obligations under thisAgreement, (iv) willful violation by Employee of a material policy of theCompany, including its policies regarding professional and ethical conduct,(v) Employee’s commission of one or more acts that constitute a felony, (vi)Employee is publicly censured by the Securities Exchange Commission, or (vii) Employeecommits one or more acts of fraud as regards the Company. For purposes of clause(i) of this definition, no act, or failure to act, on Employee’s part shall bedeemed “willful” unless done, or omitted to be done, by Employee not in good faith andwithout reasonable belief that Employee’s act, or failure to act, was in thebest interest of the Company. The determination of whether Cause exists must bemade by a resolution duly adopted by the affirmative vote of not less than amajority of the entire membership of the Board of Directors of the Company.     E. Termination by Employee. Employee may terminatehis employment hereunder at any time on 30 days’ prior written notice tothe Board.
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     SECTION 6*.*Payments Upon Termination.     A. Upon termination of Employee’s employment for any reason priorto the expiration of the Term, the Company shall be obligated to pay,and Employee shall be entitled to receive:     1. all accrued and unpaid Base Salary to the date of termination;     2. any earned, but unpaid, bonuses for the bonus year endingprior to the date of termination;     3. all incurred but unreimbursed business expenses for whichEmployee is entitled to reimbursement; and     4. any benefits to which he is entitled under the terms ofany applicable employee benefit plan or program, or applicablelaw.     B. Upon termination of Employee’s employment pursuant to Section 5.C., the Company shall be obligated to pay or provide, andEmployee’s estate or beneficiary shall be entitled to receive:     1. all of the amounts and benefits described in Section 6. A.; and     2. either (a) a lump sum payment equal to 1.5 times the sumof (i) Employee’s Base Salary, plus (ii) the most recent annualbonus earned by Employee or (b) a lump sum payment equal to 1.5 timesEmployee’s Base Salary and, solely for purposes of determining Employee’svesting under any Options, the number of shares that would become vestedunder such Options during the 12-month period following Employee’stermination date if Employee’s employment had continued during suchperiod shall become vested on his termination of employment date,whichever of (a) or (b) is elected by Employee in writing to the Company withinfive days of his termination date.     C. In the event of any termination of employment under Section 5,Employee shall be under no obligation to seek other employment and thereshall be no offset against amounts due Employee under this Agreement onaccount of any remuneration attributable to any subsequent employment orself-employment that he may obtain.     D. The Company and Employee have previously or contemporaneouslywith this Agreement entered into a Severance Agreement which providescertain payments and benefits to Employee upon a qualified terminationof employment in connection with a change of control of theCompany. Notwithstanding anything in this Agreement to the contrary, to theextent Employee is entitled to receive any severance payment or benefitsunder the Severance Agreement any
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severance payment or benefits to which Employee is otherwise entitledto receive under this Agreement shall be reduced or offset by theseverance payment or benefit payable under the Severance Agreement insuch manner as is appropriate, as determined in good faith by theBoard, to prevent a duplication of such payment and benefits.     SECTION 7. Indemnification. The Company agrees to indemnify Employeeto the fullest extent permitted by applicable law with respect to any acts ornon-acts he may have committed during the period which he was an officer, directorand/or employee of the Company or any subsidiary or affiliate thereof, or of anyother entity of which he served as an officer, director or employee at the requestof the Company.     SECTION 8. Covenants of Employee. Employee covenants as follows:     A. Confidentiality. During and after his employment withthe Company and its affiliates, Employee will hold in confidence allconfidential information and will not disclose it to any person otherthan in connection with the performance of his duties and obligationshereunder, except with the specific prior written consent of the Boardof Directors or the Chief Executive Officer; provided, however, thatthe parties agree that this Agreement does not prohibit the disclosureof confidential information where applicable law requires, including,but not limited to, in response of subpoenas and/or orders of agovernmental agency or court of competent jurisdiction. In the eventthat Employee is requested or becomes legally compelled under the termsof a subpoena or order issued by a court of competent jurisdiction orby a governmental body to make any disclosure of confidentialinformation, Employee agrees that he will (i) immediately provide theCompany with written notice of the existence, terms and circumstances,surrounding such request(s) so that the Company may seek an appropriateprotective order or other appropriate remedy, (ii) cooperate with theCompany in its efforts to decline, resist or narrow such requests and(iii) if disclosure of such confidential information is required in theopinion of counsel, exercise reasonable efforts to obtain an order orother reliable assurance that confidential treatment will be accordedto such disclosed information. “Confidential information” means any andall intellectual property of the Company (or any of its affiliates),including but not limited to: (a) trade secrets concerning the businessand affairs of the Company (or any of its affiliates), productspecifications, data, know-how, formulae, compositions, processes,designs, sketches, photographs, graphs, drawings, samples, inventionsand ideas, past, current, and planned research and development, currentand planned manufacturing or distribution methods and processes,customer lists, current and anticipated customer requirements, pricelists, market studies, business plans, computer software and programs(including object code and source code), computer software and databasetechnologies, systems, structures, and architectures (and relatedformulae, compositions, processes, improvements, devices, know-how,inventions, discoveries, concepts, ideas, designs, methods andinformation), and any other information, however documented, that is atrade secret under federal, state or other applicable law; and (b)information concerning
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the business and affairs of the Company (or any of its affiliates)(which includes historical financial statements, financial projectionsand budgets, historical and projected sales, capital spending budgetsand plans, the names and backgrounds of key personnel, personneltraining and techniques and materials), however documented; and notes,analysis, compilations, studies, summaries, and other material preparedby or for the Company (or any of its affiliates) containing or based, inwhole or in part, on any information included in the foregoing.     B. Trade Secrets. Any trade secrets of the Company will beentitled to all of the protections and benefits under the federal andstate trade secret and intellectual property laws and any otherapplicable law. If any information that the Company deems to be a tradesecret is found by a court of competent jurisdiction not to be a tradesecret for purposes of this Agreement, such information will,nevertheless, be considered confidential information for purposes of thisAgreement, so long as it otherwise meets the definition of confidentialinformation. Employee hereby waives any requirement that the Companysubmit proof of the economic value of any trade secret or post a bond orother security.     C. Proprietary Items. Employee will not remove from theCompany’s premises (except to the extent such removal is for purposes ofthe performance of Employee’s duties at home or while traveling, orexcept as otherwise specifically authorized by the Company) anydocument, record, notebook, plan, model, component, device, or computersoftware or code, whether embodied in a disk or in any other formbelonging to the Company or used in the Company’s business(collectively, the “Proprietary Items”). All of the Proprietary Items,whether or not developed by Employee, are the exclusive property of theCompany. Upon termination of his employment, or upon the request of theCompany during the Term, Employee will return to the Company all of theProprietary Items and confidential information in Employee’s possessionor subject to Employee’s control, and Employee shall not retain anycopies, abstracts, sketches, or other physical embodiment, includingelectronic or otherwise, of any of the Proprietary Items or confidentialinformation.     D. Non-Competition and Non-Interference. During the periodof his employment with the Company or its affiliates and for theone-year period after the termination of his employment with the Companyand its affiliates, Employee will not, directly or indirectly:     1. without the express prior written consent of the Board ofDirectors, own an interest in, manage, operate, join, control,lend money or render financial or other assistance to orparticipate in or be connected with, as an officer, employee,partner, stockholder, consultant or otherwise, any person thatcompetes with the Company in the field of neurostimulation in amatter covered by a patent assigned to or held by the Company;provided, however, that following Employee’s termination ofemployment with the Company the foregoing restriction shall applyonly
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to those areas where the Company is actually doing business onthe date of such termination of employment; provided, further,that Employee may purchase or otherwise acquire for passiveinvestment up to 3% of any class of securities of any suchenterprise if such securities are listed on any national orregional securities exchange or have been registered underSection 12(g) of the Securities Exchange Act of 1934;     2. whether for Employee’s own account or for the account ofany other person, (except for the account of the Company and itsaffiliates), solicit Business from any person known by Employee to be acustomer of the Company or its affiliates, whether or not Employee hadpersonal contact with such person during Employee’s employment withthe Company and its affiliates;     3. whether for Employee’s own account or the account of anyother person, (i) solicit, employ, or otherwise engageas an employee, independent contractor, or otherwise, any person who is anemployee of the Company or an affiliate, or in any manner induce, orattempt to induce, any employee of the Company or its affiliate to terminate hisemployment with the Company or its affiliate; or (ii) interfere with theCompany’s or its affiliate’s relationship with any person who at any timeduring the Term, was an employee, contractor, supplier, or customer ofthe Company or its affiliate; or     4. at any time after the termination of his employment,disparage the Company or its affiliates or any shareholders, directors,officers, employees, or agents of the Company or any of its affiliates,so long as the Company does not disparage Employee.     E.Acknowledgements. The Company acknowledges that it isproviding Employee with confidential information in order for Employeeto perform his duties under this Agreement. Employee acknowledges that(a) the services to be performed by him under this Agreement are of aspecial, unique, unusual, extraordinary, and intellectual character,and (b) the provisions of this Section 8 are reasonable and necessaryto protect the confidential information, goodwill and other businessinterests of the Company. If any covenant in this Section 8 is held tobe unreasonable, arbitrary, or against public policy, such covenantwill be considered to be divisible with respect to scope, time, andgeographic area, and such lesser scope, time, or geographic area, orall of them, as a court of competent jurisdiction may determine to bereasonable, not arbitrary, and not against public policy, will beeffective, binding, and enforceable against Employee. Employee herebyagrees that this covenant is a material and substantial part of thisAgreement and that: (i) the geographic limitations are reasonable; (ii)the term of the covenant is reasonable; and (iii) the covenant is notmade for the purpose of limiting competition per se and is reasonablyrelated to a protectable business interest of the Company. The periodof time applicable to any covenant in this Section 8 will be extendedby the duration of any violation
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by Employee of such covenant. The provisions of this Section 8 shallsurvive the termination of the Term of this Agreement.     SECTION 9. Injunctive Relief and Additional Remedy. Employeeacknowledges that the injury that would be suffered by the Company as a result of abreach of the provisions of Section 8 of this Agreement would be irreparable and thatan award of monetary damages to the Company for such a breach would be an inadequateremedy. Consequently, the Company will have the right, in addition to any otherrights it may have, to obtain a temporary restraining order and/or injunctive reliefto restrain any breach or threatened breach or otherwise to specifically enforce anyprovision of this Agreement. Employee waives any requirement for the Company’ssecuring or posting of any bond in conjunction with any such remedies. Employeefurther agrees to and hereby does submit to in personam jurisdiction before each andevery court for that purpose. Without limiting the Company’s rights under thisSection or any other remedies of the Company, if Employee breaches any of theprovisions of Section 8 and such breach is proven in a court of competentjurisdiction, the Company will have the right to cease making any payments orproviding other benefits otherwise due Employee under this Agreement.     SECTION 10. Amendment: Waiver. The terms and provisions of thisAgreement may be modified or amended only by a written instrument executed by each ofthe parties hereto, and compliance with the terms and provisions hereof may be waivedonly by a written instrument executed by each party entitled to the benefits thereof.No failure or delay on the part of any party in exercising any right, power orprivilege granted hereunder shall constitute a waiver thereof, nor shall any singleor partial exercise of any such right, power or privilege preclude any other orfurther exercise thereof or the exercise of any other right, power or privilegegranted hereunder.     SECTION 11. Entire Agreement. Except as contemplated herein, thisAgreement constitutes the entire agreement between the parties with respect to thesubject matter hereof and supersedes any and all prior or contemporaneous written ororal agreements, arrangements or understandings between the Company and Employee.     SECTION12. Notices. All notices or communications hereunder shall be inwriting, addressed as follows or to any address subsequently provided to the otherparty:To the Company:Cyberonics, Inc.