Exhibit 10.42**EMPLOYMENT AGREEMENT**     This Employment Agreement (the “Agreement”), entered into effective as of June 15, 2006 (the “Effective Date”), by and between Cyberonics, Inc. (the “Company”)and Shawn P. Lunney (“Employee”).**WITNESSETH:**     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 andother good and valuable consideration, the receipt and sufficiency of which arehereby acknowledged, the parties hereto agree as follows:     SECTION1. Employment. The Company hereby employs Employee, andEmployee hereby accepts such employment, all upon the terms and conditions setforth herein.     SECTION2. 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, MarketDevelopment of the Company and shall report to the Chief Executive Officer ofthe Company.     B. Full-Time Duties. Employee shall devote his full business time,attention and energies to the business of the Company. Notwithstanding anythingherein to the contrary, Employee shall be allowed to (i) manage Employee’spersonal investments and affairs and, (ii) with the written consent of the ChiefExecutive Officer of the Company, serve on boards or committees of civic orcharitable organizations or trade associations, provided that such activities donot materially interfere with his performance of the duties and responsibilitiesof 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 a basisconsistent with his position.     SECTION4. Compensation.     A. Base Salary. During the Term, Employee shall receive an annualsalary of $260,000 (the “Base Salary”) payable in accordance with the Company’sgeneral payroll practices. Employee’s Base Salary shall be reviewed prior to thebeginning of each fiscal year of the Company for increase in the discretion ofthe Compensation Committee of the Board of Directors (“Compensation Committee”);provided, however, that the Base Salary, as it may be increased at any time, maynot thereafter be decreased.     B. Annual Incentive Bonus. During the Term, Employee shall beeligible to participate in the Annual CEO Direct Reports Bonus Plan, with atarget bonus of 50% of Employee’s annual Base Salary. A bonus, if earned, shallbe payable as soon as reasonably practical following the completion of theapplicable fiscal year. Bonuses for Employee shall be based on the achievement ofsuch Company, departmental and/or individual performance goals that may beestablished for the applicable bonus year by the Compensation Committee.     C.Annual Overachievement Bonus. During the Term, Employee shall beeligible to participate in the Annual CEO Direct Reports Overachievement BonusPlan as determined by the Compensation Committee. Overachievement Bonuses shallbe based on the Company’s overachievement of such Company, departmental and/orindividual performance goals that may be established for the applicable bonusyear by the Compensation Committee.     D. Equity Compensation. Employee will be eligible for grants ofCompany stock options (the “Options”) and other equity awards in the discretionof the Compensation Committee.     E.General Benefits. Upon satisfying applicable eligibilityrequirements, if any, Employee will be eligible to participate in the Company’squalified 401(k) plan, group health, group life insurance, accidental death anddismemberment, travel accident, long-term disability and short-term disabilityplans and other welfare and similar plans and vacation policies under termsgenerally applicable to other similarly situated employees of the Company andshall be eligible to receive all perquisites and other benefits provided or madeavailable by the Company to other similarly situated executives ofthe Company.     F. Reimbursements. Employee shall be entitled to receive promptreimbursement by the Company in accordance with its business reimbursementpolicy in effect from time to time for all reasonable, out-of-pocket businessexpenses incurred by him in performing his duties under this Agreement upon thesubmission by Employee of such accounts and records as may be reasonablyrequired under the Company’s business reimbursement policy.
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     SECTION 5.Termination of Employment. Notwithstanding theprovisions of Section 2, Employee’s employment hereunder may terminate under any ofthe following conditions:     A. Death. Employee’s employment under this Agreement shallterminate automatically upon his death.     B.Disability. Employee’s employment under this Agreement may beterminated due to his Disability. “Disability” shall mean Employee’s inabilityto substantially perform his duties hereunder for any period of at least 180consecutive days due to a physical or mental incapacity. The date oftermination due to Disability shall be the date Employee elects toterminate 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 may terminateEmployee’s employment hereunder without Cause (as hereinafter defined) on 30days’ prior written notice to Employee.     D. Termination by Company for Cause. Employee’s employmenthereunder may be terminated for Cause by the Company. For purposes of thisAgreement, “Cause” shall mean (i) the willful and continued failure by Employeeto substantially perform Employee’s duties with the Company (other than any suchfailure resulting from Employee’s incapacity due to physical or mental illness),(ii) an act or acts of dishonesty taken by Employee and intended to result inpersonal enrichment of Employee at the expense of the Company, (iii) willfulviolation by Employee of Employee’s material obligations under this Agreement,(iv) willful violation by Employee of a material policy of the Company,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)Employee commits one or more acts of fraud as regards the Company. For purposesof clause (i) of this definition, no act, or failure to act, on Employee’s partshall be deemed “willful” unless done, or omitted to be done, by Employee not ingood faith and without reasonable belief that Employee’s act, or failure to act,was in the best interest of the Company. The determination of whether Causeexists must be made by a resolution duly adopted by the affirmative vote of notless than a majority of the entire membership of the Board of Directors of theCompany.     E. Termination by Employee. Employee may terminate hisemployment hereunder at any time on 30 days’ prior written notice to the Board.
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     SECTION 6, Payments Upon Termination.     A. Upon termination of Employee’s employment for any reason prior to the expirationof the Term, the Company shall be obligated to pay, and Employee shall be entitled toreceive:     1. all accrued and unpaid Base Salary to the date of termination;     2. any earned, but unpaid, bonuses for the bonus year ending priorto 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 of anyapplicable employee benefit plan or program, or applicable law,     B. Upon termination of Employee’s employment pursuant to Section 5.C., the Companyshall be obligated to pay or provide, and Employee’s estate or beneficiary shall beentitled 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 sum of (i)Employee’s Base Salary, plus (ii) the most recent annual bonus earned byEmployee or (b) a lump sum payment equal to 1.5 times Employee’s BaseSalary and, solely for purposes of determining Employee’s vesting underany Options, the number of shares that would become vested under suchOptions during the 12-month period following Employee’s terminationdate if Employee’s employment had continued during such period shallbecome vested on his termination of employment date, whichever of(a) or (b) is elected by Employee in writing to the Company within five days ofhis termination date.     C. In the event of any termination of employment under Section 5, Employee shall beunder no obligation to seek other employment and there shall be no offset against amountsdue Employee under this Agreement on account of any remuneration attributable to anysubsequent employment or self-employment that he may obtain.     D. The Company and Employee have previously or contemporaneously with this Agreemententered into a Severance Agreement which provides certain payments and benefits to Employeeupon a qualified termination of employment in connection with a change of control of theCompany. Notwithstanding anything in this Agreement to the contrary, to the extent Employeeis entitled to receive any severance payment or benefits under 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 Employee tothe fullest extent permitted by applicable law with respect to any acts or non-actshe may have committed during the period which he was an officer, director and/oremployee of the Company or any subsidiary or affiliate thereof, or of any otherentity of which he served as an officer, director or employee at the request of theCompany.     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) (whichincludes historical financial statements, financial projections and budgets,historical and projected sales, capital spending budgets and plans, the namesand backgrounds of key personnel, personnel training and techniques andmaterials), however documented; and notes, analysis, compilations, studies,summaries, and other material prepared by or for the Company (or any of itsaffiliates) containing or based, in whole or in part, on any informationincluded in the foregoing.     B. Trade Secrets. Any trade secrets of the Company will be entitledto all of the protections and benefits under the federal and state trade secretand intellectual property laws and any other applicable law. If any informationthat the Company deems to be a trade secret is found by a court of competentjurisdiction not to be a trade secret for purposes of this Agreement, suchinformation will, nevertheless, be considered confidential information forpurposes of this Agreement, so long as it otherwise meets the definition ofconfidential information. Employee hereby waives any requirement that theCompany submit proof of the economic value of any trade secret or post a bond orother security.     C. Proprietary Items. Employee will not remove from the Company’spremises (except to the extent such removal is for purposes of the performanceof Employee’s duties at home or while traveling, or except as otherwisespecifically authorized by the Company) any document, record, notebook, plan,model, component, device, or computer software or code, whether embodied in adisk or in any other form belonging to the Company or used in the Company’sbusiness (collectively, the “Proprietary Items”). All of the Proprietary Items,whether or not developed by Employee, are the exclusive property of the Company.Upon termination of his employment, or upon the request of the Company duringthe Term, Employee will return to the Company all of the Proprietary Items andconfidential information in Employee’s possession or subject to Employee’scontrol, and Employee shall not retain any copies, abstracts, sketches, or otherphysical embodiment, including electronic or otherwise, of any of theProprietary Items or confidential information     D. Non-Competition and Non-Interference. During the period of hisemployment with the Company or its affiliates and for the one-year period afterthe termination of his employment with the Company and its affiliates, Employeewill not, directly or indirectly:     1. without the express prior written consent of the Board ofDirectors, own an interest in, manage, operate, join, control, lendmoney or render financial or other assistance to or participate in or beconnected with, as an officer, employee, partner, stockholder,consultant or otherwise, any person that competes with the Company inthe field of neurostimulation in a matter covered by a patent assignedto or held by the Company; provided, however, that followingEmployee’s termination of employment with the Company the foregoingrestriction shall apply only
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to those areas where the Company is actually doing business on thedate of such termination of employment; provided, further, thatEmployee may purchase or otherwise acquire for passive investment up to3% of any class of securities of any such enterprise if such securitiesare listed on any national or regional securities exchange or have beenregistered under Section 12(g) of the Securities Exchange Act of 1934;     2. whether for Employee’s own account or for the account of any otherperson, (except for the account of the Company and its affiliates), solicitBusiness from any person known by Employee to be a customer of the Company orits affiliates, whether or not Employee had personal contact with such personduring Employee’s employment with the Company and its affiliates;     3. whether for Employee’s own account or the account of any other person,(i) solicit, employ, or otherwise engage as an employee, independent contractor,or otherwise, any person who is an employee of the Company or an affiliate, orin any manner induce, or attempt to induce, any employee of the Company or itsaffiliate to terminate his employment with the Company or its affiliate; or (ii)interfere with the Company’s or its affiliate’s relationship with any person whoat any time during the Term, was an employee, contractor, supplier, or customerof the Company or its affiliate; or     4. at any time after the termination of his employment, disparage theCompany or its affiliates or any shareholders, directors, officers, employees,or agents of the Company or any of its affiliates, so long as the Company doesnot disparage Employee.     E. Acknowledgements. The Company acknowledges that it isproviding Employee with confidential information in order for Employee toperform his duties under this Agreement. Employee acknowledges that (a) theservices to be performed by him under this Agreement are of a special, unique,unusual, extraordinary, and intellectual character, and (b) the provisions ofthis Section 8 are reasonable and necessary to protect the confidentialinformation, goodwill and other business interests of the Company. If anycovenant in this Section 8 is held to be unreasonable, arbitrary, or againstpublic policy, such covenant will be considered to be divisible with respectto scope, time, and geographic area, and such lesser scope, time, orgeographic area, or all of them, as a court of competent jurisdiction maydetermine to be reasonable, not arbitrary, and not against public policy, willbe effective, binding, and enforceable against Employee. Employee herebyagrees that this covenant is a material and substantial part of this Agreementand that: (i) the geographic limitations are reasonable; (ii) the term of thecovenant is reasonable; and (iii) the covenant is not made for the purpose oflimiting competition per se and is reasonably related to a protectablebusiness interest of the Company. The period of time applicable to anycovenant in this Section 8 will be extended by 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.     SECTION11. 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 bein writing, addressed as follows or to any address subsequently provided to theother party:Tothe Company: Cyberonics, Inc