Exhibit10.39**CYBERONICS, INC,****NOTICE OFSTOCK OPTION GRANT**Shawn Lunney     You have been granted an option (the “Option”) to purchase Common Stock ofCyberonics, Inc (the “Company”) as follows:         Date of Grant:   November 1, 1996         Exercise Price:   $3,0625 per share         Number of Shares Subjectto Option:   104,750          Type of Option:   ___ Incentive Stock Option      ___ Nonstatutory Stock Option         Vesting Start Date.   November 1,1996         Expiration Date:   Tenth Anniversary of Date of Grant         Exercise Schedule:   The Option shall be exercisable at any timeprior to the Expiration Date orearlier termination as to shares whichare vested in accordance with theVesting Schedule below.     VestingSchedule: For so long as the Optionee shall continue to be aService Provider, this Option shall vest cumulatively as follows:     A. 6/48ths of the Shares subject to the Option shall vest six months followingthe Vesting Start Date set forth above, and l/48th of the Shares subject to the Option shallvest on the first day of each month thereafter.     B. In addition to the foregoing, vesting of this Option will accelerate, andthis Option will become exercisable, as follows:          (i) in the event that the Food and Drug Administration (“FDA”) Panelrecommends approval of the Company’s pending Pre-Market Approval (“PMA”)Application for indications and with labeling requirements substantially asrequested by the Company, then twenty-five percent (25%) of the Shares subject tothis Option shall automatically vest and become exercisable;          (ii) in the event that the FDA grants final approval for the Company’spending Pre-Market Approval (“PMA”) Application for indications and with labelingrequirements substantially
 

 
as requested by the Company, then twenty-five percent (25%) of the Shares subject to thisOption shall automatically vest and become exercisable;          (iii) For each month in calendar 1997 in which total net sales exceed Five Hundred ThousandDollars ($500,000), two percent (2%) of the Shares subject to this Option shall automatically vestand become exercisable; and          (iv) For each month in calendar 1998 in which total net sales exceed One Million Dollars($1,000,000), two percent (2%) of the Shares subject to this Option shall automatically vest andbecome exercisable.     With respect to paragraphs (i) and (ii) above, any question as to whether the indicationscovered in a PMA or labelling requirements imposed by the FDA are “substantially as requested bythe Company” shall be determined by the Board of Directors of the Company, whose determinationwill be final and binding on the Company and the Optionee.     TerminationPeriod. Option may be exercised for up to 90 days after termination ofemployment or consulting relationship except as set out in Sections 7 and 8 of the Stock OptionAgreement (but in no event later than the Expiration Date).     OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO THE OPTION HEREOF ISEARNED ONLY BY CONTINUING CONSULTANCY OR EMPLOYMENT AT THE WILL OF THE COMPANY (NOT THROUGH THEACT OF BEING HIRED, BEING GRANTED THIS OPTION OR ACQUIRING SHARES HEREUNDER) OPTIONEE FURTHERACKNOWLEDGES AND AGREES THAT NOTHING IN THIS AGREEMENT, NOR IN THE COMPANY’S STOCK OPTION PLANWHICH IS INCORPORATED HEREIN BY REFERENCE, SHALL CONFER UPON OPTIONEE ANY RIGHT WITH RESPECT TOCONTINUATION OF EMPLOYMENT OR CONSULTANCY BY THE COMPANY, NOR SHALL IT INTERFERE IN ANY WAY WITHOPTIONEE’S OR THE COMPANY’S RIGHT TO TERMINATE OPTIONEE’S EMPLOYMENT OR CONSULTANCY RELATIONSHIPAT ANY TIME, WITH OR WITHOUT CAUSE.     By your signature and the signature of the Company’s representative below, you and theCompany agree that this option is granted under and governed by the terms and conditions of theCompany’s 1988 Incentive Stock Plan and the Stock Option Agreement, all of which are attached andmade a part of this document.           OPTIONEE:   Cyberonics, Inc.             /s/ Shawn Lunney   By: /s/ Robert P. Cummins           Shawn Lunney                   Date: 1/21/97   Title: CEO                   Date: 1/21/97  
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**Cyberonics, Inc.**STOCK OPTION AGREEMENT     1. Grantof Option. Cyberonics, Inc., a Delaware corporation (the “Company”), hereby grants to the Optionee named in the Notice of Grant (the “Optionee”), an option(the “Option”) to purchase a total number of shares of Common Stock (the “Shares”) set forth inthe Notice of Grant, at the exercise price per share set forth in the Notice of Grant (the “ExercisePrice”) subject to the terms, definitions and provisions of the Company’s 1988 Incentive Stock Plan(the “Plan”) which is incorporated herein by reference Unless otherwise defined herein, the termsdefined in the Plan shall have the same defined meanings in this Option.          If designated an Incentive Stock Option, this Option is intended to qualifyas an Incentive Stock Option as defined in Section 422 of theCode.     2. Adjustments for Stock Splits,Recapitalization.          (a) The Exercise Price and number of Shares subject to this Option (as set forth on the Notice of Grant) shall be subject to adjustment as follows: If theCompany at any time (i) sub-divides (by any stock split, stock dividend or otherwise) the Common Stock intoa greater number of shares, the Exercise Price in effect immediately prior to such subdivisionwill be proportionately reduced and the number of Shares issuable shall be proportionately increased,and (ii) if the Company at any time combines (by reverse stock split or otherwise) the Common Stock intoa smaller number of shares, the Exercise Price in effect immediately prior to such combinationwill be proportionately increased and the number of Shares issuableshall be proportionately decreased.          (b) If at any time while this Option is outstanding there shall be anyreclassification or conversion of the Common Stock into another class of securities (other than asubdivision or combination of shares provided for in the preceding paragraph), the Optioneeshall thereafter be entitled to receive, during the term hereof and upon payment of the ExercisePrice, the number of shares of stock to which a holder of the Common Stock would have been entitledupon such reclassification or conversion had the Optionee exercised this Option immediatelyprior to such reclassification or conversion,     3. Exercise of Option. This Option shall be exercisable during itsterm in accordance with the Exercise Schedule set out in the Notice of Grant andwith the provisions of Section 8(b) of the Plan as follows.          (a) Right to Exercise                (i) ThisOption may not be exercised for a fraction of a share.               (ii) In the event of Optionee’s death, disability or other termination ofemployment, the exercisability of the Option is governed by Sections 6, 7 and 8 below
 

 
               (iii) In no event may this Option be exercised after the Expiration Dateof this Option as set forth in the Notice of Grant.          (b)Method of Exercise. This Option shall be exercisable by executionand delivery of the Exercise Notice and Stock Purchase Agreement (the “ExerciseNotice”) in the form attached as Exhibit A Such written notice shall be signed bythe Optionee and shall be delivered in person or by certified mail to the Secretaryof the Company. The written notice shall be accompanied by payment of the ExercisePrice. This Option shall be deemed to be exercised upon receipt by the Company ofsuch written notice accompanied by the Exercise Price.     4. Methodof Payment.  Payment of the ExercisePrice shall be by:          (i) cash; or          (ii) check, or          (iii) delivery of a properly executed exercise notice together with such otherdocumentation as the Administrator and the broker, if applicable, shall require toeffect an exercise of the Option and immediate sale of the shares through a brokerwhich provides for delivery to the Company from the sale or loan proceeds of theexercise price; or          (iv) any combination of the foregoing methods of payment.     5. Restrictionson Exercise. This Option may not be exercised if theissuance of such Shares upon such exercise or the method of payment of consideration for suchshares would constitute a violation of any applicable federal or state securities or otherlaw or regulation, including the requirements of any stock exchange upon which the Shares may then be listedand including any rule under Part 207 of Title 12 of the Code of Federal Regulations (“RegulationG”) as promulgated by the Federal Reserve Board. As a condition to the exercise of this Option, theCompany may require Optionee to make any representation and warranty to the Company as maybe required by any applicable law or regulation.     6. Termination of Relationship. In the event of termination ofOptionee’s consulting relationship or Continuous Status as an Employee, Optionee may, to the extentotherwise so entitled at the date of such termination (the “Termination Date”), exercise this Optionduring the Termination Period set out in the Notice of Grant. To the extent that Optionee was notentitled to exercise this Option at the date of such termination, or if Optionee does not exercise thisOption within the time specified herein, the Option shall terminate.     7. Disabilityof Optionee. Notwithstanding the provisions of Section 6 above, in the event of termination of an Optionee’s consulting relationship or ContinuousStatus as an Employee as a result of total and permanent disability (as defined in Section 22(e)(3) ofthe Code), Optionee may, but only within twelve (12) months from the date of termination ofemployment (but in no event later than the Expiration Date of this Option as set forth in the Notice ofGrant), exercise the Option to the extent otherwise so entitled at the date of such termination To theextent that Optionee was not entitled to exercise the Option at the date of termination, or if Optioneedoes not exercise such
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Option (to the extent otherwise so entitled) within the time specified herein, theOption, shall terminate.     8. Death of Optionee. In the event of the death of Optionee during theterm of this Option and while an Employee or Consultant or within ninety (90) daysfollowing termination of Optionee’s employment/consultancy relationship with theCompany, this Option may be exercised at any time within twelve (12) monthsfollowing the date of death (but in no event later than the Expiration Date), byOptionee’s estate or by a person who acquired the right to exercise the Option bybequest or inheritance, but only to the extent the Optionee could exercise theOption at the date of death.     9. Non-Transferabilityof Option. This Option may not be transferred inany manner otherwise than by will or by the laws of descent or distribution and maybe exercised during the lifetime of Optionee only by him. The terms of this Optionshall be binding upon the executors, administrators, heirs,successors and assigns of the Optionee.     10. Term of Option. This Option may be exercised only prior to theExpiration Date set out in the Notice of Grant, and may be exercised during suchterm only in accordance with the Plan and the terms of this Option. The limitationsset out in Section 7 of the Plan regarding Options designated as Incentive StockOptions and Options granted to more than ten percent (10%) shareholders shall applyto this Option.     11. TaxConsequences. Set forth below is a brief summary as of thedate of this Option of some of the federal tax consequences of exercise of thisOption and disposition of the Shares. THIS SUMMARY IS NECESSARILY INCOMPLETE, ANDTHE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE OPTIONEE SHOULD CONSULT A TAXADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE SHARES.          (a) Exercise of ISO. If this Option qualifies as an ISO, there will be noregular federal income tax liability upon the exercise of the Option, although theexcess, if any, of the fair market value of the Shares on the date of exercise over the Exercise Price willbe treated as an adjustment to the alternative minimum tax for federal tax purposes and maysubject the Optionee to the alternative minimum tax in the year ofexercise.          (b)Exercise of Nonqualified Stock Option. If this Option does notqualify as an ISO, there may be a regular federal income tax liability upon the exercise ofthe Option. The Optionee will be treated as having received compensation income (taxable atordinary income tax rates) equal to the excess, if any, of the fair market value of the Shares on the date of exercise overthe Exercise Price. If Optionee is an employee, the Company will be required towithhold from Optionee’s compensation or collect from Optionee and pay to the applicabletaxing authorities an amount equal to a percentage of thiscompensation income at the time of exercise.          (c) Disposition of Shares. In the case of an NSO, if Shares are held forat least one year, any gain realized on disposition of the Shares will be treated aslong-term capital gain for federal income tax purposes. In the case of an ISO, if Shares transferredpursuant to the Option are held for at least one year after exercise and are disposed of at least two yearsafter the Date of Grant,
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any gain realized on disposition of the Shares will also be treated as long-termcapital gain for federal and income tax purposes If Shares purchased under an ISOare disposed of within such one-year period or within two years after the Date ofGrant, any gain realized on such disposition will be treated as compensation income(taxable at ordinary income rates) to the extent of the excess, if any, of the fairmarket value of the Shares on the date of exercise over the Exercise Price.          (d)Notice of Disqualifying Disposition of ISO Shares. If this Optionis an ISO, and if Optionee sells or otherwise disposes of any of the Sharesacquired pursuant to this Option on or before the later of (1) the date two yearsafter the Date of Grant, or (2) the date one year after exercise of this Option,the Optionee shall immediately notify the Company in writing of suchdisposition. Optionee agrees that Optionee may be subject to income tax withholding by theCompany on the compensation income recognized by the Optionee from the earlydisposition by payment in cash or out of the current earnings paid to the Optionee.     12. Changeof Control. In the event of a Change of Control (as definedbelow), this Option shall be exercisable as in accordance with the followingnotwithstanding anything to the contrary set forth elsewhere herein:          (a) In the event that Options under the Plan are not Assumed, as defined below, by the successor corporation (or the parent or subsidiary of such successor),this Option shall be exercisable as to all shares, whether or not vested as provided in the Notice ofGrant attached hereto.          (b) In the event of a Change of Control in which (i) the Option is Assumed (orthe parent or a subsidiary of the successor) this option shall be exercisable as toa number of shares equal to 2.5 times the number of shares actually vested as of the date of closing ofthe Change of Control (but in no event as to a number of shares greater than the number of shares setforth on the Notice of Grant)          (c) For purposes of this Section 12, “Change of Control” shall mean a corporate reorganization of the Company which results in the then current shareholders ofthe Company owning less than 50% of the equity securities of the surviving company, or the sale ofall or substantially all of the assets of the Company.          (d) For purposes of this Section 12, an Option granted under the Plan shall bedeemed to be Assumed if, following a Change of Control, the Option confers the right topurchase, for each Share subject to the Option immediately prior to the Change of Control, theconsideration (whether stock, cash or other securities or property) received in the Change of Controlby holders of Common Stock for each Share held on the effective date of the transaction (and if suchholders were offered a choice of consideration, the type of consideration chosen by the holders of amajority of the outstanding Shares); provided, however, that if such consideration received inthe Change of Control was not solely Common Stock of the successor corporation or its parent, theBoard may, with the consent of the successor corporation and the participant, provide for theconsideration to be received upon exercise of the Option to be solely Common Stock of the successorcorporation or its parent equal in Fair Market Value to the per share consideration received by holders ofCommon Stock in the Change of Control.
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     13. CertainBusiness Combinations. In the event it is determined bythe Board of Directors, upon receipt of a written opinion of the Company’sindependent public accountants, that the enforcement of any Section or subsectionof this Agreement, including, but not limited to, Section 12 hereof, which allowsfor the acceleration of vesting of options to purchase shares of the Company’scommon stock in connection with a Change of Control, would preclude accounting forany proposed business combination of the corporation involving a Change of Controlas a pooling of interests, and the Board otherwise desires to approve such aproposed business transaction which requires as a condition to the closing of suchtransaction that it be accounted for as a pooling of interests, that any suchSection or subsection of this Agreement shall be null and void.     OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO THEOPTION HEREOF IS EARNED ONLY BY CONTINUING CONSULTANCY OR EMPLOYMENT AT THE WILL OFTHE COMPANY (NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED THIS OPTION ORACQUIRING SHARES HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT NOTHINGIN THIS AGREEMENT, NOR IN THE COMPANY’S STOCK OPTION PLAN WHICH IS INCORPORATEDHEREIN BY REFERENCE, SHALL CONFER UPON OPTIONEE ANY RIGHT WITH RESPECT TOCONTINUATION OF EMPLOYMENT OR CONSULTANCY BY THE COMPANY, NOR SHALL IT INTERFERE INANY WAY WITH HIS OR HER RIGHT OR THE COMPANY’S RIGHT TO TERMINATE HIS OR HEREMPLOYMENT OR CONSULTANCY AT ANY TIME, WITH OR WITHOUT CAUSE.
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EXHIBIT A EXERCISE NOTICE AND STOCK PURCHASE AGREEMENTCyberonics, Inc.