Exhibit 4.2


 


SUBSCRIPTION AGREEMENT


 


This
Subscription Agreement (together with the Exhibits and Schedules hereto, this “Agreement”) is entered into as of January 4,  2006, by and among Rosetta Stone Inc., a Delaware corporation (“Parent”); ABS Capital Partners
IV, L.P., ABS Capital Partners
IV-A, L.P., ABS Capital Partners IV Offshore, L.P. and ABS Capital Partners IV
Special Offshore, L.P. (each an “ABS Fund”
and collectively, “ABS”); Norwest
Equity Partners VIII, L.P. (“Norwest”);
Madison Capital Funding LLC (“Madison”);
and Tom Adams (“Adams” and,
together with ABS, Norwest and Madison, individually, a “Purchaser” and collectively, the “Purchasers”).


 


WHEREAS, Parent desires to issue and sell, and ABS
desires to purchase, the number of shares of Parent’s Class A Common
Stock, par value $0.001 per share (the “Class A
Common Stock”), and the number of shares of Parent’s Series A-1
Convertible Preferred Stock, par value $0.001 per share (the “Series A-1 Preferred Stock”), set
forth opposite the name of each ABS Fund on Schedule A hereto, each for
the amount of $100.00 per share, respectively;


 


WHEREAS, Parent desires to issue and sell, and
Norwest desires to purchase, the number of shares of Parent’s Class B
Common Stock, par value $0.001 per share (the “Class B
Common Stock”), and the number of shares of Parent’s Series A-2
Convertible Preferred Stock, par value $0.001 per share (the “Series A-2 Preferred Stock”, and
together with the Class A Common Stock, Class B Common Stock and
Series A-1 Preferred Stock, the “Shares”),
set forth opposite the name of Norwest on Schedule A hereto, each for
the amount of $100.00 per share, respectively;


 


WHEREAS, Parent desires to issue and sell, and
Madison desires to purchase, the number of shares of Class A Common Stock,
the number of shares of Series A-1 Preferred Stock and the number of
shares of Series A-2 Preferred Stock set forth opposite the name of
Madison on Schedule A hereto, each for the amount of $100.00 per share, respectively; and


 


WHEREAS, Parent desires to issue and sell, and Adams
desires to purchase, the number of shares of Class A Common Stock, the number of shares of
Series A-1 Preferred Stock and the number of shares of Series A-2
Preferred Stock set forth opposite the name of Adams on Schedule A hereto, each for
the amount of $100.00 per share, respectively.


 


NOW, THEREFORE, in consideration of the foregoing
and for other good and valuable consideration, the parties hereto, intending to
be legally bound hereby, agree as follows:


 


1

















 


ARTICLE I

PURCHASE AND SALE OF SHARES


 


Section 1.1                          Purchase and Sale.


 


(a)                        Parent hereby sells, assigns, transfers and
delivers to ABS the number of shares of Class A Common Stock and the
number of shares of Series A-1 Preferred Stock set forth opposite the name
of each ABS Fund on Schedule A, and ABS hereby purchases from Parent the
number of shares of Class A Common Stock and the number of shares of Series A-1
Preferred Stock set forth opposite the name of each ABS Fund on Schedule A
for the aggregate purchase price set forth opposite the name of each ABS Fund
under the heading “Total Purchase Price” on Schedule A.


 


(b)                       Parent hereby sells, assigns, transfers and
delivers to Norwest the number of shares of Class B Common Stock and the
number of shares of Series A-2 Preferred Stock set forth opposite the name
of Norwest on Schedule A, and Norwest hereby purchases from Parent the
number of shares of Class B Common Stock and the number of shares of Series A-2
Preferred Stock set forth opposite the name of Norwest on Schedule A for
the aggregate purchase price set forth opposite the name of Norwest under the
heading “Total Purchase Price” on Schedule A.


 


(c)                        Parent hereby sells, assigns, transfers and
delivers to Madison the number of shares of Class A Common Stock, the
number of shares of Series A-1 Preferred Stock and the number of shares of
Series A-2 Preferred Stock set forth opposite the name of Madison on Schedule
A, and Madison hereby purchases from Parent the number of shares of Class A
Common Stock, the number of shares of Series A-1 Preferred Stock and the
number of shares of Series A-2 Preferred Stock set forth opposite the name
of Madison on Schedule A for the aggregate purchase price set forth
opposite the name of Madison under the heading “Total Purchase Price” on Schedule
A.


 


(d)                       Parent hereby sells, assigns, transfers and
delivers to Adams the number of shares of Class A
Common Stock, the number of shares of Series A-1 Preferred Stock and the
number of shares of Series A-2 Preferred Stock set forth opposite the name
of Adams on Schedule A, and Adams hereby purchases from Parent the
number of shares of Class A Common Stock, the number of shares of Series A-1
Preferred Stock and the number of shares of Series A-2 Preferred Stock set
forth opposite the name of Adams on Schedule A for the aggregate
purchase price set forth opposite the name of Adams under the heading “Total
Purchase Price” on Schedule A.


 


Section 1.2                                                Deliveries on Behalf of Parent. Parent hereby delivers to each Purchaser; (i) one
or more certificates representing the number of Shares set forth opposite the
name of such entity or individual on Schedule A and (ii) cross-receipts,
in the form of Exhibit A hereto, duly executed by Parent.


 


Section 1.3                                                Deliveries by the Purchasers. Each Purchaser listed on Schedule A
hereby delivers to Parent (i) a check or wire transfer of immediately
available funds of the aggregate purchase price set forth opposite the name of
such Purchaser under the heading “Total Purchase Price” on Schedule A
hereto and (ii) a cross-receipt, in the form of Exhibit A
hereto, duly executed by such Purchaser.


 


2

















 


ARTICLE II

REPRESENTATIONS AND WARRANTIES


 


Section 2.1                                                Each of the Purchasers, severally but not
jointly, represents and warrants, as to such Purchaser only, to Parent that
such Purchaser:


 


(a)                        has such knowledge and experience in
financial and business matters that it is capable of evaluating the merits and
risks of its investment in the Shares contemplated hereby, and the Purchaser’s
financial situation is such that the Purchaser is able to bear indefinitely the
economic risk of such investment;


 


(b)                       has had the opportunity to meet with certain
of Parent’s officers and representatives to discuss Parent’s business, assets,
liabilities and financial condition;


 


(c)                        is acquiring the Shares for its own account
for investment purposes only, and not with a view to, or for resale in
connection with, any distribution thereof within the meaning of the Securities
Act of 1933 as amended, and the regulations promulgated thereunder (the
“Securities Act”);


 


(d)                       understands that the Shares have not been
registered under the Securities Act and cannot be sold unless subsequently
registered under the Securities Act or pursuant to an exemption therefrom and
further understands that availability of an exemption may depend on factors
over which the Purchaser has no control;


 


(e)                        is an “accredited investor” within the
meaning of Rule 501 of Regulation D under the Securities Act;


 


(f)                          is not relying upon any information, other
than that contained in this Agreement and the results of the Purchaser’s own
independent investigation;


 


(g)                       if not a natural person, is a limited
liability company or limited partnership, as applicable, duly organized,
validly existing and in good standing under the laws of its state of
organization;


 


(h)                       has the power and authority to execute and
deliver this Agreement and to perform and consummate the transactions
contemplated hereby. The Purchaser has taken all actions necessary to authorize
the execution and delivery of this Agreement, the performance of its
obligations hereunder and the consummation of the transactions contemplated
hereby. This Agreement has been duly executed and delivered by the Purchaser.
This Agreement constitutes the legal, valid and binding obligation of the
Purchaser, enforceable against the Purchaser in accordance with its respective
terms, except as the enforceability thereof may be limited by general
principles of equity applicable to bankruptcy, insolvency, reorganization or
similar laws generally; and


 


Section 2.2                                                The Company hereby makes the following
representations and warranties to each Purchaser:


 


(a)                        The Company is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware.
The Company has the corporate power and authority to carry on its business as
now conducted and presently


 


3

















 


proposed
to be conducted and to carry out the transactions contemplated by this
Agreement.


 


(b)                       Immediately prior to the date hereof and
after giving effect to the incorporation of the Company (the “Company
Formation”), (i) the authorized capital stock of the Company consists of
3,561,958 shares, consisting of 3,000,000 shares of Common Stock, of which (A) 45,000
shares are designated as Class A Common Stock and (B) 1,000,000
shares are designated as Class B Common Stock, and 561,958 shares of
Preferred Stock, of which (A) 446,958 shares are designated as Class A
Preferred Stock and (B) 115,000 shares are designated as Class B
Preferred Stock, and of the Class A Preferred Stock, 268,758 shares are
further designated Series A-1 Preferred Stock, and 178,200 shares are
further designated Series A-2 Preferred Stock, and (ii) the Company
has issued and outstanding 0 shares of Series A-1 Preferred Stock, 0
shares of Series A-2 Preferred Stock, 0 shares of Class B Preferred
Stock, 0 shares of Class A Common Stock and 0 shares of Class B
Common Stock.


 


(c)                        Immediately prior to the date hereof and
after giving effect to the Company Formation, except as set forth in this
Agreement, the Company does not have outstanding any stock or securities
convertible or exchangeable for any shares of its capital stock, nor does it
have outstanding any rights or options to subscribe for or to purchase any
capital stock or any stock or securities convertible into or exchangeable for
any capital stock or any agreement related thereto.


 


(d)                       As of the date hereof and after giving effect
to the Company Formation, the outstanding capital stock of the Company will be
as set forth on Schedule 2.2(d).


 


(e)                             The Shares of the Company will be and all of
the outstanding shares of the Company’s capital stock have been duly
authorized, validly issued, fully paid and nonassessable.


 


(f)                          The Company has delivered to the Purchaser
true and complete copies of its certificate of incorporation and bylaws as in
effect on the date hereof.


 


(g)                       The execution, delivery and performance of
this Agreement and all other agreements and transactions contemplated hereby
and thereby have been duly authorized by the Company. This Agreement
constitutes a valid and binding obligation of the Company, enforceable in
accordance with its terms, subject to the availability of equitable remedies
and to the laws of bankruptcy and other similar laws affecting creditors’
rights generally. The execution and delivery by the Company of this Agreement
and all other agreements and instruments contemplated hereby to be executed by
the Company, the filing of the Company’s amended and restated certificate of
incorporation with the Secretary of the State of Delaware, and the offering,
sale and issuance of the Shares hereunder, does not and will not (i) conflict
with or result in a breach of the terms, conditions or provisions of, (ii) constitute
a default under, (iii) result in the creation of any lien, security
interest, charge or encumbrance upon the Company’s capital stock or assets
pursuant to, (iv) give any third party the right to accelerate any


 


4

















 


obligation
under, (v) result in a violation of or (vi) require any
authorization, consent, approval, exemption or other action by or notice to any
court or administrative or governmental body (other than in connection with
certain state and federal securities laws) pursuant to, the certificate of
incorporation or the bylaws, or any law, statute, rule, regulation, instrument,
order, judgment or decree to which the Company is subject or any agreement or
instrument to which the Company is a party.


 


(h)                       Neither the Company nor anyone acting on its
behalf has offered the Shares or any similar security or securities for sale to
or otherwise approached or negotiated in respect of such offer in a manner
constituting a general solicitation. Neither the Company nor anyone on its
behalf has taken or will take any action that would subject the issuance or
sale of any of the Company’s securities to the registration requirements of the
Securities Act. Assuming the truth and accuracy of the representations set
forth in Section 2.1 hereof, the offers and sales of the Shares pursuant
to the terms hereof are not required to be registered under the Securities Act
or any state securities laws.


 


(i)                           The Company is newly-formed as of December 23,
2005 for the purpose of acting as a holding company for Rosetta Stone Holdings
Inc. and has not conducted any business or incurred any material liabilities or
obligations except those in connection with the proposed acquisition.


 


(j)                           No representation, warranty or statement made
by the Company in this Agreement or pursuant to any agreement, certificate,
statement, financial disclosure or document furnished by or on behalf of the
Company in connection herewith or therewith contains any untrue statement of
material fact or omits to state a material fact necessary in order to make the
statements contained herein or therein, in light of the circumstances in which
they were made, not misleading.


 


ARTICLE III

MISCELLANEOUS


 


Section 3.1                                                Counterparts.
This Agreement may be executed in one or more counterparts, all of which shall
be considered one and the same Agreement, and shall become effective when one
or more such counterparts have been signed by each of the parties and delivered
to each party.


 


Section 3.2                                                Governing Law.
This Agreement shall be governed by and construed in accordance with the laws
of the State of Delaware.


 


[Signature Pages Follow]


 


5

















 


	
   

  	
  ROSETTA STONE INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Tom Adams

  
	
   

  	
  Name:  Tom Adams

  
	
   

  	
  Title:    Chief Executive Officer
  and President

  



 


 


Signature Page to Subscription Agreement


 

















 


	
   

  	
  ABS CAPITAL PARTNERS IV, L.P.

  
	
   

  	
  By:
  ABS Partners IV, L.L.C.,

  
	
   

  	
  Its
  General Partner

  
	
   

  	
   

  
	
   

  	
  By:

  	
    /s/
  Laura L. Witt

  
	
   

  	
   

  	
  Name: Laura
  L. Witt

  
	
   

  	
   

  	
  Title:   Managing
  Member

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  ABS CAPITAL PARTNERS IV-A, L.P.

  
	
   

  	
  By:
  ABS Partners IV, L.L.C.,

  
	
   

  	
  Its
  General Partner

  
	
   

  	
   

  
	
   

  	
  By:

  	
    /s/
  Laura L. Witt

  
	
   

  	
   

  	
  Name:
  Laura L. Witt

  
	
   

  	
   

  	
  Title:   Managing
  Member

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  ABS CAPITAL PARTNERS IV OFFSHORE FUND,

  
	
   

  	
  L.P.

  
	
   

  	
  By:
  ABS Partners IV, L.L.C.,

  
	
   

  	
  Its
  General Partner

  
	
   

  	
   

  
	
   

  	
  By:

  	
    /s/
  Laura L. Witt

  
	
   

  	
   

  	
  Name:
  Laura L. Witt

  
	
   

  	
   

  	
  Title:   Managing
  Member

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  ABS CAPITAL PARTNERS IV SPECIAL

  
	
   

  	
  OFFSHORE, L.P.

  
	
   

  	
  By:
  ABS Partners IV, L.L.C.,

  
	
   

  	
  Its
  General Partner

  
	
   

  	
   

  
	
   

  	
  By:

  	
    /s/
  Laura L. Witt

  
	
   

  	
   

  	
  Name:
  Laura L. Witt

  
	
   

  	
   

  	
  Title:   Managing
  Member

  



 


 


Signature Page to Subscription Agreement


 

















 


	
   

  	
  NORWEST EQUITY PARTNERS VIII, LP

  
	
   

  	
   

  
	
   

  	
  By: Itasca Partners VIII, LLC

  
	
   

  	
  Its General Partner

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Steven M. Farsht

  
	
   

  	
  Name: Steven M. Farsht

  
	
   

  	
  Title:   Member

  



 


 


Signature Page to Subscription Agreement


 

















 


	
   

  	
  MADISON CAPITAL FUNDING LLC

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ [ILLEGIBLE]

  
	
   

  	
  Title:

  	
    Managing Director

  
				



 


 


Signature Page to Subscription Agreement


 

















 


	
   

  	
  TOM ADAMS

  
	
   

  	
   

  
	
   

  	
  /s/ Tom Adams

  



 


 


Signature Page to Subscription Agreement


 

















 


Schedule A


 

















 


SCHEDULE A


 


	
  Name of

  Purchaser

  	
   

  	
  Type of Stock

  Purchased

  	
   

  	
  Par Value

  Per Share

  	
   

  	
  Number of

  Shares Purchased

  	
   

  	
  Total Purchase

  Price

  	
   

  
	
  ABS Capital Partners IV, L.P.

  	
   

  	
  Class A
  Common Stock

  	
   

  	
  $

  	
  0.001

  	
   

  	
  25,717

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Series A-1
  Preferred Stock

  	
   

  	
  $

  	
  0.001

  	
   

  	
  231,452

  	
   

  	
  $

  	
  25,716,900.00

  	
   

  
	
  ABS Capital Partners IV-A, L.P.

  	
   

  	
  Class A
  Common Stock

  	
   

  	
  $

  	
  0.001

  	
   

  	
  861

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Series A-1 Preferred Stock

  	
   

  	
  $

  	
  0.001

  	
   

  	
  7,749

  	
   

  	
  $

  	
  861,000.00

  	
   

  
	
  ABS Capital Partners IV Offshore, L.P.

  	
   

  	
  Class A
  Common Stock

  Series A-1 Preferred Stock

  	
   

  	
  $

  $

  	
  0.001

  0.001

  	
   

  	
  1,477

  13,293

  	
   

  	
  $

  	
  1,477,000.00

  	
   

  
	
  ABS Capital Partners IV Special Offshore,
  L.P.

  	
   

  	
  Class A
  Common Stock

  Series A-1 Preferred Stock

  	
   

  	
  $

  $

  	
  0.001

  0.001

  	
   

  	
  1,007

  9,064

  	
   

  	
  $

  	
  1,007,100.00

  	
   

  
	
  Norwest Equity Partners VIII, L.P.

  	
   

  	
  Class B
  Common Stock

  	
   

  	
  $

  	
  0.001

  	
   

  	
  19,000

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Series A-2 Preferred Stock

  	
   

  	
  $

  	
  0.001

  	
   

  	
  171,000

  	
   

  	
  $

  	
  19,000,000.00

  	
   

  
	
  Madison Capital Funding LLC

  	
   

  	
  Class A
  Common Stock

  	
   

  	
  $

  	
  0.001

  	
   

  	
  1,000

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Series A-1 Preferred Stock

  	
   

  	
  $

  	
  0.001

  	
   

  	
  4,500

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Series A-2 Preferred Stock

  	
   

  	
  $

  	
  0.001

  	
   

  	
  4,500

  	
   

  	
  $

  	
  1,000,000.00

  	
   

  
	
  Tom Adams

  	
   

  	
  Class A
  Common Stock

  	
   

  	
  $

  	
  0.001

  	
   

  	
  600

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Series A-1 Preferred Stock

  	
   

  	
  $

  	
  0.001

  	
   

  	
  2,700

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Series A-2 Preferred Stock

  	
   

  	
  $

  	
  0.001

  	
   

  	
  2,700

  	
   

  	
  $

  	
  600,000.00