<PAGE>

                                                                    EXHIBIT 10.4

                         MAGMA DESIGN AUTOMATION, INC.

                           1998 STOCK INCENTIVE PLAN

                        (Effective as of June __, 1998)
                                 (as amended)
<PAGE>

                               TABLE OF CONTENTS
                               -----------------

<TABLE>
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                                                                                 Page
                                                                                 ----

<S>                                                                              <C>
SECTION 1.  PURPOSE..........................................................     1

SECTION 2.  DEFINITIONS......................................................     1
      (a)   "Board of Directors".............................................     1
      (b)   "Code"...........................................................     1
      (c)   "Committee"......................................................     1
      (d)   "Company"........................................................     1
      (e)   "Consultant".....................................................     1
      (f)   "Disability".....................................................     1
      (g)   "Employee".......................................................     1
      (h)   "Exercise Price".................................................     2
      (i)   "Fair Market Value"..............................................     2
      (j)   "ISO"............................................................     2
      (k)   "Nonstatutory Option"............................................     2
      (l)   "Offeree"........................................................     2
      (m)   `Option".........................................................     2
      (n)   "Optionee".......................................................     2
      (o)   "Parent".........................................................     2
      (p)   "Plan"...........................................................     2
      (q)   "Purchase Price".................................................     2
      (r)   "Service"........................................................     2
      (s)   "Share"..........................................................     2
      (t)   "Stock"..........................................................     2
      (u)   "Stock Option Agreement".........................................     3
      (v)   "Stock Purchase Agreement".......................................     3
      (w)   "Subsidiary".....................................................     3
SECTION 3.  ADMINISTRATION...................................................     3
      (a)   Committee Membership.............................................     3
      (b)   Committee Procedures.............................................     3
      (c)   Committee Responsibilities.......................................     4
      (d)   Financial Reports................................................     5

SECTION 4.  ELIGIBILITY......................................................     5
      (a)   General Rule.....................................................     5
      (b)   Ten-Percent Shareholders.........................................     6
      (c)   Attribution Rules................................................     6
      (d)   Outstanding Stock................................................     6

SECTION 5.  STOCK SUBJECT TO PLAN............................................     6
      (a)   Basic Limitation.................................................     6
      (b)   Additional Shares................................................     7
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                                      -i-
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<S>                                                                          <C>
SECTION 6.  TERMS AND CONDITIONS OF AWARDS OR SALES........................   7
      (a)   Stock Purchase Agreement.......................................   7
      (b)   Duration of Offers and Nontransferability of Rights............   7
      (c)   Purchase Price.................................................   8
      (d)   Withholding Taxes..............................................   8
      (e)   Restrictions on Transfer of Shares.............................   8

SECTION 7.  TERMS AND CONDITIONS OF OPTIONS................................   8
      (a)   Stock Option Agreement.........................................   8
      (b)   Number of Shares...............................................   9
      (c)   Exercise Price.................................................   9
      (d)   Withholding Taxes..............................................   9
      (e)   Exercisability.................................................   9
      (f)   Term...........................................................   10
      (g)   Nontransferability.............................................   10
      (h)   Exercise of Options on Termination of Service..................   10
      (i)   No Rights as a Shareholder.....................................   11
      (j)   Modification, Extension and Assumption of Options..............   11
      (k)   Restrictions on Transfer of Shares.............................   11

SECTION 8.  PAYMENT FOR SHARES.............................................   11
      (a)   General Rule...................................................   11
      (b)   Surrender of Stock.............................................   11
      (c)   Promissory Notes...............................................   12
      (d)   Cashless Exercise..............................................   12
      (e)   Services Rendered..............................................   12

SECTION 9.  ADJUSTMENT OF SHARES...........................................   12
      (a)   General........................................................   12
      (b)   Reorganizations................................................   13
      (c)   Reservation of Rights..........................................   13

SECTION 10. LEGAL REQUIREMENTS.............................................   13

SECTION 11. NO EMPLOYMENT RIGHTS...........................................   14

SECTION 12. DURATION AND AMENDMENTS........................................   14
      (a)   Term of the Plan...............................................   14
      (b)   Right to Amend or Terminate the Plan...........................   15
      (c)   Effect of Amendment or Termination.............................   14

SECTION 13. EXECUTION......................................................   15
</TABLE>

                                     -ii-
<PAGE>

                         MAGMA DESIGN AUTOMATION, INC.
                           1998 STOCK Incentive PLAN
                         (Effective as of June  , 1998)


SECTION 1. PURPOSE.
------------------

     The purpose of the Plan is to offer selected employees, directors and
consultants an opportunity to acquire a proprietary interest in the success of
the Company, or to increase such interest, to encourage such selected persons to
remain in the employ of the Company and to attract new employees with
outstanding qualifications. The Plan provides for the direct award or sale of
Shares and for the grant of Options to purchase Shares. Options granted under
the Plan may include Nonstatutory Options as well as incentive stock options
intended to qualify under section 422 of the Internal Revenue Code.

SECTION 2. DEFINITIONS.
----------------------

     (a)  "Board of Directors" shall mean the Board of Directors of the Company,
           ------------------
as constituted from time to time.

     (b)  "Code" shall mean the Internal Revenue Code of 1986, as amended.
           ----

     (c)  "Committee" shall mean a committee consisting of members of the Board
           ---------
of Directors authorized to administer the Plan under Section 3.

     (d)  "Company" shall mean Magma Design Automation, Inc., a Delaware
           -------
corporation.

     (e)  "Consultant" shall mean an individual who performs bona fide services
           ----------
to the Company, a Parent or a Subsidiary as a consultant or advisor.

     (f)  "Disability" shall means that an Optionee is unable to engage in any
           ----------
substantial gainful activity by reason of any medically determinable physical or
mental impairment.

     (g)  "Employee" shall mean (i) any individual who is a common-law employee
           --------
of the Company or of a Subsidiary, (ii) a member of the Board of Directors, or
(iii) a Consultant.

                                      -1-
<PAGE>

Service as a member of the Board of Directors or as a Consultant shall be
considered employment for all purposes under the Plan except the second sentence
of Section 4(a).

     (h)  "Exercise Price" shall mean the amount for which one Share may be
           --------------
purchased upon exercise of an Option, as specified by the Committee in the
applicable Stock Option Agreement.

     (i)  "Fair Market Value" shall mean the fair market value of a Share, as
           -----------------
determined by the Committee in good faith. Such determination shall be
conclusive and binding on all persons.

     (j)  "ISO" shall mean an employee incentive stock option described in Code
           ---
section 422(b).

     (k)  "Nonstatutory Option" or "NSO" shall mean an employee stock option
           -------------------      ---
that is not an ISO.

     (l)  "Offeree" shall mean an individual to whom the Committee has offered
           -------
the right to acquire Shares (other than upon exercise of an Option).


     (m)  "Option" shall mean an ISO or Nonstatutory Option granted under the
           ------
Plan and entitling the holder to purchase Shares.

     (n)  "Optionee" shall mean an individual who holds an Option.
           --------

     (o)  "Parent" shall have the meaning set forth in section 424(e) of the
           ------
Code.

     (p)  "Plan" shall mean this Magma Design Automation, Inc. 1998 Stock
           ----
Incentive Plan.

     (q)  "Purchase Price" shall mean the consideration for which one Share may
           --------------
be acquired under the Plan (other than upon exercise of an Option), as specified
by the Committee.

     (r)  "Service" shall mean service as an Employee, Non-Employee Director or
           -------
Consultant.

     (s)  "Share" shall mean one share of Stock, as adjusted in accordance with
           -----
Section 9 (if applicable).

     (t)  "Stock" shall mean the common stock of the Company.
           -----

                                      -2-
<PAGE>

     (u)  "Stock Option Agreement" shall mean the agreement between the Company
           ----------------------
and an Optionee which contains the terms, conditions and restrictions pertaining
to his or her Option.

     (v)  "Stock Purchase Agreement" shall mean the agreement between the
           ------------------------
Company and an Offeree who acquires Shares under the Plan which contains the
terms, conditions and restrictions pertaining to the acquisition of such Shares.

     (w)  "Subsidiary" shall mean any corporation, of which the Company and/or
           ----------
one or more other Subsidiaries own not less than fifty percent (50%) of the
total combined voting power of all classes of outstanding stock of such
corporation. 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.

SECTION 3.  ADMINISTRATION.
--------------------------

     (a)  Committee Membership.  The Plan shall be administered by the
          --------------------
Committee, which shall consist of members of the Board of Directors.  The
members of the Committee shall be appointed by the Board of Directors.  If no
Committee has been appointed, the entire Board of Directors shall constitute the
Committee.  At such time as the directors of the Company become reporting
persons with respect to the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), the Committee shall have a membership composition which enables
the Plan to qualify under Rule 16b-3 under the Exchange Act with regard to the
grant of options or other rights to acquire shares to persons who are subject to
Section 16 of the Exchange Act.

     (b)  Committee Procedures. The Board of Directors shall designate one of
          --------------------
the members of the Committee as chairperson. The Committee may hold meetings at
such times and places as it shall determine. The acts of a majority of the
Committee members present at meetings at

                                      -3-
<PAGE>

which a quorum exists, or acts reduced to or approved in writing by all
Committee members, shall be valid acts of the Committee.

     (c)  Committee Responsibilities. Subject to the provisions of the Plan,
          --------------------------
the Committee shall have full authority and discretion to take the following
actions:

          (i)    To interpret the Plan and to apply its provisions;

          (ii)   To adopt, amend or rescind rules, procedures and forms
     relating to the Plan;

          (iii)  To authorize any person to execute, on behalf of the Company,
     any instrument required to carry out the purposes of the Plan;

          (iv)   To determine when Shares are to be awarded or offered for sale
     and when Options are to be granted under the Plan;

          (v)    To select Offerees and Optionees;

          (vi)   To determine the number of Shares to be awarded or offered for
     sale or to be made subject to each Option;

          (vii)  To prescribe the terms and conditions of each award or sale of
     Shares, including (without limitation) the Purchase Price and vesting of
     the award, and to specify the provisions of the Stock Purchase Agreement
     relating to such award or sale;

          (viii) To prescribe the terms and conditions of each Option, including
     (without limitation) the Exercise Price and vesting of the Option, to
     determine whether such Option is to be classified as an ISO or as a
     Nonstatutory Option, and to specify the provisions of the Stock Option
     Agreement relating to such Option;

          (ix)   To amend any outstanding Stock Purchase or Stock Option
     Agreement; provided, however, that the rights and obligations under any
     Stock Purchase or Stock Option Agreement shall not be materially altered or
     impaired adversely by any such amendment, except with the consent of the
     Optionee or Offeree;

                                      -4-
<PAGE>

          (x)   To determine the disposition of an Option or other right to
     acquire Shares in the event of an Optionee's or Offeree's divorce or
     dissolution of marriage;

          (xi)  To correct any defect, supply any omission, or reconcile any
     inconsistency in the Plan and any Stock Purchase Agreement or Stock Option
     Agreement; and

          (xii) To take any other actions deemed necessary or advisable for the
     administration of the Plan.

     All decisions, interpretations and other actions of the Committee shall be
final and binding on all Offerees, Optionees and all persons deriving their
rights from an Offeree or Optionee. No member of the Committee shall be liable
for any action that he or she has taken or has failed to take in good faith with
respect to the Plan, any Option or any other right to acquire Shares under the
Plan.

     (d)  Financial Reports.  To the extent required by applicable law, and not
          -----------------
less often than annually, the Company shall furnish to Optionees, Offerees and
stockholders who have received Stock under the Plan, Company summary financial
information including a balance sheet regarding the Company's financial
condition and results of operations, unless such Optionees, Offerees or
stockholders have duties with the Company that assure them access to equivalent
information. Such financial statements need not be audited.


SECTION 4. ELIGIBILITY.
----------------------

     (a)  General Rule.  Only Employees, as defined in Section 2(g), shall be
          ------------
eligible for designation as Optionees or Offerees by the Committee.  In
addition, only individuals who are employed as common-law employees by the
Company or a Subsidiary shall be eligible for the grant of ISOs.

                                      -5-
<PAGE>

     (b)  Ten-Percent Shareholders. An Employee who owns more than 10 percent of
          ------------------------
the total combined voting power of all classes of outstanding stock of the
Company or any of its Subsidiaries shall not be eligible for designation as an
Optionee or Offeree unless (i) the Exercise Price for an ISO (and an NSO to the
extent required by applicable law) is at least 110 percent of Fair Market Value
on the date of grant, (ii) the Purchase Price for a sale of Shares is at least
100% of Fair Market Value at the date of purchase, and (iii) in the case of an
ISO, such ISO by its terms is not exercisable after the expiration of five years
from the date of grant.

     (c)  Attribution Rules. For purposes of Subsection (b) above, in
          -----------------
determining stock ownership, an Employee shall be deemed to own the stock owned,
directly or indirectly, by or for his brothers, sisters, spouse, ancestors and
lineal descendants. Stock owned, directly or indirectly, by or for a
corporation, partnership, estate or trust shall be deemed to be owned
proportionately by or for its shareholders, partners or beneficiaries. Stock
with respect to which such Employee holds an option shall not be counted.

     (d)  Outstanding Stock.  For purposes of Subsection (b) above, "outstanding
          -----------------
stock" shall include all stock actually issued and outstanding immediately after
the grant. "Outstanding stock" shall not include shares authorized for issuance
under outstanding options held by the Employee or by any other person.

SECTION 5.  STOCK SUBJECT TO PLAN.
---------------------------------

     (a)  Basic Limitation.  Shares offered under the Plan shall be authorized
          ----------------
but unissued Shares, or issued Shares that have been reacquired by the Company.
The aggregate number of Shares which may be issued under the Plan (upon exercise
of Options or other rights to acquire Shares) shall not exceed eight million
eight hundred seventy thousand (8,870,000) Shares, subject to adjust-

                                      -6-
<PAGE>

ment pursuant to Section 9. The number of Shares which are subject to Options or
other rights to acquire Shares outstanding at any time under the Plan shall not
exceed the number of Shares which then remain available for issuance under the
Plan. During the term of the Plan, the Company shall at all times reserve and
keep available sufficient Shares to satisfy the requirements of the Plan.

     (b)  Additional Shares.  In the event that any outstanding Option or other
          -----------------
right to acquire Shares for any reason expires or is canceled or otherwise
terminated, the Shares allocable to the unexercised portion of such Option or
other right shall again be available for the purposes of the Plan.

SECTION 6. TERMS AND CONDITIONS OF AWARDS OR SALES.
--------------------------------------------------

     (a)  Stock Purchase Agreement.  Each award or sale of Shares under the Plan
          ------------------------
(other than upon exercise of an Option) shall be evidenced by a Stock Purchase
Agreement between the Offeree and the Company. Such award or sale shall be
subject to all applicable terms and conditions of the Plan and may be subject to
any other terms and conditions which are not inconsistent with the Plan and
which the Committee deems appropriate for inclusion in a Stock Purchase
Agreement. The provisions of the various Stock Purchase Agreements entered into
under the Plan need not be identical.

     (b)  Duration of Offers and Nontransferability of Rights. Any right to
          ---------------------------------------------------
acquire Shares under the Plan (other than an Option) shall automatically expire
if not exercised by the Offeree within the number of days specified by the
Committee after the grant of such right was communicated to the Offeree by the
Committee. Such right shall not be transferable and shall be exercisable only by
the Offeree to whom such right was granted.

                                      -7-
<PAGE>

     (c)  Purchase Price. To the extent required by applicable law, the Purchase
          --------------
Price of Shares to be offered under the Plan shall not be less than eighty-five
percent (85%) of the Fair Market Value of such Shares, except as otherwise
provided in Section 4(b). Subject to the preceding sentence, the Purchase Price
shall be determined by the Committee at its sole discretion. The Purchase Price
shall be payable in a form described in Section 8 or in the form of services
previously rendered to the Company.

     (d)  Withholding Taxes. As a condition to the purchase of Shares, the
          -----------------
Offeree shall make such arrangements as the Committee may require for the
satisfaction of any federal, state or local withholding tax obligations that may
arise in connection with such purchase.

     (e)  Restrictions on Transfer of Shares. No Shares awarded or sold under
          ----------------------------------
the Plan may be sold or otherwise transferred or disposed of by the Offeree
during the one hundred eighty (180) day period following the effective date of a
registration statement covering securities of the Company filed under the
Securities Act of 1933, as amended. Subject to the preceding sentence, any
Shares awarded or sold under the Plan shall be subject to such special
conditions, rights of repurchase, rights of first refusal and other transfer
restrictions as the Committee may determine. Such restrictions shall be set
forth in the applicable Stock Purchase Agreement and shall apply in addition to
any general restrictions that may apply to all holders of Shares. To the extent
required by applicable law, any service-based vesting conditions shall not be
less rapid than the schedule set forth in Section 7(e).

SECTION 7. TERMS AND CONDITIONS OF OPTIONS.
------------------------------------------

     (a)  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 and conditions of the Plan
and may be subject to any other terms

                                      -8-
<PAGE>

and conditions which are not inconsistent with the Plan and which the Committee
deems appropriate for inclusion in a Stock Option Agreement. The provisions of
the various Stock Option Agreements entered into under the Plan need not be
identical.

     (b)  Number of Shares. Each Stock Option Agreement shall specify the number
          ----------------
of Shares that are subject to the Option and shall provide for the adjustment of
such number in accordance with Section 9. The Stock Option Agreement shall also
specify whether the Option is an ISO or a Nonstatutory Option.

     (c)  Exercise Price. Each Stock Option Agreement shall specify the Exercise
          --------------
Price. The Exercise Price of an ISO shall not be less than one hundred percent
(100%) of the Fair Market Value of a Share on the date of grant, except as
otherwise provided in Section 4(b). The Exercise Price of a Nonstatutory Option
shall not be less than eighty-five percent (85%) of the Fair Market Value of a
Share on the date of grant, except as otherwise provided in Section 4(b).
Subject to the preceding two sentences, the Exercise Price under any Option
shall be determined by the Committee in its sole discretion. The Exercise Price
shall be payable in a form described in Section 8.

     (d)  Withholding Taxes. As a condition to the exercise of an Option, the
          -----------------
Optionee shall make such arrangements as the Committee may require for the
satisfaction of any federal, state, local or foreign withholding tax obligations
that may arise in connection with such exercise. The Optionee shall also make
such arrangements as the Committee may require for the satisfaction of any
federal, state, local or foreign withholding tax obligations that may arise in
connection with the disposition of Shares acquired by exercising an Option.

     (e)  Exercisability. Each Stock Option Agreement shall specify the date
          --------------
when all or any installment of the Option is to become exercisable. To the
extent required by applicable law, an Option shall become exercisable no less
rapidly than the rate of twenty percent (20%) per year

                                      -9-
<PAGE>

for each of the first five years from the date of grant. Subject to the
preceding sentence, the vesting of any Option shall be determined by the
Committee in its sole discretion.

     (f)  Term. The Stock Option Agreement shall specify the term of the Option.
          ----
The term shall not exceed ten (10) years from the date of grant, except as
otherwise provided in Section 4(b). Subject to the preceding sentence, the
Committee at its sole discretion shall determine when an Option is to expire.

     (g)  Nontransferability. No Option shall be transferable by the Optionee
          ------------------
other than by will or by the laws of descent and distribution. An Option may be
exercised during the lifetime of the Optionee only by him or by his guardian or
legal representative. No Option or interest therein may be transferred,
assigned, pledged or hypothecated by the Optionee during his lifetime, whether
by operation of law or otherwise, or be made subject to execution, attachment or
similar process.

     (h)  Exercise of Options on Termination of Service. Each Stock Option
          ---------------------------------------------
Agreement shall set forth the extent to which the Optionee shall have the right
to exercise the Option following termination of the Optionee's service with the
Company and its Subsidiaries. Such provisions shall be determined in the sole
discretion of the Committee, need not be uniform among all Options issued
pursuant to the Plan, and may reflect distinctions based on the reasons for
termination of employment. Notwithstanding the foregoing, to the extent required
by applicable law, each Option shall provide that the Optionee shall have the
right to exercise the vested portion of any Option held at termination for at
least 30 days following termination of service with the Company for any reason
other than cause, and that the Optionee shall have the right to exercise the
Option for at least six months if the Optionee's service terminates due to death
or Disability.

                                      -10-
<PAGE>

     (i)  No Rights as a Shareholder. An Optionee, or a transferee of an
          --------------------------
Optionee, shall have no rights as a shareholder with respect to any Shares
covered by an Option until the date of the issuance of a stock certificate for
such Shares.

     (j)  Modification, Extension and Assumption of Options. Within the
          -------------------------------------------------
limitations of the Plan, the Committee may modify, extend or assume outstanding
Options or may accept the cancellation of outstanding Options (whether granted
by the Company or 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 or for other consideration.

     (k)  Restrictions on Transfer of Shares. No Shares issued upon exercise of
          ----------------------------------
an Option may be sold or otherwise transferred or disposed of by the Optionee
during the one hundred eighty (180) day period following the effective date of a
registration statement covering securities of the Company filed under the
Securities Act of 1933. Subject to the preceding sentence, any Shares issued
upon exercise of an Option shall be subject to such rights of repurchase, rights
of first refusal and other transfer restrictions as the Committee may determine.
Such restrictions shall be set forth in the applicable Stock Option Agreement
and shall apply in addition to any restrictions that may apply to holders of
Shares generally.


SECTION 8.  PAYMENT FOR SHARES.
------------------------------

     (a)  General Rule. The entire Exercise Price of Shares issued under the
          ------------
Plan shall be payable in lawful money of the United States of America at the
time when such Shares are purchased, except as provided in Subsections (b), (c),
(d) and (e) below.

     (b)  Surrender of Stock. To the extent that a Stock Option Agreement so
          ------------------
provides, payment may be made all or in part with Shares which have already been
owned by the Optionee or the Optionee's representative for any time period
specified by the Committee and

                                      -11-
<PAGE>

which are surrendered to the Company in good form for transfer. Such Shares
shall be valued at their Fair Market Value on the date when the new Shares are
purchased under the Plan.

     (c)  Promissory Notes. To the extent that a Stock Option Agreement so
          ----------------
provides, payment may be made all or in part with a full recourse promissory
note executed by the Optionee or Offeree. The interest rate and other terms and
conditions of such note shall be determined by the Committee. The Committee may
require that the Optionee pledge his or her Shares to the Company for the
purpose of securing the payment of such note. In no event shall the stock
certificate(s) representing such Shares be released to the Optionee until such
note is paid in full.

     (d)  Cashless Exercise. To the extent that a Stock Option Agreement so
          -----------------
provides and a public market for the Shares exists, payment may be made all or
in part by delivery (on a form prescribed by the Committee) of an irrevocable
direction to a securities broker to sell Shares and to deliver all or part of
the sale proceeds to the Company in payment of the aggregate Exercise Price.

     (e)  Services Rendered. At the discretion of the Committee, Shares may be
          -----------------
awarded under the Plan in consideration of services rendered to the Company or a
Subsidiary prior to the award.


SECTION 9.  ADJUSTMENT OF SHARES.
--------------------------------

     (a)  General. In the event of a subdivision of the outstanding Stock, a
          -------
declaration of a dividend payable in Shares, a declaration of a dividend payable
in a form other than Shares in an amount that has a material effect on the value
of Shares, a combination or consolidation of the outstanding Stock into a lesser
number of Shares, a recapitalization, a reclassification or a similar
occurrence, the Committee shall make appropriate adjustments in one or more of
(i) the

                                      -12-
<PAGE>

number of Shares available for future grants of Options or other rights to
acquire Shares under Section 5, (ii) the number of Shares covered by each
outstanding Option or other right to acquire Shares or (iii) the Exercise Price
of each outstanding Option or the Purchase Price of each other right to acquire
Shares.

     (b)  Reorganizations. In the event that the Company is a party to a merger
          ---------------
or reorganization, outstanding Options or other rights to acquire Shares shall
be subject to the agreement of merger or reorganization.

     (c)  Reservation of Rights. Except as provided in this Section 9, an
          ---------------------
Optionee or Offeree shall have no rights by reason of (i) any subdivision or
consolidation of shares of stock of any class, (ii) the payment of any dividend,
or (iii) any other increase or decrease in the number of shares of stock of any
class. Any issue by the Company of shares of stock of any class, or securities
convertible into shares of stock of any class, shall not affect, and no
adjustment by reason thereof shall be made with respect to, the number or
Exercise Price of Shares subject to an Option, or the number or Purchase Price
of shares subject to any other right to acquire Shares. The grant of an Option
or other right to acquire Shares pursuant to the Plan shall not affect in any
way the right or power of the Company to make adjustments, reclassifications,
reorganizations or changes of its capital or business structure, to merge or
consolidate or to dissolve, liquidate, sell or transfer all or any part of its
business or assets.


SECTION 10.  LEGAL REQUIREMENTS.
-------------------------------

     Shares shall not be issued under the Plan unless the issuance and delivery
of such Shares complies with (or is exempt from) all applicable requirements of
law, including (without limitation) the Securities Act of 1933, as amended, the
rules and regulations promulgated thereunder, state securities laws and
regulations, and the regulations of any stock exchange on

                                      -13-
<PAGE>

which the Company's securities may then be listed, and the Company has obtained
the approval or favorable ruling from any governmental agency which the Company
determines is necessary or advisable.

SECTION 11.  NO EMPLOYMENT RIGHTS.
---------------------------------

     No provision of the Plan, nor any Option granted or other right to acquire
Shares awarded under the Plan, shall be construed to give any person any right
to become, to be treated as, or to remain an Employee. The Company and its
Subsidiaries reserve the right to terminate any person's Service at any time and
for any reason.

SECTION 12.  DURATION AND AMENDMENTS.
------------------------------------

     (a)  Term of the Plan. The Plan, as set forth herein, shall become
          ----------------
effective on the date of its adoption by the Board of Directors, subject to the
approval of the Company's shareholders. In the event that the shareholders fail
to approve the Plan within twelve (12) months after its adoption by the Board of
Directors, any Option grants or other right to acquire Shares already made shall
be null and void, and no additional Option grants or other right to acquire
Shares shall be made after such date. The Plan shall terminate automatically ten
(10) years after its adoption by the Board of Directors and may be terminated on
any earlier date pursuant to Subsection (b) below.

     (b)  Right to Amend or Terminate the Plan. The Board of Directors may amend
          ------------------------------------
the Plan at any time and from time to time. Rights and obligations under any
Option granted or other right to acquire Shares awarded before amendment of the
Plan shall not be materially altered, or impaired adversely, by such amendment,
except with consent of the Optionee or

                                      -14-
<PAGE>

Offeree. An amendment of the Plan shall be subject to the approval of the
Company's shareholders only to the extent required by applicable laws,
regulations or rules.

     (c)  Effect of Amendment or Termination. No Shares shall be issued or sold
          ----------------------------------
under the Plan after the termination thereof except upon exercise of an Option
granted prior to such termination. The termination of the Plan, or any amendment
thereof, shall not affect any Share previously issued or Option previously
granted under the Plan.


SECTION 13.  EXECUTION.
----------------------

     To record the adoption of the Plan by the Board of Directors as of June 17,
1998, the Company has caused its authorized officer to execute the same.

                                  MAGMA DESIGN AUTOMATION, INC.


                                  By /s/ Rajeev Madhavam
                                     --------------------------------
                                  Title President and CEO
                                        -----------------------------

                                      -15-
<PAGE>

            MAGMA DESIGN AUTOMATION, INC. 1998 STOCK INCENTIVE PLAN
            -------------------------------------------------------
                         NOTICE OF STOCK OPTION GRANT
                         ----------------------------

     You have been granted the following option to purchase Common Stock of
MAGMA DESIGN AUTOMATION, INC., a Delaware corporation (the "Company"):

Name of Optionee:                  ____________________

Total Number of Shares Granted:    _________

Type of Option:                    ____  Incentive Stock Option

                                   _____ Nonstatutory Stock Option


Exercise Price Per Share:          $__________

Date of Grant:                     ______________

Date Exercisable:                  This option may be exercised, in whole or in
                                   part, for 100% of the Shares subject to this
                                   option at any time after the Date of Grant.

Vesting Commencement Date:         _______________

Vesting Schedule:                  This option will vest, and if you exercise
                                   before this option is vested, the Right of
                                   Repurchase shall lapse, (a) with respect to
                                   ________ Shares, or __% of the Shares subject
                                   to this option, upon your completion of one
                                   full year of Service from the Vesting
                                   Commencement Date, (b) thereafter, with
                                   respect to ___ Shares, or ____th of the
                                   Shares subject to this option, upon your
                                   completion of each additional full month of
                                   Service, and (c) with respect to all Shares
                                   subject to this option, on the _______
                                   anniversary of the Vesting Commencement Date.

Acceleration Events (if any):      __________

Expiration Date:                   _________________

     By your signature and the signature of the Company's representative below,
you and the Company agree that this option is granted under and governed by the
terms and conditions of the 1998 Stock Incentive Plan and the attached Stock
Option Agreement, both of which are made a part of this document.

OPTIONEE                                     MAGMA DESIGN AUTOMATION, INC.
--------


________________________________________     By:________________________________

________________________________________     Title:_____________________________
Print Name
<PAGE>

THE OPTION GRANTED PURSUANT TO THIS AGREEMENT AND THE SHARES ISSUABLE UPON THE
EXERCISE THEREOF HAVE NOT BEEN REGISTERED OR QUALIFIED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD,
PLEDGED, OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION AND
QUALIFICATION THEREOF UNDER SUCH ACT AND LAWS OR AN OPINION OF COUNSEL,
SATISFACTORY TO THE COMPANY AND ITS COUNSEL, THAT SUCH REGISTRATION AND
QUALIFICATION IS NOT REQUIRED.

            MAGMA DESIGN AUTOMATION, INC. 1998 STOCK INCENTIVE PLAN
            -------------------------------------------------------

                            STOCK OPTION AGREEMENT
                            ----------------------

     1.  Grant of Option.
         ---------------

     (a)  Option.  On the terms and conditions set forth in the Notice of Stock
          ------
Option Grant and this Agreement, the Company grants to the Optionee on the Date
of Grant the option to purchase at the Exercise Price the number of Shares set
forth in the Notice of Stock Option Grant.  The Exercise Price is agreed to be
at least one hundred percent (100%) of the Fair Market Value per Share on the
Date of Grant (one hundred ten percent (110%) of Fair Market Value if Section
4(b) of the Plan applies).  This option is intended to be an ISO or a
Nonstatutory Option, as provided in the Notice of Stock Option Grant.

     (b)  Stock Plan and Defined Terms.  This option is granted pursuant to the
          ----------------------------
Plan, a copy of which the Optionee acknowledges having received.  The provisions
of the Plan are incorporated into this Agreement by this reference.  Each
capitalized term not otherwise defined in this Agreement shall have the meaning
as defined in Section 2 of the Plan.

     2.  Right to Exercise.  Subject to Section 9 below and the other conditions
         -----------------
set forth in this Agreement, all or part of this option may be exercised (prior
to its expiration) at the time or times set forth in the Notice of Stock Option
Grant.  Shares purchased by exercising this option may be subject to the Right
of Repurchase under Section 7.

     3.  No Transfer or Assignment of Option.  Except as otherwise provided in
         -----------------------------------
this Agreement, this option and the rights and privileges conferred hereby shall
not be sold, pledged or otherwise transferred (whether by operation of law or
otherwise) and shall not be subject to sale under execution, attachment, levy or
similar process.

     4.  Exercise Procedures.
         -------------------

     (a)  Notice of Exercise.  The Optionee or the Optionee's representative may
          ------------------
exercise this option by giving written notice to the Company pursuant to Section
13(c) in the form attached to this Agreement as Exhibit A.  The notice shall
                                                ---------
specify the number of Shares for which it is being exercised and the form of
payment.  The notice shall be signed by the person exercising this option.  In
the event that this option is being exercised by the representative of the
Optionee, the notice shall be accompanied by proof (satisfactory to the Company)
of the representative's right to exercise this option.  The Optionee or the

                                      -1-
<PAGE>

Optionee's representative shall deliver to the Company, at the time of giving
the notice, payment in a form permissible under Section 5 for the full amount of
the Purchase Price.

     (b)  Issuance of Shares.  After receiving a proper notice of exercise, and
          ------------------
upon determining the Optionee's compliance with the provisions of Section 10
below, the Company shall cause to be issued a certificate or certificates for
the Shares as to which this option has been exercised, registered in the name of
the person exercising this option (or in the names of such person and his or her
spouse as community property or as joint tenants with right of survivorship).
The Company shall cause such certificate or certificates to be deposited in
escrow or delivered to or upon the order of the person exercising this option.

     (c)  Withholding Taxes.  In the event that the Company determines that it
          -----------------
is required to withhold any tax as a result of the exercise of this option, the
Optionee, as a condition to the exercise of this option, shall make arrangements
satisfactory to the Company to enable it to satisfy all withholding
requirements.  The Optionee shall also make arrangements satisfactory to the
Company to enable it to satisfy any withholding requirements that may arise in
connection with the vesting or disposition of Shares purchased by exercising
this option.

     5.  Payment for Stock.
         -----------------

     (a)  Cash.  All or part of the Purchase Price may be paid in cash or cash
          ----
equivalents.

     (b)  Surrender of Stock.  All or part of the Purchase Price may be paid by
          ------------------
the surrender of Shares in good form for transfer.  Such Shares must have a fair
market value (as determined by the Board of Directors) on the date of exercise
of this option which, together with any amount paid in another form permissible
under this Section 5, is equal to the Purchase Price.  The Optionee shall not
surrender Shares in payment of the Exercise Price if such surrender would cause
the Company to recognize compensation expense with respect to the option for
financial reporting purposes.

     (c)  Exercise/Sale.  If Stock is publicly traded, all or part of the
          -------------
Purchase Price and any withholding taxes may be paid by the delivery (on a form
prescribed by the Company) of an irrevocable direction to a securities broker
approved by the Company to sell Shares and to deliver all or part of the sales
proceeds to the Company.

     (d)  Exercise/Pledge.  If Stock is publicly traded, all or part of the
          ---------------
Purchase Price and any withholding taxes may be paid by the delivery (on a form
prescribed by the Company) of an irrevocable direction to pledge Shares to a
securities broker or lender approved by the Company, as security for a loan, and
to deliver all or part of the loan proceeds to the Company.

     6.  Term and Expiration.
         -------------------

     (a)  Basic Term.  This option shall in any event expire on the expiration
          ----------
date set forth in the Notice of Stock Option Grant, which date is ten (10) years
after the Date of Grant (five (5) years after the Date of Grant if this option
is designated as an ISO in the Notice of Stock Option Grant and Section 4(b) of
the Plan applies).

                                      -2-
<PAGE>

     (b)  Termination of Service (Except by Death).  If the Optionee's Service
          ----------------------------------------
terminates for any reason other than death, then this option shall expire at the
close of business at Company headquarters on the earliest of the following
occasions:

               (i)  The expiration date determined pursuant to Subsection (a)
     above;

               (ii)  The date one (1) month after the termination of the
     Optionee's Service for any reason other than Disability; or

               (iii)  The date six (6) months after the termination of the
     Optionee's Service by reason of Disability.

The Optionee may exercise all or part of this option at any time before its
expiration under the preceding sentence, but only to the extent that this option
had become exercisable before the Optionee's Service terminated.  When the
Optionee's Service terminates, this option shall expire immediately with respect
to the number of Shares for which this option is not yet exercisable and with
respect to any Restricted Shares.  In the event that the Optionee dies after
termination of Service but before the expiration of this option, all or part of
this option may be exercised (prior to expiration) by the executors or
administrators of the Optionee's estate or by any person who has acquired this
option directly from the Optionee by beneficiary designation, bequest or
inheritance, but only to the extent that this option had become exercisable
before the Optionee's Service terminated.

     (c)  Death of the Optionee.  If the Optionee dies while in Service, then
          ---------------------
this option shall expire at the close of business at Company headquarters on the
earlier of the following dates:

               (i)  The expiration date determined pursuant to Subsection (a)
     above; or

               (ii)  The date six (6) months after the Optionee's death.

All or part of this option may be exercised at any time before its expiration
under the preceding sentence by the executors or administrators of the
Optionee's estate or by any person who has acquired this option directly from
the Optionee by beneficiary designation, bequest or inheritance, but only to the
extent that this option had become exercisable before the Optionee's death.
When the Optionee dies, this option shall expire immediately with respect to the
number of Shares for which this option is not yet exercisable and with respect
to any Restricted Shares.

     (d)  Leaves of Absence.  For any purpose under this Agreement, Service
          -----------------
shall be deemed to continue while the Optionee is on a bona fide leave of
absence, if such leave was approved by the Company in writing and if continued
crediting of Service for such purpose is expressly required by the terms of such
leave or by applicable law (as determined by the Company).

     (e)  Notice Concerning ISO Treatment.  If this option is designated as an
          -------------------------------
ISO in the Notice of Stock Option Grant, it ceases to qualify for favorable tax
treatment as an ISO to the extent it is exercised (i) more than three (3) months
after the date the Optionee ceases to be an Employee for any reason other than
death or permanent and total disability (as defined

                                      -3-
<PAGE>

in section 22(e)(3) of the Code), (ii) more than twelve (12) months after the
date the Optionee ceases to be an Employee by reason of such permanent and total
disability or (iii) after the Optionee has been on a leave of absence for more
than ninety (90) days, unless the Optionee's reemployment rights are guaranteed
by statute or by contract.

     7.  Right of Repurchase.
         -------------------

     (a)  Scope of Repurchase Right.  Unless they have become vested in
          -------------------------
accordance with the Notice of Stock Option Grant and Subsection (c) below, the
Shares acquired under this Agreement initially shall be "Restricted Shares" and
shall be subject to a right (but not an obligation) of repurchase by the
Company.  The Optionee shall not transfer, assign, encumber or otherwise dispose
of any Restricted Shares, except as provided in the following sentence.  The
Optionee may transfer Restricted Shares (i) by beneficiary designation, will or
intestate succession.

     (b)  Condition Precedent to Exercise.  The Right of Repurchase shall be
          -------------------------------
exercisable only during the sixty (60) day period next following the later of:

               (i)  The date when the Optionee's Service terminates for any
     reason, with or without cause, including (without limitation) death or
     disability; or

               (ii)  The date when this option was exercised by the Optionee,
     the executors or administrators of the Optionee's estate or any person who
     has acquired this option directly from the Optionee by bequest, inheritance
     or beneficiary designation.

     (c)  Lapse of Repurchase Right.  The Right of Repurchase shall lapse with
          -------------------------
respect to the Shares subject to this option in accordance with the vesting
schedule and acceleration provisions, if any, set forth in the Notice of Stock
Option Grant.

     (d)  Repurchase Cost.  If the Company exercises the Right of Repurchase, it
          ---------------
shall pay the Optionee an amount equal to the Exercise Price for each of the
Restricted Shares being repurchased.

     (e)  Exercise of Repurchase Right.  The Right of Repurchase shall be
          ----------------------------
exercisable only by written notice delivered to the Optionee prior to the
expiration of the sixty (60) day period specified in Subsection (b) above. The
notice shall set forth the date on which the repurchase is to be effected. Such
date shall not be more than thirty (30) days after the date of the notice. The
certificate(s) representing the Restricted Shares to be repurchased shall, prior
to the close of business on the date specified for the repurchase, be delivered
to the Company properly endorsed for transfer. The Company shall, concurrently
with the receipt of such certificate(s), pay to the Optionee the purchase price
determined according to Subsection (d) above. Payment shall be made in cash or
cash equivalents or by canceling indebtedness to the Company incurred by the
Optionee in the purchase of the Restricted Shares. The Right of Repurchase shall
terminate with respect to any Restricted Shares for which it has not been timely
exercised pursuant to this Subsection (e).

     (f)  Additional Shares or Substituted Securities.  In the event of the
          -------------------------------------------
declaration of a stock dividend, the declaration of an extraordinary dividend
payable in a form other than stock, a spin-off, a stock split, an adjustment in
conversion ratio, a recapitalization or a

                                      -4-
<PAGE>

similar transaction affecting the Company's outstanding securities without
receipt of consideration, any new, substituted or additional securities or other
property (including money paid other than as an ordinary cash dividend) which
are by reason of such transaction distributed with respect to any Restricted
Shares or into which such Restricted Shares thereby become convertible shall
immediately be subject to the Right of Repurchase.  Appropriate adjustments to
reflect the distribution of such securities or property shall be made to the
number and/or class of the Restricted Shares.  Appropriate adjustments shall
also, after each such transaction, be made to the price per share to be paid
upon the exercise of the Right of Repurchase in order to reflect any change in
the Company's outstanding securities effected without receipt of consideration
therefor; provided, however, that the aggregate purchase price payable for the
Restricted Shares shall remain the same.

     (g)  Termination of Rights as Stockholder.  If the Company makes available,
          ------------------------------------
at the time and place and in the amount and form provided in this Agreement, the
consideration for the Restricted Shares to be repurchased in accordance with
this Section 7, then after such time the person from whom such Restricted Shares
are to be repurchased shall no longer have any rights as a holder of such
Restricted Shares (other than the right to receive payment of such consideration
in accordance with this Agreement).  Such Restricted Shares shall be deemed to
have been repurchased in accordance with the applicable provisions hereof,
whether or not the certificate(s) therefor have been delivered as required by
this Agreement.

     (h)  Escrow.  Upon issuance following exercise, the certificates for
          ------
Restricted Shares shall be deposited in escrow with the Company to be held in
accordance with the provisions of this Agreement.  Each deposited certificate
shall be accompanied by a duly executed Assignment Separate from Certificate in
the form attached hereto as Exhibit B.  Any new, substituted or additional
                            ---------
securities or other property described in Subsection (f) above shall immediately
be delivered to the Company to be held in escrow, but only to the extent the
Shares are at the time Restricted Shares.  All regular cash dividends, if any,
on Restricted Shares (or other securities at the time held in escrow) shall be
paid directly to the Optionee and shall not be held in escrow.  Restricted
Shares, together with any other assets or securities held in escrow hereunder,
shall be (i) surrendered to the Company for repurchase and cancellation upon the
Company's exercise of its Right of Repurchase or Right of First Refusal or (ii)
released to the Optionee upon the Optionee's request to the extent the Shares
are no longer Restricted Shares (but not more frequently than once every six (6)
months).  In any event, all Shares which have vested (and any other vested
assets and securities attributable thereto) shall be released within sixty (60)
days after the earlier of (A) the Optionee's cessation of Service or (B) the
lapse of the Right of First Refusal.

     (i)  Section 83(b) Election.  Under section 83 of the Internal Revenue Code
          ----------------------
of 1986, as amended (the "Code"), the different between the Exercise Price paid
for the Shares and their fair market value on the date any forfeiture
restrictions applicable to such Shares lapse will be reportable as ordinary
income at that time.  For this purposes, "forfeiture restrictions" include the
Company's Right of Repurchase described above.  The Optionee may elect to be
taxed at the time Restricted Shares are acquired to the extent the fair market
value of the Restricted Shares differs from the Exercise Price rather than when
such Restricted Shares cease to be subject to such forfeiture restrictions, by
filing an election under section 83(b) of the Code with the Internal Revenue
Service within thirty (30) days after the date of exercise.  The form for making
this election is attached as Exhibit C hereto.  Failure to make this filing
                             ---------
within the thirty (30) day period will result in the recognition of

                                      -5-
<PAGE>

ordinary income by the Optionee (in the event the fair market value of the
Shares increases after the date of exercise) as the forfeiture restrictions
lapse.  OPTIONEE ACKNOWLEDGES THAT IT IS HIS/HER SOLE RESPONSIBILITY, AND NOT
THE COMPANY'S, TO FILE A TIMELY ELECTION UNDER SECTION 83(B), EVEN IF OPTIONEE
REQUESTS THE COMPANY OR ITS REPRESENTATIVES TO MAKE THIS FILING ON HIS/HER
BEHALF.  OPTIONEE IS RELYING SOLELY ON HIS/HER OWN ADVISORS WITH RESPECT TO THE
DECISION AS TO WHETHER OR NOT TO FILE AN 83(B) ELECTION.

     8.  Right of First Refusal.
         ----------------------

     (a)  Right of First Refusal.  In the event that the Optionee proposes to
          ----------------------
sell, pledge or otherwise transfer to a third party any Shares acquired under
this Agreement, or any interest in such Shares, the Company shall have the Right
of First Refusal with respect to all (and not less than all) of such Shares.  If
the Optionee desires to transfer Shares acquired under this Agreement, the
Optionee shall give a written Transfer Notice to the Company describing fully
the proposed transfer, including the number of Shares proposed to be
transferred, the proposed transfer price, the name and address of the proposed
Transferee and proof satisfactory to the Company that the proposed sale or
transfer will not violate any applicable federal or state securities laws.  The
Transfer Notice shall be signed both by the Optionee and by the proposed
Transferee and must constitute a binding commitment of both parties to the
transfer of the Shares.  The Company shall have the right to purchase all, and
not less than all, of the Shares on the terms of the proposal described in the
Transfer Notice (subject, however, to any change in such terms permitted under
Subsection (b) below) by delivery of a notice of exercise of the Right of First
Refusal within thirty (30) days after the date when the Transfer Notice was
received by the Company.  The Company's rights under this Subsection (a) shall
be freely assignable, in whole or in part.

     (b)  Transfer of Shares.  If the Company fails to exercise its Right of
          ------------------
First Refusal within thirty (30) days after the date when it received the
Transfer Notice, the Optionee may, not later than ninety (90) days following
receipt of the Transfer Notice by the Company, conclude a transfer of the Shares
subject to the Transfer Notice on the terms and conditions described in the
Transfer Notice, provided that any such sale is made in compliance with
applicable federal and state securities laws and not in violation of any other
contractual restrictions to which the Optionee is bound.  Any proposed transfer
on terms and conditions different from those described in the Transfer Notice,
as well as any subsequent proposed transfer by the Optionee, shall again be
subject to the Right of First Refusal and shall require compliance with the
procedure described in Subsection (a) above.  If the Company exercises its Right
of First Refusal, the parties shall consummate the sale of the Shares on the
terms set forth in the Transfer Notice within sixty (60) days after the date
when the Company received the Transfer Notice (or within such longer period as
may have been specified in the Transfer Notice); provided, however, that in the
event the Transfer Notice provided that payment for the Shares was to be made in
a form other than cash or cash equivalents paid at the time of transfer, the
Company shall have the option of paying for the Shares with cash or cash
equivalents equal to the present value of the consideration described in the
Transfer Notice.

     (c)  Additional Shares or Substituted Securities.  In the event of the
          -------------------------------------------
declaration of a stock dividend, the declaration of an extraordinary dividend
payable in a form other than stock, a spin-off, a stock split, an adjustment in
conversion ratio, a recapitalization or a

                                      -6-
<PAGE>

similar transaction affecting the Company's outstanding securities without
receipt of consideration, any new, substituted or additional securities or other
property (including money paid other than as an ordinary cash dividend) which
are by reason of such transaction distributed with respect to any Shares subject
to this Section 8 or into which such Shares thereby become convertible shall
immediately be subject to this Section 8.  Appropriate adjustments to reflect
the distribution of such securities or property shall be made to the number
and/or class of the Shares subject to this Section 8.

     (d)  Termination of Right of First Refusal.  Any other provision of this
          -------------------------------------
Section 8 notwithstanding, in the event that the Stock is readily tradable on an
established securities market when the Optionee desires to transfer Shares, the
Company shall have no Right of First Refusal, and the Optionee shall have no
obligation to comply with the procedures prescribed by Subsections (a) and (b)
above.

     (e)  Permitted Transfers.  This Section 8 shall not apply to (i) a transfer
          -------------------
by beneficiary designation, will or intestate succession or (ii) a transfer to
the Optionee's spouse, children or grandchildren or to a trust established by
the Optionee for the benefit of the Optionee or the Optionee's spouse, children
or grandchildren, provided in either case that the Transferee agrees in writing
on a form prescribed by the Company to be bound by all provisions of this
Agreement, including without limitation the Market Stand-off provisions of
Section 11(b) below.  If the Optionee transfers any Shares acquired under this
Agreement, either under this Subsection (e) or after the Company has failed to
exercise the Right of First Refusal, then this Section 8 shall apply to the
Transferee to the same extent as to the Optionee.

     (f)  Termination of Rights as Stockholder.  If the Company makes available,
          ------------------------------------
at the time and place and in the amount and form provided in this Agreement, the
consideration for the Shares to be purchased in accordance with this Section 8,
then after such time the person from whom such Shares are to be purchased shall
no longer have any rights as a holder of such Shares (other than the right to
receive payment of such consideration in accordance with this Agreement).  Such
Shares shall be deemed to have been purchased in accordance with the applicable
provisions hereof, whether or not the certificate(s) therefor have been
delivered as required by this Agreement.

     9.  Limited Irrevocable Proxy.  As a condition to the issuance of the
         -------------------------
Shares as to which this option has been exercised, the Optionee shall execute
and deliver to the Company a Limited Irrevocable Proxy (the "Proxy") in
substantially the form attached as Exhibit D hereto, such Proxy shall be
                                   ---------
irrevocable for the period specified therein pursuant to the provisions of the
Delaware General Corporation Law, and it is hereby acknowledged that such Proxy,
when given, shall be given for a good and valuable consideration and to secure
the performance of the Optionee's agreement, hereby made, to vote the Shares in
accordance with the Proxy.

     10.  Legality of Initial Issuance.  No Shares shall be issued upon the
          ----------------------------
exercise of this option unless and until the Company has determined that:

     (a)  It and the Optionee have taken any actions required to register the
Shares under the Securities Act or to perfect an exemption from the registration
requirements thereof;

                                      -7-
<PAGE>

     (b)  Any applicable listing requirement of any stock exchange on which
Stock is listed has been satisfied;

     (c)  Any other applicable provision of state or federal law has been
satisfied; and

     (d) The Optionee has executed and delivered the Notice of Exercise, the
Proxy and, if applicable, the Assignment Separate from Certificate relating to
the Shares to be issued.

     Any other provision of this Agreement notwithstanding, in the event the
Plan is not approved by the Company's shareholders within one (1) year of the
date the Plan was adopted by the Company's board of directors, any exercises of
this option and purchases of Shares pursuant thereto shall automatically be
deemed null and void and the Company shall have the right thereupon to cancel
the certificate(s) representing any such Shares so acquired upon its
reimbursement to the Optionee of the Exercise Price therefor.

     11.  No Registration Rights.  The Company may, but shall not be obligated
          ----------------------
to, register or qualify the sale of Shares under the Securities Act or any other
applicable law.  The Company shall not be obligated to take any affirmative
action in order to cause the sale of Shares under this Agreement to comply with
any law.

     12.  Restrictions on Transfer.
          ------------------------

     (a)  Securities Law Restrictions.  Regardless of whether the offering and
          ---------------------------
sale of Shares under the Plan have been registered under the Securities Act or
have been registered or qualified under the securities laws of any state, the
Company at its discretion may impose restrictions upon the sale, pledge or other
transfer of such Shares (including the placement of appropriate legends on stock
certificates or the imposition of stop-transfer instructions) if, in the
judgment of the Company, such restrictions are necessary or desirable in order
to achieve compliance with the Securities Act, the securities laws of any state
or any other law.

     (b)  Market Stand-Off.  The Optionee agrees in connection with any
          ----------------
registration of the Company's securities under the 1933 Act that, upon the
request of the Company or the underwriters managing any public offering of the
Company's securities, Optionee will not sell or otherwise dispose of any Shares
without the prior written consent of the Company or such underwriters, as the
case may be, for a period of time (not to exceed one hundred eighty (180) days
in connection with the Company's initial public offering and ninety (90) days in
connection with any subsequent public offerings) from the effective date of such
registration as the Company or the underwriters may specify for employee-
shareholders generally.  The Optionee agrees to enter into a similar market
stand-off agreement reasonably requested by the Company's underwriters.

     (c)  Investment Intent at Grant.  The Optionee represents and agrees that
          --------------------------
the Shares to be acquired upon exercising this option will be acquired for
investment, and not with a view to the sale or distribution thereof.

     (d)  Investment Intent at Exercise.  In the event that the sale of Shares
          -----------------------------
under the Plan is not registered under the Securities Act but an exemption is
available which requires an investment representation or other representation,
the Optionee shall represent and agree at the time of exercise that the Shares
being acquired upon exercising this option are being

                                      -8-
<PAGE>

acquired for investment, and not with a view to the sale or distribution
thereof, and shall make such other representations as are deemed necessary or
appropriate by the Company and its counsel.

     (e)  Legends.  All certificates evidencing Shares purchased under this
          -------
Agreement shall bear the following legend:

     "THE SHARES REPRESENTED HEREBY MAY NOT BE SOLD, ASSIGNED, TRANSFERRED,
     ENCUMBERED OR IN ANY MANNER DISPOSED OF, EXCEPT IN COMPLIANCE WITH THE
     TERMS OF A WRITTEN AGREEMENT BETWEEN THE COMPANY AND THE REGISTERED HOLDER
     OF THE SHARES (OR THE PREDECESSOR IN INTEREST TO THE SHARES). SUCH
     AGREEMENT GRANTS TO THE COMPANY CERTAIN RIGHTS OF FIRST REFUSAL UPON AN
     ATTEMPTED TRANSFER OF THE SHARES AND CERTAIN REPURCHASE RIGHTS UPON
     TERMINATION OF SERVICE WITH THE COMPANY. THE SECRETARY OF THE COMPANY WILL
     UPON WRITTEN REQUEST FURNISH A COPY OF SUCH AGREEMENT TO THE HOLDER HEREOF
     WITHOUT CHARGE."

All certificates evidencing Shares purchased under this Agreement in an
unregistered transaction shall bear the following legend (and such other
restrictive legends as are required or deemed advisable under the provisions of
any applicable law):

     "THE SHARES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
     SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED, OR
     OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH
     ACT OR AN OPINION OF COUNSEL, SATISFACTORY TO THE COMPANY AND ITS COUNSEL,
     THAT SUCH REGISTRATION IS NOT REQUIRED."

     (f)  Removal of Legends.  If, in the opinion of the Company and its
          ------------------
counsel, any legend placed on a stock certificate representing Shares sold under
this Agreement is no longer required, the holder of such certificate shall be
entitled to exchange such certificate for a certificate representing the same
number of Shares but without such legend.

     (g)  Administration.  Any determination by the Company and its counsel in
          --------------
connection with any of the matters set forth in this Section 11 shall be
conclusive and binding on the Optionee and all other persons.

     13.  Adjustment of Shares.  In the event of any transaction described in
          --------------------
Section 9(a) of the Plan, the terms of this option (including, without
limitation, the number and kind of Shares subject to this option and the
Exercise Price) shall be adjusted as set forth in Section 9(a) of the Plan.  In
the event that the Company is a party to a merger or consolidation, this option
shall be subject to the agreement of merger or consolidation, as provided in
Section 9(b) of the Plan.

                                      -9-
<PAGE>

     14.  Miscellaneous Provisions.
          ------------------------

     (a)  Rights as a Stockholder.  Neither the Optionee nor the Optionee's
          -----------------------
representative shall have any rights as a stockholder with respect to any Shares
subject to this option until the Optionee or the Optionee's representative
becomes entitled to receive such Shares by filing a notice of exercise and
paying the Purchase Price pursuant to Sections 4 and 5.

     (b)  No Retention Rights.  Nothing in this option or in the Plan shall
          -------------------
confer upon the Optionee any right to continue in Service for any period of
specific duration or interfere with or otherwise restrict in any way the rights
of the Company (or any Parent or Subsidiary employing or retaining the Optionee)
or of the Optionee, which rights are hereby expressly reserved by each, to
terminate his or her Service at any time and for any reason, with or without
cause.

     (c)  Notice.  Any notice required by the terms of this Agreement shall be
          ------
given in writing and shall be deemed effective upon personal delivery or upon
deposit with the United States Postal Service, by registered or certified mail,
with postage and fees prepaid.  Notice shall be addressed to the Company at its
principal executive office and to the Optionee at the address that he or she
most recently provided to the Company.

     (d)  Entire Agreement.  The Notice of Stock Option Grant, this Agreement
          ----------------
and the Plan constitute the entire contract between the parties hereto with
regard to the subject matter hereof.  They supersede any other agreements,
representations or understandings (whether oral or written and whether express
or implied) which relate to the subject matter hereof.

     (e)  Choice of Law.  This Agreement shall be governed by, and construed in
          -------------
accordance with, the laws of the State of California, as such laws are applied
to contracts entered into and performed in such State.

                                     -10-
<PAGE>

                                   EXHIBIT A
                                   ---------

                      NOTICE OF EXERCISE OF STOCK OPTION

Magma Design Automation, Inc.

953 Commercial Street
Palo Alto, California 94303

     Re: Exercise of Stock Option to Purchase Shares of Company Stock

Ladies and Gentlemen:

     Pursuant to the Stock Option Agreement dated __________, 199___ (the "Stock
Option Agreement"), between Magma Design Automation, Inc., a Delaware
corporation (the "Company"), and the undersigned, I hereby elect to purchase
_____________ shares of the common stock of the Company (the "Shares"), at the
price of $__________ per Share.  My check in the amount of $______________ and
the executed Assignment Separate from Certificate are enclosed.  The Shares are
to be issued in _____ certificate(s) and registered in the name(s) of:

                          __________________________
                          __________________________

  The undersigned understands there may be tax consequences as a result of the
purchase or disposition of the Shares.  The undersigned represents that he/she
has received and reviewed the Plan's federal income information and consulted
with any tax consultants he/she deems advisable in connection with the purchase
or disposition of the Shares and the undersigned is not relying on the Company
for any tax advice.

  The undersigned acknowledges that he/she has received, read and understood the
Stock Option Agreement and agrees to abide by and be bound by their terms and
conditions.  The undersigned represents that the Shares are being acquired
solely for its own account and not as a nominee for any other party, or for
investment, and that the undersigned purchaser will not offer, sell or otherwise
dispose of any such Shares except under circumstances that will not result in a
violation of the Securities Act of 1933, as amended, or any state securities
laws.

Dated:  _____________________                __________________________________
                                                         (Signature)

                                             __________________________________
                                                      (Please Print Name)

                                             Social Security No._______________

                                             __________________________________

                                             __________________________________
                                                         (Full Address)
<PAGE>

                                   EXHIBIT B
                                   ---------

                     ASSIGNMENT SEPARATE FROM CERTIFICATE
                     ------------------------------------

     FOR VALUE RECEIVED, ________________ hereby sells, assigns and transfers
unto Magma Design Automation, Inc., a Delaware corporation (the "Company"),
_________________ (________) shares of Common Stock of the Company represented
by Certificate No. _____ herewith and does hereby irrevocably constitute and
appoint _________________________ Attorney to transfer the said stock on the
books of the Company with full power of substitution in the premises.

     Dated:  ____________, 19__.


                                             __________________________________
                                                          Print Name

                                             __________________________________
                                                          Signature



                        Spousal Consent (if applicable)
                        -------------------------------

     ________________ (Purchaser's spouse) indicates by the execution of this
Assignment his or her consent to be bound by the terms herein as to his or her
interests, whether as community property or otherwise, if any, in the Shares.


                                             _________________________________
                                                         Signature

INSTRUCTIONS:  PLEASE DO NOT FILL IN ANY BLANKS OTHER THAN THE SIGNATURE LINE.
THE PURPOSE OF THIS ASSIGNMENT IS TO ENABLE THE COMPANY TO EXERCISE ITS "RIGHT
OF REPURCHASE" SET FORTH IN THE AGREEMENT WITHOUT REQUIRING ADDITIONAL
SIGNATURES ON THE PART OF PURCHASER.
<PAGE>

                                   EXHIBIT C
                                   ---------

Internal Revenue Service Center

     Re:  Election Under Section 83(b) of the Internal Revenue Code of 1986

Ladies and Gentlemen:

     I hereby elect under section 83(b) of the Internal Revenue Code of 1986 to
include in gross income any excess of fair market value over purchase price with
respect to the transfer of the property described below:

1.   Name:_________________________

2.   Address:______________________

             ______________________


3.   Social Security Number:  _______________________

4.   Tax Year of Election:  Calendar Year of 199___.

5.   Description of Property:  _________ shares of Common Stock of Magma Design
     Automation, Inc., a Delaware corporation (the "Company").

6.   Date of Property Transfer:  __________, 199__

7.   Nature of Property Restrictions: Property is subject to the Company's right
     to repurchase the stock at the undersigned's original purchase price if the
     undersigned ceases to be associated with the Company, which right will
     generally lapse over a designated four (4) year period.

8.   Fair Market Value at the Time of Transfer:  $_____ per share for an
     aggregate of $_________.  The Fair Market Value at the time of transfer was
     determined without regard to any lapse restrictions as defined in section
     1.83-3(i) of the Income Tax Regulations.

9.   Amount Paid for Property:  $________ per share for an aggregate of
     $________.

10.  A copy of this election has been furnished to the Company, the person for
     whom the services are performed.

                                             Sincerely,

                                             _________________________________
                                                           Signature


                                             _________________________________
                                                              Date
<PAGE>

                                   EXHIBIT D
                                   ---------
                         MAGMA DESIGN AUTOMATION, INC.
                         -----------------------------

                           LIMITED IRREVOCABLE PROXY
                           -------------------------

     The undersigned, as recordholder of __________________ (__________) shares
of Common Stock of Magma Design Automation, Inc., a Delaware corporation
("Magma"), hereby revokes any previous proxies and appoints Rajeev Madhavan as
the undersigned's proxy to attend all meetings of Magma's stockholders and to
vote, execute consents, and otherwise represent those shares for the undersigned
in the same manner and with the same effect as if the undersigned were
personally present; provided, however, that the authority granted by this proxy
is limited to the following:

          1.  representing those shares to determine a quorum;

          2.  voting or otherwise representing those shares with respect to, and
     only in favor of, the election of Rajeev Madhavan to Magma's Board of
     Directors;

          3.  voting or otherwise representing those shares with respect to, and
     only in opposition to, the removal of Rajeev Madhavan from Magma's Board of
     Directors, the reduction in the number of positions on the Board of
     Directors, the classification of the Board of Directors, or (except as set
     forth in (4) below) the alteration of the existing voting rights of the
     outstanding shares of capital stock of Magma; and

          4.  voting or otherwise representing those shares with respect to, and
     at the sole discretion of Rajeev Madhavan, any action to (a) increase the
     number of positions on the Board of Directors, (b) remove any incumbent
     director (other than Rajeev Madhavan) from the Board of Directors, and (c)
     elect any individual as a director of Magma to fill a vacancy caused by the
     increase in size of the Board, the resignation or removal of a director, or
     otherwise.

     This proxy is irrevocable until September 30, 2002 or until the earlier
termination of the voting agreement set forth in that certain Stock Option
Agreement between Magma and the undersigned pursuant to which the shares that
are the subject of this proxy were issued (the

                                      D-1
<PAGE>

"Voting Trust Agreement").  This proxy is given to secure the performance of the
undersigned under the Voting Trust Agreement and is thereby and for other valid
consideration deemed coupled with an interest sufficient to render this proxy
irrevocable for the period indicated above.

     Dated:  ______________, 199__


                                             _________________________________
                                                  Signature of Stockholder


                                             _________________________________
                                                Printed Name, exactly as it
                                                appears on stock certificate

                                             Address__________________________
                                                    __________________________


                                      D-2