**Exhibit 10.4**

 

**VENOCO, INC.**

**2000 STOCK INCENTIVE PLAN**

**NONQUALIFIED STOCK OPTION AGREEMENT**

 

**THISNONQUALIFIED STOCK OPTION AGREEMENT** (this “***OptionAgreement***”) by and between Venoco, Inc., a Delaware Company(the “***Company***”), and                     (the “***Participant***”)evidences the nonqualified stock option (the “***Option***”) granted by the Company to the Participant as tothe number of shares of the Company’s common stock, $0.01 par value (the “***Common Stock***”) set forthbelow.

 
| **Award Date** | ** ** | **Number of Shares of  Common Stock** | ** ** | **Exercise Price   per Share** | ** ** | **Expiration Date** | ** ** |
|----------------|------------|---------------------------------------|------------|--------------------------------|------------|---------------------|------------|
|           |       |                                  |       |                           |       |                |       |
|           |       |                                  |       |                           |       |                |       |
|           |       |                                  |       |                           |       |                |       |

 

**Vesting****.**  The Option shall become vested as to 20% ofthe total number of shares of Common Stock subject to the Option on the AwardDate.  The Option shall become vested asto the remaining shares of Common Stock in equal amounts on the first, second,third and fourth anniversary of the Award Date, such that the Option will befully vested on the fourth anniversary of the Award Date.

 

**Terms and Conditions****. **The Option is granted under the Venoco, Inc. 2000 Stock IncentivePlan (the “***Plan***”).  The Option is subject to the provisions ofthe Plan (except for Appendix A attached thereto) and the Terms and Conditionsof Nonqualified Stock Option (the “***Terms***”)attached to this Option Agreement and incorporated herein by reference.  The Option has been granted to theParticipant in addition to, and not in lieu of, any other form of compensationotherwise payable or to be paid to the Participant.  The Option is not and shall not be deemed tobe an incentive stock option within the meaning of Section 422 of theCode.  Capitalized terms are defined inthe Plan if not defined herein or in the Terms. The parties agree to the terms of the Option set forth herein.  The Participant acknowledges receipt of acopy of the Terms and the Plan, specifically acknowledges and agrees to Section 17of the Terms, and agrees to maintain in confidence all information provided bythe Company in connection with the Option.

 
| “**PARTICIPANT**” | **VENOCO, INC.,**       |
|-----------------------------|-------------------------|
|                        | a  Delaware corporation |
|                        |                    |
|                        |                    |
|                        |                    | By: |   |   |
|                        |                    | Timothy M. Marquez |
|                        |                    | Chief Executive Officer |
|                             |                         |  |  |  |

 

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**TERMS AND CONDITIONS OF**

**NONQUALIFIED STOCK OPTION AGREEMENT**

**WITH                           **

 

1.             **V****esting; Limits on Exercise****.**

 

1.1           Asset forth on the cover page of this Option Agreement, the Option shallvest and become exercisable in percentage installments of the aggregate numberof shares of Common Stock subject to the Option.  The Option may be exercised only to theextent the Option is vested and exercisable.

 

1.2           Tothe extent that the Option is vested and exercisable, the Participant has theright to exercise the Option (to the extent not previously exercised), and suchright shall continue, until the expiration or earlier termination of theOption.

 

1.3           Fractionalshare interests shall be disregarded, but may be cumulated. Cash will be paidin lieu of fractional shares at the time of exercise.

 

1.4           Nofewer than 1 share of Common Stock (subject to adjustment pursuant to Section 4.2.1of the Plan) may be purchased at any one time, unless the number of shares (orfractions thereof) purchased is the total number at the time exercisable underthe Option.

 

2.             **Continuance ofEmployment/Service Required; No Employment/Service Commitment**.

 

2.1           Thevesting schedule requires continued employment or service through eachapplicable vesting date as a condition to the vesting of the applicableinstallment of the Option and the rights and benefits under this OptionAgreement.  Partial employment orservice, even if substantial, during any vesting period will not entitle theParticipant to any proportionate vesting or avoid or mitigate a termination ofrights and benefits upon or following a termination of employment or service asprovided in Section 5 below or under the Plan.

 

2.2           Nothingcontained in this Option Agreement or the Plan constitutes an employmentcommitment by the Company, affects the Participant’s status as an employee whois subject to termination without cause, confers upon the Participant any rightto remain employed by or in service to the Company or any Subsidiary,interferes in any way with the right of the Company or any Subsidiary at anytime to terminate such employment or service, or affects the right of theCompany or any Subsidiary to increase or decrease the Participant’s othercompensation.

 

3.             **Method of Exercise of Option**.

 

3.1           TheOption shall be exercisable by the delivery to the Secretary of the Company of:

 

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(a)           an executed Option Exercise Agreement insubstantially the form attached hereto as Exhibit “A” or such other formas the Committee may require from time to time (the “***Exercise Agreement***”);

 

(b)           payment for the Exercise Price as providedpursuant to Section 3.2 below;

 

(c)           satisfaction of the tax withholdingprovisions of Section 4.4 of the Plan; and

 

(d)           any written statements or agreements requiredby the Committee to be made by the Participant pursuant to Section 4.3 ofthe Plan.

 

3.2           Paymentfor the shares of Common Stock to be purchased pursuant to the Option may bemade by any of the following methods:

 

(a)           Participant may pay by check or electronicfunds transfer to the Company, subject to such specific procedures ordirections as the Committee may establish.

 

(b)           Participant may elect to receive uponexercise of the Option the net number of shares of Common Stock determinedaccording to the following formula (a “***CashlessExercise***”):

 
|   | Net  Number = | (A x B) – (A x C) |   |
|--------|---------------|------------------------|--------|
|   |          | B                      |   |

 

For the purpose of thisformula:

 
|   |   | A      | =      | the total number of shares  with respect to which the Option is then being exercised.                                          |
|--------|--------|--------|--------|--------------------------------------------------------------------------------------------------------------------------------|
|   |   |   |   |                                                                                                                           |
|   |   | B      | =      | the Fair Market Value (as  defined in the Plan) per share of the Common Stock on the date the Exercise  Agreement is executed. |
|   |   |   |   |                                                                                                                           |
|   |   | C      | =      | the exercise price in  effect for the shares with respect to which the Option is being exercise.                               |

 

4.             **Change in Control**.

 

4.1           Inaccordance with Section 4.2.2 of the Plan, immediately upon the occurrenceof a Change in Control (as defined below), the Option shall become fully vestedand exercisable.  Subject to Sections4.2.3 through 4.2.6 of the Plan, the Participant shall have the right toexercise the Option (to the extent not previously exercised) until theExpiration Date or earlier termination of the Option.

 

4.2           Forthe purpose of this Option Agreement, a “***Change inControl***” shall mean the occurrence of one of the followingevents:

 

(a)           Timothy M. Marquez, Bernadette B. Marquez,their respective legal

 

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representatives,devisees, donees and heirs and any Trust for the benefit of either or both ofTimothy M. Marquez and Bernadette B. Marquez and/or the issue of either of them(the “Marquez Family”) individually or collectively no longer are the “beneficialowners” (as defined in Rule 13d-3 under the Securities Exchange Act of1934), directly or indirectly, of securities of the Company representing morethan 50% of the combined voting power of the Company’s then outstandingsecurities;

 

(b)           the stockholders of the Company approve andthe Company consumates a merger or consolidation of the Company with any otherCompany, other than (a) a merger or consolidation which would result inthe voting securities of the Company outstanding immediately prior theretocontinuing to represent (either by remaining outstanding or by being convertedinto voting securities of the surviving entity) more than 65% of the combinedvoting power of the voting securities of the Company (or such surviving entity)outstanding immediately after such merger or consolidation or (b) a mergeror consolidation effected to implement a recapitalization of the Company (orsimilar transaction) in which no “person” (as such term is used in Section 13(d) and14(d) of the Exchange Act other than the Marquez Family) acquires morethan 50% of the combined voting power of the Company’s then outstandingsecurities; or

 

(c)             the stockholders of the Company approve aplan of complete liquidation of the Company or an agreement for the sale ordisposition by the Company of all or substantially all of the Company’sassets.  For purposes of this clause (c),the term “the sale or disposition by the Company of all or substantially all ofthe Company’s assets” shall mean a sale or other disposition transaction orseries of related transactions (other than transactions related to the creationof a master limited partnership or royalty trust in which the Company continuesits corporate existence) involving assets of the Company or of any direct orindirect subsidiary of the Company (including the stock of any direct orindirect subsidiary of the Company) in which the value of the assets or stockbeing sold or otherwise disposed of (as measured by the purchase price beingpaid therefor or by such other method as the Board of Directors of the Companydetermines is appropriate in a case where there is no readily ascertainablepurchase price) constitutes more than two-thirds of the “fair market value ofthe Company” (as hereinafter defined). For purposes of the preceding sentence, the “fair market value of theCompany” shall be the aggregate market value of the Company’s outstandingcommon stock (on a fully diluted basis) plus the aggregate market value of theCompany’s other outstanding equity securities. The aggregate market value of the Company’s equity securities shall bedetermined by multiplying the number of shares of the Company’s common stock(on a fully diluted basis) outstanding on the date of the execution anddelivery of a definitive agreement with respect to the transaction or series ofrelated transactions (the “Transaction Date”) by the average closing price ofsuch security for the ten trading days immediately preceding the TransactionDate, or if not publicly traded, by such other method as the Board of Directorsof the Company shall determine is appropriate.

 

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5.             **Termination of Employment orService**.

 

5.1           Inthe event the Participant’s employment by or service to the Company isterminated by the Company for any reason other than for Misconduct (as definedbelow), the Option shall become fully vested and exercisable.  The Participant shall have the right toexercise the Option (to the extent not previously exercised), and such rightshall continue, until the earlier of the expiration of the Option or two (2) yearsfollowing the date on which the Participant’s employment or service terminated.

 

5.2           Inthe event the Participant’s employment by or service to the Company isterminated by the Company because of the Participant’s Misconduct, the Option(regardless of whether all or a portion of the Option is vested), and all otherrights in respect thereof, shall terminate and become null and void on the dateof such termination.

 

5.3           Inthe event the Participant’s employment by or service to the Company terminatesfor any reason other than as described in Section 5.1 or 5.2, the unvestedportion of the Option, and all other rights in respect thereof, shall terminateand become null and void on the date on which the Participant’s employment orservice terminated.  The Participantshall have the right to exercise the vested portion of the Option (to theextent not previously exercised), and such right shall continue, until theearlier of the expiration of the Option or two (2) years following thedate on which the Participant’s employment or service terminated.

 

5.4           Forthe purpose of this Option Agreement, “***Misconduct***”means (a) the willful and continued failure by Participant tosubstantially perform his duties with the Company (other than any such failureresulting from Participant’s incapacity due to physical or mental illness),after a written demand for substantial performance is delivered to Participantby the Board, which demand specifically identifies the manner in which theBoard believes that Participant has not substantially performed his duties, or (b) thewillful engaging by Participant in conduct which is demonstrably and materiallyinjurious to the Company, monetarily or otherwise.  For purposes hereof, no act, or failure toact, on Participant’s part shall be deemed “willful” unless done, or omitted tobe done, by Participant not in good faith and without reasonable belief thatParticipant’s action or omission was in the best interest of the Company.

 

6.             **Non-Transferability ofOptions**.  The Option and any other rights of theParticipant under this Option Agreement or the Plan are nontransferable andexercisable only by the Participant, except as set forth in Section 1.5 ofthe Plan.

 

7.             **Securities Law Compliance**.  TheParticipant acknowledges that the Option and the shares of Common Stock are notbeing registered under the Securities Act, based, in part, in reliance upon anexemption from registration under Securities and Exchange Commission Rule 701promulgated under the Securities Act of 1933, and a comparable exemption fromqualification under the Colorado Securities Act, as each may be amended fromtime to time.  The Participant, byexecuting this Option Agreement, hereby makes the following representations tothe Company and acknowledges that the Company’s reliance on federal and statesecurities law exemptions from registration and qualification is predicated, insubstantial part, upon the accuracy of these representations:

 

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7.1           TheParticipant is acquiring the Option and, if and when he exercises the Option,will acquire the shares of Common Stock solely for the Participant’s ownaccount, for investment purposes only, and not with a view to or an intent tosell, or to offer for resale in connection with any unregistered distribution,all or any portion of the shares within the meaning of the Securities Act, theColorado Securities Act, or other applicable state securities laws.

 

7.2           TheParticipant has had an opportunity to ask questions and receive answers fromthe Company regarding the terms and conditions of the Option and therestrictions imposed on any shares of Common Stock purchased upon exercise ofthe Option.  The Participant has beenfurnished with, and/or has access to, such information as he considersnecessary or appropriate for deciding whether to exercise the Option andpurchase shares of Common Stock. However, in evaluating the merits and risks of an investment in theCommon Stock, the Participant has and will rely upon the advice of his/her ownlegal counsel, tax advisors, and/or investment advisors.

 

7.3           TheParticipant is aware that the Option may be of no practical value, that anyvalue it may have depends on its vesting and exercisability as well as anincrease in the value of the underlying shares of Common Stock to an amount inexcess of the Exercise Price, and that any investment in common shares of aclosely held Company such as the Company is non-marketable, non-transferableand could require capital to be invested for an indefinite period of time,possibly without return, and at substantial risk of loss.

 

7.4           TheParticipant understands that any shares of Common Stock acquired on exercise ofthe Option will be characterized as “restricted securities” under the federalsecurities laws, and that, under such laws and applicable regulations, suchsecurities may be resold without registration under the Securities Act only incertain limited circumstances, including in accordance with the conditions of Rule 144promulgated under the Securities Act, as presently in effect, with which theParticipant is familiar.

 

7.5           The Participant has read and understands therestrictions and limitations set forth in the Plan and this Option Agreement(including these Terms), which are imposed on the Option and any shares ofCommon Stock which may be acquired upon exercise of the Option.

 

7.6           At no time was an oral representation made to the Participant relatingto the Option or the purchase of shares of Common Stock and the Participant wasnot presented with or solicited by any promotional meeting or material relatingto the Option or the Common Stock.

 

8.             **Lock-Up**. Neither the Participant nor any permitted transferee may, directly orindirectly, offer, sell or transfer or dispose of any of the shares of CommonStock acquired upon exercise of the Option (the “***Shares***”) or any interest therein (or agree to do anythereof) (collectively, a “***Transfer***”)during the period commencing as of 14 days prior to and ending one year, orsuch lesser period of time as the relevant underwriters may permit, after theeffective date of a registration statement covering any public offering of theCompany’s securities of which the Participant has notice.  For the purpose of this Section 8 “Participant”includes, where the context so requires, any permitted direct or indirecttransferee of the Participant.  TheParticipant shall agree and consent to the entry of stop transfer instructionswith the Company’s transfer agent against the Transfer of the Company’ssecurities beneficially owned by the Participant and shall confirm thelimitations hereunder by agreement with and for the benefit of

 

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therelevant underwriters by a lock-up agreement or other agreement in customaryform.  Notwithstanding anything elseherein to the contrary, this Section 8 shall not be construed so as toprohibit the Participant from participating in a registration or a publicoffering of the Common Stock with respect to any shares which he may hold atthat time; provided, however, that such participation shall be at the solediscretion of the board of directors.

 

9.             (*intentionally left blank*)

 

10.           **Non-Transferability ofShares.**

 

10.1         Except as provided in Section 10.2, noShares may be sold, transferred, assigned, pledged, or encumbered at any timeuntil the first to occur of (i) the Public Offering Date, (ii) twoyears after the date the Shares were issued upon exercise of the Option, or (iii) thesale of all or substantially all of the Common Stock or assets of the Companyto a person who is not an affiliate of the Company.

 

10.2         Notwithstanding the restrictions contained inSection 10.1, the Shares may be transferred as provided in this Section 10.2,provided, however, that such transfers remain subject to theright of first refusal in Section 10.3:

 

(a)           Transfers to the Company.

 

(b)           Transfers with the written approval of theCommittee.

 

(c)           Transfers by gift to “immediate family” asthat term is defined in Rule 16a-1(e) under the Exchange Act.

 

(d)           In the event of the Participant’s death,transfers to the Participant’s beneficiary, or in the absence of a validlydesignated beneficiary, transfers by will or the laws of descent anddistribution.

 

(e)           In the event the Participant suffers apermanent disability, transfers by the Participant’s duly authorized legalrepresentative on behalf of the Participant.

 

(f)            Transfers made pursuant to Sections 13 or 14.

 

10.3         The Company shall have a right of firstrefusal, as set forth below, to purchase the Shares before the Shares (or anyinterest in them) can be validly transferred to any other person or entity.

 

(a)           Before there can be a valid sale or transferof any Shares (or any interest in them) by any holder thereof, the holder shallfirst give notice in writing to the Company, mailed or delivered in accordancewith the provisions of Section 18.5, of his or her intention to sell ortransfer such Shares (the “***OptionNotice***”).  The OptionNotice shall specify the identity of the proposed transferee, the number of Sharesto be sold or transferred to the transferee, the price per Share and the termsupon which such holder intends to make such sale or transfer.  If the payment terms for the Shares describedin the Option Notice differ from delivery of cash or a check at closing, theCompany shall have the option, as set forth herein, of purchasing the Shares

 

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for cash (or a cashequivalent) at closing in an amount which the Company determines is a fairvalue equivalent of that payment.  Thedetermination of a fair value equivalent shall be made in the Company’s bestjudgment and such determination shall be mailed or delivered to the selling ortransferring stockholder (the “***Company’sNotice***”) within ten (10) days of its receipt of the OptionNotice.  Should the selling ortransferring stockholder disagree with the Company’s determination of a fairvalue equivalent, he shall have the right (the “***Retraction Right***”) to retract the proposed sale ortransfer to a third party and the offer of Shares to the Company pursuant tothe Option Notice (such retraction to be made in writing and mailed ordelivered in accordance with the provisions of Section 18.5 within fifteen(15) days after receipt of the Company’s Notice).  If the stockholder again proposes to sell ortransfer the Shares, the stockholder shall again offer such Shares to theCompany pursuant to the terms of this Section 10.3 prior to any sale ortransfer.

 

(b)           Subject to the selling stockholder’sRetraction Right, during the 60-day period commencing upon receipt of theOption Notice by the Company (the “***OptionPeriod***”), the Company shall have an option to purchase any orall of the Shares specified in the Option Notice at the price offered therein(the “***Right of First Refusal***”).

 

(c)           Not more than thirty (30) days after receiptof the Option Notice, the Company shall give written notice to the stockholderdesiring to sell or transfer Shares of the number of such Shares to bepurchased (or, if no Shares are to be purchased, stating such fact) by theCompany pursuant to the terms of this Section 10.3 (the “***Purchase Notice***”).  Purchases pursuant to this Section 10.3shall be consummated within thirty (30) days after delivery of the PurchaseNotice to the selling stockholder, but in no event later than the expiration ofthe Option Period.  The purchase priceshall be paid at the closing in cash, by check, by cancellation of moneypurchase indebtedness, or, if the payment terms set forth in the Option Noticediffer from payment in cash or by check at closing, in accordance with thepayment terms set forth in the Option Notice (or payment of the amount setforth in the Company’s Notice in cash, by cancellation of money purchaseindebtedness, or by check).  The purchaseprice shall be paid against surrender by the selling stockholder of one or morestock certificates evidencing the number of Shares specified in the OptionNotice, free and clear of all security interests and liens, with duly endorsedstock powers.

 

(d)           Unless all of the Shares referred to in theOption Notice are to be purchased as indicated in the Purchase Notice, thestockholder desiring to sell or transfer may dispose of any Shares referred toin the Option Notice that are not to be purchased by the Company to the personor persons specified in the Option Notice during a period of twenty (20) dayscommencing upon his or her receipt of the Purchase Notice; provided,however, that he shall not sell or transfer such Shares (a) at a lowerprice or on terms more favorable to the Participant or transferee than thosespecified in the Option Notice, and (b) to a person other than the personor persons specified in the Option Notice; and provided further thatsuch transfer is consistent with the other provisions and limitations of thePlan and this Option Agreement (including these Terms).  If the transfer is not consummated withinsuch twenty (20) day period, the stockholder shall again offer such Shares tothe Company pursuant to the terms of this Section 10.3 prior to any saleor transfer to the same or any other person.

 

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(e)           Notwithstanding anything to the contrary, theCompany may assign any or all of its rights under this Section 10.3 to oneor more stockholders of the Company.

 

(f)            The Company’s Right of First Refusal pursuantto this Section 10.3 shall terminate to the extent it is not exercisedprior to the Public Offering Date or the consummation of a sale of all orsubstantially all of the assets or Common Stock of the Company to a person whois not an affiliate of the Company.

 

11.           **Put Right**.

 

11.1         Following the second anniversary of the AwardDate, Participant shall have the right (the “***Put Right***”) to require, upon notice to the Company, thatthe Company purchase some or all of the Shares (the “***Put Shares***”) under the terms provided in this Section 11.

 

11.2         Participant may exercise the Put Right nomore than once per fiscal quarter by providing notice (“***Put Notice***”) to the Company during the thirty (30) dayperiod immediately following the conclusion of a fiscal quarter (the “***Put Notice Period***”).  The Put Notice shall specify the number ofShares for which the Participant seeks to exercise the Put Right and shallspecify a closing date for the purchase which shall be not less than thirty(30) days after the date of the Put Notice.

 

11.3         Within fifteen (15) days after receipt of thePut Notice, the Company shall provide notice (“***Price Notice***”) to the Participant of the purchase priceof the Put Shares.  The purchase pricefor the Put Shares shall be Fair Value (as defined in Section 11.7) of theshares on the date of the Put Notice, provided, however, that ifthe Fair Value is determined in accordance with subsection (d) of Section 9.4,the Price Notice must contain only a statement to that effect along with thename of the independent third party selected by the Company to determine FairValue.

 

11.4         The number of Shares that the Company may berequired to purchase during any Put Notice Period shall not exceed the lesser of(i) 0.5% of the number of Sharesof Common Stock then outstanding and (ii) the maximum number ofShares the Company may lawfully purchase at the closing date of the purchaseunder Section 160 and other applicable provisions of the Delaware GeneralCompany Law; provided, however, that in no event shall the Company be requiredto purchase Shares unless, until and to the extent such purchase is permittedby the terms of the Company’s primary credit facility and the Indenturerelating to the Company’s 8.75% Senior Notes due 2011, as amended andsupplemented from time to time.  If (x)the Company grants a Put Right to other employees of or consultants to theCompany or its subsidiaries, (y) more than one Put Notice is given during a PutNotice Period and (z) the limitations imposed by this Section 11.4 (otherthan subsection (i)) on the ability of the Company to purchase Sharesallow the Company to purchase some, but not all Shares subject to such PutNotices, the Company shall pay the maximum amount it is permitted to payhereunder to such persons pro rata in accordance with the number of Put Sharesdesignated by them in their respective Put Notices.

 

11.5         The purchase price for the Put Shares shallbe paid by the Company in the form of a check or electronic transfer ofimmediately available funds on the date set forth in the Put

 

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Notice which shall be noearlier than sixty (60) days after the date of the Put Notice; provided,however, that if Fair Value is determined by an independent third partypursuant to Section 9.4(d), the purchase price for the Put Shares shall benet of one-half of the expenses of the independent third party and the netpurchase price shall be paid within thirty (30) days after the independentthird party provides its determination of Fair Value to both the Participantand the Company.  The purchase priceshall be paid against surrender by the Participant of one or more stockcertificates evidencing the number of Shares specified in the Put Notice, freeand clear of all security interests and liens, with duly endorsed stockpowers.  No adjustments (other thanpursuant to Section 4.2 of the Plan) shall be made to the purchase pricefor fluctuations in the value of the Common Stock after the date of the PutNotice.

 

11.6         Participant’s Put Right shall terminate tothe extent that it is not exercised prior to the first to occur of (i) thePublic Offering Date, (ii) the consummation of a sale of all orsubstantially all of the assets or Common Stock of the Company to a person whois not an affiliate of the Company or (iii) March 1, 2015.

 

11.7         For the purpose of this Option Agreement, “***Fair Value***” shall mean:

 

(a)           if the stock is listed or admitted to tradeon a national securities exchange, the closing price of the stock on theComposite Tape, as published in the Western Edition of The Wall Street Journal,of the principal national securities exchange on which the stock is so listedor admitted to trade, on such date, or, if there is no trading of the stock onsuch date, then the closing price of the stock as quoted on such Composite Tapeon the next preceding date on which there was trading in such shares;

 

(b)           if the stock is not listed or admitted totrade on a national securities exchange, the last/closing price for the stockon such date, as furnished by the National Association of Securities Dealers, Inc.(“***NASD***”) through theNASDAQ National Market Reporting System or a similar organization if the NASDis no longer reporting such information;

 

(c)           if the stock is not listed or admitted totrade on a national securities exchange and is not reported on the NationalMarket Reporting System, the mean between the bid and asked price for the stockon such date, as furnished by the NASD or a similar organization; or

 

(d)           if the stock is not listed or admitted totrade on a national securities exchange, is not reported on the National MarketReporting System and if bid and asked prices for the stock are not furnished bythe NASD or a similar organization, the value, as mutually agreed by theCompany and the Participant within thirty (30) days after the date of the PutNotice, as applicable, or, in the absence of such agreement, as determined byan independent third party selected by the Participant and the Company, basedon the trading values of a comparable group of public companies withappropriate discounts for the illiquidity and minority status of the Shares, provided,however, that the discounts for all such factors shall not exceed 15% inthe aggregate.  If the Company and theParticipant are unable to select promptly a mutually agreeable independentthird party for this determination, the independent third party shall beselected pursuant to C.R.S. Section 13-22-205.  All fees and expenses of the independentthird party shall be borne equally by the Company and the Participant.

 

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12.           **No Stockholder RightsFollowing Exercise of a Repurchase or Put Right**.  Ifthe Participant (or any permitted transferee who is an employee of the Company)ceases to be an employee of the Company and holds Shares as to which the Rightof First Refusal or Put Right has been exercised, the Participant shall beentitled to the value of such Shares in accordance with the provisions of Section 10or 11, as applicable, but (unless otherwise required by law) shall no longer beentitled to participation in the Company or other rights as a stockholder withrespect to the Shares subject to the repurchase or put.  To the maximum extent permitted by law, theParticipant’s rights following the exercise of the Right of First Refusal orPut Right shall, with respect to the repurchase or put and the Shares coveredthereby, be solely the rights that he has as a general creditor of the Companyto receive payment of the amount specified in Section 10 or 11, as applicable.

 

13.           **Tag Along Right****.**  IfTimothy M. Marquez or any affiliate thereof (collectively, “***Marquez***”) proposes to sell,to a Third Party Purchaser (as defined below) in one transaction or in a seriesof related transactions ( a “***Tag AlongSale***”) either (i) more than 50% of his equity interest inthe Company or (ii) control of the Company, then the Participant shallhave the right (the “***Tag AlongRight***”) to participate in such Tag Along Sale on the followingterms:

 

13.1         Marquez shall give the Participant not lessthan 20 days’ written notice (a “**Sale Notice**”)of his intention, describing the price offered, all other material terms andconditions of the Tag Along Sale and, if the consideration payable pursuant tothe Tag Along Sale consists in whole or in part of consideration other thancash, such information relating to such other consideration as the Participantmay reasonably request.

 

13.2         In connection with any Tag Along Sale, the Participantshall have the right, in his sole discretion, to sell, at a price equal to theaverage consideration per share received by Marquez for all shares of CommonStock sold by Marquez in the Tag Along Sale, and otherwise on the same termsand conditions, as Marquez, the lesser of either (i) all of the Sharesthen held by him or (ii) a portion of such Shares equal to a fraction, thenumerator of which is the total number of shares of Common Stock to bepurchased by the Third Party Purchaser, and the denominator of which is thenumber of shares of Common Stock owned by persons other than theParticipant.  Any fractional shares willbe rounded to the nearest whole share.

 

13.3         The Participant must exercise his tag-alongright by giving written notice to Marquez within ten (10) days after thedelivery of a Sale Notice, specifying the number of Shares that the Participantdesires to include in the Tag Along Sale. At the closing for the Tag Along Sale, against payment of theconsideration, the Participant will deliver to the Third Party Purchaser thecertificate or certificates representing such number of Shares free and clearof security interests and liens and duly endorsed, together with all otherdocuments necessary to effect such Tag Along Sale.

 

13.4         There shall be no liability on the part ofMarquez to the Participant if the proposed third party sale is not consummatedfor any reason.

 

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13.5         For the purpose of this Agreement, a “***Third Party Purchaser***” meansany person that is not a stockholder or an affiliate thereof that purchases oragrees to purchase the shares of Common Stock in connection with a Tag AlongSale or Compelled Sale (as defined in Section 14).

 

13.6         Participant’s Tag Along Right shall terminateto the extent that it is not exercised prior to the Public Offering Date.

 

14.           **Right to Compel Sale**.

 

14.1         If at any time Marquez proposes to sell all,or a majority of his, its or their shares of Common Stock to a Third PartyPurchaser, Marquez shall have the right (the **“*Compelled Sale Right*”**), exercisable as set forthbelow, to compel the Participant to sell to the Third Party Purchaser (a “***Compelled Sale***”) all, but notless than all, of the shares of such Common Stock (to the extent acquired uponexercise of the Option), if any, then held by the Participant.  In connection with any Compelled Sale, theParticipant will receive a price equal to the average consideration per sharereceived by Marquez for all shares of Common Stock sold by Marquez in theCompelled Sale.

 

14.2         In the event Marquez elects to exercise itsright to cause a Compelled Sale, it will deliver written notice (a “**Compelled Sale Notice**”) to the Participantand the Company, setting forth the consideration and describing the other materialterms and conditions of the Compelled Sale, including the proposed closingdate, which shall be not less than 20 days from the date the Compelled SaleNotice is delivered.  At the closing forthe Compelled Sale, against payment of the consideration, the Participant shalldeliver to the Third Party Purchaser the certificate or certificatesrepresenting the number of shares of Common Stock held by the Employee, dulyendorsed and free and clear of security interests and liens, together with allother documents necessary to effect such Compelled Sale.

 

14.3         There shall be no liability on the part ofMarquez to the Participant if any proposed Compelled Sale is not consummatedfor any reason.

 

14.4         The Compelled Sale Right shall terminate tothe extent that it is not exercised prior to the Public Offering Date.

 

15.           **Bonus Payment**.

 

15.1         In the event the Company declares and pays acash dividend to its common stockholders, the Participant shall be entitled toreceive a cash payment (the “***DividendPayment***”) from the Company equal to the product of (i) theper share amount of the dividend payable to holders of the Company’s CommonStock, and (ii) the number of shares of Common Stock issuable uponexercise of that portion of the Participant’s Option which is vested andexercisable as of the record date used by the Company for the purpose ofdetermining the stockholders that are eligible to receive the dividend.

 

15.2         The Company shall pay the Dividend Payment tothe Participant within thirty (30) days after the date on which the Companypays the cash dividend on its Common Stock.

 

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15.3         All payments made pursuant to this Section 15shall be net of any withholding or other taxes applicable to such payment.

 

16.           **Plan**.  TheOption and all rights of the Participant under this Option Agreement aresubject to, and the Participant agrees to be bound by, all of the terms andconditions of the Plan, incorporated herein by this reference.  In the event of a conflict or inconsistencybetween this Option Agreement and the Plan, this Option Agreement shallgovern.  The Participant acknowledgesreceipt of a copy of the Plan and agrees to be bound by the terms thereof andof this Option Agreement.  TheParticipant acknowledges reading and understanding the Plan and this OptionAgreement.  Unless otherwise expresslyprovided in other sections of this Option Agreement, provisions of the Planthat confer discretionary authority on the Board or the Committee do not andshall not be deemed to create any rights in the Participant unless such rightsare expressly set forth herein or are otherwise in the sole discretion of theBoard or the Committee so conferred by appropriate action of the Board or theCommittee under the Plan after the date hereof.

 

17.           **Satisfaction of All Rightsto Equity**.  The Option is in complete satisfaction of anyand all rights that the Participant may have (under an employment, consulting,or other written or oral agreement with the Company, or otherwise) to receive (1) stockoptions or a restricted stock award with respect to the Company’s securities,and/or (2) any other equity or derivative security in or with respect tothe Company.  This Option Agreementsupersedes the terms of all prior understandings and agreements, written ororal, of the parties with respect to such matters.  The Participant shall have no further rightsor benefits under any prior agreement conveying any right with respect to anysecurity or derivative security in or with respect to the Company.  The foregoing notwithstanding, this Section 17shall not adversely affect the Participant’s rights under any prior option orrestricted stock agreement under the Plan (provided such agreement is expresslylabeled as an option, restricted stock, or award agreement under the Plan andis similar in form to this Option Agreement) which has been signed by anauthorized officer of the Company.

 

18.           **Miscellaneous**

 

18.1         Entire Agreement.  ThisOption Agreement (including these Terms and together with the form of ExerciseAgreement attached hereto) and the Plan together constitute the entireagreement and supersede all prior understandings and agreements, written ororal, of the parties hereto with respect to the subject matter hereof.  The Plan, this Option Agreement and theExercise Agreement may be amended pursuant to Section 4.5 of thePlan.  Such amendment must be in writingand signed by the Company.  The Companymay, however, unilaterally waive any provision of the Option Agreement inwriting to the extent such waiver does not adversely affect the interests ofthe Participant hereunder, but no such waiver shall operate as or be construedto be a subsequent waiver of the same provision or a waiver of any otherprovision hereof.

 

18.2         Delaware Law.  ThisOption Agreement and the Exercise Agreement shall be governed by and construedand enforced in accordance with the laws of the State of Delaware withoutregard to conflict of law principles thereunder.

 

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18.3         Limited Rights**.**  TheParticipant has no rights as a stockholder of the Company with respect to theOption as set forth in Section 4.6 of the Plan.  The Option does not place any limit on thecorporate authority of the Company as set forth in Section 4.12 of thePlan.

 

18.4         Arbitration.  Any dispute, controversy orclaim arising out of or relating to this Option Agreement (including theseTerms), the Plan, and/or the Exercise Agreement, their enforcement orinterpretation, or because of an alleged breach, default, or misrepresentationin connection with any of their provisions, will be determined exclusively byconfidential, final and binding arbitration in Denver, Colorado, pursuant tothe Colorado Arbitration Act.  Thearbitration shall be before a single neutral arbitrator mutually agreed upon bythe parties or, if the parties are unable to agree upon an arbitrator, thearbitrator shall be selected pursuant to C.R.S. Section 13-22-205.  Disputes, controversies or claims subject tofinal and binding arbitration under this Agreement include, without limitation,all those that could otherwise be tried in court to a judge or jury in theabsence of this Section 18.4.  TheParticipant and the Company agree that they each expressly waive any rights tohave such matters heard or tried before a judge or jury in anothertribunal.  The arbitrator’s award in anyJAMS proceeding will be final, binding, and conclusive upon the parties,subject only to judicial review provided by statute, and a judgment rendered onthe arbitration award can be entered in any state or federal court havingjurisdiction thereof.  Nothing in this Section 18.4,however, shall limit the right of the parties to stipulate and agree to conductthe arbitration before and pursuant to the then existing rules of anyother agreed-upon arbitration services provider.

 

18.5         Notice**. **Any notice to be given under the OptionAgreement shall be in writing and addressed to the Company at its principaloffice in the Denver metropolitan area,Colorado to the attention of the ChiefExecutive Officer, with a copy addressed to the Company at its principal officein Carpinteria, California to the attention of the General Counsel, andto the Participant at the address reflected or last reflected on the Company’spayroll records, or to such other address as is provided by the Participant inwriting.  Any notice shall be deliveredin person or shall be enclosed in a properly sealed envelope, addressed asaforesaid, registered or certified, and deposited (postage and registry orcertification fee prepaid) in a post office or branch post office regularlymaintained by the United States Government. Any such notice shall be given only when received, but if theParticipant is no longer an Eligible Person, shall be deemed to have been dulygiven as of the date mailed in accordance with this provision.

 

*(Remainder of Page IntentionallyLeft Blank)*

 

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EXHIBIT A

 

**VENOCO, INC.**

**2000 STOCK INCENTIVE PLAN**

**OPTION EXERCISE AGREEMENT**

 

Theundersigned (the “***Purchaser***”)hereby irrevocably elects to exercise his/her right, evidenced by that certainNonqualified Stock Option Agreement dated as of                                         (the “***Option Agreement***”)under the Venoco, Inc. 2000 Stock Incentive Plan (the “***Plan***”), to purchase                                     shares of Common Stock, par value $0.01 per share (the “***Shares***”), of Venoco, Inc., a Delaware Company (the “***Company***”), at an exerciseprice of                 dollars per share.  Capitalized termsused herein and not otherwise defined shall have the meaning set forth in theOption Agreement, or if not contained therein, in the Plan.

 

**1.****            ****Form of WarrantExercise Price.**  The Purchaser intends that payment of theExercise Price shall be made as (check applicable line):

 

                              a cash exercise with respect to                   shares of Common Stock; and/or

 

                              a Cashless Exercise with respect to                   shares of Common Stock.

 

**2.****            ****Purchase Price**.  Inthe event the Purchaser has elected a cash exercise with respect to some or allof the Shares to be issued pursuant hereto, the Purchaser shall pay theexercise price of $                        per share, for an aggregate exercise amount of $                    to the Company in accordance with the terms of the Option Agreement.

 

**3.****            ****Delivery.**  TheCompany shall deliver a certificate representing the Shares and registered inthe name of the Purchaser to:                                                                                                            

 

**4.****            ****Investment Representations**.  ThePurchaser acknowledges that the sale of the Shares by the Purchaser isrestricted by SEC Rule 701.  ThePurchaser hereby affirms as made as of the date hereof the representations in Section 7of the “Terms and Conditions of Nonqualified Stock Option” (which are attachedto and a part of the Option Agreement, the “***Terms***”) and such representations are incorporated hereinby this reference.  The Purchaserrepresents that he has no need for liquidity in this investment, has theability to bear the economic risk of this investment, and can afford a completeloss of the purchase price for the Shares. The Purchaser acknowledges receipt of the Company’s condensedconsolidated financial information.  ThePurchaser also understands and acknowledges (i) that the certificatesrepresenting the Shares will be legended as provided for in Section 4.3.3of the Plan, and (ii) that the Company has no obligation to register theShares or file any registration statement under federal or state securitieslaws.

 

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**5.****            ****Restrictions on the Shares.**  ThePurchaser represents that he has read the Plan and the Option Agreement andacknowledges that the Shares are and shall remain subject to variousrestrictions, including but not limited to, restrictions on transfer, a rightof first refusal in favor of the Company and a compelled sale right in favor ofthe Company, restrictions on transfer under state and federal securities lawsand a lock-up provision, in each case as set forth in the Plan or the OptionAgreement.  As a condition to anypermitted transfer of the Shares, the Company may require the transferee toexecute a written agreement, in a form acceptable to the Committee, that thetransferee acknowledges and agrees to the foregoing terms and restrictionsimposed on the Shares.

 

**6.****            ****Plan and Option Agreement**.  ThePurchaser acknowledges that all of his/her rights are subject to, and thePurchaser agrees to be bound by, all of the terms and conditions of the Planand the Option Agreement (including the Terms), both of which are incorporatedherein by this reference.  If a conflictor inconsistency between the terms and conditions of this Exercise Agreementand of the Plan and Option Agreement shall arise, the terms of the Plan and/orOption Agreement shall govern.  ThePurchaser acknowledges receipt of a copy of all documents referenced herein(including the Terms and a disclosure statement) and acknowledges reading andunderstanding these documents and having an opportunity to ask any questionsthat he may have had about them.  Anycontroversy or claim arising out of or relating to this Exercise Agreementshall be submitted to arbitration in accordance with Section 18.4 of theTerms, and Delaware law shall apply as provided in Section 18.2 of theTerms.

 

**7.****            ****Entire Agreement**.  ThisExercise Agreement, the Option Agreement (including the Terms), and the Plantogether constitute the entire agreement and supersede all prior understandingsand agreements, written or oral, of the parties hereto with respect to thesubject matter hereof.  The Plan, theOption Agreement and this Exercise Agreement may be amended pursuant to Section 4.5of the Plan.  Such amendment must be in writingand signed by the Company.  The Companymay, however, unilaterally waive any provision hereof or of the OptionAgreement in writing to the extent such waiver does not adversely affect theinterests of the Participant hereunder, but no such waiver shall operate as orbe construed to be a subsequent waiver of the same provision or a wavier of anyother provision hereof.

 
| “**PURCHASER**” | **ACCEPTED  BY:** |
|---------------------------|-------------------|
|                      | **VENOCO,  INC.** |
|                      |              | ** ** | ** ** |
| *Signature*               |              | By: |   |   |
|                      |              |   |   |   |
|                      |              | Its: |   |   |
| *Print  Name*             |              |   |   |   |
|                      |              |   |   |   |
|                      |              | *(To be  completed by the Company after the price* |   |
| *Date*                    | * *          | *(including  applicable withholding taxes), value (if* |
|                      |              | *applicable)  and receipt of funds is verified.)* |   |
|                           |                   |  |  |  |  |

 

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