**Exhibit 10.3**

 

**VENOCO, INC.2000 STOCK INCENTIVE PLANNONQUALIFIED STOCK OPTION AGREEMENT**

 

**THIS NONQUALIFIED STOCK OPTION AGREEMENT**(this “***Option Agreement***”) by andbetween 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** |
|----------------------|------------|---------------------------------------|------------|-------------------------------|------------|----------------------|
| August 26, 2005 |       | 6                                     |       | $                             | 80,000.00  |                 | August 25,  2015 |
|                      |            |                                       |            |                               |            |                      |  |

 

**Vesting**.  TheOption shall become vested as to 20% of the total number of shares of CommonStock subject to the Option on the Award Date. The Option shall become vested as to the remaining shares of CommonStock in equal amounts, on the first, second, third and fourth anniversary ofthe Award Date, such that the Option will be fully vested on the fourthanniversary of the Award Date.

 

**Terms and Conditions**.  The Option is granted under the Venoco, Inc.2000 Stock Incentive Plan (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 OFNONQUALIFIED STOCK OPTION AGREEMENTWITH                   **

 

**1.****            ****Vesting; 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 the extentthe 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           Noless 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 sharespurchased is the total number at the time exercisable under the Option.

 

**2.****            ****Continuance of Service Required;No Service Commitment**.

 

2.1           Thevesting schedule requires continued service as a director of the Companythrough each applicable vesting date as a condition to the vesting of theapplicable installment of the Option and the rights and benefits under thisOption Agreement.  Partial service, evenif substantial, during any vesting period will not entitle the Participant toany proportionate vesting or avoid or mitigate a termination of rights andbenefits upon or following a termination of service as provided in Section 5below or under the Plan.

 

2.2           Nothingcontained in this Option Agreement or the Plan constitutes commitment by theCompany to continued nomination or election as a director of the Company,confers upon the Participant any right to remain a director or otherwise inservice to the Company or any Subsidiary, interferes in any way with the rightof the stockholders of the Company at any time to terminate such service as adirector of the Company, or affects the right of the Company to increase ordecrease the Participant’s other compensation.

 

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

 

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

 

(a)           anexecuted Option Exercise Agreement in substantially the form attached hereto asExhibit ”A” or such other form as the Committee may require from time totime (the “***Exercise Agreement***”);

 

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(b)           paymentfor the Exercise Price as provided pursuant to Section 3.2 below;

 

(c)           satisfactionof the tax withholding provisions of Section 4.4 of the Plan; and

 

(d)           anywritten statements or agreements required by the Committee to be made by theParticipant pursuant to Section 4.3 of the 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)           Participantmay pay by check or electronic funds transfer to the Company, subject to suchspecific procedures or directions as the Committee may establish.

 

(b)           Participantmay elect to receive upon exercise of the Option the net number of shares ofCommon Stock determined according to the following formula (a “***Cashless Exercise***”):

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

 

Forthe purpose of this formula:

 
| 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 exercised.                              |

 

**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 toSections 4.2.3 through 4.2.6 of the Plan, the Participant shall have theright to exercise 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 in Control” shall mean theoccurrence of one of the following events:

 

(a)           any“person” or “group” of related persons (as such terms are used inSections 13(d) and 14(d) of the Exchange Act), other than theMarquez Family or any constituent thereof, is or becomes the Beneficial Owner,directly or indirectly, of voting securities of the Company representing 50% ofthe total voting power of the Company’s then outstanding securities.  The term “***Marquez Family***” shall mean Timothy M. Marquez,

 

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Bernadette B.Marquez, his, her and their respective legal representatives, devises, doneesand heirs, any trust for the benefit of either or both of Timothy M.Marquez and Bernadette B. Marquez and/or the issue of either of them andany entity 80% or more of the voting shares or other interests of which isdirectly or indirectly owned by any of the foregoing;

 

(b)           thestockholders of the Company approve and the Company consummates a merger orconsolidation of the Company with any other entity, other than (a) amerger or consolidation which would result in the voting securities of theCompany outstanding immediately prior thereto continuing to represent (eitherby remaining outstanding or by being converted into voting securities of thesurviving entity) more than 65%of the combined voting power of the voting securities of the Company (or suchsurviving entity) outstanding immediately after such merger or consolidation or(b) a merger or consolidation effected to implement a recapitalization ofthe Company (or similar transaction) in which no “person” (as such term is usedin Section (d) and 14(d) of the Exchange Act) other than theMarquez Family acquires more than 50% of the combined voting power of theCompany’s then outstanding securities; or

 

(c)           thestockholders of the Company approve a plan of complete liquidation of theCompany or an agreement for the sale or disposition by the Company of all orsubstantially all of the Company’s assets. For purposes of this clause (c), the term “the sale or dispositionby the Company of all or substantially all of the Company’s assets” shall meana sale or other disposition transaction or series of related transactions(other than transactions related to the creation of a master limitedpartnership or royalty trust in which the Company continues its corporateexistence) involving assets of the Company or of any direct or indirectsubsidiary of the Company (including the stock of any direct or indirectsubsidiary of the Company) in which the value of the assets or stock being soldor otherwise disposed of (as measured by the purchase price being paid thereforor by such other method as the Board of Directors of the Company determines isappropriate in a case where there is no readily ascertainable purchase price)constitutes more than two-thirds of the “fair market value of the Company” (ashereinafter defined).  For purposes ofthe preceding sentence, the “fair market value of the Company” shall be theaggregate market value of the Company’s outstanding Common Stock (on a fullydiluted basis) plus the aggregate market value of the Company’s otheroutstanding equity securities.  Theaggregate market value of the Company’s equity securities shall be determinedby multiplying the number of shares of the Company’s Common Stock (on a fullydiluted basis) outstanding on the date of the execution and delivery of adefinitive agreement with respect to the transaction or series of relatedtransactions (the “***TransactionDate***”) by the average closing price of such security for the tentrading days immediately preceding the Transaction Date, or if not publiclytraded, by such other method as the Board of Directors of the Company shalldetermine is appropriate.

 

**5.****            ****Termination ofService**.  In the event the Participant’s service to theCompany as a director ceases for any reason, the unvested portion of the Optionshall automatically expire. The Participant shall have the right to exercisethe vested portion of the Option (to the extent not previously exercised), andsuch right shall continue, until the

 

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earlier of the expiration of theOption or two (2) years following the date on which the Participant’sservice as a director is terminated.

 

**6.****            ****Non-Transferabilityof Options**.  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 LawCompliance**.  The Participant acknowledges that the Optionand the shares of Common Stock are not being registered under the SecuritiesAct, based, in part, in reliance upon an exemption from registration underSecurities and Exchange Commission Rule 701 promulgated under theSecurities Act of 1933, and a comparable exemption from qualification under theColorado Securities Act, as each may be amended from time to time.  The Participant, by executing this OptionAgreement, hereby makes the following representations to the Company andacknowledges that the Company’s reliance on federal and state securities lawexemptions from registration and qualification is predicated, in substantialpart, upon the accuracy of these representations:

 

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 the restrictionsimposed on any shares of Common Stock purchased upon exercise of theOption.  The Participant has beenfurnished with, and/or has access to, such information as he considersnecessary or appropriate for deciding whether to exercise the Option and purchaseshares of Common Stock.  However, inevaluating the merits and risks of an investment in the Common Stock, theParticipant has and will rely upon the advice of his/her own legal counsel, taxadvisors, 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.

 

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7.5           TheParticipant has read and understands the restrictions and limitations set forthin the Plan and this Option Agreement (including these Terms), which areimposed on the Option and any shares of Common Stock which may be acquired uponexercise of the Option.

 

7.6           Atno time was an oral representation made to the Participant relating to theOption or the purchase of shares of Common Stock and the Participant was notpresented with or solicited by any promotional meeting or material relating tothe 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) during the period commencing as of 14 days prior to and endingone year, or such lesser period of time as the relevant underwriters maypermit, after the effective date of a registration statement covering anypublic offering of the Company’s securities of which the Participant hasnotice.  For the purpose of this Section 8“Participant” includes, where the context so requires, any permitted direct orindirect transferee of the Participant. The Participant shall agree and consent to the entry of stop transferinstructions with the Company’s transfer agent against the transfer of theCompany’s securities beneficially owned by the Participant and shall confirmthe limitations hereunder by agreement with and for the benefit of the relevantunderwriters by a lock-up agreement or other agreement in customary form.  Notwithstanding anything else herein to thecontrary, this Section 8 shall not be construed so as to prohibit the Participantfrom participating in a registration or a public offering of the Common Stockwith respect to any shares which he may hold at that time; *provided,however*, that such participation shall be at the sole discretion ofthe Board of Directors.

 

**9.****            **(intentionally left blank)

 

**10.****       ****Non-Transferability of Shares**.

 

10.1         Exceptas provided in Section 10.2, no Shares may be sold, transferred, assigned,pledged, or encumbered at any time until the first to occur of (i) thePublic Offering Date, (ii) two years after the date the Shares were issuedupon exercise of the Option, or (iii) the sale of all or substantially allof the Common Stock or assets of the Company to a person who is not anaffiliate of the Company.

 

10.2         Notwithstandingthe restrictions contained in Section 10.1, the Shares may be transferredas provided in this Section 10.2, *provided, however*,that such transfers remain subject to Section 8 and to the right of firstrefusal in Section 10.3:

 

(a)           Transfersto the Company.

 

(b)           Transferswith the written approval of the Committee.

 

(c)           Transfersby gift to “immediate family” as that term is defined in Rule 16a-1(e) underthe Exchange Act.

 

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(d)           Inthe event of the Participant’s death, transfers to the Participant’sbeneficiary, or in the absence of a validly designated beneficiary, transfersby will or the laws of descent and distribution.

 

(e)           Inthe event the Participant suffers a permanent disability, transfers by theParticipant’s duly authorized legal representative on behalf of theParticipant.

 

(f)            Transfersmade pursuant to Sections 13 or 14.

 

10.3         TheCompany shall have a right of first refusal, as set forth below, to purchasethe Shares before the Shares (or any interest in them) can be validlytransferred to any other person or entity.

 

(a)           Beforethere can be a valid sale or transfer of any Shares (or any interest in them)by any holder thereof, the holder shall first give notice in writing to theCompany, mailed or delivered in accordance with the provisions of Section 18.5,of his or her intention to sell or transfer such Shares (the “***Option Notice***”).  The Option Notice shall specify the identityof the proposed transferee, the number of Shares to be sold or transferred tothe transferee, the price per Share and the terms upon which such holderintends to make such sale or transfer. If the payment terms for the Shares described in the Option Noticediffer from delivery of cash or a check at closing, the Company shall have theoption, as set forth herein, of purchasing the Shares 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)           Subjectto the selling stockholder’s Retraction Right, during the 60-day periodcommencing upon receipt of the Option Notice by the Company (the “***Option Period***”), the Companyshall have an option to purchase any or all of the Shares specified in theOption Notice at the price offered therein (the “***Right of First Refusal***”).

 

(c)           Notmore than thirty (30) days after receipt of the Option Notice, the Companyshall give written notice to the stockholder desiring to sell or transferShares of the number of such Shares to be purchased (or, if no Shares are to bepurchased, stating such fact) by the Company 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 thePurchase Notice to the selling stockholder, but in no event later than theexpiration of the Option Period.  Thepurchase price shall be paid at the

 

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closing in cash,by check, by cancellation of money purchase indebtedness, or, if the paymentterms set forth in the Option Notice differ from payment in cash or by check atclosing, in accordance with the payment terms set forth in the Option Notice(or payment of the amount set forth in the Company’s Notice in cash, bycancellation of money purchase indebtedness, or by check).  The purchase price shall be paid againstsurrender by the selling stockholder of one or more stock certificatesevidencing the number of Shares specified in the Option Notice, free and clearof all security interests and liens, with duly endorsed stock powers.

 

(d)           Unlessall of the Shares referred to in the Option Notice are to be purchased asindicated in the Purchase Notice, the stockholder desiring to sell or transfermay dispose of any Shares referred to in the Option Notice that are not to bepurchased by the Company to the person or persons specified in the OptionNotice during a period of twenty (20) days commencing upon his or herreceipt of the Purchase Notice; *provided, however*,that he shall not sell or transfer such Shares (a) at a lower price or onterms more favorable to the Participant or transferee than those specified inthe Option Notice, and (b) to a person other than the person or personsspecified in the Option Notice; and provided further that such transfer isconsistent with the other provisions and limitations of the Plan and thisOption Agreement (including these Terms). If the transfer is not consummated within such twenty (20) dayperiod, the stockholder shall again offer such Shares to the Company pursuantto the terms of this Section 10.3 prior to any sale or transfer to thesame or any other person.

 

(e)           Notwithstandinganything to the contrary, the Company may assign any or all of its rights underthis Section 10.3 to one or more stockholders of the Company.

 

(f)            TheCompany’s Right of First Refusal pursuant to this Section 10.3 shallterminate to the extent it is not exercised prior to the Public Offering Dateor the consummation of a sale of all or substantially all of the assets orCommon Stock of the Company to a person who is not an affiliate of the Company.

 

**11.****       ****Put Right**.

 

11.1         Followingthe second anniversary of the Award Date, Participant shall have the right(the “***Put Right***”) torequire, upon notice to the Company, that the Company purchase some or all ofthe Shares (the “***PutShares***”) under the terms provided in this Section 11.

 

11.2         Participantmay exercise the Put Right no more than once per fiscal quarter by providingnotice (“***Put Notice***”)to the Company during the thirty (30) day period immediately following theconclusion of a fiscal quarter (the “***PutNotice Period***”).  The PutNotice shall specify the number of Shares for which the Participant seeks toexercise the Put Right and shall specify a closing date for the purchase whichshall be not less than thirty (30) days after the date of the Put Notice.

 

11.3         Withinfifteen (15) days after receipt of the Put Notice, the Company shallprovide notice (“***PriceNotice***”) to the Participant of the purchase price of the PutShares.

 

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The purchaseprice for the Put Shares shall be Fair Value (as defined in Section 11.7)of the shares on the date of the Put Notice, *provided,however*, that if the Fair Value is determined in accordance with subsection (d) ofSection 11.7, the Price Notice must contain only a statement to thateffect along with the name of the independent third party selected by theCompany to determine Fair Value.

 

11.4         Thenumber of Shares that the Company may be required to purchase during any PutNotice Period shall not exceed the lesser of (i) 0.5% of the number ofShares of 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 noevent shall the Company be required to purchase Shares unless, until and to theextent such purchase is permitted by the terms of the Company’s primary creditfacility and the Indenture relating to the Company’s 8.75% Senior Notesdue 2011, as amended and supplemented from time to time.  If (x) the Company has granted a PutRight to one or more employees or directors of or consultants to the Company orits subsidiaries and one or more of such Put Rights remain in effect, (y) morethan one Put Notice is given during a Put Notice Period and (z) thelimitations imposed by this Section 11.4 (other than subsection (i))on the ability of the Company to purchase Shares allow the Company to purchasesome, but not all Shares subject to such Put Notices, the Company shall pay themaximum amount it is permitted to pay hereunder to such persons pro rata inaccordance with the number of Put Shares designated by them in their respectivePut Notices.

 

11.5         Thepurchase price for the Put Shares shall be paid by the Company in the form of acheck or electronic transfer of immediately available funds on the date setforth in the Put Notice which shall be no earlier than sixty (60) daysafter the date of the Put Notice; *provided,however*, that if Fair Value is determined by an independent thirdparty pursuant to Section 11.7(d), the purchase price for the Put Sharesshall be net of one-half of the expenses of the independent third partyand the net purchase price shall be paid within thirty (30) days after theindependent third party provides its determination of Fair Value to boththe Participant and the Company.  Thepurchase price shall be paid against surrender by the Participant of one ormore stock certificates evidencing the number of Shares specified in the PutNotice, free and clear of all security interests and liens, with duly endorsedstock powers.  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’sPut Right shall terminate to the extent that it is not exercised prior to thefirst to occur of (i) the Public Offering Date, (ii) the consummationof a sale of all or substantially all of the assets or Common Stock of theCompany to a person who is not an affiliate of the Company or (iii) March 1,2015.

 

11.7         Forthe purpose of this Option Agreement, “***FairValue***” shall mean:

 

(a)           ifthe stock is listed or admitted to trade on a national securities exchange, theclosing price of the stock on the Composite Tape, as published in the WesternEdition of The Wall Street Journal, of the principal national securitiesexchange

 

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on which thestock is so listed or admitted to trade, on such date, or, if there is notrading of the stock on such date, then the closing price of the stock asquoted on such Composite Tape on the next preceding date on which there wastrading in such shares;

 

(b)           ifthe stock is not listed or admitted to trade on a national securities exchange,the last/closing price for the stock on such date, as furnished by the NationalAssociation of Securities Dealers, Inc. (“***NASD***”) through the NASDAQ National Market ReportingSystem or a similar organization if the NASD is no longer reporting suchinformation;

 

(c)           ifthe stock is not listed or admitted to trade on a national securities exchangeand is not reported on the National Market Reporting System, the mean betweenthe bid and asked price for the stock on such date, as furnished by the NASD ora similar organization; or

 

(d)           ifthe stock is not listed or admitted to trade on a national securities exchange,is not reported on the National Market Reporting System and if bid and askedprices for the stock are not furnished by the NASD or a similar organization,the value, as mutually agreed by the Company and the Participant within thirty(30) days after the date of the Put Notice, as applicable, or, in theabsence of such agreement, as determined by an independent third party selectedby the Participant and the Company, based on the trading values of a comparablegroup of public companies with appropriate discounts for the illiquidity andminority status of the Shares, *provided,however*, that the discounts for all such factors shall not exceed15% in the aggregate.  If the Company andthe Participant 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.

 

**12.****       ****No StockholderRights Following Exercise of a Repurchase or Put Right**. If the Participant ceases to be a director of the Company and holds Sharesas to which the Right of First Refusal or Put Right has been exercised, theParticipant shall be entitled to the value of such Shares in accordance withthe provisions of Section 10 or 11, as applicable, but (unless otherwiserequired by law) shall no longer be entitled to participation in the Company orother rights as a stockholder with respect to the Shares subject to therepurchase or put.  To the maximum extentpermitted by law, the Participant’s rights following the exercise of the Rightof First Refusal or Put Right shall, with respect to the repurchase or put andthe Shares covered thereby, be solely the rights that he has as a generalcreditor of the Company to receive payment of the amount specified in Section 10or 11, as applicable.

 

**13.****       ****Tag Along Right**. If the Marquez Family or any constituent thereof (the “***Selling Party***”) proposes tosell, to a Third Party Purchaser (as defined below) in one transaction orin a series of related transactions (a “***Tag AlongSale***”) either (i) more than 50% of the Marquez Family’sequity interest in the Company or (ii) controlof the Company, then the Participant shall have the right (the “***Tag Along Right***”) toparticipate in such Tag Along Sale on the following terms:

 

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13.1         TheSelling Party shall give the Participant not less than twenty (20) days’written notice (a “***SaleNotice***”) of his intention, describing the price offered, allother material terms and conditions of the Tag Along Sale and, if the considerationpayable pursuant to the Tag Along Sale consists in whole or in part ofconsideration other than cash, such information relating to such otherconsideration as the Participant may reasonably request.

 

13.2         Inconnection with any Tag Along Sale, the Participant shall have the right, inhis sole discretion, to sell, at a price equal to the average consideration pershare received by the Selling Party for all shares of Common Stock sold by theSelling Party in the Tag Along Sale, and otherwise on the same terms andconditions as the Selling Party, the lesser of either (i) all of theShares then held by him or (ii) a portion of such Shares equal to afraction, the numerator of which is the total number of shares of Common Stockto be purchased by the Third Party Purchaser, and the denominator of whichis the number of shares of Common Stock owned by persons other than theParticipant.  Any fractional shares willbe rounded to the nearest wholeshare.

 

13.3         TheParticipant must exercise his tag-along right by giving written notice to theSelling Party within ten (10) days after the delivery of a SaleNotice, specifying the number of Shares that the Participant desires to includein the Tag Along Sale.  At the closingfor the Tag Along Sale, against payment of the consideration, the Participantwill deliver to the Third Party Purchaser the certificate or certificatesrepresenting such number of Shares free and clear of security interests andliens and duly endorsed, together with all other documents necessary to effectsuch Tag Along Sale.

 

13.4         Thereshall be no liability on the part of the Selling Party to the Participant ifthe proposed third party sale is not consummated for any reason.

 

13.5         Forthe purpose of this Agreement, a “***Third PartyPurchaser***” means any person that is not a stockholder or anaffiliate thereof that purchases or agrees to purchase the shares of CommonStock in connection with a Tag Along Sale or Compelled Sale (as defined in Section 14).

 

13.6         Participant’sTag Along Right shall terminate to the extent that it is not exercised prior tothe Public Offering Date.

 

**14.****       ****Right to Compel Sale**.

 

14.1         Ifat any time the Marquez Family proposes to sell all, or a majority of itsshares of Common Stock to a Third Party Purchaser, the Marquez Family shallhave the right (the “***CompelledSale Right***”), exercisable as set forth below, to compel theParticipant to sell to the Third Party Purchaser (a “***Compelled Sale***”) all, but not less than all, of theshares of such Common Stock (to the extent acquired upon exercise of theOption), if any, then held by the Participant. In connection with any Compelled Sale, the Participant will receive aprice equal to the average consideration per share received by the Marquez Familyfor all shares of Common Stock sold by the Marquez Family in the CompelledSale.

 

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14.2         Inthe event the Marquez Family elects to exercise its right to cause a CompelledSale, it will deliver written notice (a “***CompelledSale Notice***”) to the Participant and the Company, setting forththe consideration and describing the other material terms and conditions of theCompelled Sale, including the proposed closing date, which shall be not lessthan twenty (20) days from the date the Compelled Sale Notice isdelivered.  At the closing for theCompelled 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 Participant, dulyendorsed and free and clear of security interests and liens, together with allother documents necessary to effect such Compelled Sale.

 

14.3         Thereshall be no liability on the part of the Marquez Family to the Participant ifany proposed Compelled Sale is not consummated for any reason.

 

14.4         TheCompelled Sale Right shall terminate to the extent that it is not exercisedprior to the Public Offering Date.

 

**15.****       ****Bonus Payment**.

 

15.1         Inthe event the Company declares and pays a cash dividend to its commonstockholders, the Participant shall be entitled to receive a cash payment (the “***Dividend Payment***”) from theCompany equal to the product of (i) the per share amount of the dividendpayable to holders of the Company’s Common Stock, and (ii) the number ofshares of Common Stock issuable upon exercise of the Participant’s Options,whether vested or unvested.

 

15.2         TheCompany shall pay the Dividend Payment to the Participant within thirty(30) days after the date on which the Company pays the cash dividend onits Common Stock.

 

15.3         Allpayments made pursuant to this Section 15 shall be net of any withholdingor other taxes applicable to such payment. The Participant’s right to receive the Dividend Payment shall terminateon the Public Offering Date.

 

**16.****       ****Plan**. The Option and all rights of the Participant under this Option Agreementare subject 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.

 

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**17.****       ****Satisfaction ofAll Rights to Equity**.  The Option is in complete satisfaction of anyand all rights that the Participant may have (under consulting or other writtenor 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**.  This Option Agreement (including these Termsand together with the form of Exercise Agreement attached hereto) and the Plantogether constitute the entire agreement and supersede all prior understandingsand agreements, written or oral, of the parties hereto with respect to the subjectmatter hereof.  The Plan, this OptionAgreement and the Exercise Agreement may be amended pursuant to Section 4.5of the Plan.  Such amendment must be inwriting and signed by the Company.  TheCompany may, however, unilaterally waive any provision of the Option Agreementin writing 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 other provisionhereof.

 

18.2         **Delaware Law**.  This Option Agreement and the ExerciseAgreement shall be governed by and construed and enforced in accordance withthe laws of the State of Delaware without regard to conflict of law principlesthereunder.

 

18.3         **Limited Rights**.  The Participant has no rights as astockholder of the Company with respect to the Option as set forth in Section 4.6of the Plan.  The Option does not placeany limit on the corporate authority of the Company as set forth in Section 4.12of the Plan.

 

18.4         **Arbitration**.  Any dispute, controversy or claim arising outof or relating to this Option Agreement (including these Terms), the Plan,and/or the Exercise Agreement, their enforcement or interpretation, or becauseof an alleged breach, default, or misrepresentation in connection with any oftheir provisions, will be determined exclusively by confidential, final andbinding arbitration in Denver, Colorado, pursuant to the Colorado ArbitrationAct.  The arbitration shall be before asingle neutral arbitrator mutually agreed upon by the parties or, if theparties are unable to agree upon an arbitrator, the arbitrator shall beselected 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

 

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each expresslywaive any rights to have such matters heard or tried before a judge or jury inanother tribunal.  The arbitrator’s awardin any 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, and to theParticipant at the address reflected or last reflected on the Company’s payrollrecords, 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 Intentionally Left Blank)*

 

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EXHIBIT A

 

**VENOCO, INC.2000 STOCK INCENTIVE PLANOPTION 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 ofWarrant Exercise Price**.  The Purchaser intends that payment of theExercise Price shall be made as (check applicable line):

 

                    acash exercise with respectto                    sharesof Common Stock; and/or

 

                    aCashless Exercise with respectto                    sharesof Common Stock.

 

**2.****            ****Purchase Price**. In the event the Purchaser has elected a cash exercise with respect tosome or all of the Shares to be issued pursuant hereto, the Purchaser shall paythe exercise price of $**[         ]**per share, for an aggregate exercise amount of $**[         ]** tothe Company in accordance with the terms of the Option Agreement.

 

**3.****            ****Delivery**. The Company shall deliver a certificate representing the Shares andregistered in the name of the Purchaser to:

 

**4.****            ****InvestmentRepresentations**.  The Purchaser acknowledges that the sale ofthe Shares by the Purchaser is restricted by SEC Rule 701.  The Purchaser hereby affirms as made as ofthe date hereof the representations in Section 7 of the “Terms andConditions of Nonqualified Stock Option” (which are attached to and a part ofthe Option Agreement, the “**Terms**”)and such representations are incorporated herein by this reference.  The Purchaser represents that he has no needfor liquidity in this investment, has the ability to bear the economic risk ofthis investment, and can afford a complete loss of the purchase price for theShares.  The Purchaser acknowledgesreceipt of the Company’s condensed consolidated financial information.  The Purchaser also understands andacknowledges (i) that the certificates representing the Shares will belegended as provided for in Section 4.3.3 of the Plan, and (ii) thatthe Company has no obligation to register the Shares or file any registrationstatement under federal or state securities laws.

 

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**5.****            ****Restrictions onthe Shares**.  The Purchaser represents that he has read thePlan and the Option Agreement and acknowledges that the Shares are and shallremain subject to various restrictions, including but not limited to,restrictions on transfer, a right of first refusal in favor of the Company, acall right and a compelled sale right in favor of the Company, restrictions ontransfer under state and federal securities laws and a lock-up provision, ineach case as set forth in the Plan or the Option Agreement.  As a condition to any permitted transfer ofthe Shares, the Company may require the transferee to execute a writtenagreement, in a form acceptable to the Committee, that the transfereeacknowledges and agrees to the foregoing terms and restrictions imposed on theShares.

 

**6.****            ****Plan and OptionAgreement**.  The Purchaser acknowledges that all ofhis/her rights are subject to, and the Purchaser agrees to be bound by, all ofthe terms and conditions of the Plan and the Option Agreement (including theTerms), both of which are incorporated herein by this reference.  If a conflict or inconsistency between theterms and conditions of this Exercise Agreement and of the Plan and OptionAgreement shall arise, the terms of the Plan and/or Option Agreement shallgovern.  The Purchaser acknowledges receiptof a copy of all documents referenced herein (including the Terms and adisclosure statement) and acknowledges reading and understanding thesedocuments and having an opportunity to ask any questions that he may have hadabout them.  Any controversy or claimarising out of or relating to this Exercise Agreement shall be submitted toarbitration in accordance with Section 18.4 of the Terms, and Delaware lawshall apply as provided in Section 18.2 of the Terms.

 

**7.****            ****Entire Agreement**. This Exercise Agreement, the Option Agreement (including the Terms), andthe Plan together constitute the entire agreement and supersede all priorunderstandings and agreements, written or oral, of the parties hereto withrespect to the subject matter hereof. The Plan, the Option Agreement and this Exercise Agreement may beamended pursuant to Section 4.5 of the Plan.  Such amendment must be in writing and signedby the Company.  The Company may,however, unilaterally waive any provision hereof or 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 wavier of any otherprovision hereof.

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

 

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