Exhibit
10.3


 


October 3, 2003


 


Patricia McKay


2301 Northwest 23rd
Way


Boca Raton, FL 
33431


 


Dear Pat:


 


I am pleased to offer you
the position of Chief Financial Officer at Restoration Hardware, Inc. (the
Company). I’m confident that you will find Restoration to be an exciting and
challenging environment in which to work. This letter will confirm the most
important details of our offer to you.


 


	
  Title

  	
   

  	
  Chief Financial Officer reporting to the Chief Executive Officer.

  
	
   

  	
   

  	
   

  
	
  Salary

  	
   

  	
  $350,000 per
  year, paid bi-weekly. Salary to increase to $375,000 per year, effective
  June 2004, then $400,000 per year, effective June 2005.

  
	
   

  	
   

  	
   

  
	
  Bonus

  	
   

  	
  You will be
  guaranteed a minimum bonus of $50,000 for Fiscal 2003, and $125,000 for
  Fiscal 2004. The bonus will be payable when the Company distributes its
  annual incentive bonuses.

  
	
   

  	
   

  	
   

  
	
  Management Incentive Program

  	
   

  	
  You will be
  eligible to participate in the Management Incentive Program. Your eligibility
  range will be up to 50% of your base pay. 
  Your guaranteed bonus amounts for Fiscal 2003 and Fiscal 2004 referred
  to above will be credited against your actual bonus for such years.

  
	
   

  	
   

  	
   

  
	
  Stock Option Grant

  	
   

  	
  250,000 stock options
  at the fair market value of our common stock on the grant date thereof, to
  have a grant date concurrent with your first day of employment with the
  Company.  Stock options will vest at
  25% per year, over a four-year period, and have a ten-year term, with other
  terms being in accordance with the Company’s 1998 Stock Incentive Plan, as
  amended and restated October 9, 2002. 
  Your initial option grant will be an incentive stock option to the
  maximum extent permitted under Section 422 of the Internal Revenue Code.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  In the
  event your employment with the Company is terminated for any reason other
  than death, disability or for Cause, you will have three months following
  your termination of employment to exercise the vested portion of your initial
  option grant.  In the event your
  employment with the Company is terminated for Cause, your initial option
  grant will terminate concurrently with your termination of employment.  In the event your employment with the
  Company is terminated due to your death or disability, you will have twelve
  months following your termination of employment to exercise the vested
  portion of your initial option grant. 
  In no event may your initial option grant be exercised after the
  expiration of its ten-year term.

  



 

















 


	
  Stock Option Grant (con’t)

  	
   

  	
  In addition, the
  following will be granted:

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  •     50,000
  stock options in June, 2004, at the fair market value of our common stock on
  the grant date.  Stock options
  will vest at 25% per year, over a four-year period, and have a ten-year term,
  with other terms being in accordance with the Company’s 1998 Stock Incentive
  Plan, as amended and restated October 9, 2002.  This option grant will be an incentive stock option to the
  maximum extent permitted under Section 422 of the Internal Revenue Code.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  •     Beginning in 2005, you
  will be eligible to receive stock option grants on an annual basis in accordance
  with the Company’s 1998 Stock Incentive Plan, as amended and restated
  October 9, 2002. The number of options will be determined by your
  performance, but the target will be in the range of 20,000 to 40,000 stock
  options.

  
	
   

  	
   

  	
   

  
	
  Severance

  	
   

  	
  Should you be terminated
  Not for Cause (as defined in Attachment A) by the Company, other than
  in connection with a Change of Control (as defined in Attachment B), within the
  first two (2) years of your employment with the Company, you will receive
  salary continuation for a period of two (2) years from your termination date
  and a pro rated bonus based on the greater of (i) your prior year’s
  bonus payment or (ii) your then current year’s incentive target bonus
  amount (the “Bonus Amount”), and you also will receive full vesting of your
  initial stock option grant.  Should
  you be terminated Not for Cause by the Company, other than in connection with
  a Change of Control, after your second full year of employment with the
  Company, you will receive salary continuation for a period of one (1) year
  from your termination date and a pro rated bonus based on the Bonus Amount,
  and you also will receive full vesting of your initial stock option
  grant.  In the event that you resign
  or are terminated by the Company for Cause (as defined in Attachment
  A), you will not be eligible to receive any severance pay or any
  accelerated option vesting.  Your
  entitlement to any severance payments and acceleration of your stock option
  grant will be contingent upon your execution of the Company’s written release
  and expiration of any applicable revocation period to the Company’s written
  release. See
  Attachment A.)

  
	
   

  	
   

  	
   

  
	
  Change of Control

  	
   

  	
  Should there be
  a Change of Control of the Company (See Attachment B) and you, thereafter,
  are subject to an Involuntary Termination (as defined in Attachment B) by the
  Company, you will receive, in lieu of any other severance pursuant to this
  offer letter, a pro rated bonus based on the Bonus Amount and salary
  continuation for a period of two (2) years from your termination date at the
  annual rate of your base salary plus the Bonus Amount; plus a possible
  gross-up payment as set forth in Attachment B.  In addition, your initial stock option grant will vest in full.

  
	
   

  	
   

  	
   

  
	
  Non-Compete Provision

  	
   

  	
  You acknowledge and agree that in your role as Chief Financial
  Officer you shall acquire confidential and proprietary information belonging
  to the Company.  To preserve and
  protect this information and the assets of the Company, and in consideration
  of the severance and benefits provided to you under this offer letter,  you agree not to work in a capacity that
  would compete directly with the Company, or solicit any employees or
  customers of the Company, for a period of one (1) year following the effective date of your resignation from
  or termination by the Company. (See Attachment C.)  In the event that you breach this provision all
  severance and other benefits shall cease.

  



 


2

















 


	
  Car Allowance

  	
   

  	
  You will receive
  a car allowance of $500.00 per month..

  
	
   

  	
   

  	
   

  
	
  401(K) Plan

  	
   

  	
  You will be
  eligible to participate in the Company’s 401(K) Plan on the first enrollment
  dates following your date of hire.

  
	
   

  	
   

  	
   

  
	
  Medical Benefits

  	
   

  	
  You will be
  eligible to participate in the Company’s healthcare program per the Company’s
  guidelines.

  
	
   

  	
   

  	
   

  
	
  Vacation

  	
   

  	
  15 days (3
  weeks) per year.

  
	
   

  	
   

  	
   

  
	
  Employee Discount

  	
   

  	
  You will be
  eligible for a 40% associate discount on Restoration merchandise.

  
	
   

  	
   

  	
   

  
	
  Miscellaneous Benefits:

  	
   

  	
  You will be
  eligible for other benefits, if any, to the extent set forth in the
  attachments hereto.

  



 


The
language that follows reflects our standard and legally required offer letter
language. We don’t mean for it to come across as impersonal, but rather, as
sound and necessary information for you to know from the outset of your working
relationship with us. The relationship between you and the Company is called
“at-will employment.” This means that employment with the Company is for no
specific period of time. As a result, either you or the Company is free to terminate
your employment relationship at any time for any reason, with or without Cause.
This is the full and complete agreement between us on this term. Although your
job duties, title, compensation, benefits, or the Company’s policies, practices
and procedures may change from time to time, the “at-will” nature of your
employment may only be changed  in an
express writing signed by you and the Chief Executive Officer of the Company.


 


Finally,
your employment is contingent on you executing a Proprietary Information and
Inventions Agreement and providing the Company with legal proof of your
identity and authorization to work in the United States at time of hire.


 


I am enclosing two copies of this
letter. Please sign and return one copy to me on your first day of work and
keep the other copy for your files.


 


Pat, we are very excited about you joining the “Resto”
team and look forward to your contributions to the growth and success of the
Company.


 


	
  Sincerely,

  
	
   

  
	
  /s/ Gary
  Friedman

  	
   

  
	
   

  
	
  Gary Friedman

  
	
  Chief Executive Officer

  



 


Þ  I understand and agree to the terms of this offer of
employment:


 


 


	
  /s/ Patricia
  McKay

  	
   

  	
  10/6/03

  	
   

  
	
   

  	
   

  
	
  Pat McKay

  	
  Date

  



 


cc:                                 Associate’s
File


 


3

















 


Attachment A


 


Severance.  In the event that you are terminated Not for
Cause by the Company within the first two (2) years of your employment with the
Company, other than in connection with a Change of Control (as defined in Attachment B),
you will be eligible to receive severance pay in the form of salary
continuation for a period of twenty-four (24) months from your termination date
with the Company at an annual rate equal to your base salary and a pro rated
bonus based on the greater of (i) your prior year’s bonus payment or
(ii) your then current year’s incentive target bonus amount, less
applicable deductions and withholdings, payable in regular periodic payments in
accordance with the Company’s policy. 
(Insert D1 of Attachment D.).  You also will receive full vesting of your initial stock option
grant only.  Should you be terminated
Not for Cause by the Company after the second full year of your employment with
the Company, other than in connection with a Change of Control (as defined in Attachment B),
you will be eligible to receive severance pay in the form of salary
continuation for a period of twelve (12) months from your termination date with
the Company in an aggregate amount equal to your base salary and a pro rated
bonus based on the greater of (i) your prior year’s bonus payment or (ii) your
then current year’s incentive target bonus amount, less applicable deductions
and withholdings, payable in regular periodic payments in accordance with the
Company’s policy.  (Insert D1 of Attachment D.).
You also will receive full vesting of your initial stock option grant
only.  You acknowledge that except as
expressly provided in this offer letter, you will not receive any additional
compensation, severance or benefits after your termination of employment. You
agree and acknowledge that your right to receive the severance payments shall
be conditioned upon your execution of a release agreement with the Company
containing standard terms and conditions used by the Company at the time for a
general release by a senior officer of all claims arising from the officer’s
relationship with the Company.  In the
event that the Company terminates your employment for Cause, the Company shall
pay you all compensation due and owing through the last day actually worked and
thereafter the obligations of the Company under this offer letter shall cease.


 


Definition of Cause and Not for Cause.  The Company may terminate your employment
for “Cause”.  A termination of
employment is for “Cause” if you have been convicted of a felony involving
fraud or dishonesty, you die or suffer from a Disability (as defined below)
during your continued employment with the Company or the termination is
evidenced by a resolution adopted in good faith by a majority of the Board of
Directors of the Company to the effect that you (i) intentionally and
continually failed substantially to perform your reasonably assigned duties
with the Company (other than a failure resulting from your assignment of duties
that would constitute an Involuntary Termination (as defined in Attachment B)
following a Change of Control (as defined in Attachment B)), which
failure continued for a period of at least thirty (30) days after a written
notice of demand for substantial performance has been delivered to you
specifying the manner in which you have failed substantially to perform, or
(ii) intentionally engaged in conduct which is demonstrably and materially
injurious to the Company; provided, that no termination of your employment
shall be for Cause as set forth in clause (ii) above until there shall have
been delivered to you a copy of a written notice setting forth that you were
guilty of the conduct set forth in clause (ii) and specifying the particulars
thereof in detail. No act, nor failure to act, on your part shall be considered
“intentional” unless you have acted, or failed to act, with a lack of good
faith and with a lack of reasonable belief that your action or failure to act
was in the best interest of the Company.


 


For purposes of this
offer letter, the term “Not for Cause” shall mean termination of your employment
by the Company for reasons other than for “Cause.”


 


Termination by Employee.  In the event that you elect to terminate
your employment for any reason other than in connection with an Involuntary
Termination following a Change of Control, the Company shall pay you all
compensation due and owing through the last day actually worked and thereafter
the obligations of the Company under this offer letter shall cease.


 


Disability.  “Disability” shall mean that you are unable
to carry out the responsibilities and functions of the position held by you by
reason of any physical or mental impairment for more than 120 days in any
twelve-month period.  If you suffer from
a Disability, then, to the extent permitted by law, the Company may terminate
your employment.  The Company shall pay
to you all compensation to which you are entitled up through the date of
termination, and thereafter all obligations of the Company under this offer
letter shall cease.  Nothing in this
offer letter shall affect your rights under any disability plan in which you
are a participant.


 


4

















 


Attachment B


 


Definitions:


 


“Involuntary Termination”
shall mean the termination of your employment which occurs by reason of:


 


(i)                   your
involuntary dismissal or discharge by the Company Not for Cause, or


 


(ii)                your
voluntary resignation following


 


(A)
a change in your position with the Company which materially reduces your duties
and responsibilities or the level of management to which you report, (B) a reduction
in your level of compensation (including base salary, fringe benefits and
target bonus under any corporate-performance based bonus or incentive
programs), or (C) a relocation of your place of employment by more than fifty
(50) miles, provided and only if such change, reduction or relocation is
effected by the Company without your consent.


 


“Change
of Control” shall mean any of the following:


 


(a)
An acquisition (other than directly from the Company) of any voting securities
of the Company (the “Voting Securities”) by any Person (as the term “person” is
used for purposes of Section 13 or 14 of the Securities Exchange Act of
1934, as amended (the “1934 Act”)) immediately after which such Person has
Beneficial Ownership (as the term “beneficial ownership” is defined under Rule
13d-3 promulgated under the 1934 Act) of fifty percent (50%) or more of the
combined voting power of the Company’s then outstanding Voting Securities;
provided, that in determining whether a Change of Control has occurred, Voting Securities
which are acquired in a Non-Control Acquisition (as hereinafter defined) shall
not constitute an acquisition which would cause a Change of Control. A
“Non-Control Acquisition” shall mean an acquisition by (i) an employee benefit
plan (or a trust forming a part thereof) maintained by (1) the Company or (2)
any corporation or other Person of which a majority of its voting power or its
equity securities or equity interest is owned directly or indirectly by the
Company (a “Subsidiary”), (ii) the Company or any Subsidiary, or (iii) any
Person in connection with a Non-Control Transaction (as hereinafter defined);


 


(b)
The individuals who, as of date this offer letter, are members of the Board of
Directors of the Company (the “Incumbent Board”), cease for any reason to
constitute at least a majority of the Board of Directors of the Company;
provided, that if the appointment, election or nomination for election by the
Company’s stockholders of any new director was approved by a vote of at least
two-thirds of the Incumbent Board, such new director shall, for purposes of
this offer letter, be considered a member of the Incumbent Board; and provided,
further, that no individual shall be considered a member of the Incumbent Board
if such individual initially assumed office as a result of either an actual or
threatened “Election Contest” (as described in Rule 14a-11 promulgated under
the 1934 Act) or other actual or threatened solicitation of proxies or consents
by or on behalf of a Person other than the Board of Directors of the Company (a
“Proxy Contest”) including by reason of any agreement intended to avoid or
settle any Election Contest or Proxy Contest;


 


(c)
A merger, consolidation or reorganization involving the Company, unless such
merger, consolidation or reorganization satisfies the conditions set forth in
clauses (1) and (2) below (any transaction(s) meeting the requirements of
clauses (1) and (2) below being referred to herein as “Non-Control
Transactions”):


 


5

















 


(1)
the stockholders of the Company immediately before such merger, consolidation
or reorganization own, directly or indirectly, immediately following such
merger, consolidation or reorganization, at least fifty percent (50%) of the
combined voting power of the outstanding voting securities of the corporation
resulting from such merger, consolidation or reorganization (the “Surviving
Corporation”) in substantially the same proportion as their ownership of the
Voting Securities immediately before such merger, consolidation or
reorganization; and


 


(2)
the individuals who were members of the Incumbent Board immediately prior to
the execution of the agreement providing for such merger, consolidation or
reorganization constitute at least a majority of the members of the board of
directors of the Surviving Corporation;


 


(d)
A complete liquidation or dissolution of the Company; or


 


(e)
An agreement for the sale or other disposition of all or substantially all of
the assets of the Company to any Person (other than a transfer to a
Subsidiary); and


 


(f)
Any other event that at least two-thirds of the Incumbent Board in its sole
discretion shall determine constitutes a Change of Control.


 


Notwithstanding
the foregoing, a Change of Control shall not be deemed to occur solely because
any Person (the “Subject Person”) acquired Beneficial Ownership of more than
the permitted amount of the outstanding Voting Securities as a result of the
acquisition of Voting Securities by the Company which, by reducing the number
of Voting Securities outstanding, increases the proportional number of shares
Beneficially Owned by the Subject Person; provided, that if a Change of Control
would occur (but for the operation of this sentence) as a result of the
acquisition of Voting Securities by the Company, and after such share
acquisition by the Company the Subject Person becomes the Beneficial Owner of
any additional voting Securities which increases the percentage of the then
outstanding Voting Securities Beneficially Owned by the Subject Person, then a
Change of Control shall occur; provided further that no Change of Control shall
be deemed to have occurred under (a) or (c) above merely because individuals
and entities who, individually, as of the date of the offer letter have
Beneficial Ownership of at least 5% of the Voting Securities have, immediately
after the transaction described in (a) or (c) above, Beneficial Ownership, in
the aggregate, of more than 50% of the Voting Securities of the Company or
successor or parent thereof if both (i) no one such individual or entity has,
immediately after such a transaction, Beneficial Ownership of more than 50% and
(ii) the transaction does not result in the Company or successor or parent
thereof becoming a private company.


 


Notwithstanding
anything contained in this offer letter to the contrary, if your employment is
terminated prior to a Change of Control and the Board of Directors of the
Company determines that such termination (i) was at the request of a third
party who has indicated an intention or taken steps reasonably calculated to
effect a Change of Control and who subsequently effectuates a Change of Control
or (ii) otherwise occurred in connection with, or in anticipation of, a Change
of Control which actually occurs, then, for all purposes of this offer letter,
the date of a Change of Control with respect to you shall mean the date
immediately prior to the date of such termination of your employment.


 


6

















 


Excise Tax Payments.


 


(1) In the event that any
payment or benefit (within the meaning of Section 280G(b)(2) of the
Internal Revenue Code of 1986, as amended (the “Code”)) to you or for your
benefit, paid or payable or distributed or distributable pursuant to the terms
of this letter or otherwise in connection with, or arising out of, your
employment with the Company or a Change of Control (a “Payment” or “Payments”),
would be subject to the excise tax imposed by Code Section 4999, or any
interest or penalties are incurred by you with respect to such excise tax (such
excise tax, together with any such interest and penalties, are hereinafter
collectively referred to as the “Excise Tax”), then you will be entitled to
receive an additional payment (a “Gross-Up Payment”) in an amount such that after
payment by you of all taxes (including any interest or penalties (other than
interest and penalties imposed by reason of your failure to file timely a tax
return or pay taxes shown due on your return) imposed with respect to such
taxes and the Excise Tax), including any Excise Tax imposed upon the Gross-Up
Payment, you retain an amount of the Gross-Up Payment equal to the Excise Tax
imposed upon the Payments.


 


(2) An initial determination
as to whether a Gross-Up Payment is required pursuant to this letter and the
amount of such Gross-Up Payment shall be made by the Company. The Company shall
provide its determination (the “Determination”), together with detailed
supporting calculations and documentation, to you within fifteen (15) days of
the termination date, if applicable, or such other time as requested by you
(provided you reasonably believe that any of the Payments may be subject to the
Excise Tax). Upon your request, the Company shall furnish you, at the Company’s
expense, with an opinion reasonably acceptable to you from a nationally
recognized certified public accounting firm (or an accounting firm of
equivalent stature reasonably acceptable to you) that there is a reasonable
basis for the Determination. Any Gross-Up Payment determined pursuant to this
Section 2 shall be paid by the Company to you within five (5) days of
receipt of the Determination.


 


(3) As a result of the
uncertainty in the application of Sections 4999 and 280G of the Code, it is
possible that a Gross-Up Payment (or a portion thereof) will be paid which
should not have been paid (an “Excess Payment”) or a Gross-Up Payment (or a
portion thereof) which should have been paid will not have been paid (an
“Underpayment”).


 


(a) An Underpayment shall be
deemed to have occurred (i) upon notice (formal or informal) to you from any
governmental taxing authority that your tax liability (whether in respect of
your current taxable year or in respect of any prior taxable year) may be
increased by reason of the imposition of the Excise Tax on a Payment or
Payments with respect to which the Company has failed to make a sufficient
Gross-Up Payment, (ii) upon a determination by a court, or (iii) by reason of
determination by the Company (which shall include the position taken by the
Company, together with its consolidated group, on its federal income tax
return). If an Underpayment occurs, you shall promptly notify the Company and
the Company shall promptly, but in any event at least five (5) days prior to
the date on which the applicable government taxing authority has requested
payment, pay to you an additional Gross-Up Payment equal to the amount of the
Underpayment plus any interest and penalties (other than interest and penalties
imposed by reason of your failure to file timely a tax return or pay taxes
shown due on your return) imposed on the Underpayment.


 


7

















 


(b) An Excess Payment shall
be deemed to have occurred upon a Final Determination (as hereinafter defined)
that the Excise Tax shall not be imposed upon a Payment or Payments (or portion
thereof) with respect to which you had previously received a Gross-Up Payment.
A “Final Determination” shall be deemed to have occurred when you have received
from the applicable government taxing authority a refund of taxes or other
reduction in your tax liability by reason of the Excess Payment and upon either
(i) the date a determination is made by, or an agreement is entered into with,
the applicable governmental taxing authority which finally and conclusively
binds you and such taxing authority, or in the event that a claim is brought
before a court of competent jurisdiction, the date upon which a final
determination has been made by such court and either all appeals have been
taken and finally resolved or the time for all appeals has expired or (ii) the
statute of limitations with respect to your applicable tax return has
expired.  If an Excess Payment is
determined to have been made, you shall promptly pay to the Company the amount
of such refund (together with any interest paid or credited thereon after taxes
applicable thereto).


 


(4) Notwithstanding anything
contained in this letter to the contrary, in the event that, according to the
Determination, an Excise Tax will be imposed on any Payment or Payments, the
Company shall pay to the applicable government taxing authorities, as Excise
Tax withholding, the amount of the Excise Tax that the Company has actually
withheld from the Payment or Payments.


 


8

















 


Attachment C


 


Restriction on Competition.  You acknowledge and agree that in your role
as Chief Financial Officer you shall acquire confidential and proprietary
information belonging to the Company. 
To preserve and protect this information and the assets of the Company,
including the goodwill and customers of the Company of which you will have an
interest in your role as an employee and officer of the Company, or its
subsidiaries, and to preserve and protect the goodwill and business interests
of the Company going forward, and in consideration of the severance and
benefits provided to you under the offer letter, you agree that, for a period
of one (1) year from your   termination of employment for any reason (the “Restricted
Period”), you will not directly or indirectly engage in, or have any ownership
interest in, or participate in the financing operation, management or control
of, any person, firm, corporation or business that engages in the Restricted
Business of Restoration Hardware, Inc. 
“Restricted Business of Restoration Hardware, Inc.” is defined as Insert
D2 of Attachment
D.


 


Restrictions on Solicitation after
Termination.  In
consideration of the severance and benefits provided to you under the offer
letter, you agree that, during the Restricted Period, you shall not, without
the prior written consent of the Company, directly or indirectly, including,
without limitation, as a sole proprietor, member of a partnership, stockholder
or investor, officer or director of a corporation, or as an employee, associate,
consultant, independent contractor or agent of any person, partnership,
corporation or other business organization or entity other than the Company (i)
solicit or endeavor to entice away from the Company any person or entity who
is, or during the then most recent 8-month period was, employed by, or had
served as an agent or key consultant of the Company, or (ii) solicit or
endeavor to entice away from the Company any person or entity who is, or was
within the then most recent 8-month period, a customer of the Company; (iii)
attempt to solicit any business that is related to the business of the Company
or any business that is competitive with the Company.  Furthermore, during the Restricted Period, you shall not, for yourself
or for any other entity, hire or employ any person who is, or during the then
most recent 8-month period was, employed by, or had served as an agent or key
consultant of, the Company.


 


9

















 


Attachment D


 


D1. Medical
Benefits As Part Of Severance.  You shall be entitled to
continue medical benefit coverage for yourself and your eligible dependents
until the later of the date that you become entitled to medical benefits from
another employer or the end of the period of base salary continuation, subject
to your payment of applicable premiums, if any, at the same rate that would
have applied had you remained an officer of the Company.


 


D2.
Definition of “Restricted Business of Restoration Hardware, Inc.” 
“Restricted Business of Restoration Hardware, Inc.” shall mean (a) a
retail company, including without limitation, a subsidiary or business unit of
such company, where an aggregate of 25% or more of its revenue (including
revenue of any subsidiary or business unit) is derived from the home furnishings
business, including without limitation, lighting, floor covering, furniture,
hardware and tools, or hard goods business or (b) a manufacturer, supplier or
other vendor that has a material vendor relationship with the Company.


 


10