Document:

Exhibit 10.3

 

ARYx Therapeutics

 

2001 EQUITY INCENTIVE PLAN

 

Adopted May 21, 2001

Approved By Shareholders on May 15, 2002

Amendment approved by the Board on May 16, 2002

Amendment approved by the Shareholders on June 6,
2002

Amendment approved by the Board on March 24, 2004

Amendment approved by the Shareholders on May 26,
2004

Amendment approved by the Board on September 22,
2004

Amendment approved by the Shareholders on January
25, 2005

Amendment approved by the Board on April 19, 2006

Amendment approved by the Shareholders on  April 6, 2007

Amendment approved by the Board on February 15,
2007

Amendment approved by the Shareholders on  April 6, 2007

 

Termination
Date:  May 21, 2011

1.             PURPOSES.

(a)           Eligible Stock Award Recipients. 
The persons eligible to receive Stock Awards are the Employees,
Directors and Consultants of the Company and its Affiliates.

(b)           Available Stock Awards. 
The purpose of the Plan is to provide a means by which eligible
recipients of Stock Awards may be given an opportunity to benefit from
increases in value of the Common Stock through the granting of the following
Stock Awards:  (i) Incentive Stock
Options, (ii) Nonstatutory Stock Options, (iii) stock bonuses and (iv) rights
to acquire restricted stock.

(c)           General Purpose.  The Company, by means of the Plan, seeks to
retain the services of the group of persons eligible to receive Stock Awards,
to secure and retain the services of new members of this group and to provide
incentives for such persons to exert maximum efforts for the success of the
Company and its Affiliates.

2.             DEFINITIONS.

(a)           “Affiliate” means any parent corporation or
subsidiary corporation of the Company, whether now or hereafter existing, as
those terms are defined in Sections 424(e) and (f), respectively, of the Code.

(b)           “Board” means the Board of Directors of the
Company.

(c)           “Code” means the Internal Revenue Code of 1986,
as amended.

(d)           “Committee” means a committee of one or more members
of the Board appointed by the Board in accordance with subsection 3(c).

(e)           “Common Stock” means the common stock of the Company.

 

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(f)            “Company” means ARYx Therapeutics, a California
corporation.

(g)           “Consultant” means any person, including an advisor,
(i) engaged by the Company or an Affiliate to render consulting or advisory
services and who is compensated for such services or (ii) who is a member of
the Board of Directors of an Affiliate. 
However, the term “Consultant”
shall not include either Directors who are not compensated by the Company for
their services as Directors or Directors who are merely paid a director’s fee
by the Company for their services as Directors.

(h)           “Continuous Service” means that the Participant’s service
with the Company or an Affiliate, whether as an Employee, Director or
Consultant, is not interrupted or terminated. 
The Participant’s Continuous Service shall not be deemed to have
terminated merely because of a change in the capacity in which the Participant
renders service to the Company or an Affiliate as an Employee, Consultant or
Director or a change in the entity for which the Participant renders such
service, provided that there is no interruption or termination of the
Participant’s Continuous Service.  For
example, a change in status from an Employee of the Company to a Consultant of
an Affiliate or a Director will not constitute an interruption of Continuous
Service.  The Board or the chief
executive officer of the Company, in that party’s sole discretion, may
determine whether Continuous Service shall be considered interrupted in the
case of any leave of absence approved by that party, including sick leave,
military leave or any other personal leave.

(i)            “Covered Employee” means the chief executive officer and
the four (4) other highest compensated officers of the Company for whom total
compensation is required to be reported to shareholders under the Exchange Act,
as determined for purposes of Section 162(m) of the Code.

(j)            “Director” means a member of the Board of Directors
of the Company.

(k)            “Disability” means (i) before the Listing Date, the
inability of a person, in the opinion of a qualified physician acceptable to
the Company, to perform the major duties of that person’s position with the
Company or an Affiliate of the Company because of the sickness or injury of the
person and (ii) after the Listing Date, the permanent and total disability of a
person within the meaning of Section 22(e)(3) of the Code.

(l)            “Employee” means any person employed by the Company
or an Affiliate.  Mere service as a
Director or payment of a director’s fee by the Company or an Affiliate shall
not be sufficient to constitute “employment”
by the Company or an Affiliate.

(m)          “Exchange Act” means the Securities Exchange Act of
1934, as amended.

(n)           “Fair Market Value” means, as of any date, the value of the
Common Stock determined as follows:

(i)            If the Common Stock is listed on any established stock
exchange or traded on the Nasdaq National Market or the Nasdaq SmallCap Market,
the Fair Market Value of a share of Common Stock shall be the closing sales
price for such stock (or the closing bid, if no sales were reported) as quoted
on such exchange or market (or the exchange or market with the greatest volume
of trading in the Common Stock) on the last market trading day prior to the day
of determination, as reported in The Wall Street Journal  or such other source as the Board deems
reliable.

(ii)           In the absence of such markets for the Common Stock,
the Fair Market Value shall be determined in good faith by the Board.

 

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(iii)         Prior to the Listing Date, the value of the Common
Stock shall be determined in a manner consistent with Section 260.140.50 of
Title 10 of the California Code of Regulations.

(o)           “Incentive Stock Option” means an Option intended to qualify as
an incentive stock option within the meaning of Section 422 of the Code
and the regulations promulgated thereunder.

(p)           “Listing Date” means the first date upon which any
security of the Company is listed (or approved for listing) upon notice of
issuance on any securities exchange or designated (or approved for designation)
upon notice of issuance as a national market security on an interdealer
quotation system if such securities exchange or interdealer quotation system
has been certified in accordance with the provisions of Section 25100(o) of the
California Corporate Securities Law of 1968.

(q)           “Non-Employee Director”
means a Director
who either (i) is not a current Employee or Officer of the Company or its
parent or a subsidiary, does not receive compensation (directly or indirectly)
from the Company or its parent or a subsidiary for services rendered as a
consultant or in any capacity other than as a Director (except for an amount as
to which disclosure would not be required under Item 404(a) of Regulation S-K
promulgated pursuant to the Securities Act (“Regulation
S-K”)), does not possess an interest in any other transaction as
to which disclosure would be required under Item 404(a) of Regulation S-K and
is not engaged in a business relationship as to which disclosure would be
required under Item 404(b) of Regulation S-K; or (ii) is otherwise
considered a “non-employee director” for
purposes of Rule 16b-3.

(r)           “Nonstatutory Stock Option” means an Option not intended to qualify
as an Incentive Stock Option.

(s)           “Officer” means (i) before the Listing Date, any
person designated by the Company as an officer and (ii) on and after the
Listing Date, a person who is an officer of the Company within the meaning of
Section 16 of the Exchange Act and the rules and regulations promulgated
thereunder.

(t)            “Option” means an Incentive Stock Option or a
Nonstatutory Stock Option granted pursuant to the Plan.

(u)           “Option Agreement” means a written agreement between the
Company and an Optionholder evidencing the terms and conditions of an
individual Option grant.  Each Option
Agreement shall be subject to the terms and conditions of the Plan.

(v)             “Optionholder” means a person to whom an Option is
granted pursuant to the Plan or, if applicable, such other person who holds an
outstanding Option.

(w)           “Outside Director” means a Director who either (i) is not a
current employee of the Company or an “affiliated corporation”
(within the meaning of Treasury Regulations promulgated under Section 162(m) of
the Code), is not a former employee of the Company or an “affiliated
corporation” receiving compensation for prior services (other
than benefits under a tax-qualified pension plan), was not an officer of the
Company or an “affiliated corporation” at
any time and is not currently receiving direct or indirect remuneration from
the Company or an “affiliated corporation” for
services in any capacity other than as a Director or (ii) is otherwise
considered an “outside director” for
purposes of Section 162(m) of the Code.

(x)           “Participant” means a person to whom a Stock Award is
granted pursuant to the Plan or, if applicable, such other person who holds an
outstanding Stock Award.

 

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(y)           “Plan” means this ARYx Therapeutics 2001 Equity
Incentive Plan.

(z)           “Rule 16b-3” means Rule 16b-3 promulgated under the
Exchange Act or any successor to Rule 16b-3, as in effect from time to time.

(aa)         “Securities Act” means the Securities Act of 1933, as
amended.

(bb)         “Stock Award” means any right granted under the Plan,
including an Option, a stock bonus and a right to acquire restricted stock.

(cc)         “Stock Award Agreement” means a written agreement between the
Company and a holder of a Stock Award evidencing the terms and conditions of an
individual Stock Award grant.  Each Stock
Award Agreement shall be subject to the terms and conditions of the Plan.

(dd)         “Ten Percent Shareholder” means a person who owns (or is deemed to
own pursuant to Section 424(d) of the Code) stock possessing more than ten
percent (10%) of the total combined voting power of all classes of stock of the
Company or of any of its Affiliates.

3.             ADMINISTRATION.

(a)           Administration by Board. 
The Board shall administer the Plan unless and until the Board delegates
administration to a Committee, as provided in subsection 3(c).

(b)           Powers of Board. 
The Board shall have the power, subject to, and within the limitations
of, the express provisions of the Plan:

(i)            To determine from time to time which of the persons
eligible under the Plan shall be granted Stock Awards; when and how each Stock
Award shall be granted; what type or combination of types of Stock Award shall
be granted; the provisions of each Stock Award granted (which need not be
identical), including the time or times when a person shall be permitted to
receive Common Stock pursuant to a Stock Award; and the number of shares of
Common Stock with respect to which a Stock Award shall be granted to each such
person.

(ii)           To construe and interpret the Plan and Stock Awards
granted under it, and to establish, amend and revoke rules and regulations for
its administration.  The Board, in the
exercise of this power, may correct any defect, omission or inconsistency in
the Plan or in any Stock Award Agreement, in a manner and to the extent it
shall deem necessary or expedient to make the Plan fully effective.

(iii)         To amend the Plan or a Stock Award as provided in
Section 12.

(iv)          Generally, to exercise such powers and to perform such
acts as the Board deems necessary or expedient to promote the best interests of
the Company which are not in conflict with the provisions of the Plan.

(c)           Delegation
to Committee.

(i)            General. 
The Board may delegate administration of the Plan to a Committee or
Committees of one (1) or more members of the Board, and the term “Committee” shall apply to any person
or persons to whom such authority has been delegated.  If administration is delegated to a
Committee, the Committee shall have, in connection with the administration of
the Plan, the powers 

 

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theretofore possessed by
the Board, including the power to delegate to a subcommittee any of the
administrative powers the Committee is authorized to exercise (and references
in this Plan to the Board shall thereafter be to the Committee or
subcommittee), subject, however, to such resolutions, not inconsistent with the
provisions of the Plan, as may be adopted from time to time by the Board.  The Board may abolish the Committee at any
time and revest in the Board the administration of the Plan.

(ii)           Committee Composition when Common
Stock is Publicly Traded.  At such time as the Common
Stock is publicly traded, in the discretion of the Board, a Committee may
consist solely of two or more Outside Directors, in accordance with Section
162(m) of the Code, and/or solely of two or more Non-Employee Directors, in
accordance with Rule 16b-3.  Within the
scope of such authority, the Board or the Committee may (1) delegate to a
committee of one or more members of the Board who are not Outside Directors the
authority to grant Stock Awards to eligible persons who are either (a) not then
Covered Employees and are not expected to be Covered Employees at the time of
recognition of income resulting from such Stock Award or (b) not persons with
respect to whom the Company wishes to comply with Section 162(m) of the Code
and/or) (2) delegate to a committee of one or more members of the Board who are
not Non-Employee Directors the authority to grant Stock Awards to eligible
persons who are not then subject to Section 16 of the Exchange Act.

(d)           Effect
of Board’s Decision. All determinations,
interpretations and constructions made by the Board in good faith shall not be
subject to review by any person and shall be final, binding and conclusive on
all persons.

4.             SHARES
SUBJECT TO THE PLAN.

(a)           Share Reserve. 
Subject to the provisions of Section 11 relating to adjustments upon
changes in Common Stock, the Common Stock that may be issued pursuant to Stock
Awards shall not exceed in the aggregate thirteen million one hundred one  thousand two hundred fifty (13,101,250) shares
of Common Stock.

(b)           Reversion of Shares to the Share
Reserve.  If any Stock Award shall for any reason
expire or otherwise terminate, in whole or in part, without having been
exercised in full, the shares of Common Stock not acquired under such Stock
Award shall revert to and again become available for issuance under the Plan.

(c)           Source of Shares. 
The shares of Common Stock subject to the Plan may be unissued shares or
reacquired shares, bought on the market or otherwise.

(d)           Share Reserve Limitation. 
Prior to the Listing Date and to the extent then required by Section
260.140.45 of Title 10 of the California Code of Regulations, the total number
of shares of Common Stock issuable upon exercise of all outstanding Options and
the total number of shares of Common Stock provided for under any stock bonus
or similar plan of the Company shall not exceed the applicable percentage as
calculated in accordance with the conditions and exclusions of Section
260.140.45 of Title 10 of the California Code of Regulations, based on the
shares of Common Stock of the Company that are outstanding at the time the
calculation is made.

5.             ELIGIBILITY.

(a)           Eligibility for Specific Stock Awards. 
Incentive Stock Options may be granted only to Employees.  Stock Awards other than Incentive Stock
Options may be granted to Employees, Directors and Consultants.

 

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(b)           Ten Percent Shareholders.

(i)            A Ten Percent Shareholder shall not be granted an
Incentive Stock Option unless the exercise price of such Option is at least one
hundred ten percent (110%) of the Fair Market Value of the Common Stock at the
date of grant and the Option is not exercisable after the expiration of five
(5) years from the date of grant.

(ii)           Prior to the Listing Date, a Ten Percent Shareholder
shall not be granted a Nonstatutory Stock Option unless the exercise price of
such Option is at least (i) one hundred ten percent (110%) of the Fair Market
Value of the Common Stock at the date of grant or (ii) such lower percentage of
the Fair Market Value of the Common Stock at the date of grant as is permitted
by Section 260.140.41 of Title 10 of the California Code of Regulations at the
time of the grant of the Option.

(iii)         Prior to the Listing Date, a Ten Percent Shareholder
shall not be granted a restricted stock award unless the purchase price of the
restricted stock is at least (i) one hundred percent (100%) of the Fair Market
Value of the Common Stock at the date of grant or (ii) such lower percentage of
the Fair Market Value of the Common Stock at the date of grant as is permitted
by Section 260.140.41 of Title 10 of the California Code of Regulations at the
time of the grant of the restricted stock award.

(c)           Section 162(m) Limitation. 
Subject to the provisions of Section 11 relating to adjustments upon
changes in the shares of Common Stock, no Employee shall be eligible to be
granted Options covering more than one million (1,000,000) shares of Common
Stock during any calendar year.  This
subsection 5(c) shall not apply prior to the Listing Date and, following the
Listing Date, this subsection 5(c) shall not apply until (i) the earliest
of:  (1) the first material modification
of the Plan (including any increase in the number of shares of Common Stock
reserved for issuance under the Plan in accordance with Section 4); (2) the
issuance of all of the shares of Common Stock reserved for issuance under the
Plan; (3) the expiration of the Plan; or (4) the first meeting of shareholders
at which Directors are to be elected that occurs after the close of the third
calendar year following the calendar year in which occurred the first
registration of an equity security under Section 12 of the Exchange Act; or
(ii) such other date required by Section 162(m) of the Code and the rules and
regulations promulgated thereunder.

(d)           Consultants.

(i)            Prior to the Listing Date, a Consultant shall not be
eligible for the grant of a Stock Award if, at the time of grant, either the
offer or the sale of the Company’s securities to such Consultant is not exempt
under Rule 701 of the Securities Act (“Rule 701”)
because of the nature of the services that the Consultant is providing to the
Company, or because the Consultant is not a natural person, or as otherwise
provided by Rule 701, unless the Company determines that such grant need not
comply with the requirements of Rule 701 and will satisfy another exemption
under the Securities Act as well as comply with the securities laws of all
other relevant jurisdictions.

(ii)           From and after the Listing Date, a Consultant shall
not be eligible for the grant of a Stock Award if, at the time of grant, a Form
S-8 Registration Statement under the Securities Act (“Form
S-8”) is not available to register
either the offer or the sale of the Company’s securities to such Consultant
because of the nature of the services that the Consultant is providing to the
Company, or because the Consultant is not a natural person, or as otherwise
provided by the rules governing the use of Form S-8, unless the Company
determines both (i) that such grant (A) shall be registered in another manner
under the Securities Act (e.g., on a Form
S-3 Registration Statement) or (B) does not require registration under the
Securities Act in order to comply with the requirements of the Securities Act,
if applicable, and (ii) that such grant complies with the securities laws of
all other relevant jurisdictions.

 

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(iii)         Rule 701 and Form S-8 generally are available to
consultants and advisors only if (i) they are natural persons; (ii) they
provide bona fide services to the issuer, its parents, its majority-owned
subsidiaries or majority-owned subsidiaries of the issuer’s parent; and (iii)
the services are not in connection with the offer or sale of securities in a
capital-raising transaction, and do not directly or indirectly promote or
maintain a market for the issuer’s securities.

6.             OPTION
PROVISIONS.

Each Option shall be in such form and shall contain
such terms and conditions as the Board shall deem appropriate.  All Options shall be separately designated
Incentive Stock Options or Nonstatutory Stock Options at the time of grant,
and, if certificates are issued, a separate certificate or certificates will be
issued for shares of Common Stock purchased on exercise of each type of
Option.  The provisions of separate
Options need not be identical, but each Option shall include (through
incorporation of provisions hereof by reference in the Option or otherwise) the
substance of each of the following provisions:

(a)           Term.  Subject to the
provisions of subsection 5(b) regarding Ten Percent Shareholders, no Option
granted prior to the Listing Date shall be exercisable after the expiration of
ten (10) years from the date it was granted, and no Incentive Stock Option
granted on or after the Listing Date shall be exercisable after the expiration
of ten (10) years from the date it was granted.

(b)           Exercise Price of an Incentive Stock
Option.  Subject to the provisions of subsection 5(b)
regarding Ten Percent Shareholders, the exercise price of each Incentive Stock
Option shall be not less than one hundred percent (100%) of the Fair Market
Value of the Common Stock subject to the Option on the date the Option is
granted.  Notwithstanding the foregoing,
an Incentive Stock Option may be granted with an exercise price lower than that
set forth in the preceding sentence if such Option is granted pursuant to an
assumption or substitution for another option in a manner satisfying the
provisions of Section 424(a) of the Code.

(c)           Exercise Price of a Nonstatutory
Stock Option.  Subject to the provisions of subsection 5(b)
regarding Ten Percent Shareholders, the exercise price of each Nonstatutory
Stock Option granted prior to the Listing Date shall be not less than
eighty-five percent (85%) of the Fair Market Value of the Common Stock subject
to the Option on the date the Option is granted.  The exercise price of each Nonstatutory Stock
Option granted on or after the Listing Date shall be not less than eighty-five
percent (85%) of the Fair Market Value of the Common Stock subject to the
Option on the date the Option is granted. 
Notwithstanding the foregoing, a Nonstatutory Stock Option may be
granted with an exercise price lower than that set forth in the preceding
sentence if such Option is granted pursuant to an assumption or substitution
for another option in a manner satisfying the provisions of Section 424(a) of
the Code.

(d)           Consideration. 
The purchase price of Common Stock acquired pursuant to an Option shall
be paid, to the extent permitted by applicable statutes and regulations, either
(i) in cash at the time the Option is exercised or (ii) at the discretion of
the Board at the time of the grant of the Option (or subsequently in the case
of a Nonstatutory Stock Option) (1) by delivery to the Company of other Common
Stock, (2) according to a deferred payment or other similar arrangement with
the Optionholder or (3) in any other form of legal consideration that may be
acceptable to the Board.  Unless
otherwise specifically provided in the Option, the purchase price of Common Stock
acquired pursuant to an Option that is paid by delivery to the Company of other
Common Stock acquired, directly or indirectly from the Company, shall be paid
only by shares of the Common Stock of the Company that have been held for more
than six (6) months (or such longer or shorter period of time required to avoid
a charge to earnings for financial accounting purposes).  At any time that the Company is incorporated
in Delaware, payment

 

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of the Common Stock’s “par value,” as defined in the Delaware
General Corporation Law, shall not be made by deferred payment.

In the case of any deferred payment arrangement,
interest shall be compounded at least annually and shall be charged at the
market rate of interest necessary to avoid a charge to earnings for financial
accounting purposes.

(e)           Transferability of an Incentive Stock
Option.  An Incentive Stock Option shall not be
transferable except by will or by the laws of descent and distribution and
shall be exercisable during the lifetime of the Optionholder only by the
Optionholder.  Notwithstanding the
foregoing, the Optionholder may, by delivering written notice to the Company,
in a form satisfactory to the Company, designate a third party who, in the
event of the death of the Optionholder, shall thereafter be entitled to
exercise the Option.

(f)            Transferability of a Nonstatutory
Stock Option. A
Nonstatutory Stock Option granted prior to the Listing Date shall not be
transferable except by will or by the laws of descent and distribution and, to
the extent provided in the Option Agreement, to such further extent as
permitted by Section 260.140.41(d) of Title 10 of the California Code of
Regulations at the time of the grant of the Option, and shall be exercisable
during the lifetime of the Optionholder only by the Optionholder.  A Nonstatutory Stock Option granted on or
after the Listing Date shall be transferable to the extent provided in the
Option Agreement.  If the Nonstatutory
Stock Option does not provide for transferability, then the Nonstatutory Stock
Option shall not be transferable except by will or by the laws of descent and
distribution and shall be exercisable during the lifetime of the Optionholder
only by the Optionholder. 
Notwithstanding the foregoing, the Optionholder may, by delivering written
notice to the Company, in a form satisfactory to the Company, designate a third
party who, in the event of the death of the Optionholder, shall thereafter be
entitled to exercise the Option.

(g)           Vesting Generally. 
The total number of shares of Common Stock subject to an Option may, but
need not, vest and therefore become exercisable in periodic installments that
may, but need not, be equal.  The Option
may be subject to such other terms and conditions on the time or times when it
may be exercised (which may be based on performance or other criteria) as the
Board may deem appropriate.  The vesting
provisions of individual Options may vary. 
The provisions of this subsection 6(g) are subject to any Option
provisions governing the minimum number of shares of Common Stock as to which
an Option may be exercised.

(h)           Minimum Vesting Prior to the Listing
Date.  Notwithstanding the foregoing subsection
6(g), to the extent that the following restrictions on vesting are required by
Section 260.140.41(f) of Title 10 of the California Code of Regulations at the
time of the grant of the Option, then:

(i)            Options granted prior to the Listing Date to an
Employee who is not an Officer, Director or Consultant shall provide for
vesting of the total number of shares of Common Stock at a rate of at least
twenty percent (20%) per year over five (5) years from the date the Option was
granted, subject to reasonable conditions such as continued employment;  and

(ii)           Options granted prior to the Listing Date to Officers,
Directors or Consultants may be made fully exercisable, subject to reasonable
conditions such as continued employment, at any time or during any period
established by the Company.

(i)            Termination of Continuous Service. 
In the event an Optionholder’s Continuous Service terminates (other than
upon the Optionholder’s death or Disability), the Optionholder may exercise his
or her Option (to the extent that the Optionholder was entitled to exercise
such Option as of

 

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the date of termination)
but only within such period of time ending on the earlier of (i) the date three
(3) months following the termination of the Optionholder’s Continuous Service
(or such longer or shorter period specified in the Option Agreement, which
period shall not be less than thirty (30) days for Options granted prior to the
Listing Date unless such termination is for cause), or (ii) the expiration of
the term of the Option as set forth in the Option Agreement.  If, after termination, the Optionholder does
not exercise his or her Option within the time specified in the Option
Agreement, the Option shall terminate.

(j)            Extension of Termination Date. 
An Optionholder’s Option Agreement may also provide that if the exercise
of the Option following the termination of the Optionholder’s Continuous
Service (other than upon the Optionholder’s death or Disability) would be
prohibited at any time solely because the issuance of shares of Common Stock
would violate the registration requirements under the Securities Act, then the
Option shall terminate on the earlier of (i) the expiration of the term of the
Option set forth in subsection 6(a) or (ii) the expiration of a period of three
(3) months after the termination of the Optionholder’s Continuous Service during
which the exercise of the Option would not be in violation of such registration
requirements.

(k)           Disability of Optionholder. 
In the event that an Optionholder’s Continuous Service terminates as a
result of the Optionholder’s Disability, the Optionholder may exercise his or
her Option (to the extent that the Optionholder was entitled to exercise such
Option as of the date of termination), but only within such period of time
ending on the earlier of (i) the date twelve (12) months following such termination
(or such longer or shorter period specified in the Option Agreement, which
period shall not be less than six (6) months for Options granted prior to the
Listing Date) or (ii) the expiration of the term of the Option as set forth in
the Option Agreement.  If, after
termination, the Optionholder does not exercise his or her Option within the
time specified herein, the Option shall terminate.

(l)            Death of Optionholder. 
In the event (i) an Optionholder’s Continuous Service terminates as a
result of the Optionholder’s death or (ii) the Optionholder dies within the
period (if any) specified in the Option Agreement after the termination of the
Optionholder’s Continuous Service for a reason other than death, then the
Option may be exercised (to the extent the Optionholder was entitled to
exercise such Option as of the date of death) by the Optionholder’s estate, by
a person who acquired the right to exercise the Option by bequest or
inheritance or by a person designated to exercise the option upon the Optionholder’s
death pursuant to subsection 6(e) or 6(f), but only within the period ending on
the earlier of (1) the date eighteen (18) months following the date of death
(or such longer or shorter period specified in the Option Agreement, which
period shall not be less than six (6) months for Options granted prior to the
Listing Date) or (2) the expiration of the term of such Option as set forth in
the Option Agreement.  If, after death,
the Option is not exercised within the time specified herein, the Option shall
terminate.

(m)          Early Exercise. 
The Option may, but need not, include a provision whereby the
Optionholder may elect at any time before the Optionholder’s Continuous Service
terminates to exercise the Option as to any part or all of the shares of Common
Stock subject to the Option prior to the full vesting of the Option.  Subject to the “Repurchase
Limitation” in subsection 10(h), any unvested shares of Common
Stock so purchased may be subject to a repurchase option in favor of the
Company or to any other restriction the Board determines to be appropriate.

(n)           Right of Repurchase. 
Subject to the “Repurchase Limitation”
in subsection 10(h), the Option may, but need not, include a provision whereby
the Company may elect, prior to the Listing Date, to repurchase all or any part
of the vested shares of Common Stock acquired by the Optionholder pursuant to
the exercise of the Option.

 

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(o)           Right of First Refusal. 
The Option may, but need not, include a provision whereby the Company
may elect, prior to the Listing Date, to exercise a right of first refusal
following receipt of notice from the Optionholder of the intent to transfer all
or any part of the shares of Common Stock received upon the exercise of the Option.  Except as expressly provided in this
subsection 6(o), such right of first refusal shall otherwise comply with any
applicable provisions of the Bylaws of the Company.

(p)           Re-Load Options.

(i)            Without in any way limiting the authority
of the Board to make or not to make grants of Options hereunder, the Board
shall have the authority (but not an obligation) to include as part of any
Option Agreement a provision entitling the Optionholder to a further Option (a “Re-Load Option”) in the event the
Optionholder exercises the Option evidenced by the Option Agreement, in whole
or in part, by surrendering other shares of Common Stock in accordance with
this Plan and the terms and conditions of the Option Agreement.  Unless otherwise specifically provided in the
Option, the Optionholder shall not surrender shares of Common Stock acquired,
directly or indirectly from the Company, unless such shares have been held for
more than six (6) months (or such longer or shorter period of time required to
avoid a charge to earnings for financial accounting purposes).

(ii)           Any such Re-Load Option shall (1) provide for a number
of shares of Common Stock equal to the number of shares of Common Stock
surrendered as part or all of the exercise price of such Option; (2) have an expiration
date which is the same as the expiration date of the Option the exercise of
which gave rise to such Re-Load Option; and (3) have an exercise price which is
equal to one hundred percent (100%) of the Fair Market Value of the Common
Stock subject to the Re-Load Option on the date of exercise of the original
Option.  Notwithstanding the foregoing, a
Re-Load Option shall be subject to the same exercise price and term provisions
heretofore described for Options under the Plan.

(iii)         Any such Re-Load Option may be an
Incentive Stock Option or a Nonstatutory Stock Option, as the Board may
designate at the time of the grant of the original Option; provided, however,
that the designation of any Re-Load Option as an Incentive Stock Option shall
be subject to the one hundred thousand dollar ($100,000) annual limitation on
the exercisability of Incentive Stock Options described in subsection 10(d) and
in Section 422(d) of the Code. 
There shall be no Re-Load Options on a Re-Load Option.  Any such Re-Load Option shall be subject to
the availability of sufficient shares of Common Stock under subsection 4(a) and
the “Section 162(m) Limitation” on
the grants of Options under subsection 5(c) and shall be subject to such other
terms and conditions as the Board may determine which are not inconsistent with
the express provisions of the Plan regarding the terms of Options.

7.             PROVISIONS
OF STOCK AWARDS OTHER THAN OPTIONS.

(a)           Stock Bonus Awards. 
Each stock bonus agreement shall be in such form and shall contain such
terms and conditions as the Board shall deem appropriate.  The terms and conditions of stock bonus
agreements may change from time to time, and the terms and conditions of
separate stock bonus agreements need not be identical, but each stock bonus
agreement shall include (through incorporation of provisions hereof by
reference in the agreement or otherwise) the substance of each of the following
provisions:

(i)            Consideration.  A
stock bonus may be awarded in consideration for past services actually rendered
to the Company or an Affiliate for its benefit.

(ii)           Vesting. 
Subject to the “Repurchase Limitation”
in subsection 10(h), shares of Common Stock awarded under the stock bonus
agreement may, but need not, be subject to a share

 

10

 

repurchase option in
favor of the Company in accordance with a vesting schedule to be determined by
the Board.

(iii)         Termination of Participant’s Continuous
Service.  Subject to the “Repurchase
Limitation” in subsection 10(h), in
the event a Participant’s Continuous Service terminates, the Company may
reacquire any or all of the shares of Common Stock held by the Participant
which have not vested as of the date of termination under the terms of the
stock bonus agreement.

(iv)          Transferability. 
For a stock bonus award made before the Listing Date, rights to acquire
shares of Common Stock under the stock bonus agreement shall not be
transferable except by will or by the laws of descent and distribution and
shall be exercisable during the lifetime of the Participant only by the
Participant.  For a stock bonus award
made on or after the Listing Date, rights to acquire shares of Common Stock
under the stock bonus agreement shall be transferable by the Participant only
upon such terms and conditions as are set forth in the stock bonus agreement,
as the Board shall determine in its discretion, so long as Common Stock awarded
under the stock bonus agreement remains subject to the terms of the stock bonus
agreement.

(b)           Restricted Stock Awards. 
Each restricted stock purchase agreement shall be in such form and shall
contain such terms and conditions as the Board shall deem appropriate.  The terms and conditions of the restricted
stock purchase agreements may change from time to time, and the terms and
conditions of separate restricted stock purchase agreements need not be
identical, but each restricted stock purchase agreement shall include (through
incorporation of provisions hereof by reference in the agreement or otherwise)
the substance of each of the following provisions:

(i)            Purchase Price. 
Subject to the provisions of subsection 5(b) regarding Ten Percent
Shareholders, the purchase price under each restricted stock purchase agreement
shall be such amount as the Board shall determine and designate in such
restricted stock purchase agreement.  For
restricted stock awards made prior to the Listing Date, the purchase price
shall not be less than eighty-five percent (85%) of the Common Stock’s Fair
Market Value on the date such award is made or at the time the purchase is
consummated.  For restricted stock awards
made on or after the Listing Date, the purchase price shall not be less than
eighty-five percent (85%) of the Common Stock’s Fair Market Value on the date
such award is made or at the time the purchase is consummated.

(ii)           Consideration. 
The purchase price of Common Stock acquired pursuant to the restricted
stock purchase agreement shall be paid either: 
(i) in cash at the time of purchase; (ii) at the discretion of the
Board, according to a deferred payment or other similar arrangement with the
Participant; or (iii) in any other form of legal consideration that may be
acceptable to the Board in its discretion; provided, however, that at any time
that the Company is incorporated in Delaware, then payment of the Common Stock’s
“par value,” as defined in the
Delaware General Corporation Law, shall not be made by deferred payment.

(iii)         Vesting.  Subject to the
“Repurchase Limitation” in subsection
10(h), shares of Common Stock acquired under the restricted stock purchase
agreement may, but need not, be subject to a share repurchase option in favor
of the Company in accordance with a vesting schedule to be determined by the
Board.

(iv)          Termination of Participant’s
Continuous Service.  Subject to the “Repurchase
Limitation” in subsection 10(h), in
the event a Participant’s Continuous Service terminates, the Company may
repurchase or otherwise reacquire any or all of the shares of Common Stock held
by the Participant which have not vested as of the date of termination under
the terms of the restricted stock purchase agreement.

 

11

 

(v)            Transferability. 
For a restricted stock award made before the Listing Date, rights to
acquire shares of Common Stock under the restricted stock purchase agreement
shall not be transferable except by will or by the laws of descent and
distribution and shall be exercisable during the lifetime of the Participant
only by the Participant.  For a
restricted stock award made on or after the Listing Date, rights to acquire
shares of Common Stock under the restricted stock purchase agreement shall be
transferable by the Participant only upon such terms and conditions as are set
forth in the restricted stock purchase agreement, as the Board shall determine
in its discretion, so long as Common Stock awarded under the restricted stock
purchase agreement remains subject to the terms of the restricted stock
purchase agreement.

8.             COVENANTS
OF THE COMPANY.

(a)           Availability of Shares. 
During the terms of the Stock Awards, the Company shall keep available
at all times the number of shares of Common Stock required to satisfy such
Stock Awards.

(b)           Securities Law Compliance. 
The Company shall seek to obtain from each regulatory commission or
agency having jurisdiction over the Plan such authority as may be required to
grant Stock Awards and to issue and sell shares of Common Stock upon exercise
of the Stock Awards; provided, however, that this undertaking shall not require
the Company to register under the Securities Act the Plan, any Stock Award or
any Common Stock issued or issuable pursuant to any such Stock Award.  If, after reasonable efforts, the Company is
unable to obtain from any such regulatory commission or agency the authority
which counsel for the Company deems necessary for the lawful issuance and sale
of Common Stock under the Plan, the Company shall be relieved from any
liability for failure to issue and sell Common Stock upon exercise of such
Stock Awards unless and until such authority is obtained.

9.             USE
OF PROCEEDS FROM STOCK.

Proceeds from the sale of Common Stock pursuant to
Stock Awards shall constitute general funds of the Company.

10.          MISCELLANEOUS.

(a)           Acceleration of Exercisability and
Vesting.  The Board shall have the power to accelerate
the time at which a Stock Award may first be exercised or the time during which
a Stock Award or any part thereof will vest in accordance with the Plan,
notwithstanding the provisions in the Stock Award stating the time at which it
may first be exercised or the time during which it will vest.

(b)           Shareholder Rights. 
No Participant shall be deemed to be the holder of, or to have any of
the rights of a holder with respect to, any shares of Common Stock subject to
such Stock Award unless and until such Participant has satisfied all
requirements for exercise of the Stock Award pursuant to its terms.

(c)           No Employment or other Service
Rights.  Nothing in the Plan or any instrument
executed or Stock Award granted pursuant thereto shall confer upon any
Participant any right to continue to serve the Company or an Affiliate in the
capacity in effect at the time the Stock Award was granted or shall affect the
right of the Company or an Affiliate to terminate (i) the employment of an
Employee with or without notice and with or without cause, (ii) the service of
a Consultant pursuant to the terms of such Consultant’s agreement with the
Company or an Affiliate or (iii) the service of a Director pursuant to the
Bylaws of the Company or an Affiliate, and any applicable provisions of the
corporate law of the state in which the Company or the Affiliate is
incorporated, as the case may be.

 

12

 

(d)           Incentive Stock Option $100,000 Limitation. 
To the extent that the aggregate Fair Market Value (determined at the
time of grant) of Common Stock with respect to which Incentive Stock Options
are exercisable for the first time by any Optionholder during any calendar year
(under all plans of the Company and its Affiliates) exceeds one hundred
thousand dollars ($100,000), the Options or portions thereof which exceed such
limit (according to the order in which they were granted) shall be treated as
Nonstatutory Stock Options.

(e)           Investment Assurances. 
The Company may require a Participant, as a condition of exercising or
acquiring Common Stock under any Stock Award, (i) to give written assurances
satisfactory to the Company as to the Participant’s knowledge and experience in
financial and business matters and/or to employ a purchaser representative
reasonably satisfactory to the Company who is knowledgeable and experienced in
financial and business matters and that he or she is capable of evaluating,
alone or together with the purchaser representative, the merits and risks of
exercising the Stock Award; and (ii) to give written assurances satisfactory to
the Company stating that the Participant is acquiring Common Stock subject to
the Stock Award for the Participant’s own account and not with any present
intention of selling or otherwise distributing the Common Stock.  The foregoing requirements, and any
assurances given pursuant to such requirements, shall be inoperative if (1) the
issuance of the shares of Common Stock upon the exercise or acquisition of
Common Stock under the Stock Award has been registered under a then currently
effective registration statement under the Securities Act or (2) as to any
particular requirement, a determination is made by counsel for the Company that
such requirement need not be met in the circumstances under the then applicable
securities laws.  The Company may, upon
advice of counsel to the Company, place legends on stock certificates issued
under the Plan as such counsel deems necessary or appropriate in order to
comply with applicable securities laws, including, but not limited to, legends
restricting the transfer of the Common Stock.

(f)            Withholding Obligations. 
To the extent provided by the terms of a Stock Award Agreement, the
Participant may satisfy any federal, state or local tax withholding obligation
relating to the exercise or acquisition of Common Stock under a Stock Award by
any of the following means (in addition to the Company’s right to withhold from
any compensation paid to the Participant by the Company) or by a combination of
such means:  (i) tendering a cash
payment; (ii) authorizing the Company to withhold shares of Common Stock from
the shares of Common Stock otherwise issuable to the Participant as a result of
the exercise or acquisition of Common Stock under the Stock Award, provided,
however, that no shares of Common Stock are withheld with a value exceeding the
minimum amount of tax required to be withheld by law; or (iii) delivering to
the Company owned and unencumbered shares of Common Stock.

(g)           Information Obligation. 
Prior to the Listing Date, to the extent required by Section 260.140.46
of Title 10 of the California Code of Regulations, the Company shall deliver
financial statements to Participants at least annually.  This subsection 10(g) shall not apply to key
Employees whose duties in connection with the Company assure them access to
equivalent information.

(h)           Repurchase Limitation. 
The terms of any repurchase option shall be specified in the Stock Award
and may be either at Fair Market Value at the time of repurchase or at not less
than the original purchase price.  To the
extent required by Section 260.140.41 and Section 260.140.42 of Title 10 of the
California Code of Regulations at the time a Stock Award is made, any
repurchase option contained in a Stock Award granted prior to the Listing Date
to a person who is not an Officer, Director or Consultant shall be upon the
terms described below:

(i)            Fair Market Value. 
If the repurchase option gives the Company the right to repurchase the
shares of Common Stock upon termination of employment at not less than the Fair
Market Value of the shares of Common Stock to be purchased on the date of
termination of Continuous Service, 

 

13

 

then (i) the right to
repurchase shall be exercised for cash or cancellation of purchase money
indebtedness for the shares of Common Stock within ninety (90) days of
termination of Continuous Service (or in the case of shares of Common Stock
issued upon exercise of Stock Awards after such date of termination, within
ninety (90) days after the date of the exercise) or such longer period as may
be agreed to by the Company and the Participant (for example, for purposes of
satisfying the requirements of Section 1202(c)(3) of the Code regarding “qualified small business stock”) and
(ii) the right terminates when the shares of Common Stock become publicly
traded.

(ii)           Original Purchase Price. 
If the repurchase option gives the Company the right to repurchase the
shares of Common Stock upon termination of Continuous Service at the original
purchase price, then (i) the right to repurchase at the original purchase price
shall lapse at the rate of at least twenty percent (20%) of the shares of
Common Stock per year over five (5) years from the date the Stock Award is
granted (without respect to the date the Stock Award was exercised or became
exercisable) and (ii) the right to repurchase shall be exercised for cash or
cancellation of purchase money indebtedness for the shares of Common Stock
within  ninety (90) days of termination
of Continuous Service (or in the case of shares of Common Stock issued upon
exercise of Options after such date of termination, within ninety (90) days
after the date of the exercise) or such longer period as may be agreed to by
the Company and the Participant (for example, for purposes of satisfying the
requirements of Section 1202(c)(3) of the Code regarding “qualified
small business stock”).

11.          ADJUSTMENTS UPON CHANGES IN STOCK.

(a)           Capitalization Adjustments. 
If any change is made in the Common Stock subject to the Plan, or
subject to any Stock Award, without the receipt of consideration by the Company
(through merger, consolidation, reorganization, recapitalization, reincorporation,
stock dividend, dividend in property other than cash, stock split, liquidating
dividend, combination of shares, exchange of shares, change in corporate
structure or other transaction not involving the receipt of consideration by
the Company), the Plan will be appropriately adjusted in the class(es) and
maximum number of securities subject to the Plan pursuant to subsection 4(a)
and the maximum number of securities subject to award to any person pursuant to
subsection 5(c), and the outstanding Stock Awards will be appropriately
adjusted in the class(es) and number of securities and price per share of
Common Stock subject to such outstanding Stock Awards.  The Board shall make such adjustments, and
its determination shall be final, binding and conclusive.  (The conversion of any convertible securities
of the Company shall not be treated as a transaction “without
receipt of consideration” by the Company.)

(b)           Dissolution or Liquidation. 
In the event of a dissolution or liquidation of the Company, then all
outstanding Stock Awards shall terminate immediately prior to such event.

(c)           Asset Sale, Merger, Consolidation or
Reverse Merger.  In the event of (i) a sale, lease or other
disposition of all or substantially all of the assets of the Company, (ii) a
merger or consolidation in which the Company is not the surviving corporation
or (iii) a reverse merger in which the Company is the surviving corporation but
the shares of Common Stock outstanding immediately preceding the merger are
converted by virtue of the merger into other property, whether in the form of
securities, cash or otherwise (individually, a “Corporate
Transaction”), then any surviving corporation or acquiring
corporation shall assume any Stock Awards outstanding under the Plan or shall
substitute similar stock awards (including an award to acquire the same
consideration paid to the shareholders in the Corporate Transaction for those
outstanding under the Plan).  In the
event any surviving corporation or acquiring corporation refuses to assume such
Stock Awards or to substitute similar stock awards for those outstanding under
the Plan, then with respect to Stock Awards held by Participants whose
Continuous Service has not terminated, the vesting of such Stock Awards (and,
if applicable, the time during which such Stock Awards may be exercised) shall
be accelerated in full, and the Stock Awards shall terminate if 

 

14

 

not exercised (if
applicable) at or prior to the Corporate Transaction.  With respect to any other Stock Awards
outstanding under the Plan, such Stock Awards shall terminate if not exercised
(if applicable) prior to the Corporate Transaction.

12.          AMENDMENT
OF THE PLAN AND STOCK AWARDS.

(a)           Amendment of Plan. 
The Board at any time, and from time to time, may amend the Plan.  However, except as provided in Section 11
relating to adjustments upon changes in Common Stock, no amendment shall be
effective unless approved by the shareholders of the Company to the extent
shareholder approval is necessary to satisfy the requirements of Section 422 of
the Code, Rule 16b-3 or any Nasdaq or securities exchange listing requirements.

(b)           Shareholder Approval. 
The Board may, in its sole discretion, submit any other amendment to the
Plan for shareholder approval, including, but not limited to, amendments to the
Plan intended to satisfy the requirements of Section 162(m) of the Code and the
regulations thereunder regarding the exclusion of performance-based
compensation from the limit on corporate deductibility of compensation paid to
certain executive officers.

(c)           Contemplated Amendments. 
It is expressly contemplated that the Board may amend the Plan in any
respect the Board deems necessary or advisable to provide eligible Employees
with the maximum benefits provided or to be provided under the provisions of
the Code and the regulations promulgated thereunder relating to Incentive Stock
Options and/or to bring the Plan and/or Incentive Stock Options granted under
it into compliance therewith.

(d)           No Impairment of Rights. 
Rights under any Stock Award granted before amendment of the Plan shall
not be impaired by any amendment of the Plan unless (i) the Company requests
the consent of the Participant and (ii) the Participant consents in writing.

(e)           Amendment of Stock Awards. 
The Board at any time, and from time to time, may amend the terms of any
one or more Stock Awards; provided, however, that the rights under any Stock
Award shall not be impaired by any such amendment unless (i) the Company
requests the consent of the Participant and (ii) the Participant consents in
writing.

13.          TERMINATION
OR SUSPENSION OF THE PLAN.

(a)           Plan Term. 
The Board may suspend or terminate the Plan at any time.  Unless sooner terminated, the Plan shall
terminate on the day before the tenth (10th) anniversary of the date the Plan
is adopted by the Board or approved by the shareholders of the Company,
whichever is earlier.  No Stock Awards
may be granted under the Plan while the Plan is suspended or after it is
terminated.

(b)            No Impairment of Rights. 
Suspension or termination of the Plan shall not impair rights and
obligations under any Stock Award granted while the Plan is in effect except
with the written consent of the Participant.

14.          EFFECTIVE
DATE OF PLAN.

The Plan shall become
effective as determined by the Board, but no Stock Award shall be exercised
(or, in the case of a stock bonus, shall be granted) unless and until the Plan
has been approved by the shareholders of the Company, which approval shall be
within twelve (12) months before or after the date the Plan is adopted by the
Board.

 

15

 

15.          CHOICE
OF LAW.

The law of the
State of California shall govern all questions concerning the construction,
validity and interpretation of this Plan, without regard to such state’s
conflict of laws rules.

 

16Exhibit 10.4

ARYX THERAPEUTICS

2001 EQUITY
INCENTIVE PLAN

STOCK OPTION AGREEMENT

(INCENTIVE STOCK OPTION OR NONSTATUTORY STOCK OPTION)

Pursuant
to your Stock Option Grant Notice (“Grant Notice”)
and this Stock Option Agreement, ARYX
THERAPEUTICS, a California corporation (the “Company”),
has granted you an option under its 2001 Equity Incentive Plan (the “Plan”) to purchase the number of
shares of the Company’s Common Stock indicated in your Grant Notice at the
exercise price indicated in your Grant Notice. 
Defined terms not explicitly defined in this Stock Option Agreement but
defined in the Plan shall have the same definitions as in the Plan.

The
details of your option are as follows:

1.             VESTING.  Subject to the limitations contained herein,
your option will vest as provided in your Grant Notice, provided that vesting
will cease upon the termination of your Continuous Service.

2.             NUMBER OF SHARES AND EXERCISE PRICE.  The number of shares of Common Stock subject
to your option and your exercise price per share referenced in your Grant
Notice may be adjusted from time to time for Capitalization Adjustments, as
provided in the Plan.

3.             EXERCISE PRIOR TO VESTING (“EARLY EXERCISE”).  If permitted in your Grant Notice (i.e., the “Exercise Schedule” indicates that “Early Exercise” of your option is
permitted) and subject to the provisions of your option, you may elect at any
time that is both (i) during the period of your Continuous Service and (ii)
during the term of your option, to exercise all or part of your option,
including the nonvested portion of your option; provided, however, that:

(a)           a partial exercise
of your option shall be deemed to cover first vested shares of Common Stock and
then the earliest vesting installment of unvested shares of Common Stock;

(b)           any shares of
Common Stock so purchased from installments that have not vested as of the date
of exercise shall be subject to the purchase option in favor of the Company as
described in the Company’s form of Early Exercise Stock Purchase Agreement;

(c)           you shall enter
into the Company’s form of Early Exercise Stock Purchase Agreement with a
vesting schedule that will result in the same vesting as if no early exercise
had occurred; and

(d)           if your option is an incentive stock option, then, as
provided in the Plan, to the extent that the aggregate Fair Market Value
(determined at the time of grant) of the shares of Common Stock with respect to
which your option plus all other incentive stock options you hold are
exercisable for the first time by you during any calendar year (under all plans
of the Company and its Affiliates) exceeds one hundred thousand dollars
($100,000), your option(s) or portions thereof that exceed such limit
(according to the order in which they were granted) shall be treated as nonstatutory
stock options.

4.             METHOD OF PAYMENT.  Payment of the exercise price is due in full
upon exercise of all or any part of your option.  You may elect to make payment of the exercise
price in cash or by check or in any other manner permitted
by your Grant Notice, which may include one or more of the
following:

 

1

 

(a)           In the Company’s
sole discretion at the time your option is exercised and provided that at the
time of exercise the Common Stock is publicly traded and quoted regularly in The Wall Street Journal, pursuant to a program developed
under Regulation T as promulgated by the Federal Reserve Board that, prior to
the issuance of Common Stock, results in either the receipt of cash (or check)
by the Company or the receipt of irrevocable instructions to pay the aggregate
exercise price to the Company from the sales proceeds.

(b)           Provided that at
the time of exercise the Common Stock is publicly traded and quoted regularly
in The Wall Street Journal, by delivery of
already-owned shares of Common Stock either that you have held for the period
required to avoid a charge to the Company’s reported earnings (generally six
months) or that you did not acquire, directly or indirectly from the Company,
that are owned free and clear of any liens, claims, encumbrances or security
interests, and that are valued at Fair Market Value on the date of
exercise.  “Delivery”
for these purposes, in the sole discretion of the Company at the time you
exercise your option, shall include delivery to the Company of your attestation
of ownership of such shares of Common Stock in a form approved by the
Company.  Notwithstanding the foregoing,
you may not exercise your option by tender to the Company of Common Stock to
the extent such tender would violate the provisions of any law, regulation or
agreement restricting the redemption of the Company’s stock.

5.             WHOLE SHARES.  You may exercise your option only for whole
shares of Common Stock.

6.             SECURITIES LAW COMPLIANCE.  Notwithstanding anything to the contrary
contained herein, you may not exercise your option unless the shares of Common
Stock issuable upon such exercise are then registered under the Securities Act
or, if such shares of Common Stock are not then so registered, the Company has
determined that such exercise and issuance would be exempt from the
registration requirements of the Securities Act.  The exercise of your option must also comply
with other applicable laws and regulations governing your option, and you may
not exercise your option if the Company determines that such exercise would not
be in material compliance with such laws and regulations.

7.             TERM.  You may not exercise your option before the
commencement of its term or after its term expires.  The term of your option commences on the Date
of Grant and expires upon the earliest of
the following:

(a)           immediately upon
the termination of your Continuous Service for Cause;

(b)           three (3) months
after the termination of your Continuous Service for any reason other than Cause,
Disability or death, provided that if during any part of such three- (3-) month
period you may not exercise your option solely because of the condition set
forth in the preceding paragraph relating to “Securities
Law Compliance,” your option shall not expire until the earlier
of the Expiration Date or until it shall have been exercisable for an aggregate
period of three (3) months after the termination of your Continuous Service;

(c)           twelve (12) months
after the termination of your Continuous Service due to your Disability;

(d)           eighteen (18)
months after your death if you die either during your Continuous Service or
within three (3) months after your Continuous Service terminates for reason
other than Cause;

(e)           the Expiration Date
indicated in your Grant Notice; or

 

2

 

(f)            the day before the
tenth (10th) anniversary of the Date of Grant.

For purposes of your
option, “Cause” means your misconduct,
including but not limited to: 
(i) your conviction of any felony or any crime involving moral
turpitude or dishonesty, (ii) your participation in a fraud or act of
dishonesty against the Company, (iii) your conduct that, based upon a good
faith and reasonable factual investigation and determination by the Company’s
board of directors (the “Board”),
demonstrates your gross unfitness to serve, or (iv) your intentional,
material violation of any contract between the Company and you or any statutory
duty of yours to the Company that you do not correct within thirty (30) days
after written notice to you thereof. 
Your physical or mental disability shall not constitute “Cause.”

If
your option is an incentive stock option, note that, to obtain the federal
income tax advantages associated with an “incentive stock option,”
the Code requires that at all times beginning on the date of grant of your
option and ending on the day three (3) months before the date of your option’s
exercise, you must be an employee of the Company or an Affiliate, except in the
event of your death or Disability.  The
Company has provided for extended exercisability of your option under certain
circumstances for your benefit but cannot guarantee that your option will
necessarily be treated as an “incentive stock option”
if you continue to provide services to the Company or an Affiliate as a
Consultant or Director after your employment terminates or if you otherwise
exercise your option more than three (3) months after the date your employment
terminates.

8.             EXERCISE.

(a)           You may exercise
the vested portion of your option (and the unvested portion of your option if
your Grant Notice so permits) during its term by delivering a Notice of
Exercise (in a form designated by the Company) together with the exercise price
to the Secretary of the Company, or to such other person as the Company may
designate, during regular business hours, together with such additional
documents as the Company may then require.

(b)           By exercising your
option you agree that, as a condition to any exercise of your option, the
Company may require you to enter into an arrangement providing for the payment
by you to the Company of any tax withholding obligation of the Company arising
by reason of (1) the exercise of your option, (2) the lapse of any substantial
risk of forfeiture to which the shares of Common Stock are subject at the time
of exercise, or (3) the disposition of shares of Common Stock acquired upon
such exercise.

(c)           If your option is
an incentive stock option, by exercising your option you agree that you will
notify the Company in writing within fifteen (15) days after the date of any
disposition of any of the shares of the Common Stock issued upon exercise of
your option that occurs within two (2) years after the date of your option
grant or within one (1) year after such shares of Common Stock are transferred
upon exercise of your option.

(d)           By exercising your option you
agree that the Company (or a representative of the underwriter(s)) may, in
connection with the first underwritten registration of the offering of any
securities of the Company under the Securities Act, require that you not sell,
dispose of, transfer, make any short sale of, grant any option for the purchase
of, or enter into any hedging or similar transaction with the same economic
effect as a sale, any shares of Common Stock or other securities of the Company
held by you, for a period of time specified by the underwriter(s) (not to
exceed one hundred eighty (180) days) following the effective date of the
registration statement of the Company filed under the Securities Act.  You further agree to execute and deliver such
other agreements as may be reasonably requested by the Company and/or the
underwriter(s) that are consistent with the foregoing or that are necessary to
give 

 

3

 

further
effect thereto.  In order to enforce the
foregoing covenant, the Company may impose stop-transfer instructions with
respect to your shares of Common Stock until the end of such period.  The underwriters of the Company’s stock are intended
third party beneficiaries of this Section 8(d) and shall have the right, power
and authority to enforce the provisions hereof as though they were a party
hereto.

9.             TRANSFERABILITY.  Your option is not transferable, except by
will or by the laws of descent and distribution, and is exercisable during your
life only by you.  Notwithstanding the
foregoing, by delivering written notice to the Company, in a form satisfactory
to the Company, you may designate a third party who, in the event of your
death, shall thereafter be entitled to exercise your option.

10.          RIGHT OF FIRST REFUSAL.  Shares of Common Stock that you acquire upon
exercise of your option are subject to any right of first refusal that may be
described in the Company’s bylaws in effect at such time the Company elects to
exercise its right.  The Company’s right
of first refusal shall expire on the Listing Date.

11.          RIGHT OF REPURCHASE.  To the extent provided in the Company’s
bylaws as amended from time to time, the Company shall have the right to
repurchase all or any part of the shares of Common Stock you acquire pursuant
to the exercise of your option.

12.          OPTION NOT A SERVICE CONTRACT.  Your option is not an employment or service
contract, and nothing in your option shall be deemed to create in any way
whatsoever any obligation on your part to continue in the employ of the Company
or an Affiliate, or of the Company or an Affiliate to continue your
employment.  In addition, nothing in your
option shall obligate the Company or an Affiliate, their respective
shareholders, Board, Officers or Employees to continue any relationship that
you might have as a Director or Consultant for the Company or an Affiliate.

13.          WITHHOLDING OBLIGATIONS.

(a)           At the time you
exercise your option, in whole or in part, or at any time thereafter as
requested by the Company, you hereby authorize withholding from payroll and any
other amounts payable to you, and otherwise agree to make adequate provision
for (including by means of a “cashless  exercise” pursuant to a program
developed under Regulation T as promulgated by the Federal Reserve Board to the
extent permitted by the Company), any sums required to satisfy the federal,
state, local and foreign tax withholding obligations of the Company or an
Affiliate, if any, which arise in connection with your option.

(b)           Upon your request
and subject to approval by the Company, in its sole discretion, and compliance
with any applicable conditions or restrictions of law, the Company may withhold
from fully vested shares of Common Stock otherwise issuable to you upon the
exercise of your option a number of whole shares of Common Stock having a Fair
Market Value, determined by the Company as of the date of exercise, not in
excess of the minimum amount of tax required to be withheld by law.  If the date of determination of any tax
withholding obligation is deferred to a date later than the date of exercise of
your option, share withholding pursuant to the preceding sentence shall not be
permitted unless you make a proper and timely election under Section 83(b)
of the Code, covering the aggregate number of shares of Common Stock acquired
upon such exercise with respect to which such determination is otherwise
deferred, to accelerate the determination of such tax withholding obligation to
the date of exercise of your option. 
Notwithstanding the filing of such election, shares of Common Stock
shall be withheld solely from fully vested shares of Common Stock determined as
of the date of exercise of your option that are otherwise issuable to you upon
such exercise.  Any adverse consequences
to you arising in connection with such share withholding procedure shall be
your sole responsibility.

 

4

 

(c)           You may not
exercise your option unless the tax withholding obligations of the Company
and/or any Affiliate are satisfied. 
Accordingly, you may not be able to exercise your option when desired
even though your option is vested, and the Company shall have no obligation to
issue a certificate for such shares of Common Stock or release such shares of
Common Stock from any escrow provided for herein.

14.          NOTICES.  Any notices provided for in your option or
the Plan shall be given in writing and shall be deemed effectively given upon
receipt or, in the case of notices delivered by mail by the Company to you,
five (5) days after deposit in the United States mail, postage prepaid,
addressed to you at the last address you provided to the Company.

15.          GOVERNING PLAN
DOCUMENT.  Your option is
subject to all the provisions of the Plan, the provisions of which are hereby
made a part of your option, and is further subject to all interpretations,
amendments, rules and regulations which may from time to time be promulgated
and adopted pursuant to the Plan.  In the
event of any conflict between the provisions of your option and those of the
Plan, the provisions of the Plan shall control.

 

5

 

ARYX
THERAPEUTICS

STOCK
OPTION GRANT NOTICE

(2001 EQUITY INCENTIVE PLAN)

 

ARYX THERAPEUTICS, a California corporation (the “Company”), pursuant
to its 2001 Equity Incentive Plan (the “Plan”), hereby grants to Optionholder an
option to purchase the number of shares of the Company’s Common Stock set forth
below.  This option is subject to all of
the terms and conditions as set forth herein and in the Stock Option Agreement,
the Plan and the Notice of Exercise, all of which are attached hereto and
incorporated herein in their entirety.

 

	
  Optionholder:

  	
   

  
	
  Date of Grant:

  	
   

  
	
  Vesting
  Commencement Date:

  	
   

  
	
  Number of Shares
  Subject to Option:

  	
   

  
	
  Exercise Price
  (Per Share):

  	
   

  
	
  Total Exercise
  Price:

  	
   

  
	
  Expiration Date:

  	
   

  

 

	
  Type of Grant:

  	
   

  	
   ̈ Incentive Stock Option

  	
   

  	
   ̈ Nonstatutory Stock Option

  
	
  Exercise Schedule:

  	
   

  	
   ̈ Same as Vesting Schedule

  	
   

  	
   ̈ Early Exercise Permitted

  

 

Vesting Schedule:

 

Payment:                                            By one or a combination of the following
items (described in the Stock Option Agreement):  By cash or check

 

Additional
Terms/Acknowledgements:  The undersigned Optionholder
acknowledges receipt of, and understands and agrees to, this Grant Notice, the
Stock Option Agreement and the Plan. 
Optionholder further acknowledges that as of the Date of Grant, this
Grant Notice, the Stock Option Agreement and the Plan set forth the entire
understanding between Optionholder and the Company regarding the acquisition of
stock in the Company and supersede all prior oral and written agreements on
that subject with the exception of (i) options previously granted and delivered
to Optionholder under the Plan, and (ii) the following agreements only:

 

	
  OTHER AGREEMENTS:

  	
   

  
	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  ARYX THERAPEUTICS

  	
   

  	
  OPTIONHOLDER:

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  By:

  	
   

  	
   

  	
   

  
	
   

  	
  Signature

  	
   

  	
  Signature

  
	
  Title:

  	
   

  	
   

  	
  Date:

  	
   

  
	
  Date:

  	
   

  	
   

  	
   

  	
   

  

 

ATTACHMENTS: 
Stock Option Agreement, 2001 Equity Incentive Plan and Notice of
Exercise

 

 

 

NOTICE OF EXERCISE

 

	
  Aryx
  Therapeutics

  	
   

  	
   

  	
   

  	
   

  
	
  6300 Dumbarton
  Circle

  	
   

  	
   

  	
   

  	
   

  
	
  Fremont, CA
  94555

  	
   

  	
   

  	
  Date of
  Exercise:  

  	
   

  

 

Ladies
and Gentlemen:

This constitutes notice under my stock option that I
elect to purchase the number of shares for the price set forth below.

	
  Type of option
  (check one):

  	
   

  	
  Incentive  ̈

  	
   

  	
  Nonstatutory  ̈

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Stock option
  dated:

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Number of shares
  as to which option is exercised:

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Certificates to
  be issued in name of:

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Total exercise
  price:

  	
   

  	
  $

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Cash payment
  delivered herewith:

  	
   

  	
  $

  	
   

  	
   

  

 

By this exercise, I agree (i) to provide such
additional documents as you may require pursuant to the terms of the Stock
Option Grant Notice and the Stock Option Agreement, (ii) to provide for
the payment by me to you (in the manner designated by you) of your withholding
obligation, if any, relating to the exercise of this option, and (iii) if
this exercise relates to an incentive stock option, to notify you in writing
within fifteen (15) days after the date of any disposition of any of the shares
of Common Stock issued upon exercise of this option that occurs within two (2)
years after the date of grant of this option or within one (1) year after such
shares of Common Stock are issued upon exercise of this option.

I hereby make the following certifications and
representations with respect to the number of shares of Common Stock of the
Company listed above (the “Shares”), which are being acquired by me for my own
account upon exercise of the Option as set forth above:

I acknowledge that the Shares have not been registered
under the Securities Act of 1933, as amended (the “Securities Act”), and are
deemed to constitute “restricted securities” under Rule 701 and “control
securities” under Rule 144 promulgated under the Securities Act.  I warrant and represent to the Company that I
have no present intention of distributing or selling said Shares, except as
permitted under the Securities Act and any applicable state securities laws.

 

1

 

I further acknowledge that I will not be able to
resell the Shares for at least ninety days (90) after the stock of the Company
becomes publicly traded (i.e., subject
to the reporting requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934) under Rule 701 and that more restrictive conditions apply to
affiliates of the Company under Rule 144.

I further acknowledge that all certificates
representing any of the Shares subject to the provisions of the Option shall
have endorsed thereon appropriate legends reflecting the foregoing limitations,
as well as any legends reflecting restrictions pursuant to the Company’s
Articles of Incorporation, Bylaws and/or applicable securities laws.

I further agree that, if required by the Company (or a
representative of the underwriter(s)) in connection with the first underwritten
registration of the offering of any securities of the Company under the
Securities Act, I will not sell or otherwise transfer or dispose of any shares
of Common Stock or other securities of the Company during such period (not to
exceed one hundred eighty (180) days) following the effective date of the
registration statement of the Company filed under the Securities Act as may be
requested by the Company or the representative of the underwriters.  I further agree to execute and deliver such
other agreements as may be reasonably requested by the Company and/or the
underwriter(s) that are consistent with the foregoing or that are necessary to
give further effect thereto.  I further
agree that the Company may impose stop-transfer instructions with respect
to securities subject to the foregoing restrictions until the end of such
period.

	
   

  	
   

  	
  Very truly yours,

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  

 

 

2

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