Document:

exv10w14

 

Exhibit 10.14

Avalon Pharmaceuticals

Non-Qualified Stock Option Agreement

     1. Grant of Option. Avalon Pharmaceuticals, Inc., a Delaware corporation (the
“Company”) hereby grants to                     , an entity whose address is set forth below the
optionee signature line (the “Optionee”), an option, pursuant to the Company’s 1999 Stock Plan (the
“Plan”), to purchase an aggregate of 5,000 shares of common stock of the Company (“Common Stock”)
at a price of $.20 per share, purchasable as set forth in and subject to the terms and conditions
of this option and the Plan. Except where the context otherwise requires, the term “Company” shall
include the parent and all present and future subsidiaries of the Company as defined in Sections
424(e) and 424(f) of the Internal Revenue Code of 1986, as amended or replaced from time to time
(the “Code”).

     2. Non-Qualified Stock Option. This option is not intended to qualify as an
incentive stock option (“Incentive Stock Option”) within the meaning of Section 422 of the
Code.

     3. Exercise of Option and Provisions for Termination.

          (a) Vesting Schedule. Except as otherwise provided in this Agreement, this option
may be exercised as to the number of shares indicated opposite the respective dates on Schedule
A hereto (“Vested Shares”). This option may not be exercised with respect to any shares after
the tenth anniversary of the date of grant (hereinafter the “Expiration Date”).

          (b) Exercise Procedure. Subject to the conditions set forth in this Agreement,
this option shall be exercised by the Optionee’s delivery of written notice of exercise to the
Company, specifying the number of shares to be purchased and the purchase price to be paid
therefor and accompanied by payment in full in accordance with Section 4. Such exercise shall
be effective upon receipt by the Company of such written notice together with the required
payment. The Optionee may purchase less than the number of shares covered hereby, provided that
no partial exercise of this option may be for any fractional share or for less than one whole
share.

          (c) Continuous
Employment/Engagement Required. Except as otherwise provided in
this Section 3, this option may not be exercised unless
Dr. Ivor Royston (Royston), at the time
Optionee exercises this option, is, and has been at all times since the date of grant of this option, an employee, consultant, officer or director of the Company. For all purposes of this
option, (i) “employment” shall be defined in accordance with the provisions of Section 1.421-7(h)
of the Income Tax Regulations or any successor regulations, and (ii) if this option shall be
assumed or a new option substituted therefore in a transaction to which Section 424(a) of the Code
applies, employment or engagement as a consultant, director or officer by such assuming or
substituting corporation (hereinafter called the “Successor Corporation”) shall be considered for
all purposes of this option to be employment or engagement by the Company.

 

 

          (d) Exercise Period Upon Termination of Employment. If Royston ceases to be
employed or engaged by the Company for any reason, then, except as provided in paragraphs (e)
and (f) below, the right to exercise this option shall terminate three months after such
cessation (but in no event after the Expiration Date), provided that this option shall be
exercisable only to the extent that the Optionee was entitled to exercise this option on the date
of such cessation. Notwithstanding the foregoing, if the Optionee or Royston, prior to the
Expiration Date, materially violates any non-competition or confidentiality provisions of any
agreement between the Optionee and the Company, the right to exercise this option shall
terminate immediately upon such violation.

          (e) Exercise Period Upon Death or Disability. If Royston dies or becomes disabled
(within the meaning of Section 22(e)(3) of the Code) prior to the Expiration Date while he is
an employee, consultant, director or officer of the Company, or if Royston dies within three
months after Royston ceases to be an employee, consultant, director or officer of the Company
(other than as the result of a discharge for “cause” as specified in paragraph (f) below), this
option shall be exercisable, within the period of one year following the date of death or
disability of Royston (but in no event after the Expiration Date), by the Optionee;
provided that this option shall be exercisable only to the extent that this option was
exercisable by the Optionee on the date of Royston’s death or disability.

          (f) Voluntary Termination or Discharge for Cause. If Royston, prior to the
Expiration Date, ceases his or her employment or engagement with the Company because he or she
voluntarily resigns or is discharged for “Cause” (as defined below), the right to exercise this
option shall terminate immediately upon such cessation of employment or engagement. “Cause” is
conduct, as determined by the Board of Directors, involving one or more of the following: (i)
gross misconduct by the Optionee which is materially injurious to the Company; or (ii) the
commission of an act of embezzlement, fraud or deliberate disregard of the rules or policies of
the Company which results in material economic loss, damage or injury to the Company; or (iii)
the unauthorized disclosure of any trade secret or confidential information of the Company or
any third party who has a business relationship with the Company or
the violation of any non-competition covenant or assignment of inventions obligation with the Company; or (iv) the
commission of any act which induces any customer or prospective customer of the Company to
break a contract with the Company or to decline to do business with the Company; or (v) the
conviction of Royston of a felony involving any financial impropriety or which would materially
interfere with the Optionee’s ability to perform his services for the Company or otherwise be
injurious to the Company; or (vi) the failure of Royston to perform in a material respect his or
her employment or engagement obligations without proper cause. In making such determination,
the Board of Directors shall act fairly and in utmost good faith. For the purposes of this
subsection (f), termination of employment or engagement shall be deemed to occur when Royston
receives notice that his or her employment or engagement is terminated.

          (g) If Royston’s engagement or employment with the Company terminates prior to the
Company’s first underwritten offering to the public pursuant to an effective registration statement
under the Securities Act of 1933, as amended, then the Company shall have the right and option to
purchase, for a period of 180 days from the date of Royston’s termination of engagement or
employment, and if the Company exercises such right, the Optionee shall be required to sell to the
Company, any or all of the shares of Common Stock of

 

 

the Company granted hereunder at a price per share equal to the fair market value (determined by an
independent third party appraiser as of the date the Company exercises such right). If at any time
the Company elects to purchase shares pursuant to this Section 3(g), the closing of such purchase
shall take place at the offices of the Company within 30 days after delivery of notice to the
Optionee of the Company’s election to purchase such shares. The purchase price for such shares
shall be paid by delivery of a bank cashier’s check or certified check.

     4. Payment of Purchase Price

          (a) Method of Payment. Payment of the purchase price for shares purchased upon
exercise of this option shall be made (i) by delivery to the Company of cash or a certified or
bank check to the order of the Company in an amount equal to the purchase price of such shares,
(ii) subject to the consent of the Company, by delivery to the Company of shares of Common
Stock of the Company then owned by the Optionee having a fair market value equal in amount to
the purchase price of such shares, (iii) subject to the consent of the Company, by the delivery
of an assignment to the Company of a sufficient amount of the proceeds from the sale of the
Common Stock acquired upon exercise of this option and an authorization to the broker or
selling agent to pay that amount to the Company, which sale shall be at the Optionee’s direction
at the time of exercise, (iv) by any other means (including, without limitation, by delivery of a
promissory note of the Optionee payable on such terms as are specified by the Board of
Directors) which the Board of Directors determines are consistent with the purpose of the Plan
and with applicable laws and regulations (including, without limitation, the provisions of Rule
16b-3 under the Securities Exchange Act of 1934 and Regulation T promulgated by the Federal
Reserve Board), or (v) by any combination of such methods of payment.

          (b) Valuation of Shares or Other Non-Cash Consideration Tendered in Payment of
Purchase Price. For the purposes hereof, unless a recognized market value is available, the
fair market value of any share of the Company’s Common Stock or other non-cash consideration
which may be delivered to the Company in exercise of this option shall be determined in good
faith by the Board of Directors of the Company.

          (c) Delivery of Shares Tendered in Payment of Purchase Price. If the Optionee
exercises this option by delivery of shares of Common Stock of the Company, the certificate or
certificates representing the shares of Common Stock of the Company to be delivered shall be
duly executed in blank by the Optionee or shall be accompanied by a stock power duly executed
in blank suitable for purposes of transferring such shares to the Company. Fractional shares of
Common Stock of the Company will not be accepted in payment of the purchase price of shares
acquired upon exercise of this option.

          (d) Net Issue Exercise. Prior to the closing of the Company’s first underwritten
offering to the public pursuant to an effective registration statement under the Securities Act
of 1933, as amended, in lieu of the payment provisions set forth in Section 4(a), the Optionee
may elect to exercise this option by using the following formula:

X = Y ( A – B )

        A

Where: X = The number of shares of Common Stock to be issued to the Optionee.

 

 

          Y = The number of shares of Common Stock receivable upon exercise of this option (at the date of such calculation).

          A = The fair market value of one share of Common Stock (at the date of such calculation).

          B = The per share purchase price payable for one share of Common Stock upon exercise of this
option.

     5. Delivery
of Shares; Compliance With Securities Laws, Etc.

          (a) General. The Company shall, upon payment of the option price for the
number of shares purchased and paid for, make prompt delivery of such shares to the Optionee;
provided that if any law or regulation requires the Company to take any action with respect
to such shares before the issuance thereof, then the date of delivery of such shares shall be
extended for the period necessary to complete such action.

          (b) Listing, Qualification, Etc. This option shall be subject to the requirement
that if, at any time, counsel to the Company shall determine that the listing, registration or
qualification of the shares subject hereto upon any securities exchange or under any state or
federal law, or the consent or approval of any governmental or regulatory body, or that the
disclosure of non-public information or the satisfaction of any other condition is necessary as a
condition of, or in connection with, the issuance or purchase of shares hereunder, this option
may not be exercised, in whole or in part, unless such listing, registration, qualification,
consent or approval, disclosure or satisfaction of such other condition shall have been
effected or obtained on terms acceptable to the Board of Directors. Nothing herein shall be
deemed to require the Company to apply for, effect or obtain such listing, registration,
qualification, or disclosure, or to satisfy such other condition.

     6. Non-transferability of Option. This option is personal and no rights granted
hereunder may be transferred, assigned, pledged or hypothecated in any way (whether by
operation of law or otherwise) nor shall any such rights be subject to execution, attachment or
similar process. Upon any attempt to transfer, assign, pledge, hypothecate or otherwise dispose
of this option or of such rights contrary to the provisions hereof, or upon the levy of any
attachment or similar process upon this option or such rights, this option and such rights shall,
at the election of the Company, become null and void.

     7. No Special Employment Rights. Nothing contained in the Plan or this option
shall be construed or deemed by any person under any circumstances to bind the Company to
continue the employment or engagement of the Optionee for the period within which this option
may be exercised, or for any other period.

     8. Rights as a Shareholder. The Optionee shall have no rights as a shareholder with
respect to any shares which may be purchased by exercise of this option (including, without
limitation, any rights to receive dividends or non-cash distributions with respect to such shares)
unless and until a certificate representing such shares is duly issued and delivered to the
Optionee. No adjustment shall be made for dividends or other rights for which the record date is
prior to the date such stock certificate is issued.

 

 

     9. Adjustment Provisions

          (a) General. If, through, or as a result of, any merger, consolidation, sale of
all or substantially all of the assets of the Company, reorganization, recapitalization,
reclassification, stock dividend, stock split, reverse stock split or other similar transaction,
(i) the outstanding shares of Common Stock are increased, decreased or exchanged for a
different number or kind of shares or other securities of the Company, or (ii) additional
shares or new or different shares or other securities of the Company or other non-cash assets
are distributed with respect to such shares of Common Stock or other securities, the Optionee
shall, with respect to this option or any unexercised portion hereof, be entitled to the rights
and benefits, and be subject to the limitations, set forth in Section 15(a) of the Plan.

          (b) Board Authority to Make Adjustments. Any adjustments under this Section 9 will
be made by the Board of Directors, whose determination as to what adjustments, if any, will be
made and the extent thereof will be final, binding and conclusive. No fractional shares will be
issued pursuant to this option on account of any such adjustments.

          (c) Limits on Adjustments. No adjustment shall be made under this Section 9 which
would, within the meaning of any applicable provision of the Code, constitute a modification,
extension or renewal of this option or a grant of additional benefits to the Optionee.

     10. Withholding Taxes. The Company’s obligation to deliver shares of Common Stock
upon the exercise of this option shall be subject to the Optionee’s satisfaction of all
applicable federal, state, local and foreign taxes of any kind required by law to be withheld with
respect to any shares issued upon exercise of this option. If the Company, in its discretion,
determines that it must or should withhold or pay over tax with respect to the exercise of this
option, the Optionee hereby agrees that, at the option of the Company, Optionee will pay to the
Company or the Company may withhold from the Optionee’s wages the appropriate amount of
federal, state, local and foreign taxes attributable thereto. At the Company’s discretion, the
amount required to be withheld may be withheld in cash from such wages, or (with respect to
compensation income attributable to the exercise of this option) in kind from the Common Stock
otherwise deliverable to the Optionee on exercise of this Option. The Optionee further agrees
that, if the Company does not withhold an amount from the Optionee’s wages sufficient to
satisfy the Company’s withholding obligation, the Optionee will reimburse the Company on
demand, in cash, for the amount under withheld.

     11. Investment
Representations; Legends; Limitations on Certain Dispositions

          (a) Representations. The Optionee represents, warrants and covenants that:

          (i) Any shares purchased upon exercise of this option shall be acquired for the
Optionee’s account for investment only and not with a view to, or for sale in connection
with, any distribution of the shares in violation of the Securities Act of 1933, as amended
(the “Securities Act”), or any rule or regulation under the Securities Act.

 

 

          (ii) The Optionee has had such opportunity as he or she has deemed adequate to
obtain from representatives of the Company such information as is necessary to permit the
Optionee to evaluate the merits and risks of his or her investment in the Company.

          (iii) The Optionee is able to bear the economic risk of holding shares acquired
pursuant to the exercise of this option for an indefinite period.

          (iv) The Optionee understands that (A) the shares acquired pursuant to the
exercise of this option will not be registered under the Securities Act and are “restricted
securities” within the meaning of Rule 144 under the Securities Act; (B) such shares cannot
be sold, transferred or otherwise disposed of unless they are subsequently registered under
the Securities Act or an exemption from registration is then available; (C) in any event, an
exemption from registration under Rule 144 or otherwise under the Securities Act may not be
available for at least one year and even then will not be available unless a public market
then exists for the Common Stock, adequate information concerning the Company is then
available to the public and other terms and conditions of Rule 144 are complied with; and
(D) there is now no registration statement on file with the Securities and Exchange
Commission with respect to any stock of the Company and the Company has no obligation or
current intention to register any shares acquired pursuant to the exercise of this option
under the Securities Act.

     By making payment upon exercise of this option, the Optionee shall be deemed to have
reaffirmed, as of the date of such payment, the representations made in this Section 11.

          (b) Legends on Stock Certificates. All stock certificates representing shares of
Common Stock issued to the Optionee upon exercise of this option shall have affixed thereto
legends substantially in the following forms, in addition to any other legends required by
applicable law:

“The securities represented by this certificate have not been
registered under the Securities Act of 1933 and may not be
transferred, sold or otherwise disposed of in the absence of an
effective registration statement with respect thereto under the
Securities Act of 1933, or an opinion of counsel satisfactory to the
Company to the effect that registration under such Act is not
required.”

“The securities represented by this certificate are subject to
certain rights of repurchase and restrictions on transfer set forth
in the Non-Qualified Stock Option Agreement between the Company and
the holder hereof pursuant to which such securities were issued. A
copy of such Agreement will be provided free of charge to the holder
of this certificate upon written request therefor addressed to the
Company.”

          (c) Limitations on Certain Dispositions. The Optionee agrees, by accepting
this option, that if the Company offers any of its Common Stock for sale pursuant to a
registration statement under the Securities Act, the Optionee will not, directly or indirectly,
without the prior written consent of the Company, sell, offer or agree to sell, grant any option to
purchase or otherwise transfer or dispose of any shares of Common Stock purchased upon

 

 

exercise of this option for a period of 180 days after the effective date of such registration
statement.

     12. Interpretation of this Agreement. All decisions and interpretations made by the
Committee, as defined in Section 2 of the Plan, with regard to any question arising under the
Plan or this Agreement shall be binding and conclusive on the Company and the Optionee and any
other person entitled to exercise this option as provided herein. In the event there is any
inconsistency between the provisions of this Agreement and of the Plan, the provisions of the
Plan shall govern, subject to the provisions of section 2 above.

     13. Miscellaneous

          (a) Except as provided herein, this option may not be amended or otherwise modified unless
evidenced in writing and signed by the Company and the Optionee.

          (b) All notices under this option shall be mailed or delivered by hand to the parties at
their respective addresses set forth beneath their names below or at such other address as may
be designated in writing by either of the parties to one another.

          (c) This option shall be governed by and construed in accordance with the laws of the
State of Delaware.

Date of Grant:

	 	 	 	 	 	 	 
	

	 	By:	 	 	 	 
	 	 	 	 	 
	

	 	 	 	 	 	Kenneth C. Carter, Ph.D.
	

	 	 	 	 	 	President and CEO
	

	 	 	 	 	 	Avalon Pharmaceuticals, Inc.

 

 

OPTIONEE’S ACCEPTANCE

     The undersigned hereby accepts the foregoing option and agrees to the terms and conditions
thereof. The undersigned hereby acknowledges receipt of a copy of the Company’s 1999 Stock Plan.

	 	 	 
	

	 	OPTIONEE:exv10w15

 

Exhibit 10.15

Avalon Pharmaceuticals

Non-Qualified Stock Option Agreement

     1. Grant
of Option. Avalon Pharmaceuticals, Inc., a Delaware corporation (the
“Company”) hereby grants to                                         , individual whose address is set forth below the
optionee signature line (the “Optionee”), an option, pursuant to the Company’s Amended and

Restated 1999 Stock Plan as of October 15, 2001 (the “Plan”), to purchase an aggregate of
             shares of common stock of the Company (“Common Stock”) at a price of $.40 per share, purchasable
as set forth in and subject to the terms and conditions of this option and the Plan. Except where
the context otherwise requires, the term “Company” shall include the parent and all present and
future subsidiaries of the Company as defined in Sections 424(e) and 424(f) of the Internal
Revenue Code of 1986, as amended or replaced from time to time (the “Code”).

     2. Non-Qualified
Stock Option. This option is not intended to qualify as an
incentive stock option (“Incentive Stock Option”) within the meaning of Section 422 of the
Code.

     3. Exercise of Option and Provisions for Termination.

          (a) Vesting Schedule. Except as otherwise provided in this Agreement, this option
may be exercised as to the number of shares indicated opposite the respective dates on Schedule
A hereto (“Vested Shares”). This option may not be exercised with respect to any shares after
the tenth anniversary of the date of grant (hereinafter the “Expiration Date”).

          (b) Exercise Procedure. Subject to the conditions set forth in this Agreement, this
option shall be exercised by the Optionee’s delivery of written notice of exercise to the
Company, specifying the number of shares to be purchased and the purchase price to be paid
therefor and accompanied by payment in full in accordance with Section 4. Such exercise shall
be effective upon receipt by the Company of such written notice together with the required
payment. The Optionee may purchase less than the number of shares covered hereby, provided that
no partial exercise of this option may be for any fractional share or for less than one whole
share.

          (c) Fulfillment of All Contractual Obligations or Other Duties Required. Except as
otherwise provided in this Section 3, this option may not be exercised unless the Optionee, at
the time he or she exercises this option, has either, (i) fully performed and satisfied the
terms and conditions of the agreement pursuant to which this option was granted and/or (ii) if
the Optionee is an officer or director of the Company, and to date, has fulfilled and discharged
the duties and obligations owed as said officer or director, to the satisfaction of the Company.

          (d) Exercise
Period Upon Termination of Engagement. If the Optionee’s engagement
is terminated by the Company for any reason other than for “Cause” (as defined below), then,
except as provided in paragraphs (c) above and (e) and (f) below, the right to exercise this
option shall terminate the earlier of (i) the fifth anniversary of the date of termination
(“Post-Termination Exercise Period”) or (ii) the Expiration Date. Provided that this

 

 

option shall be exercisable
only to the extent that the Optionee was entitled to exercise this
option on the date of termination. Notwithstanding the foregoing, if the Optionee, prior to the
Expiration Date, materially violates any non-competition or confidentiality provisions of any
agreement between the Optionee and the Company, the right to exercise this option shall terminate
immediately upon such violation. An Optionee’s engagement shall not be deemed terminated by the
Company if the engagement expires in the ordinary course of the engagement.

          (e) Exercise
Period Upon Death or Disability. If the Optionee dies or becomes
disabled (within the meaning of Section 22(e)(3) of the Code) prior to the Expiration Date while
he or she is engaged by the Company or during the Post-Termination Exercise Period, (other than as
the result of a discharge for “cause” as specified in paragraph (f) below), this option shall be
exercisable, within the period of one year following the date of death or disability of the
Optionee (but in no event after the Expiration Date), by the Optionee or by the person to whom
this option is transferred by will or the laws of descent and distribution; provided that this
option shall be exercisable only to the extent that this option was exercisable by the Optionee on
the date of his or her death or disability. Except as otherwise indicated by the context, the term
“Optionee”, as used in this option, shall be deemed to include the estate of the Optionee or any
person who acquires the right to exercise this option by bequest or inheritance or otherwise by
reason of the death of the Optionee.

          (f) Termination for Cause. If the Optionee, prior to the Expiration Date, ceases
his or her engagement with the Company because he or she is terminated for “Cause” (as defined
below), the right to exercise this option shall terminate immediately upon such cessation of
engagement. “Cause” is conduct, as determined by the Board of Directors, involving one or more of
the following: (i) gross misconduct by the Optionee which is materially injurious to the Company;
or (ii) the commission of an act of embezzlement, fraud or deliberate disregard of the rules or
policies of the Company which results in material economic loss, damage or injury to the Company;
or (iii) the unauthorized disclosure of any trade secret or confidential information of the
Company or any third party who has a business relationship with the Company or the violation of
any noncompetition covenant or assignment of inventions obligation with the Company; or (iv) the
commission of any act which induces any customer or prospective customer of the Company to break
a contract with the Company or to decline to do business with the Company; or (v) the conviction
of the Optionee of a felony involving any financial impropriety or which would materially
interfere with the Optionee’s ability to perform his or her services for the Company or otherwise
be injurious to the Company; or (vi) the failure of the optionee to perform in a material respect
his or her engagement obligations without proper cause. In making such determination, the Board
of Directors shall act fairly and in utmost good faith. For the purposes of this subsection (f),
termination of engagement shall be deemed to occur when the optionee receives notice that his or
her engagement is terminated.

          (g) Buy Back Rights: If the Optionee, prior to the Expiration Date, ceases his or
her engagement with the Company because he or she is terminated for Cause pursuant to paragraph
(f) of this Section 3 prior to the Company’s first underwritten offering to the public pursuant
to an effective registration statement under the Securities Act of 1933, as amended, then the
Company shall have the right and option to purchase, for a period of 180 days from the date of
the Optionee’s termination of engagement, and if the Company exercises such right, the Optionee
shall be required to sell to the Company, any or all of the shares of Common Stock of

2

 

the Company which may have been granted hereunder as a result of a previous exercise, or as a
result of a previous exercise under an Option Agreement granted in connection with a previous
period of engagement with the Company, at a price per share equal to the fair market value
(determined by an independent third party appraiser as of the date the Company exercises such
right). If at any time the Company elects to purchase shares pursuant to this Section 3(g), the
closing of such purchase shall take place at the offices of the Company within 30 days after
delivery of notice to the Optionee of the Company’s election to purchase such shares. The purchase
price for such shares shall be paid by delivery of a bank cashier’s check or certified check. This
provision 3(g) shall survive the exercise or partial exercise of this Option.

     4. Payment of Purchase Price

          (a) Method of Payment. Payment of the purchase price for shares purchased upon
exercise of this option shall be made (i) by delivery to the Company of cash or a certified or
bank check to the order of the Company in an amount equal to the purchase price of such shares,
(ii) subject to the consent of the Company, by delivery to the Company of shares of Common Stock
of the Company then owned by the Optionee having a fair market value equal in amount to the
purchase price of such shares, (iii) subject to the consent of the Company, by the delivery of an
assignment to the Company of a sufficient amount of the proceeds from the sale of the Common
Stock acquired upon exercise of this option and an authorization to the broker or selling agent
to pay that amount to the Company, which sale shall be at the Optionee’s direction at the time of
exercise, (iv) by any other means (including, without limitation, by delivery of a promissory
note of the Optionee payable on such terms as are specified by the Board of Directors) which the
Board of Directors determines are consistent with the purpose of the Plan and with applicable
laws and regulations (including, without limitation, the provisions of Rule 16b-3 under the
Securities Exchange Act of 1934 and Regulation T promulgated by the Federal Reserve Board), or
(v) by any combination of such methods of payment.

          (b) Valuation of Shares or Other Non-Cash Consideration Tendered in Payment of Purchase
Price. For the purposes hereof, unless a recognized market value is available, the fair
market value of any share of the Company’s Common Stock or other non-cash consideration which may
be delivered to the Company in exercise of this option shall be determined in good faith by the
Board of Directors of the Company.

          (c) Delivery
of Shares Tendered in Payment of Purchase Price. If the Optionee
exercises this option by delivery of shares of Common Stock of the Company, the certificate or
certificates representing the shares of Common Stock of the Company to be delivered shall be duly
executed in blank by the Optionee or shall be accompanied by a stock power duly executed in blank
suitable for purposes of transferring such shares to the Company. Fractional shares of Common
Stock of the Company will not be accepted in payment of the purchase price of shares acquired
upon exercise of this option.

          (d) Net
Issue Exercise. Prior to the closing of the Company’s first
underwritten offering to the public pursuant to an effective registration statement under the
Securities Act of 1933, as amended, in lieu of the payment provisions set forth in Section 4(a),
the Optionee may elect to exercise this option by using the following formula:

3

 

X = Y (A - B)
A

Where: X = The number of shares of Common Stock to be issued to the Optionee.

          Y = The number of shares of Common Stock receivable upon
exercise of this option (at the date of such calculation).

          A = The fair market value of one share of Common Stock (at
the date of such calculation).

          B = The per share purchase price payable for one share of Common Stock upon exercise of this
option.

     5. Delivery
of Shares; Compliance With Securities Laws, Etc.

          (a) General. The Company shall, upon payment of the option price for the number of
shares purchased and paid for, make prompt delivery of such shares to the Optionee; provided that
if any law or regulation requires the Company to take any action with respect to such shares
before the issuance thereof, then the date of delivery of such shares shall be extended for the
period necessary to complete such action.

          (b) Listing,
Qualification, Etc. This option shall be subject to the requirement
that if, at any time, counsel to the Company shall determine that the listing, registration or
qualification of the shares subject hereto upon any securities exchange or under any state or
federal law, or the consent or approval of any governmental or regulatory body, or that the
disclosure of non-public information or the satisfaction of any other condition is necessary as a
condition of, or in connection with, the issuance or purchase of shares hereunder, this option may
not be exercised, in whole or in part, unless such listing, registration, qualification, consent
or approval, disclosure or satisfaction of such other condition shall have been effected or
obtained on terms acceptable to the Board of Directors. Nothing herein shall be deemed to require
the Company to apply for, effect or obtain such listing, registration, qualification, or
disclosure, or to satisfy such other condition.

     6. Nontransferability
of Option. This option is personal and no rights granted
hereunder may be transferred, assigned, pledged or hypothecated in any way (whether by operation
of law or otherwise) nor shall any such rights be subject to execution, attachment or similar
process except that this option may be transferred as provided in paragraph (e) of Section 3
above. Upon any attempt to transfer, assign, pledge, hypothecate or otherwise dispose of this
option or of such rights contrary to the provisions hereof, or upon the levy of any attachment or
similar process upon this option or such rights, this option and such rights shall, at the election
of the Company, become null and void.

     7. No
Special Employment Rights. Nothing contained in the Plan or this option
shall be construed or deemed by any person under any circumstances to bind the Company to
continue the engagement of the Optionee for the period within which this option may be exercised,
or for any other period.

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     8. Shareholder Rights

     (a) No Rights as a Shareholder until Exercise. The Optionee shall have no rights as a
shareholder with respect to any shares which may be purchased by exercise of this option
(including, without limitation, any rights to receive dividends or non-cash distributions with
respect to such shares) unless and until a certificate representing such shares is duly issued and
delivered to the Optionee. No adjustment shall be made for dividends or other rights for which
the record date is prior to the date such stock certificate is issued.

     (b) Transfer Restrictions on Underlying Stock. This Option is subject to the
requirement that upon exercise, the underlying security exchanged for the Option, shall be
subject to all of the transfer restrictions set forth in the Plan including but not limited those
requirements set forth in Paragraph 13 of the Plan entitled “Stock Transfer Restrictions on
Underlying Stock,” “Right of First Refusal” and “Drag Along Rights,” and in Paragraph 21 of the
Plan entitled “Lock-Up,” and as may be set forth in the by-laws of the Company. The Optionee
agrees to be bound by these restrictions and further agrees, upon the request of the Company to
execute any further documentation necessary to evidence said agreement. An Optionee’s failure to
execute same, at the Company’s request, shall cause the Option, and/or the underlying security to
be immediately null and void. The Company shall be free to place a legend on the back of the
underlying security specifying the foregoing restrictions.

9. Adjustment Provisions

          (a) General. If, through, or as a result of, any merger, consolidation, sale of all
or substantially all of the assets of the Company, reorganization, recapitalization,
reclassification, stock dividend, stock split, reverse stock split or other similar transaction,
(i) the outstanding shares of Common Stock are increased, decreased or exchanged for a different
number or kind of shares or other securities of the Company, or (ii) additional shares or new or
different shares or other securities of the Company or other non-cash assets are distributed with
respect to such shares of Common Stock or other securities, the Optionee shall, with respect to
this option or any unexercised portion hereof, be entitled to the rights and benefits, and be
subject to the limitations, set forth in Section 15(a) of the Plan.

          (b) Board Authority to Make Adjustments. Any adjustments under this Section 9
will be made by the Board of Directors, whose determination as to what adjustments, if any, will
be made and the extent thereof will be final, binding and conclusive. No fractional shares will
be issued pursuant to this option on account of any such adjustments.

          (c) Limits on Adjustments. No adjustment shall be made under this Section 9, which
would, within the meaning of any applicable provision of the Code, constitute a modification,
extension or renewal of this option or a grant of additional benefits to the Optionee.

     10. Withholding Taxes. The Company’s obligation to deliver shares of Common Stock
upon the exercise of this option shall be subject to the Optionee’s satisfaction of all
applicable federal, state, local and foreign taxes of any kind required by law to be withheld with
respect to any shares issued upon exercise of this option. If the Company, in its discretion,

5

 

determines that it must or should withhold or pay over tax with respect to the exercise of this
option, the Optionee hereby agrees that, at the option of the Company, Optionee will pay to the
Company or the Company may withhold from the Optionee’s wages the appropriate amount of federal,
state, local and foreign taxes attributable thereto. At the Company’s discretion, the amount
required to be withheld may be withheld in cash from such wages, or (with respect to compensation
income attributable to the exercise of this option) in kind from the Common Stock otherwise
deliverable to the Optionee on exercise of this Option. The Optionee further agrees that, if the
Company does not withhold an amount from the Optionee’s wages sufficient to satisfy the Company’s
withholding obligation, the Optionee will reimburse the Company on demand, in cash, for the amount
under withheld.

        11. Investment
Representations; Legends; Limitations on Certain Dispositions

          (a) Representations. The Optionee represents, warrants and covenants that:

               (i) Any shares purchased upon exercise of this option shall be acquired for the
Optionee’s account for investment only and not with a view to, or for sale in connection
with, any distribution of the shares in violation of the Securities Act of 1933, as amended
(the “Securities Act”), or any rule or regulation under the Securities Act.

               (ii) The Optionee has had such opportunity as he or she has deemed adequate to obtain
from representatives of the Company such information as is necessary to permit the Optionee
to evaluate the merits and risks of his or her investment in the Company.

               (iii) The Optionee is able to bear the economic risk of holding shares acquired
pursuant to the exercise of this option for an indefinite period.

               (iv) The Optionee understands that (A) the shares acquired pursuant to the exercise of
this option will not be registered under the Securities Act and are “restricted securities”
within the meaning of Rule 144 under the Securities Act; (B) such shares cannot be sold,
transferred or otherwise disposed of unless they are subsequently registered under the
Securities Act or an exemption from registration is then available; (C) in any event, an
exemption from registration under Rule 144 or otherwise under the Securities Act may not be
available for at least one year and even then will not be available unless a public market
then exists for the Common Stock, adequate information concerning the Company is then
available to the public and other terms and conditions of Rule 144 are complied with; and
(D) there is now no registration statement on file with the Securities and Exchange
Commission with respect to any stock of the Company and the Company has no obligation or
current intention to register any shares acquired pursuant to the exercise of this option
under the Securities Act.

       By making payment upon exercise of this option, the Optionee shall be deemed to have
reaffirmed, as of the date of such payment, the representations made in this Section 11.

          (b) Legends
on Stock Certificates. All stock certificates representing shares of
Common Stock issued to the Optionee upon exercise of this option shall have affixed thereto

6

 

legends substantially in the following forms, in addition to any other legends required by
applicable law:

“The securities represented by this certificate have not been
registered under the Securities Act of 1933 and may not be
transferred, sold or otherwise disposed of in the absence of an
effective registration statement with respect thereto under the
Securities Act of 1933, or an opinion of counsel satisfactory to the
Company to the effect that registration under such Act is not
required.”

“The securities represented by this certificate are subject to
certain rights of repurchase and restrictions on transfer set forth
in the Amended and Restated 1999 Stock Plan and in the Non-Qualified
Stock Option Agreement between the Company and the holder hereof
pursuant to which such securities were issued. A copy of such
Agreement will be provided free of charge to the holder of this
certificate upon written request therefor addressed to the Company.”

          (c) Limitations
on Certain Dispositions. The Optionee agrees, by accepting
this option, that if the Company offers any of its Common Stock for sale pursuant to a
registration statement under the Securities Act, the Optionee will not, directly or indirectly,
without the prior written consent of the Company, sell, offer or agree to sell, grant any option
to purchase or otherwise transfer or dispose of any shares of Common Stock purchased upon exercise
of this option for a period of 180 days after the effective date of such registration statement.

     12. Interpretation
of this Agreement. All decisions and interpretations made by the
Committee, as defined in Section 2 of the Plan, with regard to any question arising under the
Plan or this Agreement shall be binding and conclusive on the Company and the Optionee and any
other person entitled to exercise this option as provided herein. In the event there is any
inconsistency between the provisions of this Agreement and of the Plan, the provisions of the
Plan shall govern, subject to the provisions of section 2 above.

     13. Miscellaneous

          (a) Except as provided herein, this option may not be amended or otherwise modified unless
evidenced in writing and signed by the Company and the Optionee.

          (b) All notices under this option shall be mailed or delivered by hand to the parties at
their respective addresses set forth beneath their names below or at such other address as may be
designated in writing by either of the parties to one another.

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          (c) This option shall be governed by and construed in accordance with the laws of
the State of Delaware.

Date of Grant:

	 	 	 	 	 
	 	 	Avalon Pharmaceuticals
	 
	 	 	 	 
	

	 	By:	 	 
	

	 	 	 	 
	

	 	 	 	Kenneth C. Carter, Ph.D.
	

	 	 	 	President and Chief Executive Officer

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OPTIONEE’S ACCEPTANCE

     The undersigned hereby accepts the foregoing option and agrees to the terms and
conditions thereof. The undersigned hereby acknowledges receipt of a copy of the Company’s Amended
and Restated 1999 Stock Plan as of October 15, 2001.

	 	 	 
	

	 	OPTIONEE:
	 
	 	 
	

	 	 

9

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