Document:

Exhibit 10.7

CLEARSIGN COMBUSTION CORPORATION

2011 EQUITY INCENTIVE PLAN

As Adopted January 27, 2011

 

	
1. 

	
PURPOSE.

The purpose of this Plan is to provide incentives to attract, retain and motivate eligible persons whose present and potential contributions are important to the success of the Company, and its Parent and Subsidiaries (if any), by offering them an opportunity to participate in the Company’s future performance through awards of Options, the right to purchase Common Stock and Stock Bonuses.  Capitalized terms not defined in the text are defined in Section 2.

	
2. 

	
DEFINITIONS.

As used in this Plan, the following terms will have the following meanings:

“AWARD” means any award under this Plan, including any Option, Stock Award or Stock Bonus.

“AWARD AGREEMENT” means, with respect to each Award, the signed written agreement between the Company and the Participant setting forth the terms and conditions of the Award.

“BOARD” means the Board of Directors of the Company.

“CAUSE” means any cause, as defined by applicable law, for the termination of a Participant’s employment with the Company or a Parent or Subsidiary of the Company.

“CODE” means the Internal Revenue Code of 1986, as amended.

“COMMON STOCK” means the common stock, $0.0001 par value, of ClearSign Combustion Corporation, a Washington corporation, or any successor corporation.

 “COMPANY” means ClearSign Combustion Corporation, a Washington corporation, or any successor corporation.

“COMMITTEE” means that committee appointed by the Board of Directors to administer and interpret the Plan as more particularly described in Section 5 of the Plan; provided, however, that the term Committee will refer to the Board of Directors during such times as no Committee is appointed by the Board of Directors.

“DISABILITY” means a disability, whether temporary or permanent, partial or total, as determined by the Committee.

“EXCHANGE ACT” means the Securities Exchange Act of 1934, as amended.

  

  

  

“EXERCISE PRICE” means the price at which a holder of an Option may purchase the Shares issuable upon exercise of the Option.

“FAIR MARKET VALUE” means, as of any date, the value of a share of the Company’s Common Stock determined as follows:

(a)           if such Common Stock is publicly traded and is then listed on a national securities exchange or on Nasdaq, its official closing price on the date of determination on the principal national securities exchange on which the Common Stock is listed or admitted to trading or on Nasdaq;

(b)           if such Common Stock is quoted on the Over-the-Counter Bulletin Board, its last sale price on the Over-the-Counter Bulletin Board on the date of determination, provided, however, if no sale takes place on the date of determination then the Fair Market Value will be the last sale price on the Over-the-Counter Bulletin Board on the last trading day prior to the determination date on which a sale was recorded; or

(c)           if neither of the foregoing is applicable, by the Committee in good faith.

 

“INSIDER” means an officer or director of the Company or a Ten Percent Shareholder, as defined in Section 6.3.

“OPTION” means an award of an option to purchase Shares pursuant to Section 6.

“PARENT” means any corporation (other than the Company) in an unbroken chain of corporations ending with the Company if each of such corporations other than the Company owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain.

“PARTICIPANT” means a person who receives an Award under this Plan.

“PERFORMANCE FACTORS” means the factors selected by the Committee, in its sole and absolute discretion, from among the following measures to determine whether the performance goals applicable to Awards have been satisfied:

	
  

	
(a)

	
Net revenue and/or net revenue growth;

	
  

	
(b)

	
Earnings before income taxes and amortization and/or earnings before income taxes and amortization growth;

	
  

	
(c)

	
Operating income and/or operating income growth;

	
  

	
(d)

	
Net income and/or net income growth;

	
  

	
(e)

	
Earnings per share and/or earnings per share growth;

	
  

	
(f)

	
Total shareholder return and/or total shareholder return growth;

	
  

	
(g)

	
Return on equity;

	
  

	
(h)

	
Operating cash flow return on income;

	
  

	
(i)

	
Adjusted operating cash flow return on income;

  

  

  

 

	
  

	
(j)

	
Economic value added; and

	
  

	
(k)

	
Individual business objectives.

“PERFORMANCE PERIOD” means the period of service determined by the Committee, not to exceed five years, during which years of service or performance is to be measured for Stock Awards or Stock Bonuses, if such Awards are restricted.

“PLAN” means this ClearSign Combustion Corporation 2011 Equity Incentive Plan, as amended from time to time.

“PURCHASE PRICE” means the price at which the Participant of a Stock Award may purchase the Shares.

“SHARES” means shares of the Company’s Common Stock reserved for issuance under this Plan, as adjusted pursuant to Sections 3 and 18, and any successor security.

“STOCK AWARD” means an award of Shares pursuant to Section 7.

“STOCK BONUS” means an award of Shares pursuant to Section 8.

“SUBSIDIARY” means any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company if each of the corporations other than the last corporation in the unbroken chain owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain.

“TERMINATION” or “TERMINATED” means, for purposes of this Plan with respect to a Participant, that the Participant has for any reason ceased to provide services as an employee, officer, director, consultant, independent contractor or advisor to the Company or a Parent or Subsidiary of the Company.  An employee will not be deemed to have ceased to provide services in the case of (i) sick leave, (ii) military leave, or (iii) any other leave of absence approved by the Company, provided that such leave is for a period of not more than 90 days, unless reemployment upon the expiration of such leave is guaranteed by contract or statute or unless provided otherwise pursuant to a formal policy adopted from time to time by the Company and issued and promulgated to employees in writing.  In the case of any employee on an approved leave of absence, the Committee may make such provisions respecting suspension of vesting of the Award while on leave from the employ of the Company or a Subsidiary as it may deem appropriate, except that in no event may an Option be exercised after the expiration of the term set forth in the Option agreement.  The Committee will have sole discretion to determine whether a Participant has ceased to provide services and the effective date on which the Participant ceased to provide services (the “Termination Date”).

	
3. 

	
SHARES SUBJECT TO THE PLAN.

3.1           Number of Shares Available.  Subject to Sections 3.2, 3.3 and 18, the total aggregate number of Shares reserved and available for grant and issuance pursuant to this Plan, shall be 500,000 Shares and will include Shares that are subject to:  (a) issuance upon exercise of an Option but cease to be subject to such Option for any reason other than exercise of such Option; (b) an Award granted hereunder but forfeited or repurchased by the Company at the original issue price; and (c) an Award that otherwise terminates without Shares being issued.  At all times the Company shall reserve and keep available a sufficient number of Shares as shall be required to satisfy the requirements of all outstanding Options granted under this Plan and all other outstanding but unvested Awards granted under this Plan.

 

  

  

  

 

3.2           Increase in Number of Shares Available.  The maximum aggregate number of Shares that may be granted under the Plan will be increased effective the first day of each of the Company’s fiscal quarters, beginning with the fiscal quarter commencing October 1, 2011, (the “Adjustment Date”) by an amount equal to the lesser of:

(i)           10% of the difference between the number of shares of Common Stock outstanding on the applicable Adjustment Date and the number of shares of Common Stock outstanding at the beginning of the fiscal quarter immediately preceding the Adjustment Date; or

(ii)           such lesser number of Shares as may be determined by the Board.

3.3           Adjustment of Shares.  In the event that the number of outstanding shares of Common Stock is changed by a stock dividend, recapitalization, stock split, reverse stock split, subdivision, combination, reclassification or similar change in the capital structure of the Company without consideration, then (a) the number of Shares reserved for issuance under this Plan, (b) the Exercise Prices of and number of Shares subject to outstanding Options, and (c) the number of Shares subject to other outstanding Awards will be proportionately adjusted, subject to any required action by the Board or the shareholders of the Company and compliance with applicable securities laws; provided, however, that fractions of a Share will not be issued but will either be replaced by a cash payment equal to the Fair Market Value of such fraction of a Share or will be rounded up to the nearest whole Share, as determined by the Committee.

	
4. 

	
ELIGIBILITY.

ISOs (as defined in Section 6 below) may be granted only to employees (including officers and directors who are also employees) of the Company or of a Parent or Subsidiary of the Company.  All other Awards may be granted to employees, officers, directors, consultants, independent contractors and advisors of the Company or any Parent or Subsidiary of the Company, provided such consultants, independent contractors and advisors are natural persons who render bona-fide services not in connection with the offer and sale of securities in a capital-raising transaction or promotion of the Company’s securities.  A person may be granted more than one Award under this Plan.

	
5. 

	
ADMINISTRATION.

	 	
5.1 

	
Committee.

(a)           The Plan shall be administered and interpreted by a committee consisting of two or more members of the Board.

(b)           Members of the Committee may resign at any time by delivering written notice to the Board.  The Board shall fill vacancies in the Committee.  The Committee shall act by a majority of its members in office.  The Committee may act either by vote at a meeting or by a memorandum or other written instrument signed by a majority of the Committee.

 

  

  

  

 

(c)           If the Board, in its discretion, does not appoint a Committee, the Board itself will administer and interpret the Plan and take such other actions as the Committee is authorized to take hereunder; provided that the Board may take such actions hereunder in the same manner as the Board may take other actions under the Certificate of Incorporation and bylaws of the Company generally.

5.2           Committee Authority.  Without limitation, the Committee will have the authority to:

(a)           construe and interpret this Plan, any Award Agreement and any other agreement or document executed pursuant to this Plan;

(b)           prescribe, amend and rescind rules and regulations relating to this Plan or any Award;

(c)           select persons to receive Awards;

(d)           determine the form and terms of Awards;

(e)           determine the number of Shares or other consideration subject to Awards;

(f)           determine whether Awards will be granted singly, in combination with, in tandem with, in replacement of, or as alternatives to, other Awards under this Plan or any other incentive or compensation plan of the Company or any Parent or Subsidiary of the Company;

(g)           grant waivers of Plan or Award conditions;

(h)           determine the vesting, exercisability and payment of Awards;

(i)           correct any defect, supply any omission or reconcile any inconsistency in this Plan, any Award or any Award Agreement;

(j)           determine whether an Award has been earned; and

(k)           make all other determinations necessary or advisable for the administration of this Plan.

5.3           Committee Discretion.  Any determination made by the Committee with respect to any Award will be made at the time of grant of the Award or, unless in contravention of any express term of this Plan or Award, at any later time, and such determination will be final and binding on the Company and on all persons having an interest in any Award under this Plan.  The Committee may delegate to one or more officers of the Company the authority to grant an Award under this Plan to Participants who are not Insiders of the Company.  No member of the Committee shall be personally liable for any action taken or decision made in good faith relating to this Plan, and all members of the Committee shall be fully protected and indemnified to the fullest extent permitted under applicable law by the Company in respect to any such action, determination, or interpretation.

  

  

  

  

	
6. 

	
OPTIONS.

The Committee may grant Options to eligible persons and will determine whether such Options will be Incentive Stock Options within the meaning of the Code (“ISO”) or Nonqualified Stock Options (“NQSOs”), the number of Shares subject to the Option, the Exercise Price of the Option, the period during which the Option may be exercised, and all other terms and conditions of the Option, subject to the following:

6.1           Form of Option Grant.  Each Option granted under this Plan will be evidenced by an Award Agreement which will expressly identify the Option as an ISO or an NQSO (hereinafter referred to as the “Stock Option Agreement”), and will be in such form and contain such provisions (which need not be the same for each Participant) as the Committee may from time to time approve, and which will comply with and be subject to the terms and conditions of this Plan.

6.2           Date of Grant.  The date of grant of an Option will be the date on which the Committee makes the determination to grant such Option, unless otherwise specified by the Committee.  The Stock Option Agreement and a copy of this Plan will be delivered to the Participant within a reasonable time after the granting of the Option.

6.3           Exercise Period.  Options may be exercisable within the times or upon the events determined by the Committee as set forth in the Stock Option Agreement governing such Option; provided, however, that no Option will be exercisable after the expiration of 10 years from the date the Option is granted; and provided further that no ISO granted to a person who directly or by attribution owns more than 10% of the total combined voting power of all classes of stock of the Company or of any Parent or Subsidiary of the Company (“Ten Percent Shareholder”) will be exercisable after the expiration of five years from the date the ISO is granted.  The Committee also may provide for Options to become exercisable at one time or from time to time, periodically or otherwise, in such number of Shares or percentage of Shares as the Committee determines, provided, however, that in all events a Participant will be entitled to exercise an Option at the rate of at least 20% per year over five years from the date of grant, subject to reasonable conditions such as continued employment; and further provided that an Option granted to a Participant who is an officer or director may become fully exercisable, subject to reasonable conditions such as continued employment, at any time or during any period established by the Company.

6.4           Exercise Price.  The Exercise Price of an Option will be determined by the Committee when the Option is granted and may be not less than 85% of the Fair Market Value of the Shares on the date of grant; provided that:  (a) the Exercise Price of an ISO will be not less than 100% of the Fair Market Value of the Shares on the date of grant; and (b) the Exercise Price of any Option granted to a Ten Percent Shareholder will not be less than 110% of the Fair Market Value of the Shares on the date of grant.  Payment for the Shares purchased may be made in accordance with Section 9 of this Plan.

6.5           Method of Exercise.  Options may be exercised only by delivery to the Company of a written stock option exercise agreement  (the “Exercise Agreement”) in a form approved by the Committee, (which need not be the same for each Participant), stating the number of Shares being purchased, the restrictions imposed on the Shares purchased under such Exercise Agreement, if any, and such representations and agreements regarding the Participant’s investment intent and access to information and other matters, if any, as may be required or desirable by the Company to comply with applicable securities laws, together with payment in full of the Exercise Price for the number of Shares being purchased.

  

  

  

6.6          Termination.  Notwithstanding the exercise periods set forth in the Stock Option Agreement, exercise of an Option will always be subject to the following:

(a)           If the Participant’s service is Terminated for any reason except death or Disability, then the Participant may exercise such Participant’s Options only to the extent that such Options would have been exercisable upon the Termination Date no later than three months after the Termination Date (or such longer time period not exceeding five years as may be determined by the Committee, with any exercise beyond three months after the Termination Date deemed to be an NQSO).

(b)           If the Participant’s service is Terminated because of the Participant’s death or Disability (or the Participant dies within three (3) months after a Termination other than for Cause or because of Participant’s Disability), then the Participant’s Options may be exercised only to the extent that such Options would have been exercisable by the Participant on the Termination Date and must be exercised by the Participant (or the Participant’s legal representative) no later than 12 months after the Termination Date (or such longer time period not exceeding five years as may be determined by the Committee, with any such exercise beyond (i) three months after the Termination Date when the Termination is for any reason other than the Participant’s death or Disability, or (ii) 12 months after the Termination Date when the Termination is for Participant’s death or Disability, deemed to be an NQSO).

(c)           Notwithstanding the provisions in Section 6.6(a) above, if the Participant’s service is Terminated for Cause, neither the Participant, the Participant’s estate nor such other person who may then hold the Option shall be entitled to exercise any Option with respect to any Shares whatsoever, after Termination, whether or not after Termination the Participant may receive payment from the Company or a Subsidiary for vacation pay, for services rendered prior to Termination, for services rendered for the day on which Termination occurs, for salary in lieu of notice, or for any other benefits.  For the purpose of this paragraph, Termination shall be deemed to occur on the date when the Company dispatches notice or advice to the Participant that his service is Terminated for Cause.

6.7          Limitations on Exercise.  The Committee may specify a reasonable minimum number of Shares that may be purchased on any exercise of an Option, provided that such minimum number will not prevent the Participant from exercising the Option for the full number of Shares for which it is then exercisable.

6.8          Limitations on ISO.  The aggregate Fair Market Value (determined as of the date of grant) of Shares with respect to which ISO are exercisable for the first time by a Participant during any calendar year (under this Plan or under any other incentive stock option plan of the Company, Parent or Subsidiary of the Company) will not exceed $100,000.  If the Fair Market Value of Shares on the date of grant with respect to which ISO are exercisable for the first time by a Participant during any calendar year exceeds $100,000, then the Options for the first $100,000 worth of Shares to become exercisable in such calendar year will be ISO and the Options for the amount in excess of $100,000 that become exercisable in that calendar year will be NQSOs.  In the event that the Code or the regulations promulgated thereunder are amended after the Effective Date of this Plan to provide for a different limit on the Fair Market Value of Shares permitted to be subject to ISO, such different limit will be automatically incorporated herein and will apply to any Options granted after the effective date of such amendment.

  

  

  

 

6.9           Modification, Extension or Renewal.  The Committee may modify, extend or renew outstanding Options and authorize the grant of new Options in substitution therefore, provided that any such action may not, without the written consent of a Participant, impair any of such Participant’s rights under any Option previously granted.  Any outstanding ISO that is modified, extended, renewed or otherwise altered will be treated in accordance with Section 424(h) of the Code.  The Committee may reduce the Exercise Price of outstanding Options without the consent of Participants affected by a written notice to them; provided, however, that the Exercise Price may not be reduced below the minimum Exercise Price that would be permitted under Section 6.4 of this Plan for Options granted on the date the action is taken to reduce the Exercise Price.

6.10           No Disqualification.  Notwithstanding any other provision in this Plan, no term of this Plan relating to ISO will be interpreted, amended or altered, nor will any discretion or authority granted under this Plan be exercised, so as to disqualify this Plan under Section 422 of the Code or, without the consent of the Participant affected, to disqualify any ISO under Section 422 of the Code.

	
7. 

	
STOCK AWARD.

A Stock Award is an offer by the Company to sell to an eligible person Shares that may or may not be subject to restrictions.  The Committee will determine to whom an offer will be made, the number of Shares the person may purchase, the price to be paid (the “Purchase Price”), the restrictions to which the Shares will be subject, if any, and all other terms and conditions of the Stock Award, subject to the following:

7.1           Form of Stock Award.  All purchases under a Stock Award made pursuant to this Plan will be evidenced by an Award Agreement (the “Stock Purchase Agreement”) that will be in such form (which need not be the same for each Participant) as the Committee will from time to time approve, and will comply with and be subject to the terms and conditions of this Plan.  The offer of a Stock Award will be accepted by the Participant’s execution and delivery of the Stock Purchase Agreement and payment for the Shares to the Company in accordance with the Stock Purchase Agreement.

7.2           Purchase Price.  The Purchase Price of Shares sold pursuant to a Stock Award will be determined by the Committee on the date the Stock Award is granted and may not be less than 85% of the Fair Market Value of the Shares on the grant date, except in the case of a sale to a Ten Percent Shareholder, in which case the Purchase Price will be 100% of the Fair Market Value.  Payment of the Purchase Price must be made in accordance with Section 9 of this Plan.

7.3           Terms of Stock Awards.  Stock Awards may, but need not be, subject to such restrictions as the Committee may impose.  These restrictions may be based upon completion of a specified number of years of service with the Company or upon completion of the performance goals as set out in advance in the Participant’s individual Stock Purchase Agreement.  Stock Awards may vary from Participant to Participant and between groups of Participants.  Prior to the grant of a Stock Award subject to restrictions, the Committee shall:  (a) determine the nature, length and starting date of any Performance Period for the Stock Award; (b) select from among the Performance Factors to be used to measure performance goals, if any; and (c) determine the number of Shares that may be awarded to the Participant.  Prior to the transfer of any Stock Award, the Committee shall determine the extent to which such Stock Award has been earned.  Performance Periods may overlap and Participants may participate simultaneously with respect to Stock Awards that are subject to different Performance Periods and have different performance goals and other criteria.

  

  

  

 

7.4           Termination During Performance Period.  If a Participant is Terminated during a Performance Period for any reason, then such Participant will be entitled to payment (whether in Shares, cash or otherwise) with respect to the Stock Award only to the extent earned as of the date of Termination in accordance with the Stock Purchase Agreement, unless the Committee determines otherwise.

	
8. 

	
STOCK BONUSES.

8.1           Awards of Stock Bonuses.  A Stock Bonus is an award of Shares for services rendered to the Company or any Parent or Subsidiary of the Company.  A Stock Bonus will be awarded pursuant to an Award Agreement (the “Stock Bonus Agreement”) that will be in such form (which need not be the same for each Participant) as the Committee will from time to time approve, and will comply with and be subject to the terms and conditions of this Plan.  A Stock Bonus may be awarded for general excellence of service or upon satisfaction of such performance goals as are set out in advance in the Participant’s individual Award Agreement (the “Performance Stock Bonus Agreement”) that will be in such form (which need not be the same for each Participant) as the Committee will from time to time approve, and will comply with and be subject to the terms and conditions of this Plan.  Stock Bonuses may vary from Participant to Participant and between groups of Participants, and may be based upon the achievement of the Company, Parent or Subsidiary and/or individual performance factors or upon such other criteria as the Committee may determine.

8.2           Terms of Stock Bonuses.  The Committee will determine the number of Shares to be awarded to the Participant.  If the Stock Bonus is being earned upon the satisfaction of performance goals pursuant to a Performance Stock Bonus Agreement, then the Committee will: (a) determine the nature, length and starting date of any Performance Period for each Stock Bonus; (b) select from among the Performance Factors to be used to measure the performance, if any; and (c) determine the number of Shares that may be awarded to the Participant.  Prior to the payment of any Stock Bonus, the Committee shall determine the extent to which such Stock Bonuses have been earned.  Performance Periods may overlap and Participants may participate simultaneously with respect to Stock Bonuses that are subject to different Performance Periods and different performance goals and other criteria.  The number of Shares may be fixed or may vary in accordance with such performance goals and criteria as may be determined by the Committee.  The Committee may adjust the performance goals applicable to the Stock Bonuses to take into account changes in law and accounting or tax rules and to make such adjustments as the Committee deems necessary or appropriate to reflect the impact of extraordinary or unusual items, events or circumstances to avoid windfalls or hardships.

8.3           Form of Payment.  The earned portion of a Stock Bonus may be paid to the Participant by the Company either currently or on a deferred basis, with such interest or dividend equivalent, if any, as the Committee may determine.  Payment of an interest or dividend equivalent (if any) may be made in the form of cash or whole Shares or a combination thereof, either in a lump sum payment or in installments, all as the Committee will determine.

	
9. 

	
PAYMENT FOR SHARE PURCHASES.

Payment for Shares purchased pursuant to this Plan may be made in cash (by check) or, where expressly approved for the Participant by the Committee and where permitted by law:

  

  

  

(a)           by cancellation of indebtedness of the Company to the Participant;

(b)           by surrender of shares that either: (1) have been owned by the Participant for more than six months and have been paid for within the meaning of Securities and Exchange Commission Rule 144; or (2) were obtained by the Participant in the public market;

(c)           by waiver of compensation due or accrued to the Participant for services rendered;

(d)           with respect only to purchases upon exercise of an Option, and provided that a public market for the Company’s stock exists:

 (1)           through a “same day sale” commitment from the Participant and a broker-dealer that is a member of the Financial Industry Regulatory Authority (a “FINRA Dealer”) whereby the Participant irrevocably elects to exercise the Option and to sell a portion of the Shares so purchased to pay for the Exercise Price, and whereby the FINRA Dealer irrevocably commits upon receipt of such Shares to forward the Exercise Price directly to the Company; or

 (2)           through a “margin” commitment from the Participant and a FINRA Dealer whereby the Participant irrevocably elects to exercise the Option and to pledge the Shares so purchased to the NASD Dealer in a margin account as security for a loan from the FINRA Dealer in the amount of the Exercise Price, and whereby the FINRA Dealer irrevocably commits upon receipt of such Shares to forward the Exercise Price directly to the Company; or

(f)           by any combination of the foregoing.

	
10. 

	
WITHHOLDING TAXES.

10.1         Withholding Generally.  Whenever Shares are to be issued in satisfaction of Awards granted under this Plan, the Company may require the Participant to remit to the Company an amount sufficient to satisfy federal, state and local withholding tax requirements prior to the delivery of any certificate or certificates for such Shares.  Whenever, under this Plan, payments in satisfaction of Awards are to be made in cash, such payment will be net of an amount sufficient to satisfy federal, state, and local withholding tax requirements.

10.2         Stock Withholding.  When, under applicable tax laws, a participant incurs tax liability in connection with the exercise or vesting of any Award that is subject to tax withholding and the Participant is obligated to pay the Company the amount required to be withheld, the Committee may allow the Participant to satisfy the minimum withholding tax obligation by electing to have the Company withhold from the Shares to be issued that number of Shares having a Fair Market Value equal to the minimum amount required to be withheld, determined on the date that the amount of tax to be withheld is to be determined.  All elections by a Participant to have Shares withheld for this purpose will be made in accordance with the requirements established by the Committee and will be in writing in a form acceptable to the Committee.

 

  

  

  

 

	
11. 

	
PRIVILEGES OF STOCK OWNERSHIP.

11.1           Voting and Dividends.  No Participant will have any of the rights of a shareholder with respect to any Shares until the Shares are issued to the Participant.  After Shares are issued to the Participant, the Participant will be a shareholder and will have all the rights of a shareholder with respect to such Shares, including the right to vote and receive all dividends or other distributions made or paid with respect to such Shares; provided, that if such Shares are issued pursuant to a Stock Award with restrictions, then any new, additional or different securities the Participant may become entitled to receive with respect to such Shares by virtue of a stock dividend, stock split or any other change in the corporate or capital structure of the Company will be subject to the same restrictions as the Stock Award.

11.2           Financial Statements.  The Company will provide financial statements to each Participant prior to such Participant’s purchase of Shares under this Plan, and to each Participant annually during the period such Participant has Awards outstanding; provided, however, the Company will not be required to provide such financial statements to Participants whose services in connection with the Company assure them access to equivalent information.

	
12. 

	
NON-TRANSFERABILITY.

Awards of Shares granted under this Plan, and any interest therein, will not be transferable or assignable by the Participant, and may not be made subject to execution, attachment or similar process, other than by will or by the laws of descent and distribution.  Awards of Options granted under this Plan, and any interest therein, will not be transferable or assignable by the Participant, and may not be made subject to execution, attachment or similar process, other than by will or by the laws of descent and distribution.  During the lifetime of the Participant an Award will be exercisable only by the Participant.  During the lifetime of the Participant, any elections with respect to an Award may be made only by the Participant unless otherwise determined by the Committee and set forth in the Award Agreement with respect to Awards that are not ISOs.

	
13. 

	
CERTIFICATES.

All certificates for Shares or other securities delivered under this Plan will be subject to such stop transfer orders, legends and other restrictions as the Committee may deem necessary or advisable, including restrictions under any applicable federal, state or foreign securities law, or any rules, regulations and other requirements of the Securities and Exchange Commission or any stock exchange or automated quotation system upon which the Shares may be listed or quoted.

	
14. 

	
ESCROW; PLEDGE OF SHARES.

To enforce any restrictions on a Participant’s Shares, the Committee may require the Participant to deposit all certificates representing Shares, together with stock powers or other instruments of transfer approved by the Committee appropriately endorsed in blank, with the Company or an agent designated by the Company to hold in escrow until such restrictions have lapsed or terminated, and the Committee may cause a legend or legends referencing such restrictions to be placed on the certificates.

	
15. 

	
EXCHANGE AND BUYOUT OF AWARDS.

The Committee may, at any time or from time to time, authorize the Company, with the consent of the respective Participants, to issue new Awards in exchange for the surrender and cancellation of any or all outstanding Awards.  The Committee may at any time buy from a Participant an Award previously granted with payment in cash, Shares or other consideration, based on such terms and conditions as the Committee and the Participant may agree.

  

  

  

 

	
16. 

	
SECURITIES LAW AND OTHER REGULATORY COMPLIANCE.

An Award will not be effective unless such Award is in compliance with all applicable federal and state securities laws, rules and regulations of any governmental body, and the requirements of any stock exchange or automated quotation system upon which the Shares may then be listed or quoted, as they are in effect on the date of grant of the Award and also on the date of exercise or other issuance. Notwithstanding any other provision in this Plan, the Company will have no obligation to issue or deliver certificates for Shares under this Plan prior to: (a) obtaining any approvals from governmental agencies that the Company determines are necessary or advisable; and/or (b) completion of any registration or other qualification of such Shares under any state or federal law or ruling of any governmental body that the Company determines to be necessary or advisable.  The Company will be under no obligation to register the Shares with the Securities and Exchange Commission or to effect compliance with the registration, qualification or listing requirements of any state securities laws, stock exchange or automated quotation system, and the Company will have no liability for any inability or failure to do so.

	
17. 

	
NO OBLIGATION TO EMPLOY.

Nothing in this Plan or any Award granted under this Plan will confer or be deemed to confer on any Participant any right to continue in the employ of, or to continue any other relationship with, the Company or any Parent or Subsidiary of the Company or limit in any way the right of the Company or any Parent or Subsidiary of the Company to terminate Participant’s employment or other relationship at any time, with or without cause.

	
18. 

	
CORPORATE TRANSACTIONS.

18.1           Assumption or Replacement of Awards by Successor.  In the event of (a) a dissolution or liquidation of the Company, (b) a merger or consolidation in which the Company is not the surviving corporation (other than a merger or consolidation with a wholly-owned subsidiary, a reincorporation of the Company in a different jurisdiction, or other transaction in which there is no substantial change in the shareholders of the Company or their relative stock holdings and the Awards granted under this Plan are assumed, converted or replaced by the successor corporation, which assumption will be binding on all Participants), (c) a merger in which the Company is the surviving corporation but after which the shareholders of the Company immediately prior to such merger (other than any shareholder that merges, or which owns or controls another corporation that merges, with the Company in such merger) cease to own their shares or other equity interest in the Company, (d) the sale of substantially all of the assets of the Company, or (e) the acquisition, sale, or transfer of more than 50% of the outstanding shares or the Company by tender offer or similar transaction, any or all outstanding Awards may be assumed, converted or replaced by the successor corporation (if any), which assumption, conversion or replacement will be binding on all Participants.  In the alternative, the successor corporation may substitute equivalent Awards or provide substantially similar consideration to Participants as was provided to shareholders (after taking into account the existing provisions of the Awards).  The successor corporation may also issue, in place of outstanding Shares of the Company held by the Participant, substantially similar shares or other property subject to repurchase restrictions no less favorable to the Participant.  In the event such successor corporation (if any) refuses to assume or substitute Awards, as provided above, pursuant to a transaction described in this Subsection 18.1, (i) the vesting of any or all Awards granted pursuant to this Plan will accelerate upon a transaction described in this Section 18 and (ii) any or all Options granted pursuant to this Plan will become exercisable in full prior to the consummation of such event at such time and on such conditions as the Committee determines.  If such Options are not exercised prior to the consummation of the corporate transaction, they shall terminate at such time as determined by the Committee.

  

  

  

 

18.2           Other Treatment of Awards.  Subject to any greater rights granted to Participants under the foregoing provisions of this Section 18, in the event of the occurrence of any transaction described in Section 18.1, any outstanding Awards will be treated as provided in the applicable agreement or plan of merger, consolidation, dissolution, liquidation, or sale of assets.

18.3           Assumption of Awards by the Company.  The Company, from time to time, also may substitute or assume outstanding awards granted by another company, whether in connection with an acquisition of such other company or otherwise, by either; (a) granting an Award under this Plan in substitution of such other company’s award; or (b) assuming such award as if it had been granted under this Plan if the terms of such assumed award could be applied to an Award granted under this Plan.  Such substitution or assumption will be permissible if the holder of the substituted or assumed award would have been eligible to be granted an Award under this Plan if the other company had applied the rules of this Plan to such grant.  In the event the Company assumes an award granted by another company, the terms and conditions of such award will remain unchanged (except that the exercise price and the number and nature of Shares issuable upon exercise of any such option will be adjusted appropriately pursuant to Section 424(a) of the Code).  In the event the Company elects to grant a new Option rather than assuming an existing option, such new Option may be granted with a similarly adjusted Exercise Price.

	
19. 

	
ADOPTION AND SHAREHOLDER APPROVAL.

This Plan will become effective on the date on which it is adopted by the Board (the “Effective Date”).  Upon the Effective Date, the Committee may grant Awards pursuant to this Plan.  The Company intends to seek shareholder approval of the Plan within 12 months after the date this Plan is adopted by the Board; provided, however, if the Company fails to obtain shareholder approval of the Plan during such 12-month period, pursuant to Section 422 of the Code, any Option granted as an ISO at any time under the Plan will not qualify as an ISO within the meaning of the Code and will be deemed to be an NQSO.

	
20. 

	
TERM OF PLAN/GOVERNING LAW.

Unless earlier terminated as provided herein, this Plan will terminate 10 years from the date this Plan is adopted by the Board or, if earlier, the date of shareholder approval.  This Plan and all agreements thereunder shall be governed by and construed in accordance with the laws of the State of Washington.

	
21. 

	
AMENDMENT OR TERMINATION OF PLAN.

The Board may at any time terminate or amend this Plan in any respect, including without limitation amendment of any form of Award Agreement or instrument to be executed pursuant to this Plan; provided, however, that the Board will not, without the approval of the shareholders of the Company, amend this Plan in any manner that requires such shareholder approval.

 

  

  

  

 

	
22. 

	
NONEXCLUSIVITY OF THE PLAN.

Neither the adoption of this Plan by the Board, the submission of this Plan to the shareholders of the Company for approval, nor any provision of this Plan will be construed as creating any limitations on the power of the Board to adopt such additional compensation arrangements as it may deem desirable, including, without limitation, the granting of stock options and bonuses otherwise than under this Plan, and such arrangements may be either generally applicable or applicable only in specific cases.

	
23. 

	
ACTION BY COMMITTEE.

Any action permitted or required to be taken by the Committee or any decision or determination permitted or required to be made by the Committee pursuant to this Plan shall be taken or made in the Committee’s sole and absolute discretion.

WHEREFORE, this ClearSign Combustion Corporation 2011 Equity Incentive Plan has been adopted by the Board on the 27th day of January 2011.

 

	  	
CLEARSIGN COMBUSTION CORPORATION

	  	  	  
	  	
By:

	
/s/ Richard Rutkowski

	  	
 

	

Richard Rutkowski, Chief Executive OfficerUnassociated Document

Exhibit 10.10

CLEARSIGN COMBUSTION CORPORATION

 

FOUNDERS AGREEMENT

 

This Founders Agreement (this "Agreement") is made and entered into as of April 14, 2008 (the "Effective Date") by and among ClearSign Combustion Corporation, a Washington corporation (the "Company"), David Goodson ("Goodson"), B.D. and D.G. Goodson Trust (the "Goodson Trust"), The Alternative Energy Resource Alliance ("AERA"), Geoff Osler ("Osler"), Richard Rutkowski ("Rutkowski"), Trinity West Trust I, and Trinity West Trust II (a "Rutkowski Trust" and, together with Trinity West Trust I, the "Rutkowski Trusts") (Goodson, Osler and Rutkowski collectively referred to as the "Founders," and the Goodson Trust, AERA, Osler and the Rutkowski Trusts collectively referred to as the "Investors").

 

RECITALS

 

A.           The Goodson Trust owns 832,000 shares of the Company's Common Stock, AERA owns 208,000 shares of the Company's Common Stock, Osler owns 380,000 shares of the Company's Class B Common Stock, and the Rutkowski Trusts own, in the aggregate, 480,000 shares of the Company's Class B Common Stock (together with any shares of Company capital stock held or in the future acquired by any of the Founders or Investors, the "Founder Shares").  Such fixed share numbers are subject to equitable adjustment for stock splits, stock dividends, combinations and the like occurring after the date hereof.

 

B.           Each Founder desires to provide incentive to the other Founders to remain with the Company and to provide a mechanism for the repurchase of Founder Shares owned by a Founder, a Permitted Transferee (as defined below) of such Founder, and/or an Investor consisting of an entity created for the benefit of such Founder or such Founder's Immediate Family (as defined below) (in respect of a particular Founder, such Investor, together with such Founder and any Permitted Transferee(s) of either such Founder or such Investor constitute a "Founder Group," provided, however, that the Founder Group for Goodson shall include Goodson, the Goodson Trust, and AERA) should such Founder's relationship with the Company terminate under specified circumstances.

 

AGREEMENTS

 

NOW, THEREFORE, in consideration of the promises and representations set forth herein, and for other good and valuable consideration, the parties agree as follows:

 

1.           Right of First Refusal.

 

1.1         Right of First Refusal.

 

(a)         No Investor, no Founder that owns any shares of the Company's capital stock, and no Permitted Transferee(s) of any such Investor or Founder may sell, pledge, gift or otherwise transfer, whether voluntarily or involuntarily, any Founder Shares unless (i) to the extent such Founder Shares are shares of Class B Common Stock, such Founder Shares have been converted into Common Stock of the Company ("Conversion Shares," any Founder Shares and any Conversion Shares referred to herein as "Shares"), and (ii) such sale, gift, pledge or other transfer is effected in compliance with all applicable terms and provisions of this Agreement.  Each Investor, each Founder and each Permitted Transferree is referred to hereinafter as a "Shareholder" and are collectively  referred to as "Shareholders".

  

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(b)         If (i) a Shareholder proposes to sell, pledge, gift or otherwise voluntarily transfer to a third party any Shares, or any interest therein (such proposing Shareholder, a "Transferring Shareholder," and any such event a "Voluntary Transfer"), or (ii) Shares, or any interest therein, are to be transferred involuntarily to any third party pursuant to divorce, legal separation, foreclosure, legal judgment, bankruptcy or other legal or administrative proceeding, or any other involuntary transfer (the holder of any such involuntarily transferred Shares also a Transferring Shareholder, and any such event an "Involuntary Transfer"), the non-transferring Shareholders (the "Remaining Shareholders") shall have a right of first refusal with respect to all, or any portion thereof, of the Shares to be transferred, and the Company shall have a right of first refusal with respect to all, or any portion thereof, of the Shares to be transferred with respect to which the non-transferring Shareholders elected not to exercise their right of purchase as described in Section 1.1(e) (the Remaining Shareholders' right of first refusal and the Company's right of purchase being referred to as the "Rights of First Refusal").

 

(c)         In the event of a proposed Voluntary or Involuntary Transfer, the Transferring Shareholder shall give a written notice to the Remaining Shareholder and the Company describing fully the proposed transfer, including the number of Shares proposed to be transferred (the "Offered Shares"), the proposed transfer price (if applicable), the name and address of the proposed transferee and proof satisfactory to the Company that the proposed sale or transfer will not violate any applicable federal or state securities laws (a "Transfer Notice").  In the event of a Voluntary Transfer, the Transfer Notice shall be signed both by the Transferring Shareholder and by the proposed transferee and must constitute a binding commitment on both parties to the proposed transfer of the Offered Shares.  In the event of an Involuntary Transfer, the Transfer Notice shall contain an explanation of the circumstances of the transfer and copies of any related legal documents, including without limitation, any judgment liens, court documents or foreclosure notices.

  

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(d)        The Remaining Shareholders shall have an option (subject to the provisions of Sections 1.2 and 1.6 below) for a period of 10 business days from the effective date of the Transfer Notice to elect to purchase all or any portion of their respective pro rata shares of the Offered Shares at the same price and subject to the same material terms and conditions as described in the Transfer Notice.  Each Remaining Shareholder may exercise such purchase option and thereby agree to purchase all or a portion of such Remaining Shareholder's pro rata share of the Offered Shares, by notifying the Transferring Shareholder and the Company to such effect in writing, on or before the last day of such 10 day period.  Such notice shall indicate whether such Remaining Shareholder elects to purchase any Overallotment Shares (as defined below), if available, and, if so, any limits thereon (the "Overallotment Limit").  Each Remaining Shareholder's pro rata share of the Offered Shares shall be a fraction of the Offered Shares, of which the numerator shall be the number of shares of the Common Stock (including shares of Common Stock issuable upon conversion of Class B Common Stock or Preferred Stock) owned by such Remaining Shareholder on the date of the Transfer Notice and the denominator shall be the total number of shares of Common Stock (including shares of Common Stock issuable upon conversion of Class B Common Stock or Preferred Stock) held by all Remaining Shareholders on the date of the Transfer Notice.  In the event any Remaining Shareholder declines to purchase its pro rata share of Offered Shares, all such unpurchased shares ("Overallotment Shares") shall be available to be purchased by Remaining Shareholders who have exercised their full pro rata purchase rights under this Section 1.1(d) and who indicated in connection with such exercise a desire to purchase Overallotment Shares ("Oversubscribers").  Overallotment Shares shall be allocated pro rata among Oversubscribers up to, with respect to an individual Oversubscriber, the Overallotment Limit expressed in such Oversubscriber's purchase election notices under this paragraph.  Each Remaining Shareholder shall be entitled to apportion Offered Shares to be purchased among its partners, members, shareholders and affiliates, provided that such Remaining Shareholder notifies the Transferring Shareholder of such allocation.  Payment for Offered Shares being purchased under this paragraph shall be by check or wire transfer, against delivery of certificates representing the Offered Shares to be purchased at a place agreed upon between the parties and at the time of the scheduled closing therefor, which shall be no later than 30 business days after the Remaining Shareholders' receipt of the Transfer Notice, provided, however, that in the event the Transfer Notice provided that payment for the Offered Shares was to be made in a form other than cash or cash equivalents paid at the time of transfer (an "In-Kind Transfer"), the Remaining Shareholders shall have the option of paying for the Offered Shares with cash or cash equivalents at a price equal to the fair market value of the consideration described in the Transfer Notice as mutually agreed to by the Transferring Shareholder and the purchasing Remaining Shareholders or, if mutual agreement cannot be reached, the Fair Market Value as determined in accordance with Section 1.6.  The obligations of the Remaining Shareholders under this paragraph shall be several and not joint.  If the Remaining Shareholders decline or fail to purchase all of the Offered Shares as provided above, any remaining Offered Shares ("Remaining Shares") shall be subject to the purchase option granted to the Company pursuant to Section 1.1(e) below.

 

(e)         If the Remaining Shareholders have declined to purchase any portion of the Offered Shares, the Transferring Shareholder shall provide, within 12 business days of the effective date of the Transfer Notice, notice to the Company ("Additional Transfer Notice") which shall identify the number of Offered Shares which the Remaining Shareholders have elected to purchase, if any, and the number of Remaining Shares available for purchase by the Company.  The Company shall have the right to purchase all, or any portion thereof, of the Remaining Shares on the terms of the proposal described in the Transfer Notice (subject, however, to any change in such terms permitted under Sections 1.2 and 1.6 below) by delivery of a notice of exercise of the Company Right of First Refusal within 15 business days after the date when the Transfer Notice was received by the Company.  Payment for Remaining Shares being purchased under this paragraph shall be by check or wire transfer, against delivery of certificates representing the Remaining Shares to be purchased at a place agreed upon between the parties and at the time of the scheduled closing therefor, which shall be no later than 30 days after the Company's receipt of the Transfer Notice, provided, however, that in the event the Transfer Notice provided that payment for the Offered Shares was to be made in the form of an In-Kind Transfer, the Company shall have the option of paying for the Remaining Shares with cash or cash equivalents at a price equal to the fair market value of the consideration described in the Transfer Notice or the Fair Market Value as determined in accordance with Section 1.6.

 

(f)           The Remaining Shareholders' and Company's rights under this Section 1.1 shall be assignable, in whole or in part.

  

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1.2         Transfer of Shares.  If the Remaining Shareholders and the Company fail to exercise their entire respective Rights of First Refusal within 30 days after the date of receipt of the Transfer Notice, the Transferring Shareholder may, not later than 90 days following the effective date of receipt of the Transfer Notice, conclude a sale, pledge, gift or transfer of the portion of the Offered Shares that were not elected to be purchased by either the Remaining Shareholders or the Company and were subject to the Transfer Notice on the terms and conditions described in the Transfer Notice, provided that, in accordance with Section 1.1, to the extent such Offered Shares contain shares of Class B Common Stock, all of such Offered Shares are converted into Common Stock prior to such sale, pledge, gift or transfer, and provided that any such sale is made in compliance with applicable federal and state securities laws and not in violation of any other contractual restrictions to which the Transferring Shareholder is bound.  Any proposed transfer on terms and conditions different from those described in the Transfer Notice, as well as any subsequent proposed transfer by the Transferring Shareholder, shall again be subject to the Rights of First Refusal and shall require compliance with the procedure described in Section 1.1 above.

 

1.3         Additional Shares or Substituted Securities.  In the event of the declaration of a stock dividend, the declaration of an extraordinary dividend payable in a form other than stock, a spin-off, a stock split, an adjustment in conversion ratio, a recapitalization or a similar transaction affecting the Company's outstanding securities without receipt of consideration, any new, substituted or additional securities or other property (including money paid other than as an ordinary cash dividend) which are by reason of such transaction distributed with respect to any Founder Shares or into which such Founder Shares thereby become convertible shall immediately be subject to this Section 1.  Appropriate adjustments to reflect the distribution of such securities or property shall be made to the number and/or class of Founder Shares subject to this Section 1.

 

1.4         Permitted Transfers.

 

(a)         This Section 1 shall not apply to a proposed transfer of Founder Shares, and the proposed transferee of such Founder Shares will be considered a "Permitted Transferee" pursuant to this Agreement, subject to the terms hereof, provided that each of the following conditions precedent to the Company's recognizing such transfer are met:

 

(i)           The transfer of Founder Shares may only be made pursuant to (A) a transfer by beneficiary designation, will or intestate succession or (B) a voluntary transfer to the Shareholder's spouse, domestic partner, children (whether natural or adopted), siblings, or parents (such relations, the "Immediate Family") or to a trust established by the Shareholder for the benefit of the Shareholder or the Shareholder's Immediate Family; and

 

(ii)           The transferee must agree in writing to be subject to each of the terms of this Agreement by executing and delivering an Adoption Agreement substantially in the form attached hereto as Exhibit A.

 

(b)           Any Permitted Transferee shall be deemed to be a party hereto as if such Permitted Transferee were the transferor and such Permitted Transferee's signature appeared on the signature pages of this Agreement and shall be deemed to be a Shareholder.  No transferee of any Shares shall be considered a Permitted Transferee pursuant to this Agreement unless and until such transferee shall have complied with the terms of Section 1.4(a).

  

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1.5         Termination of Rights as Shareholder.  If the Remaining Shareholders or Company, as applicable, make available, at the time and place and in the amount and form provided in this Agreement, the consideration for the Offered Shares to be purchased in accordance with this Section 1, then after such time the person from whom such Offered Shares are to be purchased shall no longer have any rights as a holder of such Offered Shares (other than the right to receive payment of such consideration in accordance with this Agreement).  Such Offered Shares shall be deemed to have been purchased in accordance with the applicable provisions hereof, whether or not the certificate(s) therefor has or have been delivered as required by this Agreement.

 

1.6         Transfer Price.  In the event of a Voluntary Transfer by pledge, gift or In-Kind Transfer, or any Involuntary Transfer, the Remaining Shareholders and the Company shall be entitled to purchase the Offered Shares at the then effective fair market value for such Offered Shares (assuming their conversion into Conversion Shares), as determined in good faith by the Board of Directors (the "Fair Market Value").

 

2.           Conversion of Class B Common Stock.

 

2.1         Deemed Notice.

 

(a)         To the extent that a Shareholder is a holder of Class B Common Stock, effective as of the business day immediately prior to the date of any Voluntary or Involuntary Transfer by such Shareholder (a "Conversion Date"), this Agreement shall constitute notice to the Company, for purposes of the appropriate provisions of the Company's charter documents that are effective at such time, that such Shareholder irrevocably elects to convert that number of Founder Shares that are Class B Common Stock sufficient to cause the issuance of the number of Conversion Shares to be transferred (a "Conversion").

 

(b)         To the extent that a Founder is a holder of Class B Common Stock, effective as of the business day immediately prior to the date of the termination of such Founder's service to the Company (also referred to herein as a "Conversion Date") this Agreement shall constitute notice to the Company, for purposes of the appropriate provisions of the Company's charter documents that are effective at such time, that all Shareholders within the Founder Group of which such Founder is a part irrevocably elect to convert all of the then outstanding Founder Shares held by such Shareholders that are Class B Common Stock into Conversion Shares to be issued in such Shareholders' respective names in accordance with the Company's charter documents (also referred to herein as a "Conversion").  For purposes of this Section 2.1(b), employment with the Company or service as a member of the Company's Board of Directors, or both of them, shall constitute service to the Company.

  

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2.2         Within five business days after the Conversion Date, any Shareholder whose Founder Shares are subject to a Conversion that has been elected as described in Section 2.1 shall surrender the certificate or certificates then evidencing the Founder Shares to be converted pursuant to this Section 2, duly endorsed or accompanied by an executed assignment separate from certificate, at the office of the Company or any transfer agent for such stock.  To facilitate such Conversion, each Shareholder has executed in blank the undated stock power attached to as Exhibit B to this Agreement and authorizes the Company, on Shareholder's behalf, to complete and use such assignment separate from certificate to facilitate Conversion in accordance with the terms of this Section 2.  If such Shareholder does not surrender such certificate or certificates as required under this Section 2 within five business days after the Conversion Date, then this Agreement shall constitute notice from the Shareholder to the Company that such certificate or certificates have been lost, stolen or destroyed, and that such Shareholder agrees to hold harmless and indemnify the Company against any loss incurred by the Company in connection with the Conversion and such certificates.

 

3.           Restrictions On Transfer; Legends.

 

3.1         Market Stand-Off.  In connection with the initial underwritten public offering by the Company of its equity securities pursuant to an effective registration statement filed under the Securities Act of 1933, as amended, no Shareholder shall, without the prior written consent of the Company's managing underwriter, (i) lend, offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, directly or indirectly, any shares of the Company's Common Stock or any securities convertible into or exercisable or exchangeable for Company's Common Stock (whether such shares or any such securities are then owned by the Shareholder or are thereafter acquired), or (ii) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the Company's Common Stock or any securities convertible into or exercisable or exchangeable for Company's Common Stock, whether any such transaction described in clause (i) or (ii) above is to be settled by delivery of stock or such other securities, in cash or otherwise.  Such restriction (the "Market Stand-Off") shall be in effect for such period of time following the date of the final prospectus for the offering as may be requested by the Company or such underwriters.  In no event, however, shall such period exceed 180 days or such longer period requested by the underwriters to comply with regulatory restrictions on the publication of research reports (including, without limitation, NASD 2711).  In the event of the declaration of a stock dividend, a spin-off, a stock split, an adjustment in conversion ratio, a recapitalization or a similar transaction affecting the Company's outstanding securities without receipt of consideration, any new, substituted or additional securities that are by reason of such transaction distributed with respect to any Company Common Stock subject to the Market Stand-Off, or into which such Company Common Stock thereby become convertible, shall immediately be subject to the Market Stand-Off.  In order to enforce the Market Stand-Off, the Company may impose stop-transfer instructions with respect to the Founder Shares until the end of the applicable stand-off period.  This Section 3.1 shall not apply to Shares registered in the public offering under the Securities Act, and the Shareholder shall be subject to this Section 3.1 only if the directors and officers of the Company are subject to similar arrangements.

3.2         Legends.

(a)         All certificates evidencing Founder Shares consisting of shares of Common Stock shall bear the following legend:

  

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"THE SHARES REPRESENTED HEREBY MAY NOT BE SOLD, ASSIGNED, TRANSFERRED, ENCUMBERED OR IN ANY MANNER DISPOSED OF, EXCEPT IN COMPLIANCE WITH THE TERMS OF A WRITTEN AGREEMENT BETWEEN THE COMPANY AND THE REGISTERED HOLDER OF THE SHARES (OR THE PREDECESSOR IN INTEREST TO THE SHARES).  SUCH AGREEMENT GRANTS TO THE COMPANY CERTAIN RIGHTS OF FIRST REFUSAL UPON AN ATTEMPTED TRANSFER OF THE SHARES.  THE SECRETARY OF THE COMPANY WILL UPON WRITTEN REQUEST FURNISH A COPY OF SUCH AGREEMENT TO THE HOLDER HEREOF WITHOUT CHARGE."

(b)         All certificates evidencing Founder Shares consisting of shares of Class B Common Stock shall bear the following legend:

"THE SHARES REPRESENTED HEREBY MAY NOT BE SOLD, ASSIGNED, TRANSFERRED, ENCUMBERED OR IN ANY MANNER DISPOSED OF, EXCEPT IN COMPLIANCE WITH THE TERMS OF A WRITTEN AGREEMENT BETWEEN THE COMPANY AND THE REGISTERED HOLDER OF THE SHARES (OR THE PREDECESSOR IN INTEREST TO THE SHARES).  SUCH AGREEMENT CONSTITUTES AN ELECTION TO CONVERT THE SHARES INTO COMMON STOCK OF THE COMPANY UPON AN ATTEMPTED TRANSFER OF THE SHARES AND GRANTS TO THE COMPANY CERTAIN RIGHTS OF FIRST REFUSAL UPON AN ATTEMPTED TRANSFER OF THE SHARES.  THE SECRETARY OF THE COMPANY WILL UPON WRITTEN REQUEST FURNISH A COPY OF SUCH AGREEMENT TO THE HOLDER HEREOF WITHOUT CHARGE."

If required by the authorities of any state in connection with the issuance of any Shares, the legend or legends required by such state authorities shall also be endorsed on all such certificates.

(c)         At any time after the termination of this Agreement, any holder of a stock certificate legended pursuant to this Section 3.2 may surrender such certificate to the Company for removal of the legend, and the Company will duly reissue a new certificate without the legend.

 

4.           General Provisions.

 

4.1         Term.

 

(a)         This Agreement shall automatically terminate upon the earliest to occur of (i) the consummation of the Company's first underwritten public offering of its Common Stock (other than a registration statement relating either to the sale of securities to employees of the Company pursuant to its stock option, stock purchase or similar plan or an SEC Rule 145 transaction); (ii) termination of this Agreement in accordance with Section 4.7 below; (iii) the consummation of a Change of Control (as defined below) and distribution of proceeds to or escrow for the benefit of the Shareholders in accordance with the Articles; and (iv) the date on which the Shares shall constitute less than 20% of the outstanding capital stock of the Company.

  

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(b)         For purposes of this Agreement, "Change of Control" means:  (i) the closing of the sale, transfer or other disposition of all or substantially all of the Company's assets (including an exclusive worldwide license with respect to all or substantially all of the Company's intellectual property); (ii) the consummation of a merger, share exchange or consolidation of the Company with or into another entity (except one in which the holders of capital stock of the Company as constituted immediately prior to such merger, share exchange or consolidation continue to hold at least 50% of the voting power of the capital stock of the Company or the surviving or acquiring entity (or its parent entity)); or (iii) a liquidation, dissolution or winding up of the Company (whether voluntary or involuntary).

 

4.2         Successors and Assigns, Assignment.  The terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective successors and assigns of the parties.  Nothing in this Agreement, express or implied, is intended to confer upon any party other than the parties hereto or their respective successors and assigns any rights, remedies, obligations, or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement.

 

4.3         Governing Law.  This Agreement and all acts and transactions pursuant hereto and the rights and obligations of the parties hereto shall be governed, construed and interpreted in accordance with the laws of the State of Washington, without giving effect to principles of conflicts of law.  The parties consent to jurisdiction and venue in the state and federal courts sitting in King County, Washington.

 

4.4         Notices.  All notices and other communications given or made pursuant to this Agreement shall be in writing and shall be deemed effectively given upon the earlier of actual receipt or:  (a) personal delivery to the party to be notified, (b) when sent, if sent by facsimile during normal business hours of the recipient, and if not sent during normal business hours, then on the recipient's next business day, (c) 5 days after having been sent by registered or certified mail, return receipt requested, postage prepaid, or (d) one business day after the business day of deposit with a nationally recognized overnight courier, freight prepaid, specifying next business day delivery, with written verification of receipt.  All communications shall be sent to the respective parties at their address as set forth on the signature pages hereto, or to such facsimile number or address as subsequently modified by written notice given in accordance with this Section 4.4.  If notice is given to the Company, a copy shall also be sent to Perkins Coie LLP, Attention: David F. McShea, 1201 Third Avenue, Suite 4800, Seattle, WA 98101.

 

4.5         Counterparts; Facsimile.  This Agreement may be executed and delivered by facsimile signature and in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

 

4.6         Titles and Headings.  The titles and subtitles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement.

  

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4.7         Amendments and Waivers.  This Agreement may be amended or terminated and the observance of any term hereof may be waived (either generally or in a particular instance and either retroactively or prospectively) only by a written instrument executed by (a) the Company; and (b) with respect to each Founder Group, holders of a majority of the Founder Shares held in the aggregate by such Founder Group, provided that such consent shall not be required from a Founder Group that does not then own, in the aggregate, Founder Shares representing at least 10% of the outstanding capital stock of the Company unless the proposed amendment, termination or waiver would adversely affect the rights of such Founder Group in a manner differently than the rights of the other Founder Groups.  The Company shall give prompt written notice of any amendment, termination or waiver hereunder to any party that did not consent in writing thereto.  Any amendment, termination or waiver effected in accordance with this Section 4.7 shall be binding on each party and all of such party's successors and permitted assigns, whether or not any such party, successor or assignee entered into or approved such amendment, termination or waiver.

 

4.8         Severability.  If one or more provisions of this Agreement are held to be unenforceable under applicable law, the parties agree to renegotiate such provision in good faith.  In the event that the parties cannot negotiate a mutually agreeable and enforceable replacement for such provision, then (a) such provision shall be excluded from this Agreement, (b) the balance of the Agreement shall be interpreted as if such provision were so excluded and (c) the balance of the Agreement shall be enforceable in accordance with its terms.

 

4.9         Entire Agreement.  This Agreement constitutes the entire agreement and understanding of the parties with respect to the subject matter of this Agreement, and supersedes all prior understandings and agreements, whether oral or written, between or among the parties hereto with respect to the specific subject matter hereof.

 

4.10       Further Assurances.  At any time or from time to time after the date hereof, the parties agree to cooperate with each other, and at the request of any other party, to execute and deliver any further instruments or documents and to take all such further action as the other party may reasonably request in order to evidence or effectuate the consummation of the transactions contemplated hereby and to otherwise carry out the intent of the parties hereunder.

 

4.11       Delays or Omissions.  No delay or omission to exercise any right, power or remedy accruing to any party under this Agreement, upon any breach or default of any other party under this Agreement, shall impair any such right, power or remedy of such non-breaching or non-defaulting party nor shall it be construed to be a waiver of any such breach or default, or an acquiescence therein, or of or in any similar breach or default thereafter occurring; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default previously or thereafter occurring.  Any waiver, permit, consent or approval of any kind or character on the part of any party of any breach or default under this Agreement, or any waiver on the part of any party of any provisions or conditions of this Agreement, must be in writing and shall be effective only to the extent specifically set forth in such writing.  All remedies, either under this Agreement or by law or otherwise afforded to any party, shall be cumulative and not alternative.

 

[Remainder of page intentionally left blank]

  

-9-

  

In witness whereof, the parties hereto have executed this Founders Agreement as of the date first written above.

 

	
CLEARSIGN COMBUSTION CORPORATION

	  	  
	
By:

	  
	
Name:

	  
	
Title:

	  

Signature page to Founders Agreement

  

  

  

In witness whereof, the parties hereto have executed this Founders Agreement as of the date first written above.

 

	
FOUNDERS:

	  
	
DAVID GOODSON

	  
	
Signature: 

	
/s/ David B. Goodson

	  
	
GEOFF OSLER

	  
	
Signature: 

	
/s/ Geoffrey D. Osler

	  
	
RICHARD RUTKOWSKI

	  
	
Signature: 

	
/s/ Richard Rutkowski

Signature page to Founders Agreement

  

  

  

In witness whereof, the parties hereto have executed this Founders Agreement as of the date first written above.

 

	
INVESTORS:

	  
	
B.D. AND D.G. GOODSON TRUST

	  	  
	
By:

	
/s/ Howard Sprouse

	
Name:

	
Howard Sprouse

	
Title:

	
Trustee

	  	  
	
THE ALTERNATIVE ENERGY RESOURCE ALLIANCE

	  	  
	
By:

	
/s/ David B. Goodson

	
Name:

	
David B. Goodson

	
Title:

	
Executive Director

	  	  
	 TRINITY WEST TRUST I
	  	  
	
By:

	
/s/ Geoffrey D. Osler

	
Name:

	
 Geoffrey D. Osler

	
Title:

	
Trustee

	  	  
	
TRINITY WEST TRUST II

	  	  
	
By:

	
/s/ Geoffrey D. Osler

	
Name:

	
Geoffrey D. Osler

	
Title:

	
Trustee

Signature page to Founders Agreement

  

  

  

EXHIBIT A

 

ADOPTION AGREEMENT

 

This Adoption Agreement ("Adoption Agreement") is executed on ___________________, 20__, by the undersigned (the "Holder") pursuant to the terms of that certain Founders Agreement dated as of _____ __, 2008 (the "Agreement"), by and among the Company, the Founders and the Investors, as such Agreement may be amended or amended and restated hereafter.  Capitalized terms used but not defined in this Adoption Agreement shall have the respective meanings ascribed to such terms in the Agreement.  By the execution of this Adoption Agreement, the Holder agrees as follows.

 

1.1           Acknowledgement.  Holder acknowledges that Holder is acquiring certain shares of the capital stock of the Company (the "Stock"), as a transferee of Shares from a party in such party's capacity as an "Shareholder" bound by the Agreement pursuant to the terms of Section 1.4(a) of the Agreement, and after such transfer, Holder shall be considered a "Shareholder" for all purposes of the Agreement.

 

1.2           Agreement.  Holder hereby (a) agrees that the Stock, and any other shares of capital stock or securities required by the Agreement to be bound thereby, shall be deemed Shares and be bound by and subject to the terms of the Agreement and (b) adopts the Agreement with the same force and effect as if Holder were originally a party thereto.

 

1.3           Notice.  Any notice required or permitted by the Agreement shall be given to Holder at the address or facsimile number listed below Holder's signature hereto.

	
HOLDER:

	 	  	
ACCEPTED AND AGREED:

	
By:

	  	  	
CLEARSIGN COMBUSTION CORPORATION

	Name and Title of Signatory	  	  

	
Address: 

	  	  	
By:

	  
	  	  	  
	  	  	
Title: 

	  

	
Facsimile Number: 

	  	  	  

  

  

  

EXHIBIT B

STOCK POWER AND ASSIGNMENT

SEPARATE FROM CERTIFICATE

 

FOR VALUE RECEIVED and pursuant to that certain Founders Agreement dated as of ______________, 2008 (the "Agreement"), the undersigned hereby sells, assigns and transfers unto ____________________________________ ________________, shares of the ____________________ Stock of ClearSign Combustion Corporation, a Washington corporation (the "Company"), standing in the undersigned's name on the books of the Company represented by Certificate No(s). __________ delivered herewith, and does hereby irrevocably constitute and appoint the Secretary of the Company as the undersigned's attorney-in-fact, with full power of substitution, to transfer said stock on the books of the Company.  THIS ASSIGNMENT MAY ONLY BE USED AS AUTHORIZED BY THE AGREEMENT AND THE EXHIBITS THERETO.

 

	
Dated:

	  	  

 

	
SHAREHOLDER (if an entity)

	  	
SHAREHOLDER (if an individual)

	  	  	  
	  	  	  
	

[Print Name of Shareholder]

	  	

[Print Name of Shareholder]

	  	  	  
	  	  	  
	

[Signature]

	  	

[Signature ]

	  	  	  
	  	  	  
	

[Print Name of Signatory]

	  	

[Spouse's or Partner's Signature, if applicable]

	  	  	  
	  	  	  
	

[Print Title of Signatory]

	  	

[Print Spouse's or Partner's Name, if applicable]

 

Instruction:  Please do not fill in any blanks other than the signature line.  The purpose of this Stock Power and Assignment is to enable the Company and/or its assignee(s) and certain other parties to exercise their respective "Rights of Repurchase" as set forth in the Agreement without requiring additional signatures on the part of the Shareholder or Shareholder's Spouse.

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