Document:

Form of Notice of Exercise under the 2001 Stock Plan (Early Exercise)

 Exhibit 10.6 
 KALOBIOS PHARMACEUTICALS, INC. 2001 STOCK PLAN 

NOTICE OF STOCK OPTION EXERCISE (EARLY
EXERCISE) 
 You must sign this Notice on Page 3 before submitting it to the Company.

 OPTIONEE INFORMATION: 

 

							
	 Name:
	 	  
	    	Social Security Number:	 	  

				
	 Address:
	 	  
	    	Employee Number:	 	  

				
		 	  
	    		 	

 OPTION INFORMATION: 

 

			
	 Date of Grant:
                              , 20    
	  	Type of Stock Option:
		
	 Exercise Price per Share:
$                    
	  	  ̈       Nonstatutory
(NSO)

		
	 Total number of shares of Common Stock of KaloBios
	  	  ̈       Incentive
(ISO)

	Pharmaceuticals, Inc. (the “Company”) covered by the
option:
                        	  	

 EXERCISE INFORMATION: 

 

	
	Number of shares of Common Stock of the Company for which the option is being exercised now:
	                    . (These shares are referred to below as the
“Purchased Shares.”)
	
	Total Exercise Price for the Purchased Shares:
$                    

 Form of payment enclosed [check all that apply]: 

 

			
	  ̈
	  	Check for $                    , payable to
“KaloBios Pharmaceuticals, Inc.”
		
	  ̈
	  	Certificate(s) for                      shares of Common Stock of the
Company. These shares will be valued as of the date this notice is received by the Company. [Requires Company consent.]
		
	  ̈
	  	Attestation Form covering                      shares of Common Stock
of the Company. These shares will be valued as of the date this notice is received by the Company. [Requires Company consent.]

 Name(s) in which the Purchased Shares should be registered [please review the attached explanation of the available
forms of ownership, and then check one box]: 
  

					
	  ̈       
	 	In my name only	    	
			
	  ̈       
	 	In the names of my spouse and myself as community property	    	My spouse’s name (if applicable):
			
	  ̈       
	 	In the names of my spouse and myself as community property with the right of survivorship	    	  
  

 

							
	  ̈
	  	In the names of my spouse and myself as joint tenants with the right of survivorship	  		  	
				
	  ̈
	  	 In the name of an eligible revocable trust
 [requires Stock Transfer Agreement]
	  		  	Full legal name of revocable trust:
		  		  		  	  

		  		  		  	  

		  		  		  	  

	The certificate for the Purchased Shares should be sent to the following address:	  	  

	  	  

	  	  

	  	  

 REPRESENTATIONS AND ACKNOWLEDGMENTS OF THE
OPTIONEE: 
  

	1.	I represent and warrant to the Company that I am acquiring and will hold the Purchased Shares for investment for my account only, and not with a view to, or for resale
in connection with, any “distribution” of the Purchased Shares within the meaning of the Securities Act of 1933, as amended (the “Securities Act”). 

 

	2.	I understand that the Purchased Shares have not been registered under the Securities Act by reason of a specific exemption therefrom and that the Purchased Shares must
be held indefinitely, unless they are subsequently registered under the Securities Act or I obtain an opinion of counsel (in form and substance satisfactory to the Company and its counsel) that registration is not required. 

 

	3.	I acknowledge that the Company is under no obligation to register the Purchased Shares. 

 

	4.	I am aware of the adoption of Rule 144 by the Securities and Exchange Commission under the Securities Act, which permits limited public resales of securities acquired
in a non-public offering, subject to the satisfaction of certain conditions. These conditions include (without limitation) that certain current public information about the issuer is available, that the resale occurs only after the holding period
required by Rule 144 has been satisfied, that the sale occurs through an unsolicited “broker’s transaction” and that the amount of securities being sold during any three-month period does not exceed specified limitations. I understand
that the conditions for resale set forth in Rule 144 have not been satisfied and that the Company has no plans to satisfy these conditions in the foreseeable future. 

 

	5.	I will not sell, transfer or otherwise dispose of the Purchased Shares in violation of the Securities Act, the Securities Exchange Act of 1934, or the rules promulgated
thereunder, including Rule 144 under the Securities Act. 

  

	6.	I acknowledge that I have received and had access to such information as I consider necessary or appropriate for deciding whether to invest in the Purchased Shares and
that I had an opportunity to ask questions and receive answers from the Company regarding the terms and conditions of the issuance of the Purchased Shares. 

 

	7.	I am aware that my investment in the Company is a speculative investment that has limited liquidity and is subject to the risk of complete loss. I am able, without
impairing my financial condition, to hold the Purchased Shares for an indefinite period and to suffer a complete loss of my investment in the Purchased Shares. 

 

	8.	I acknowledge that the Purchased Shares remain subject to the Company’s right of first refusal and the market stand-off (sometimes referred to as the
“lock-up”) and may remain subject to the Company’s right of repurchase at the exercise price, all in accordance with the applicable Notice of Stock Option Grant and Stock Option Agreement. 

  
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	9.	I acknowledge that I am acquiring the Purchased Shares subject to all other terms of the Notice of Stock Option Grant and Stock Option Agreement.

  

	10.	I acknowledge that I have received a copy of the Company’s explanation of the forms of ownership available for my Purchased Shares. I acknowledge that the Company
has encouraged me to consult my own adviser to determine the form of ownership that is appropriate for me. In the event that I choose to transfer my Purchased Shares to a trust, I agree to sign a Stock Transfer Agreement. In the event that I choose
to transfer my Purchased Shares to a trust that does not satisfy the requirements described in the attached explanation (i.e. a trust that is not an eligible revocable trust), I also acknowledge that the transfer will be treated as a
“disposition” for tax purposes. As a result, the favorable ISO tax treatment will be unavailable and other unfavorable tax consequences may occur. 

 

	11.	I acknowledge that I have received a copy of the Company’s explanation of the federal income tax consequences of an option exercise and the tax election under
section 83(b) of the Internal Revenue Code. In the event that I choose to make a section 83(b) election, I acknowledge that it is my responsibility—and not the Company’s responsibility—to file the election in a timely manner, even if
I ask the Company or its agents to make the filing on my behalf. I acknowledge that the Company has encouraged me to consult my own adviser to determine the tax consequences of acquiring the Purchased Shares at this time. 

 

	12.	I agree that the Company does not have a duty to design or administer the 2001 Stock Plan or its other compensation programs in a manner that minimizes my tax
liabilities. I will not make any claim against the Company or its Board of Directors, officers or employees related to tax liabilities arising from my options or my other compensation. In particular, I acknowledge that my options are exempt from
section 409A of the Internal Revenue Code only if the exercise price per share is at least equal to the fair market value per share of the Company’s Common Stock at the time the option was granted by the Company’s Board of Directors. Since
shares of the Company’s Common Stock are not traded on an established securities market, the determination of their fair market value was made by the Company’s Board of Directors or by an independent valuation firm retained by the Company.
I acknowledge that there is no guarantee in either case that the Internal Revenue Service will agree with the valuation, and I will not make any claim against the Company or its Board of Directors, officers or employees in the event that the
Internal Revenue Service asserts that the valuation was too low. 

  

	13.	I agree to seek the consent of my spouse to the extent required by the Company to enforce the foregoing. 

 

							
	SIGNATURE: 	 		  	DATE:	  	
				
	  
	 		  	  
	  	

  
 3 

 EXPLANATION OF FORMS OF
STOCK OWNERSHIP 
 PURPOSE OF THIS EXPLANATION

 The purpose of this explanation is to provide you with a brief summary of the forms of legal ownership available for the shares that you
are purchasing (the “Purchased Shares”). For a number of reasons, this explanation is no substitute for personal legal advice: 
  

	 	•	 	 To make the explanation short and readable, only the highlights are covered. Some legal rules are not addressed, even though they may be important in
particular cases. 

  

	 	•	 	 While the summary attempts to deal with the most common situations, your own situation may well be different from the norm.

  

	 	•	 	 The law may change, and the Company is not responsible for updating this summary. 

 

	 	•	 	 The form in which you own your shares may have a substantial impact on the estate tax treatment that applies to those shares when you die or the
income tax treatment that applies when your survivors sell the shares after your death. 

 FOR
THESE REASONS. THE COMPANY STRONGLY ENCOURAGES YOU TO CONSULT YOUR OWN
ADVISER BEFORE EXERCISING YOUR OPTION AND BEFORE MAKING A DECISION ABOUT
THE FORM OF OWNERSHIP FOR YOUR SHARES. 
 OVERVIEW 
 The Notice of Stock Option Exercise offers five forms of taking
title to the Purchased Shares: 
  

	 	•	 	 In your name only, 

  

	 	•	 	 In your name and the name of your spouse as community property, 

 

	 	•	 	 In your name and the name of your spouse as community property with the right of survivorship, 

 

	 	•	 	 In your name and the name of your spouse as joint tenants with the right of survivorship, or 

 

	 	•	 	 In the name of an eligible revocable trust. 

 Title in the Purchased Shares depends upon (a) your marital status, (b) the marital property laws of your state of residence and (c) any agreement with your spouse altering the existing
marital property laws of your state of residence. If you are not married, you generally will take title in your name alone. If you are married, title depends upon the marital property laws of your state of residence. In general, states are
classified either as “community property” states or as “common-law property” states. (But individual state law may vary within these classifications.) 

  
 4 

 COMMUNITY PROPERTY AND JOINT
TENANCY 
 Community property states include California, Texas, Washington, Arizona, Nevada, New Mexico, Idaho, Louisiana and
Wisconsin. In a community property state, property acquired during marriage by either spouse is presumed to be one-half owned by each spouse. All other property is classified as the separate property of the spouse who acquires the property. While
either spouse has equal management and control over the community property and may sell, spend or encumber all community property, neither spouse may gift community property or partition his/her one-half interest without the consent of the other
spouse. Upon divorce, all community property is divided equally among the spouses and each spouse is entitled to retain all of his/her separate property. Upon the death of a spouse, one-half of the community property (and all of the decedent
spouse’s separate property) will pass to the decedent spouse’s heirs. The other one-half of the community property remains the property of the surviving spouse. 
 Other states are common-law property states. In a common-law property state, each spouse is generally deemed to own whatever he/she earns or acquires. 

A married couple may elect to alter the marital property rules by mutually agreeing to take title to property in other forms. For example, a couple
residing in a community property state may generally enter into an agreement and transform what otherwise would be community property into the separate property of the spouse who earns or acquires the property. 

In addition, many community property and common-law property states allow married couples to take joint title in property acquired during marriage. For
example, California allows a married couple to take title in a joint tenancy with the right of survivorship. In a joint tenancy, each spouse owns a one-half interest in the property as separate property. This means that each spouse may transfer or
sell his/her one-half interest in the property while he/she is alive. However, unlike traditional separate property, a spouse cannot transfer his/her one-half interest to heirs at death. Instead, the surviving spouse automatically receives
the decedent spouse’s one-half interest and becomes the full owner of the property. (This is called the “right of survivorship.”) Both spouses must consent to taking property in a joint tenancy in lieu of having the community property
laws apply. 
 California also allows a married couple to take title in the shares as community property with the right of survivorship. This
means that the shares are treated like community property while both spouses are alive. However, if one spouse dies, then the other spouse automatically receives the decedent spouse’s one-half interest and becomes the full owner of the shares.
In other words, the decedent spouse’s will or trust does not control the disposition of the shares. 
 If you have the Purchased
Shares issued in a form other than those described above, then the transfer will be treated as a “disposition” for tax purposes. This means that the effect, for tax purposes, will be the same as selling the Purchased Shares. Please refer
to the attached tax summary for additional information. 

  
 5 

 TRUSTS 
 A transfer to a trust generally should not be treated as a “disposition” of the Purchased Shares for tax purposes if the trust satisfies each of the following conditions: 

 

	 	•	 	 You are the sole grantor of the trust, 

  

	 	•	 	 You are the sole trustee, or you and your spouse are the sole co-trustees, 

 

	 	•	 	 The trustee or trustees are not required to distribute the income of the trust to any person other than you and/or your spouse while you are alive, and

  

	 	•	 	 The trust permits you to revoke all or part of the trust and to have the trust’s assets returned to you, without the consent of any other person
(including your spouse). 

 If you have the Purchased Shares issued to a trust that does not meet these requirements, then the
transfer will be treated as a “disposition” for tax purposes. This means that the effect, for tax purposes, will be the same as selling the Purchased Shares. Please refer to the attached tax summary for additional information. 

If you have the Purchased Shares issued to any trust, you will be required to sign a Stock Transfer Agreement in your capacity as trustee. Under the
Stock Transfer Agreement, the Purchased Shares remain subject to the Company’s right of first refusal and may remain subject to the Company’s right of repurchase at the exercise price, all in accordance with the applicable Notice of Stock
Option Grant and Stock Option Agreement. 
 THE COMPANY WILL NOT
CHECK TO DETERMINE WHETHER THE FORM OF OWNERSHIP THAT YOU ELECT IN
YOUR NOTICE OF STOCK OPTION EXERCISE IS APPROPRIATE. YOU SHOULD CONSULT
YOUR OWN ADVISERS ON THIS SUBJECT. IF AN INAPPROPRIATE ELECTION IS
MADE, THE FORM OF OWNERSHIP MAY NOT WITHSTAND LEGAL SCRUTINY OR MAY
HAVE ADVERSE TAX CONSEQUENCES. 

  
 6 

 EXPLANATION OF FEDERAL INCOME
TAX CONSEQUENCES 
 AND SECTION 83(b) ELECTION

 (Current as of February 2009) 
 PURPOSE OF THIS EXPLANATION 

The purpose of this explanation is to provide you with a brief summary of the tax consequences of exercising your option. For a number of reasons, this
explanation is no substitute for personal tax advice: 
  

	 	•	 	 To make the explanation short and readable, only the highlights are covered. Some tax rules are not addressed, even though they may be important in
particular cases. 

  

	 	•	 	 While the summary attempts to deal with the most common situations, your own tax situation may well be different from the norm.

  

	 	•	 	 State and foreign income taxes are not addressed at all, even though they could have a significant impact on your tax planning. Likewise, federal gift
and estate taxes and state inheritance taxes are not discussed. 

  

	 	•	 	 Tax planning involving incentive stock options is exceedingly complex, in part because of the possible application of the alternative minimum tax.

  

	 	•	 	 The explanation assumes that you are paying the exercise price of your option in cash (or in the form of a full-recourse promissory note with an
interest rate that meets IRS requirements). If you are paying the exercise price in the form of stock, you become subject to special rules that are not addressed here. 

 

	 	•	 	 This explanation assumes that your option is not subject to section 409A of the Internal Revenue Code. However, the Company cannot be certain that
section 409A is inapplicable to your option. (Please refer to the last segment of this summary for more information about section 409A.) 

  

	 	•	 	 The tax rules change often, and the Company is not responsible for updating this summary. (Please refer to the date at the top of this page.)

 FOR THESE REASONS, THE COMPANY
STRONGLY ENCOURAGES YOU TO CONSULT YOUR OWN TAX ADVISER BEFORE EXERCISING
YOUR OPTION AND BEFORE MAKING A DECISION ABOUT FILING OR NOT FILING
A SECTION 83(b) ELECTION. 
 LIMIT ON ISO
TREATMENT 
 The Notice of Stock Option Grant indicates whether your option is a nonstatutory stock option (NSO) or an
incentive stock option (ISO). The favorable tax treatment for ISOs is limited, regardless of what the Notice of Stock Option Grant indicates. Of the options that become 

  
 7 

 
exercisable in any calendar year, only options covering the first $100,000 of stock are eligible for ISO treatment. The excess over $100,000 automatically receives NSO treatment. For this
purpose, stock is valued at the time of grant. This means that the value is generally equal to the exercise price. 
 For example, assume that
you hold an option to buy 50,000 shares for $4 per share. Assume further that the entire option is exercisable immediately after the date of grant. (It is irrelevant when the underlying stock vests.) Only the first 25,000 shares qualify for ISO
treatment. (25,000 times $4 equals $100,000.) The remaining 25,000 shares will be treated as if they had been acquired by exercising an NSO. This is true regardless of when the option is actually exercised; what matters is when it first
could have been exercised. 
 EXERCISE OF NSO TO PURCHASE
VESTED SHARES 
 The Notice of Stock Option Grant indicates whether your Purchased Shares are already vested.
Vested shares are no longer subject to the Company’s right to repurchase them at the exercise price, although they are still subject to the Company’s right of first refusal. If you know that your Purchased Shares are already vested, there
is no need to file a section 83(b) election. 
 If you are exercising an NSO to purchase vested shares, you will be taxed now. You will
recognize ordinary income in an amount equal to the excess of (a) the fair market value of the Purchased Shares on the date of exercise over (b) the exercise price you are paying. If you are an employee or former employee of the Company,
this amount is subject to withholding for income and payroll taxes. Your tax basis in the Purchased Shares (to calculate capital gain when you sell the shares) is equal to their fair market value on the date of exercise. 

EXERCISE OF NSO TO PURCHASE NON-VESTED SHARES

 If you are exercising an NSO to purchase non-vested shares, and if you do not file a timely election under section 83(b) of the
Internal Revenue Code, then you will not be taxed now. Instead, you will be taxed whenever an increment of Purchased Shares vests—in other words, when the Company no longer has the right to repurchase those shares at the exercise price. The
Notice of Stock Option Grant indicates when this occurs, generally over a period of several years. Whenever an increment of Purchased Shares vests, you will recognize ordinary income in an amount equal to the excess of (a) the fair market value
of those Purchased Shares on the date of vesting over (b) the exercise price you are paying for those Purchased Shares. If you are an employee or former employee of the Company, this amount will be subject to withholding for income and payroll
taxes. Your tax basis in the Purchased Shares (to calculate capital gain when you sell the shares) will be equal to their fair market value on the date of vesting. 
 If you are exercising an NSO to purchase non-vested shares, and if you file a timely election under section 83(b) of the Internal Revenue Code, then you will be taxed now. You will recognize ordinary
income in an amount equal to the excess of (a) the fair market value of the Purchased Shares on the date of exercise over (b) the exercise price you are paying. If you are an employee or former employee of the Company, this amount is
subject to withholding for income and payroll taxes. Your tax basis in the Purchased Shares (to calculate capital gain when you sell the shares) is equal to their fair market value on the date of exercise. Even if the fair market

  
 8 

 
value of the Purchased Shares on the date of exercise equals the exercise price (and thus no tax is payable), the section 83(b) election must be made in order to avoid having any subsequent
appreciation taxed as ordinary income at the time of vesting. 
 YOU MUST FILE
A SECTION 83(b) ELECTION WITH THE INTERNAL REVENUE SERVICE WITHIN 30 DAYS AFTER
THE NOTICE OF STOCK OPTION EXERCISE IS SIGNED. The 30-day filing period cannot be
extended. If you miss the deadline, you will be taxed as the Purchased Shares vest, based on the value of the shares at that time. (See above.) The form for making the 83(b) election is attached. Additional copies of the form must be filed with the
Company and with your tax return for the year in which you make the election. 
 DISPOSITION OF NSO
SHARES 
 When you dispose of the Purchased Shares, you will recognize a capital gain equal to the excess of (a) the sale
proceeds over (b) your tax basis in the Purchased Shares. As described above, your tax basis in the Purchased Shares is equal to their fair market value on the date of exercise (or on the date of vesting if you exercised an NSO for non-vested
shares and did not file a timely election under section 83(b) of the Internal Revenue Code). If the sale proceeds are less than your tax basis, you will recognize a capital loss. The capital gain or loss will be long-term if you held the Purchased
Shares more than 12 months. The holding period normally starts when you exercise your NSO. In general, the maximum marginal federal income tax rate on long-term capital gains is 15% under current law. 

EXERCISE OF ISO AND ISO HOLDING PERIODS 

If you are exercising an ISO, you will not be taxed under the regular tax rules until you dispose of the Purchased Shares.1 (The alternative minimum tax rules are described below.) The tax
treatment at the time of disposition depends on how long you hold the shares. You will satisfy the ISO holding periods if you hold the Purchased Shares until the later of the following dates: 

 

	 	•	 	 The date two years after the ISO was granted, and 

  

	 	•	 	 The date one year after the ISO is exercised. 

 DISPOSITION OF ISO SHARES 
 If you dispose of
the Purchased Shares after satisfying both of the ISO holding periods, then you will recognize only a long-term capital gain at the time of disposition. The amount of the capital gain is equal to the excess of (a) the sale proceeds over
(b) the exercise price. In general, the maximum marginal federal income tax rate on long-term capital gains is 15% under current law. 
  

 

	1	 Generally, a “disposition” of shares purchased under an ISO encompasses any transfer of legal title, such as a transfer by sale, exchange or gift. It generally does not include a transfer to
your spouse, a transfer into joint ownership with right of survivorship (if you remain one of the joint owners), a pledge, a transfer by bequest or inheritance, or certain tax-free exchanges permitted under the Internal Revenue Code. A transfer to a
trust is a “disposition” unless the trust is an eligible revocable trust, as described in the attached explanation. 

  
 9 

 If you dispose of the Purchased Shares before either or both of the ISO holding periods are met, then you
will recognize ordinary income at the time of disposition. The calculation of the ordinary income amount depends on whether the shares are vested at the time of exercise. 

 

	 	•	 	 Shares Vested. If the shares are vested at the time of exercise, the amount of ordinary income will be equal to the excess of (a) the fair
market value of the Purchased Shares on the date of exercise over (b) the exercise price. But if the disposition is an arm’s length sale to an unrelated party, the amount of ordinary income will not exceed the total gain from the sale.
Under current IRS rules, the ordinary income amount will not be subject to withholding for income or payroll taxes. Your tax basis in the Purchased Shares will be equal to their fair market value on the date of exercise. Any gain in excess of your
basis will be taxed as a capital gain—either long-term or short-term, depending on how long you held the Purchased Shares after the date of exercise. 

 

	 	•	 	 Shares Not Vested. If the Purchased Shares are not vested at the time of exercise, then the amount of ordinary income will be equal to the
excess of (a) the fair market value of the Purchased Shares on the date of vesting over (b) the exercise price. But if the disposition is an arm’s length sale to an unrelated party, the amount of ordinary income will not exceed
the total gain from the sale. Under current IRS rules, the ordinary income amount will not be subject to withholding for income or payroll taxes. Your tax basis in the Purchased Shares will be equal to their fair market value on the date of vesting.
Any gain in excess of your basis will be taxed as a capital gain—either long-term or short-term, depending on how long you held the Purchased Shares after the date of vesting. Please note that it makes no difference under the regular tax
rules whether or not you filed a section 83(b) election at the time you exercised your ISO. In either case, your regular taxable income is measured as of the time of vesting rather than the time of exercise. 

SUMMARY OF ALTERNATIVE MINIMUM TAX 

The alternative minimum tax (AMT) must be paid if it exceeds your regular income tax. The AMT is equal to 26% of your alternative minimum tax base up to
$175,000 and 28% of the excess over $175,000. (In the case of married individuals filing separately, the breakpoint is $87,500 rather than $175,000.) Your alternative minimum tax base is equal to your alternative minimum taxable income (AMTI) minus
your exemption amount. 
  

	 	•	 	 Alternative Minimum Taxable Income. Your AMTI is equal to your regular taxable income, subject to certain adjustments and increased by items of
tax preference. Among the many adjustments made in computing AMTI are the following: 

  

	 	•	 	 State and local income and property taxes are not allowed as a deduction. 

 

	 	•	 	 Miscellaneous itemized deductions are not allowed. 

  

	 	•	 	 Medical expenses are not allowed as a deduction until they exceed 10% of adjusted gross income (as opposed to the 7.5% floor that applies to regular
income taxes). 

  

	 	•	 	 Certain interest deductions are not allowed. 

  

	 	•	 	 The standard deduction and personal exemptions are not allowed. 

  
 10 

	 	•	 	 When an ISO is exercised, the spread is treated as if the option were an NSO. (See discussion below.) 

 

	 	•	 	 Exemption Amount. Before AMT is calculated, AMTI is reduced by the exemption amount. Under current law, the exemption amount is as follows:

  

													
	 Year:
	  	Joint Returns:	 	  	Single Returns:	 	  	Separate Returns:	 
	2009	  	 	$70,950	  	  	 	$46,700	  	  	 	$35,475	  
	After 20092	  	 	$45,000	  	  	 	$33,750	  	  	 	$22,500	  

 The exemption amount is phased out by 25 cents for each $1 by which AMTI exceeds the following
levels: 
  

					
	Joint Returns: $150,000	 	Single Returns: $112,500	 	Separate Returns: $75,000

 This means, for example, that the entire $70,950 exemption amount disappears for married individuals
filing joint returns when AMTI reaches $433,800. 
 APPLICATION OF AMT WHEN ISO
IS EXERCISED 
 As noted above, when an ISO is exercised, the spread is treated for AMT purposes as if the
option were an NSO. In other words, the spread is included in AMTI at the time of exercise, unless the Purchased Shares are not yet vested at the time of exercise. If the Purchased Shares are not yet vested, the value of the shares minus the
exercise price is included in AMTI when the shares vest. However, if you make an election under section 83(b) within 30 days after exercise, then the spread is included in AMTI at the time of exercise. YOU MUST
FILE AN 83(b) ELECTION WITH THE INTERNAL REVENUE SERVICE WITHIN 30 DAYS AFTER
THE NOTICE OF STOCK OPTION EXERCISE IS SIGNED. The 30-day filing period cannot be
extended. 
 A special rule applies if you dispose of the Purchased Shares in the same year in which you exercised the ISO. If the amount you
realize on the sale is less than the value of the stock at the time of exercise, then the amount includible in AMTI on account of the ISO exercise is limited to the gain realized on the sale.3 
 To the
extent that your AMT is attributable to the spread on exercising an ISO (and certain other items), you may be able to apply the AMT that you paid as a credit against your income tax liability in future years. But the rules on calculating the
available tax credits were amended frequently in recent years and have become extraordinarily complex. On this issue in particular, you must consult your own tax adviser. 

 

	2	This assumes that Congress does not extend AMT relief, as it has done annually in prior years. 

	3	This is similar to the rule that applies under the regular tax system in the event of a disqualifying disposition of ISO stock. The amount of ordinary income that must
be recognized in that case generally does not exceed the amount of the gain realized in the disposition. 

  
 11 

 When Purchased Shares are sold, your basis for purposes of computing the capital gain or loss under the AMT
system is increased by the option spread that exists at the time of exercise. Again, an ISO is treated under the AMT system much like an NSO is treated under the regular tax system. But your basis in the ISO shares for purposes of computing gain or
loss under the regular tax system is equal to the exercise price; it does not reflect any AMT that you pay on the spread at exercise. Therefore, if you pay AMT in the year of the ISO exercise and regular income tax in the year of selling the
Purchased Shares, you could pay tax twice on the same gain (except to the extent that you can use the AMT credit described above). 

SECTION 409A OF THE INTERNAL REVENUE CODE 

The preceding summary assumes that section 409A of the Internal Revenue Code does not apply to your option. In general, your option is exempt from section
409A if the exercise price per share is at least equal to the fair market value per share of the Company’s Common Stock at the time the option was granted by the Board of Directors. Since shares of Common Stock are not traded on an established
securities market, the determination of their fair market value generally is made by the Board of Directors or by an independent appraisal firm retained by the Company. In either case, there is no guarantee that the Internal Revenue Service will
agree with the valuation. 
 If your option were found to be subject to section 409A, then you would be required to recognize ordinary income
whenever shares subject to your option vest (until the option is exercised). The amount of ordinary income would be equal to the fair market value of the shares at the time of vesting minus the exercise price of the shares. This amount would also be
subject to a 20% federal tax in addition to the federal income tax at your usual marginal rate for ordinary income. 

  
 12 

 SECTION 83(b) ELECTION 

This statement is made under Sections 55 and 83(b) of the Internal Revenue Code of 1986, as amended, pursuant to Treasury Regulations
Section 1.83-2. 
  

	 	A.	The taxpayer who performed the services is: 

  

							
	 Name:
	 	  
	 	
			
	Address:	 	  
	 	
		 	  
	 	

							
			
	Social Security No.:	 	  
	 	

  

	 	B.	The property with respect to which the election is made is              shares of the common stock of
KaloBios Pharmaceuticals, Inc. 

  

	 	C.	The property was transferred on                     
        ,             . 

  

	 	D.	The taxable year for which the election is made is the calendar year             .

  

	 	E.	The property is subject to a repurchase right pursuant to which the issuer has the right to acquire the property at the original purchase price if for any reason
taxpayer’s service with the issuer terminates. The issuer’s repurchase right lapses in a series of installments over a             -year period ending on
                             ,
            . 

  

	 	F.	The fair market value of such property at the time of transfer (determined without regard to any restriction other than a restriction which by its terms will never
lapse) is $             per share. 

  

	 	G.	The amount paid for such property is $             per share. 

 

	 	H.	A copy of this statement was furnished to KaloBios Pharmaceuticals, Inc., for whom taxpayer rendered the services underlying the transfer of such property.

  

	 	I.	This statement is executed on                     
        ,             . 

  

					
			
	  	 		 	  
	Signature of Spouse (if any)	 		 	Signature of Taxpayer

 Within 30 days after the date of exercise, this election must be filed with the Internal Revenue Service Center
where the Optionee files his or her federal income tax returns. The filing should be made by registered or certified mail, return receipt requested. The Optionee must (a) file a copy of the completed form with his or her federal tax return for
the current tax year and (b) deliver an additional copy to the Company. 

  
 132012 Equity Incentive Plan

 Exhibit 10.7 

 
  
 KALOBIOS PHARMACEUTICALS, INC. 
 2012 EQUITY INCENTIVE PLAN 

(AS ADOPTED EFFECTIVE UPON REGISTRATION OF
SECURITIES ON FORM 10) 
  
  

 
  

 KALOBIOS PHARMACEUTICALS, INC.

 2012 EQUITY INCENTIVE PLAN 

ARTICLE 1. INTRODUCTION. 

The Board adopted the Plan to become effective immediately, although no Awards may be granted prior to the Registration Date. The purpose
of the Plan is to promote the long-term success of the Company and the creation of stockholder value by (a) encouraging Service Providers to focus on critical long-range corporate objectives, (b) encouraging the attraction and retention of
Service Providers with exceptional qualifications and (c) linking Service Providers directly to stockholder interests through increased stock ownership. The Plan seeks to achieve this purpose by providing for Awards in the form of Options
(which may constitute ISOs or NSOs), SARs, Restricted Shares, Stock Units and Performance Cash Awards. 
 ARTICLE 2. ADMINISTRATION.

 2.1 General. The Plan may be administered by the Board or one or more Committees. Each Committee shall have the
authority and be responsible for such functions as have been assigned to it. 
 2.2 Section 162(m). To the extent an
Award is intended to qualify as “performance-based compensation” within the meaning of Code Section 162(m), the Plan will be administered by a Committee of two or more “outside directors” within the meaning of Code
Section 162(m). 
 2.3 Section 16. To the extent desirable to qualify transactions hereunder as exempt under
Exchange Act Rule 16b-3, the transactions contemplated hereunder will be approved by the entire Board or a Committee of two or more “non-employee directors” within the meaning of Exchange Act Rule 16b-3. 

2.4 Powers of Administrator. Subject to the terms of the Plan, and in the case of a Committee, subject to the specific duties
delegated to the Committee, the Administrator shall have the authority to (a) select the Service Providers who are to receive Awards under the Plan, (b) determine the type, number, vesting requirements and other features and conditions of
such Awards, (c) determine whether and to what extent any Performance Goals have been attained, (d) interpret the Plan and Awards granted under the Plan, (e) make, amend and rescind rules relating to the Plan and Awards granted under
the Plan, including rules relating to sub-plans established for the purposes of satisfying applicable foreign laws or for qualifying for favorable tax treatment under applicable foreign laws, (f) impose such restrictions, conditions or
limitations as it determines appropriate as to the timing and manner of any resales by a Participant of any Common Shares issued pursuant to an Award, including restrictions under an insider trading policy and restrictions as to the use of a
specified brokerage firm for such resales, and (g) make all other decisions relating to the operation of the Plan and Awards granted under the Plan. 

 2.5 Effect of Administrator’s Decisions. The Administrator’s decisions,
determinations and interpretations shall be final and binding on all Participants and any other holders of Awards. 
 2.6
Governing Law. The Plan shall be governed by, and construed in accordance with, the laws of the State of Delaware (except its choice-of-law provisions). 
 ARTICLE 3. SHARES AVAILABLE FOR GRANTS. 
 3.1 Basic Limitation.
Common Shares issued pursuant to the Plan may be authorized but unissued shares or treasury shares. The aggregate number of Common Shares issued under the Plan shall not exceed the sum of (a)
                     Common Shares, (b) the number of Common Shares reserved under the Predecessor Plan that are not issued or subject to
outstanding awards under the Predecessor Plan on the Registration Date, (c) any Common Shares subject to outstanding options under the Predecessor Plan on the Registration Date that subsequently expire or lapse unexercised and Common Shares
issued pursuant to awards granted under the Predecessor Plans that are outstanding on the Registration Date and that are subsequently forfeited to or repurchased by the Company and (d) the additional Common Shares described in Articles 3.2 and
3.3; provided, however, that no more than                      Common Shares, in the aggregate, shall be added to the Plan pursuant to clauses
(b) and (c). The number of Common Shares that are subject to Stock Awards outstanding at any time under the Plan may not exceed the number of Common Shares that then remain available for issuance under the Plan. The numerical limitations in
this Article 3.1 shall be subject to adjustment pursuant to Article 9. 
 3.2 Annual Increase in Shares. As of the first
business day of each fiscal year of the Company during the term of the Plan, commencing on January 1, 2013, the aggregate number of Common Shares that may be issued under the Plan shall automatically increase by a number equal to the least of
(a)         % of the total number of Common Shares outstanding on December 31 
 of the prior
year, (b) subject to adjustment under Article 9,                      Common Shares, or (c) a number of Common Shares determined by
the Board. 
 3.3 Shares Returned to Reserve. To the extent that Options, SARs or Stock Units granted under this Plan or
under the Predecessor Plan are forfeited or expire for any other reason before being exercised or settled in full, the Common Shares subject to such Options, SARs or Stock Units shall again become available for issuance under the Plan. If SARs are
exercised, then only the number of Common Shares (if any) actually issued to the Participant in settlement of such SARs shall reduce the number available under Article 3.1 and the balance shall again become available for issuance under the Plan. If
Stock Units are settled, then only the number of Common Shares (if any) actually issued to the Participant in settlement of such Stock Units shall reduce the number available under Article 3.1 and the balance shall again become available for
issuance under the Plan. If Restricted Shares or Common Shares issued upon the exercise of Options or otherwise under the Plan or the Predecessor Plan are reacquired by the Company pursuant to a forfeiture provision, repurchase right or for any
other reason prior to the shares having become vested, then such Common Shares shall again become available for issuance under the Plan. Common Shares applied to pay the Exercise Price of Options or to satisfy tax withholding obligations related to
any Award shall again become available for issuance under the Plan. To the extent that an Award is settled in cash rather than Common Shares, the cash settlement shall not reduce the number of Shares available for issuance under the Plan.

  
 2 

 3.4 Awards Not Reducing Share Reserve in Article 3.1. Any dividend equivalents paid
or credited under the Plan with respect to Stock Units shall not be applied against the number of Common Shares that may be issued under the Plan, whether or not such dividend equivalents are converted into Stock Units. In addition, Common Shares
subject to Substitute Awards granted by the Company shall not reduce the number of Common Shares that may be issued under Article 3.1, nor shall shares subject to Substitute Awards again be available for Awards under the Plan in the event of any
forfeiture, expiration or cash settlement of such Substitute Awards. 
 3.5 Code Section 162(m) and 422 Limits.
Subject to adjustment in accordance with Article 9: 
 (a) The aggregate number of Common Shares subject to Options and SARs
that may be granted under this Plan during any calendar year to any one Participant shall not exceed                     , except that the
Company may grant to a new Employee in the calendar year in which his or her Service as an Employee first commences Options and/or SARs that cover (in the aggregate) up to an additional
                     Common Shares; 
 (b) The aggregate number of Common Shares subject to Restricted Share awards and Stock Units that may be granted under this Plan during any calendar year to any one Participant shall not exceed
                    , except that the Company may grant to a new Employee in the calendar year in which his or her Service as an Employee
first commences Restricted Share awards and Stock Units that cover (in the aggregate) up to an additional                      Common Shares;

 (c) No Participant shall be paid more than $             
in cash in any calendar year pursuant to Performance Cash Awards granted under the Plan; and 
 (d) No more than
                     Common Shares plus the additional Common Shares described in Article 3.2 may be issued under the Plan upon the exercise
of ISOs. 
 ARTICLE 4. ELIGIBILITY. 
 4.1 Incentive Stock Options. Only Employees who are common-law employees of the Company, a Parent or a Subsidiary shall be eligible for the grant of ISOs. In addition, an Employee who owns more
than 10% of the total combined voting power of all classes of outstanding stock of the Company or any of its Parents or Subsidiaries shall not be eligible for the grant of an ISO unless the additional requirements set forth in Code
Section 422(c)(5) are satisfied. 
 4.2 Other Awards. Awards other than ISOs may only be granted
to Service Providers.1 

 

	1	Special tax considerations apply with respect to Options and SARs granted to Service Providers of a Parent. 

  
 3 

 ARTICLE 5. OPTIONS. 
 5.1 Stock Option Agreement. Each grant of an Option under the Plan shall be evidenced by a Stock Option Agreement between the Optionee and the Company. Such Option shall be subject to all
applicable terms of the Plan and may be subject to any other terms that are not inconsistent with the Plan. The Stock Option Agreement shall specify whether the Option is intended to be an ISO or an NSO. The provisions of the various Stock Option
Agreements entered into under the Plan need not be identical. 
 5.2 Number of Shares. Each Stock Option Agreement shall
specify the number of Common Shares subject to the Option, which number shall adjust in accordance with Article 9. 
 5.3
Exercise Price. Each Stock Option Agreement shall specify the Exercise Price, which shall not be less than 100% of the Fair Market Value of a Common Share on the date of grant. The preceding sentence shall not apply to an Option that is a
Substitute Award granted in a manner that would satisfy the requirements of Code Section 409A and, if applicable, Code Section 424(a). 
 5.4 Exercisability and Term. Each Stock Option Agreement shall specify the date or event when all or any installment of the Option is to become vested and/or exercisable. The Stock Option Agreement
shall also specify the term of the Option; provided that, except to the extent necessary to comply with applicable foreign law, the term of an Option shall in no event exceed 10 years from the date of grant. A Stock Option Agreement may provide for
accelerated vesting and/or exercisability upon certain specified events and may provide for expiration prior to the end of its term in the event of the termination of the Optionee’s Service. 

5.5 Death of Optionee. After an Optionee’s death, any vested and exercisable Options held by such Optionee may be exercised
by his or her beneficiary or beneficiaries. Each Optionee may designate one or more beneficiaries for this purpose by filing the prescribed form with the Company. A beneficiary designation may be changed by filing the prescribed form with the
Company at any time before the Optionee’s death. If no beneficiary was designated or if no designated beneficiary survives the Optionee, then any vested and exercisable Options held by the Optionee may be exercised by his or her estate.

 5.6 Modification or Assumption of Options. Within the limitations of the Plan, the Administrator may modify, reprice,
extend or assume outstanding Options or may accept the cancellation of outstanding options (whether granted by the Company or by another issuer) in return for the grant of new Options for the same or a different number of shares and at the same or a
different exercise price or in return for the grant of a different type of Award. The foregoing notwithstanding, no modification of an Option shall, without the consent of the Optionee, impair his or her rights or obligations under such Option.

 5.7 Buyout Provisions. The Administrator may at any time (a) offer to buy out for a payment in cash or cash
equivalents an Option previously granted or (b) authorize an Optionee to elect to cash out an Option previously granted, in either case at such time and based upon such terms and conditions as the Administrator shall establish. 

  
 4 

 5.8 Payment for Option Shares. The entire Exercise Price of Common Shares issued upon
exercise of Options shall be payable in cash or cash equivalents at the time when such Common Shares are purchased. In addition, the Administrator may, in its sole discretion and to the extent permitted by applicable law, accept payment of all or a
portion of the Exercise Price through any one or a combination of the following forms or methods: 
 (a) Subject to any
conditions or limitations established by the Administrator, by surrendering, or attesting to the ownership of, Common Shares that are already owned by the Optionee with a Fair Market Value on the date of surrender equal to the aggregate exercise
price of the Common Shares as to which such Option will be exercised; 
 (b) By delivering (on a form prescribed by the Company)
an irrevocable direction to a securities broker approved by the Company to sell all or part of the Common Shares being purchased under the Plan and to deliver all or part of the sales proceeds to the Company; 

(c) Subject to such conditions and requirements as the Administrator may impose from time to time, through a net exercise procedure;

 (d) By delivering a full-recourse promissory note, on such terms approved by the Administrator; or 

(e) Through any other form or method consistent with applicable laws, regulations and rules. 

ARTICLE 6. STOCK APPRECIATION RIGHTS. 
 6.1 SAR Agreement. Each grant of a SAR under the Plan shall be evidenced by a SAR Agreement between the Optionee and the Company. Such SAR shall be subject to all applicable terms of the Plan and
may be subject to any other terms that are not inconsistent with the Plan. The provisions of the various SAR Agreements entered into under the Plan need not be identical. 
 6.2 Number of Shares. Each SAR Agreement shall specify the number of Common Shares to which the SAR pertains, which number shall adjust in accordance with Article 9. 

6.3 Exercise Price. Each SAR Agreement shall specify the Exercise Price, which shall in no event be less than 100% of the Fair
Market Value of a Common Share on the date of grant. The preceding sentence shall not apply to a SAR that is a Substitute Award granted in a manner that would satisfy the requirements of Code Section 409A. 

6.4 Exercisability and Term. Each SAR Agreement shall specify the date when all or any installment of the SAR is to become vested
and exercisable. The SAR Agreement shall also specify the term of the SAR; provided that except to the extent necessary to comply with applicable foreign law, the term of a SAR shall not exceed 10 years from the date of grant. A SAR Agreement may
provide for accelerated vesting and exercisability upon certain specified events and may provide for expiration prior to the end of its term in the event of the termination of the Optionee’s Service. 

  
 5 

 6.5 Exercise of SARs. Upon exercise of a SAR, the Optionee (or any person having the
right to exercise the SAR after his or her death) shall receive from the Company (a) Common Shares, (b) cash or (c) a combination of Common Shares and cash, as the Administrator shall determine. The amount of cash and/or the Fair
Market Value of Common Shares received upon exercise of SARs shall, in the aggregate, not exceed the amount by which the Fair Market Value (on the date of surrender) of the Common Shares subject to the SARs exceeds the Exercise Price. If, on the
date when a SAR expires, the Exercise Price is less than the Fair Market Value on such date but any portion of such SAR has not been exercised or surrendered, then such SAR shall automatically be deemed to be exercised as of such date with respect
to such portion. A SAR Agreement may also provide for an automatic exercise of the SAR on an earlier date. 
 6.6 Death of
Optionee. After an Optionee’s death, any vested and exercisable SARs held by such Optionee may be exercised by his or her beneficiary or beneficiaries. Each Optionee may designate one or more beneficiaries for this purpose by filing the
prescribed form with the Company. A beneficiary designation may be changed by filing the prescribed form with the Company at any time before the Optionee’s death. If no beneficiary was designated or if no designated beneficiary survives the
Optionee, then any vested and exercisable SARs held by the Optionee at the time of his or her death may be exercised by his or her estate. 
 6.7 Modification or Assumption of SARs. Within the limitations of the Plan, the Administrator may modify, reprice, extend or assume outstanding SARs or may accept the cancellation of outstanding
SARs (whether granted by the Company or by another issuer) in return for the grant of new SARs for the same or a different number of shares and at the same or a different exercise price or in return for the grant of a different type of Award. The
foregoing notwithstanding, no modification of a SAR shall, without the consent of the Optionee, impair his or her rights or obligations under such SAR. 
 ARTICLE 7. RESTRICTED SHARES. 
 7.1 Restricted Stock Agreement. Each
grant of Restricted Shares under the Plan shall be evidenced by a Restricted Stock Agreement between the recipient and the Company. Such Restricted Shares shall be subject to all applicable terms of the Plan and may be subject to any other terms
that are not inconsistent with the Plan. The provisions of the various Restricted Stock Agreements entered into under the Plan need not be identical. 
 7.2 Payment for Awards. Restricted Shares may be sold or awarded under the Plan for such consideration as the Administrator may determine, including (without limitation) cash, cash equivalents,
property, cancellation of other equity awards, full-recourse promissory notes, past services and future services, and such other methods of payment as are permitted by applicable law. 

7.3 Vesting Conditions. Each Award of Restricted Shares may or may not be subject to vesting and/or other conditions as the
Administrator may determine. Vesting shall occur, in full or in installments, upon satisfaction of the conditions specified in the Restricted Stock Agreement. Such conditions, at the Administrator’s discretion, may include one or more
Performance Goals. A Restricted Stock Agreement may provide for accelerated vesting upon certain specified events. 

  
 6 

 7.4 Voting and Dividend Rights. The holders of Restricted Shares awarded under the
Plan shall have the same voting, dividend and other rights as the Company’s other stockholders, unless the Administrator otherwise provides. A Restricted Stock Agreement, however, may require that any cash dividends paid on Restricted Shares
(a) be accumulated and paid when such Restricted Shares vest, or (b) be invested in additional Restricted Shares. Such additional Restricted Shares shall be subject to the same conditions and restrictions as the shares subject to the Stock
Award with respect to which the dividends were paid. In addition, unless the Administrator provides otherwise, if any dividends or other distributions are paid in Common Shares, such Common Shares shall be subject to the same restrictions on
transferability and forfeitability as the Restricted Shares with respect to which they were paid. 
 ARTICLE 8. STOCK UNITS. 

8.1 Stock Unit Agreement. Each grant of Stock Units under the Plan shall be evidenced by a Stock Unit Agreement between the
recipient and the Company. Such Stock Units shall be subject to all applicable terms of the Plan and may be subject to any other terms that are not inconsistent with the Plan. The provisions of the various Stock Unit Agreements entered into under
the Plan need not be identical. 
 8.2 Payment for Awards. To the extent that an Award is granted in the form of Stock
Units, no cash consideration shall be required of the Award recipients. 
 8.3 Vesting Conditions. Each Award of Stock
Units may or may not be subject to vesting, as determined by the Administrator. Vesting shall occur, in full or in installments, upon satisfaction of the conditions specified in the Stock Unit Agreement. Such conditions, at the Administrator’s
discretion, may include one or more Performance Goals. A Stock Unit Agreement may provide for accelerated vesting upon certain specified events. 
 8.4 Voting and Dividend Rights. The holders of Stock Units shall have no voting rights. Prior to settlement or forfeiture, Stock Units awarded under the Plan may, at the Administrator’s
discretion, provide for a right to dividend equivalents. Such right entitles the holder to be credited with an amount equal to all cash dividends paid on one Common Share while the Stock Unit is outstanding. Dividend equivalents may be converted
into additional Stock Units. Settlement of dividend equivalents may be made in the form of cash, in the form of Common Shares, or in a combination of both. Prior to distribution, any dividend equivalents shall be subject to the same conditions and
restrictions as the Stock Units to which they attach. 
 8.5 Form and Time of Settlement of Stock Units. Settlement of
vested Stock Units may be made in the form of (a) cash, (b) Common Shares or (c) any combination of both, as determined by the Administrator. The actual number of Stock Units eligible for settlement may be larger or smaller than the
number included in the original Award, based on predetermined performance factors, including Performance Goals. Methods of converting Stock Units into cash may include (without limitation) a method based on the average Fair Market Value of Common
Shares over a series of trading days. Vested Stock Units shall be settled in such manner and at such time(s) as specified in the Stock Unit Agreement. Until an Award of Stock Units is settled, the number of such Stock Units shall be subject to
adjustment pursuant to Article 9. 

  
 7 

 8.6 Death of Recipient. Any Stock Units that become payable after the
recipient’s death shall be distributed to the recipient’s beneficiary or beneficiaries. Each recipient of Stock Units under the Plan may designate one or more beneficiaries for this purpose by filing the prescribed form with the Company. A
beneficiary designation may be changed by filing the prescribed form with the Company at any time before the Award recipient’s death. If no beneficiary was designated or if no designated beneficiary survives the Award recipient, then any Stock
Units that becomes payable after the recipient’s death shall be distributed to the recipient’s estate. 
 8.7
Modification or Assumption of Stock Units. Within the limitations of the Plan, the Administrator may modify or assume outstanding stock units or may accept the cancellation of outstanding stock units (whether granted by the Company or by another
issuer) in return for the grant of new Stock Units for the same or a different number of shares or in return for the grant of a different type of Award. The foregoing notwithstanding, no modification of a Stock Unit shall, without the consent of the
Participant, impair his or her rights or obligations under such Stock Unit. 
 8.8 Creditors’ Rights. A holder of
Stock Units shall have no rights other than those of a general creditor of the Company. Stock Units represent an unfunded and unsecured obligation of the Company, subject to the terms and conditions of the applicable Stock Unit Agreement.

 ARTICLE 9. ADJUSTMENTS; DISSOLUTIONS AND LIQUIDATIONS; CORPORATE TRANSACTIONS. 

9.1 Adjustments. In the event of a subdivision of the outstanding Common Shares, a declaration of a dividend payable in Common
Shares or a combination or consolidation of the outstanding Common Shares (by reclassification or otherwise) into a lesser number of Common Shares, corresponding proportionate adjustments shall automatically be made in each of the following:

 (a) The number and kind of shares available for issuance under Article 3, including the numerical share limits in Articles
3.1, 3.2 and 3.5; 
 (b) The number and kind of shares covered by each outstanding Option, SAR and Stock Unit; and 

(c) The Exercise Price applicable to each outstanding Option and SAR, and the repurchase price, if any, applicable to Restricted Shares.

 In the event of a declaration of an extraordinary dividend payable in a form other than Common Shares in an amount that has a material effect
on the price of Common Shares, a recapitalization, a spin-off or a similar occurrence, the Administrator shall make such adjustments as it, in its sole discretion, deems appropriate in one or more of the foregoing. Any adjustment in the number of
and kind of shares subject to an Award under this Article 9.1 shall be rounded down to the nearest whole share, although the Administrator in its sole discretion may make a cash payment in lieu of a fractional share. Except as provided in this
Article 9, a Participant shall have no rights by reason of any issuance by the Company of stock of any class or securities convertible 

  
 8 

 
into stock of any class, any subdivision or consolidation of shares of stock of any class, the payment of any stock dividend or any other increase or decrease in the number of shares of stock of
any class. 
 9.2 Dissolution or Liquidation. To the extent not previously exercised or settled, Options, SARs and Stock
Units shall terminate immediately prior to the dissolution or liquidation of the Company. 
 9.3 Corporate Transactions.
In the event that the Company is a party to a merger, consolidation, or a Change in Control (other than one described in Article 14.6(d)), all Common Shares acquired under the Plan and all Awards outstanding on the effective date of the transaction
shall be treated in the manner described in the definitive transaction agreement (or, in the event the transaction does not entail a definitive agreement to which the Company is party, in the manner determined by the Administrator, with such
determination having final and binding effect on all parties), which agreement or determination need not treat all Awards (or portions thereof) in an identical manner. Unless an Award Agreement provides otherwise, the treatment specified in the
transaction agreement or by the Administrator shall include (without limitation) one or more of the following with respect to each outstanding Award: 
 (a) The continuation of such outstanding Awards by the Company (if the Company is the surviving entity); 
 (b) The assumption of such outstanding Awards by the surviving entity or its parent, provided that the assumption of an Option or a SAR shall comply with applicable tax requirements; 

(c) The substitution by the surviving entity or its parent of an equivalent award for outstanding Awards (including, but not limited to,
an award to acquire the same consideration paid to the holders of Common Shares in the transaction), provided that the substitution of an Option or a SAR shall comply with applicable tax requirements; 

(d) The cancellation of outstanding Options and SARs without payment of any consideration. The Optionees shall be able to exercise such
Options and SARs (to the extent the Options and SARs are vested or become vested as of the effective date of the transaction) during a period of not less than five full business days preceding the closing date of the transaction, unless (i) a
shorter period is required to permit a timely closing of the transaction and (ii) such shorter period still offers the Optionees a reasonable opportunity to exercise such Options and SARs. Any exercise of such Options and SARs during such
period may be contingent on the closing of the transaction; 
 (e) Full exercisability of outstanding Options and SARs and full
vesting of the Common Shares subject to Options and SARs, followed by cancellation of such Options and SARs. The full exercisability of such Options and SARs and full vesting of such Common Shares may be contingent on the closing of the transaction.
The Optionees shall be able to exercise such Options and SARs during a period of not less than five full business days preceding the closing date of such merger or consolidation, unless (i) a shorter period is required to permit a timely
closing of such merger or consolidation and (ii) such shorter period still offers 

  
 9 

 
the Optionees a reasonable opportunity to exercise such Options and SARs. Any exercise of such Options and SARs during such period may be contingent on the closing of such merger or
consolidation; 
 (f) The cancellation of the Options and SARs and a payment to the Optionee with respect to each Share subject
to the portion of the Award that is vested as of the transaction date equal to the excess of (A) the value, as determined by the Administrator in its absolute discretion, of the property (including cash) received by the holder of a Common Share
as a result of the transaction, over (B) the per-share Exercise Price of the Option or SAR (such excess, the “Spread”). Such payment shall be made in the form of cash, cash equivalents, or securities of the surviving entity or
its parent having a value equal to the Spread. In addition, any escrow, holdback, earn-out or similar provisions in the transaction agreement may apply to such payment to the same extent and in the same manner as such provisions apply to the holders
of Common Shares, but only to the extent the application of such provisions does not adversely affect the status of the Option or SAR as exempt from Code Section 409A. If the Spread applicable to an Option or SAR is zero or a negative number,
then the Option or SAR may be cancelled without making a payment to the Optionee; 
 (g) The cancellation of outstanding Stock
Units and a payment to the holder thereof with respect to each Common Share subject to the Stock Unit equal to the value, as determined by the Administrator in its absolute discretion, of the property (including cash) received by the holder of a
Common Share as a result of the transaction (the “Transaction Value”). Such payment shall be made in the form of cash, cash equivalents, or securities of the surviving entity or its parent having a value equal to the Transaction
Value. In addition, such payment may be subject to vesting based on the Participant’s continuing Service, provided that the vesting schedule shall not be less favorable to the Participant than the schedule under which such Stock Units would
have vested, and if required under applicable tax rules, such payment may be deferred until the settlement date specified in the Stock Unit Agreement. In addition, any escrow, holdback, earn-out or similar provisions in the transaction agreement may
apply to such payment to the same extent and in the same manner as such provisions apply to the holders of Common Shares. In the event that a Stock Unit is subject to Code Section 409A, the payment described in this clause (g) shall be
made on the settlement date specified in the applicable Stock Unit Agreement, provided that settlement may be accelerated in accordance with Treasury Regulation Section 1.409A-3(j)(4); or 

(h) The assignment of any reacquisition or repurchase rights held by the Company in respect of an Award of Restricted Shares to the
surviving entity or its parent, with corresponding proportionate adjustments made to the price per share to be paid upon exercise of any such reacquisition or repurchase rights. 
 For avoidance of doubt, the Administrator shall have the discretion, exercisable either at the time an Award is granted or at any time while the Award remains outstanding, to provide for the acceleration
of vesting upon the occurrence of a Change in Control, whether or not the Award is to be assumed or replaced in the transaction, or in connection with a termination of the Participant’s Service following a transaction. 

  
 10 

 Any action taken under this Article 9.3 shall either preserve an Award’s status as exempt from Code
Section 409A or comply with Code Section 409A. 
 ARTICLE 10. OTHER AWARDS. 

10.1 Performance Cash Awards. A Performance Cash Award is a cash award that may be granted subject to the attainment of specified
Performance Goals during a Performance Period. A Performance Cash Award may also require the completion of a specified period of continuous Service. The length of the Performance Period, the Performance Goals to be attained during the Performance
Period, and the degree to which the Performance Goals have been attained shall be determined conclusively by the Administrator. Each Performance Cash Award shall be set forth in a written agreement or in a resolution duly adopted by the
Administrator which shall contain provisions determined by the Administrator and not inconsistent with the Plan. The terms of various Performance Cash Awards need not be identical. 

10.2 Awards Under Other Plans. The Company may grant awards under other plans or programs. Such awards may be settled in the form
of Common Shares issued under this Plan. Such Common Shares shall be treated for all purposes under the Plan like Common Shares issued in settlement of Stock Units and shall, when issued, reduce the number of Common Shares available under Article 3.

 ARTICLE 11. LIMITATION ON RIGHTS. 
 11.1 Retention Rights. Neither the Plan nor any Award granted under the Plan shall be deemed to give any individual a right to remain a Service Provider. The Company and its Parents, Subsidiaries
and Affiliates reserve the right to terminate the Service of any Service Provider at any time, with or without cause, subject to applicable laws, the Company’s certificate of incorporation and by-laws and a written employment agreement (if
any). 
 11.2 Stockholders’ Rights. Except as set forth in Article 7.4 or 8.4 above, a Participant shall have no
dividend rights, voting rights or other rights as a stockholder with respect to any Common Shares covered by his or her Award prior to the time when a stock certificate for such Common Shares is issued or, if applicable, the time when he or she
becomes entitled to receive such Common Shares by filing any required notice of exercise and paying any required Exercise Price. No adjustment shall be made for cash dividends or other rights for which the record date is prior to such time, except
as expressly provided in the Plan. 
 11.3 Regulatory Requirements. Any other provision of the Plan notwithstanding, the
obligation of the Company to issue Common Shares under the Plan shall be subject to all applicable laws, rules and regulations and such approval by any regulatory body as may be required. The Company reserves the right to restrict, in whole or in
part, the delivery of Common Shares pursuant to any Award prior to the satisfaction of all legal requirements relating to the issuance of such Common Shares, to their registration, qualification or listing or to an exemption from registration,
qualification or listing. The inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed necessary by the Company’s counsel to be necessary to the lawful issuance and sale of any Common
Shares hereunder, will relieve the Company of any liability in respect of the failure to issue or sell such Common Shares as to which such requisite authority will not have been obtained. 

  
 11 

 11.4 Transferability of Awards. The Administrator may, in its sole discretion, permit
transfer of an Award in a manner consistent with applicable law. Unless otherwise determined by the Administrator, Awards shall be transferable by a Participant only by (a) beneficiary designation, (b) a will or (c) the laws of
descent and distribution. An ISO may only be transferred by will or by the laws of descent and distribution and may be exercised during the lifetime of the Optionee only by the Optionee or by the Optionee’s guardian or legal representative.

 11.5 Other Conditions and Restrictions on Common Shares. Any Common Shares issued under the Plan shall be subject to
such forfeiture conditions, rights of repurchase, rights of first refusal, other transfer restrictions and such other terms and conditions as the Administrator may determine. Such conditions and restrictions shall be set forth in the applicable
Award Agreement and shall apply in addition to any restrictions that may apply to holders of Common Shares generally. In addition, Common Shares issued under the Plan shall be subject to such conditions and restrictions imposed either by applicable
law or by Company policy, as adopted from time to time, designed to ensure compliance with applicable law or laws with which the Company determines in its sole discretion to comply including in order to maintain any statutory, regulatory or tax
advantage. 
 ARTICLE 12. TAXES. 
 12.1 General. As a condition to an Award under the Plan, a Participant or his or her successor shall make arrangements satisfactory to the Company for the satisfaction of any federal, state, local
or foreign withholding tax obligations that arise in connection with any Award granted under the Plan. The Company shall not be required to issue any Common Shares or make any cash payment under the Plan until such obligations are satisfied.

 12.2 Share Withholding. To the extent that applicable law subjects a Participant to tax withholding obligations, the
Administrator may permit such Participant to satisfy all or part of such obligations by having the Company withhold all or a portion of any Common Shares that otherwise would be issued to him or her or by surrendering all or a portion of any Common
Shares that he or she previously acquired. Such Common Shares shall be valued at their Fair Market Value on the date when they are withheld or surrendered. Any payment of taxes by assigning Common Shares to the Company may be subject to restrictions
including any restrictions required by SEC, accounting or other rules. 
 12.3 Section 162(m) Matters The
Administrator, in its sole discretion, may determine whether an Award is intended to qualify as “performance-based compensation” within the meaning of Code Section 162(m). The Administrator may grant Awards that are based on
Performance Goals but that are not intended to qualify as performance-based compensation. With respect to any Award that is intended to qualify as performance-based compensation, the Administrator shall designate the Performance Goal(s) applicable
to, and the formula for calculating the amount payable under, an Award within 90 days following commencement of the applicable Performance Period (or such earlier time as may be required under Code Section

  
 12 

 
162(m)), and in any event at a time when achievement of the applicable Performance Goal(s) remains substantially uncertain. Prior to the payment of any Award that is intended to constitute
performance-based compensation, the Administrator shall certify in writing whether and the extent to which the Performance Goal(s) were achieved for such Performance Period. The Administrator shall have the right to reduce or eliminate (but not to
increase) the amount payable under an Award that is intended to constitute performance-based compensation. 
 12.4
Section 409A Matters. Except as otherwise expressly set forth in an Award Agreement, it is intended that Awards granted under the Plan either be exempt from, or comply with, the requirements of Code Section 409A. To the extent an Award
is subject to Code Section 409A (a “409A Award”), the terms of the Plan, the Award and any written agreement governing the Award shall be interpreted to comply with the requirements of Code Section 409A so that the Award
is not subject to additional tax or interest under Code Section 409A, unless the Administrator expressly provides otherwise. A 409A Award shall be subject to such additional rules and requirements as specified by the Administrator from time to
time in order for it to comply with the requirements of Code Section 409A. In this regard, if any amount under a 409A Award is payable upon a “separation from service” to an individual who is considered a “specified
employee” (as each term is defined under Code Section 409A), then no such payment shall be made prior to the date that is the earlier of (i) six months and one day after the Participant’s separation from service or (ii) the
Participant’s death, but only to the extent such delay is necessary to prevent such payment from being subject to Code Section 409A(a)(1). 
 12.5 Limitation on Liability. Neither the Company nor any person serving as Administrator shall have any liability to a Participant in the event an Award held by the Participant fails to achieve
its intended characterization under applicable tax law. 
 ARTICLE 13. FUTURE OF THE PLAN. 

13.1 Term of the Plan. The Plan, as set forth herein, shall become effective on the Registration Date. The Plan shall remain in
effect until the earlier of (a) the date when the Plan is terminated under Article 13.2 or (b) the 10th anniversary of the date when the Board adopted the Plan. 
 13.2 Amendment or Termination. The Board may, at any time and for any reason, amend or terminate the Plan. No Awards shall be granted under the Plan after the termination thereof. The termination
of the Plan, or any amendment thereof, shall not affect any Award previously granted under the Plan. 
 13.3 Stockholder
Approval. An amendment of the Plan shall be subject to the approval of the Company’s stockholders only to the extent required by applicable laws, regulations or rules. 
 ARTICLE 14. DEFINITIONS. 
 14.1 “Administrator” means the
Board or any Committee administering the Plan in accordance with Article 2. 

  
 13 

 14.2 “Affiliate” means any entity other than a Subsidiary, if the Company
and/or one or more Subsidiaries own not less than 50% of such entity. 
 14.3 “Award” means any award granted
under the Plan, including as an Option, a SAR, a Restricted Share, a Stock Unit or a Performance Cash Award. 
 14.4
“Award Agreement” means a Stock Option Agreement, an SAR Agreement, a Restricted Stock Agreement, a Stock Unit Agreement or such other agreement evidencing an Award granted under the Plan. 

14.5 “Board” means the Company’s Board of Directors, as constituted from time to time. 

14.6 “Change in Control” means: 
 (a) Any “person” (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) becomes the “beneficial owner” (as defined in Rule 13d-3 of the Exchange Act), directly or
indirectly, of securities of the Company representing more than fifty percent (50%) of the total voting power represented by the Company’s then-outstanding voting securities; 

(b) The consummation of the sale or disposition by the Company of all or substantially all of the Company’s assets; 

(c) The consummation of a merger or consolidation of the Company with or into any other entity, other than a merger or consolidation
which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or its parent) more than
fifty percent (50%) of the total voting power represented by the voting securities of the Company or such surviving entity or its parent outstanding immediately after such merger or consolidation; or 

(d) Individuals who are members of the Board (the “Incumbent Board”) cease for any reason to constitute at least a
majority of the members of the Board over a period of 12 months; provided, however, that if the appointment or election (or nomination for election) of any new Board member was approved or recommended by a majority vote of the members of the
Incumbent Board then still in office, such new member shall, for purposes of this Plan, be considered as a member of the Incumbent Board. 
 A
transaction shall not constitute a Change in Control if its sole purpose is to change the state of the Company’s incorporation or to create a holding company that will be owned in substantially the same proportions by the persons who held the
Company’s securities immediately before such transaction. In addition, if a Change in Control constitutes a payment event with respect to any Award which provides for a deferral of compensation and is subject to Code Section 409A, then
notwithstanding anything to the contrary in the Plan or applicable Award Agreement the transaction with respect to such Award must also constitute a “change in control event” as defined in Treasury Regulation Section 1.409A-3(i)(5) to
the extent required by Code Section 409A. 

  
 14 

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

 14.8 “Committee” means a committee of one or more members of the Board, or of other individuals satisfying
applicable laws, appointed by the Board to administer the Plan. 
 14.9 “Common Share” means one share of the
common stock of the Company. 
 14.10 “Company” means KaloBios Pharmaceuticals, Inc., a Delaware corporation.

 14.11 “Consultant” means a consultant or adviser who provides bona fide services
to the Company, a Parent, a Subsidiary or an Affiliate as an independent contractor and who qualifies as a consultant or advisor under Instruction A.1.(a)(1) of Form S-8 under the Securities Act.2 

14.12 “Employee” means a common-law employee of the Company, a Parent, a Subsidiary or an
Affiliate.3 

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

14.14 “Exercise Price,” in the case of an Option, means the amount for which one Common Share may be purchased
upon exercise of such Option, as specified in the applicable Stock Option Agreement. “Exercise Price,” in the case of a SAR, means an amount, as specified in the applicable SAR Agreement, which is subtracted from the Fair Market Value of
one Common Share in determining the amount payable upon exercise of such SAR. 
 14.15 “Fair Market Value”
means the closing price of a Common Share on any established stock exchange or a national market system on the applicable date or, if the applicable date is not a trading day, on the last trading day prior to the applicable date, as reported in a
source that the Administrator deems reliable. If Common Shares are no longer traded on an established stock exchange or a national market system, the Fair Market Value shall be determined by the Administrator in good faith on such basis as it deems
appropriate. The Administrator’s determination shall be conclusive and binding on all persons. 
 14.16
“ISO” means an incentive stock option described in Code Section 422(b). 
 14.17 “NSO”
means a stock option not described in Code Sections 422 or 423. 
 14.18 “Option” means an ISO or NSO granted
under the Plan and entitling the holder to purchase Common Shares. 
 14.19 “Optionee” means an individual or
estate holding an Option or SAR. 
  

	2	Special tax considerations apply with respect to Options or SARs granted to Consultants of a Parent. 

	3	Special tax considerations apply with respect to Options or SARs granted to Employees of a Parent. 

  
 15 

 14.20 “Outside Director” means a member of the Board who is not an
Employee. 
 14.21 “Parent” means any corporation (other than the Company) in an unbroken chain of corporations
ending with the Company, if each of the 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. A corporation that attains the
status of a Parent on a date after the adoption of the Plan shall be considered a Parent commencing as of such date. 
 14.22
“Participant” means an individual or estate holding an Award. 
 14.23 “Performance Cash
Award” means an award of cash granted under Article 10.1 of the Plan. 
 14.24 “Performance Goal”
means a goal established by the Administrator for the applicable Performance Period based on one or more of the performance criteria set forth in Appendix A. Depending on the performance criteria used, a Performance Goal may be expressed in terms of
overall Company performance or the performance of a business unit, division, Subsidiary, Affiliate or an individual. A Performance Goal may be measured either in absolute terms or relative to the performance of one or more comparable companies or
one or more relevant indices. The Administrator may adjust the results under any performance criterion to exclude any of the following events that occurs during a Performance Period: (a) asset write-downs, (b) litigation, claims, judgments
or settlements, (c) the effect of changes in tax laws, accounting principles or other laws or provisions affecting reported results, (d) accruals for reorganization and restructuring programs, (e) extraordinary, unusual or
non-recurring items, (f) exchange rate effects for non-U.S. dollar denominated net sales and operating earnings, or (g) statutory adjustments to corporate tax rates; provided, however, that if an Award is intended to qualify as
“performance-based compensation” within the meaning of Code Section 162(m), such adjustment(s) shall only be made to the extent consistent with Code Section 162(m). 

14.25 “Performance Period” means a period of time selected by the Administrator over which the attainment of one or more
Performance Goals will be measured for the purpose of determining a Participant’s right to a Performance Cash Award or an Award of Restricted Shares or Stock Units that vests based on the achievement of Performance Goals. Performance Periods
may be of varying and overlapping duration, at the discretion of the Administrator. 
 14.26 “Plan” means this
KaloBios Pharmaceuticals, Inc. 2012 Equity Incentive Plan, as amended from time to time. 
 14.27 “Predecessor
Plan” means the Company’s 2001 Stock Plan, as amended. 
 14.28 “Registration Date” means the
effective date of the registration statement filed by the Company with the Securities and Exchange Commission pursuant to Form 10. 
 14.29 “Restricted Share” means a Common Share awarded under the Plan. 

  
 16 

 14.30 “Restricted Stock Agreement” means the agreement between the Company
and the recipient of a Restricted Share that contains the terms, conditions and restrictions pertaining to such Restricted Share. 
 14.31 “SAR” means a stock appreciation right granted under the Plan. 
 14.32 “SAR Agreement” means the agreement between the Company and an Optionee that contains the terms, conditions and restrictions pertaining to his or her SAR. 

14.33 “Service” means service as an Employee, Outside Director or Consultant. 

14.34 “Service Provider” means any individual who is an Employee, Outside Director or Consultant. 

14.35 “Stock Award” means any award of an Option, a SAR, a Restricted Share or a Stock Unit under the Plan. 

14.36 “Stock Option Agreement” means the agreement between the Company and an Optionee that contains the terms,
conditions and restrictions pertaining to his or her Option. 
 14.37 “Stock Unit” means a bookkeeping entry
representing the equivalent of one Common Share, as awarded under the Plan. 
 14.38 “Stock Unit Agreement”
means the agreement between the Company and the recipient of a Stock Unit that contains the terms, conditions and restrictions pertaining to such Stock Unit. 
 14.39 “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. A corporation that attains the status of a Subsidiary on a date after the
adoption of the Plan shall be considered a Subsidiary commencing as of such date 
 14.40 “Substitute Awards”
means Awards or Common Shares issued by the Company in assumption of, or substitution or exchange for, Awards previously granted, or the right or obligation to make future awards, in each case by a corporation acquired by the Company or any
Affiliate or with which the Company or any Affiliate combines to the extent permitted by NASDAQ Marketplace Rule 5635 or any successor thereto. 

  
 17 

 APPENDIX A 

PERFORMANCE CRITERIA 
 The Administrator may establish Performance Goals derived from one or more of the following criteria when it makes Awards of Restricted Shares or Stock Units that vest entirely or in part on the basis of
performance or when it makes Performance Cash Awards: 
  

			
	 •   Earnings (before or after taxes)
	  	 •   Sales or revenue (using a measure thereof that complies

with Section 162(m))

		
	 •   Earnings per share
	  	 •   Expense or cost reduction

		
	 •   Earnings before interest, taxes and depreciation
	  	 •   Working capital

		
	 •   Earnings before interest, taxes, depreciation and amortization
	  	 •   Economic value added (or an equivalent metric)

		
	 •   Total stockholder return
	  	 •   Market share

		
	 •   Return on equity or average stockholders’ equity
	  	 •   Cash measures including cash flow and cash balance

		
	 •   Return on assets, investment or capital employed
	  	 •   Operating cash flow

		
	 •   Operating income
	  	 •   Cash flow per share

		
	 •   Gross margin
	  	 •   Share price

		
	 •   Operating margin
	  	 •   Debt reduction

		
	 •   Net operating income
	  	 •   Customer satisfaction

		
	 •   Net operating income after tax
	  	 •   Stockholders’ equity

		
	 •   Return on operating revenue
	  	 •   Contract awards or backlog

		
	 •   Objective corporate or individual strategic goals
	  	 •   Objective individual performance goals

	
	 •   To the extent that an Award is not intended to comply with
Code Section 162(m), other measures of performance selected by the
 Administrator

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