Document:

EXHIBIT 10.1

 

EMPLOYMENT
AGREEMENT

 

This Employment Agreement, effective as of May 24, 2004 (the “Agreement”),
is by and between Restoration Hardware, Inc., a Delaware corporation (the “Company”),
and STEPHEN GORDON (“EXECUTIVE”), and supercedes that certain Severance
Agreement, by and between the Company and Executive, dated as of March 21,
2001 (“Severance Agreement”).

 

1.                          POSITION
AND RESPONSIBILITIES

 

a.               Position. 
Executive is employed by the Company to render services to the Company
on a part-time basis in the position of Founder/Merchant, reporting to the
Chief Executive Officer, as set forth in more detail on Exhibit A hereto.  Executive shall perform the duties and
responsibilities as described in Exhibit A. 
Executive shall abide by the rules, regulations, and practices as
adopted or modified from time to time in the Company’s sole discretion.

 

b.               Other Activities. 
Except upon the prior written consent of the Company, Executive will
not, during the term of this Agreement, (i) engage, directly or indirectly,
in any other business activity (whether or not pursued for pecuniary advantage)
that interferes with Executive’s duties and responsibilities hereunder or
create a conflict of interest with the Company or (ii) engage, directly or
indirectly, in any other business activity that is competitive with the
Company.

 

c.               No Conflict.  Executive represents and warrants that
Executive’s execution of this Agreement, Executive’s employment with the
Company, and the performance of Executive’s proposed duties under this
Agreement shall not violate any obligations Executive may have to any other
employer, person or entity, including any obligations with respect to
proprietary or confidential information of any other person or entity.

 

d.               Location.  Executive shall continue to perform his duties
at the Company’s headquarters in Corta Madera, California.  Throughout the term of his employment under
this Agreement, Executive shall be entitled to use the office and
administrative space used by Executive immediately before the effective date of
this Agreement.

 

2.                          COMPENSATION
AND BENEFITS

 

a.               Base Salary.  In consideration of the services to be rendered
under this Agreement, the Company shall pay Executive a salary at the rate of
Three

 

 

Hundred Seventy-Five Thousand Dollars ($375,000)
per year (“Base Salary”).  The Base
Salary shall be paid in accordance with the Company’s regularly established
payroll practices.  Executive’s Base
Salary will be reviewed from time to time in accordance with the established
procedures of the Company for adjusting salaries for similarly situated
employees and may be adjusted in the sole discretion of the Company.

 

b.               Benefits. 
Executive shall be eligible to participate in the health and welfare
benefits made generally available by the Company to other officers of the
Company, in accordance with the benefit plans established by the Company, and
as may be amended from time to time in the Company’s sole discretion.  In addition, Executive shall be entitled to
the following:

 

(i)                         Discretionary Incentive Bonus:  Entitlement to an incentive bonus, if any,
will be subject to the recommendation of the Company’s Chief Executive Officer,
in his sole discretion, to the Compensation Committee of the Board of Directors
of the Company and approval of the Compensation Committee, in its sole
discretion.

 

(ii)                      Car Allowance:  Executive shall be entitled to a monthly car
allowance of $1,100.

 

(iii)                   Tax Preparation Benefit:  Executive shall be entitled to reimbursement
of up to $5,000 annually for costs incurred to prepare Executive’s annual
income tax returns.

 

(iv)                  Disability Insurance:  Executive shall be entitled to disability
insurance that will provide a full annual salary benefit in the event Executive
is terminated by the Company due to a Disability (as defined in
Section 4(c) of this Agreement) pursuant to the terms of this Agreement or
coverage otherwise is triggered during the term of this Agreement or as
otherwise provided under such disability insurance policy.

 

(v)                     Personal Assistant:  Executive shall be entitled to the use of a
personal assistant on a half-time basis during the term of this Agreement.

 

c.               Expenses. 
The Company shall reimburse Executive for reasonable business expenses
incurred in the performance of Executive’s duties hereunder in accordance with
the Company’s expense reimbursement guidelines.

 

d.               Stock Option.  Executive will be awarded a stock option
pursuant to the Company’s 1998 Stock Incentive Plan, as amended and restated,
to acquire up to 150,000 shares of the common stock of the Company at an
exercise price per share equal to the fair market value of one share of the
Company’s common stock on the date of grant. 
The foregoing stock option shall have a ten year term, shall vest
annually over the three (3) year Term of Employment (unless earlier vested
pursuant to Section 3(b) of this Agreement) in accordance with the Company’s
1998 Stock Incentive Plan’s vesting schedule and shall otherwise

 

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be issued in accordance with the Company’s
standard form of Notice of Grant of Stock Option and Stock Option
Agreement.  The Company acknowledges and
agrees that such shares of common stock issued pursuant to the Company’s 1998
Stock Incentive Plan are, or shall be at the time of exercise of the stock
option (or any portion thereof), registered pursuant to a registration
statement on Form S-8, provided that the Company continues to be subject to the
reporting requirements of the Securities Exchange Act of 1934, as amended.

 

3.                          TERM
OF EMPLOYMENT; TERMINATION OF EMPLOYMENT

 

a.               Term of Employment.  
The term of this Agreement shall be for three (3) years following the
effective date of this Agreement (“Term of Employment”).  During the Term of Employment, the Company
may terminate Employee’s employment with the Company at any time, without any
advance notice, for any reason or no reason at all.  Upon expiration of the Term of Employment,
the Company shall pay to Executive any compensation then due and owing.  Thereafter, all obligations of the Company
under this Agreement shall cease.

 

b.               Severance.  In
the event that the Company terminates the employment of Executive during the
Term of Employment without Cause, or Executive terminates his employment for
Good Reason, Executive shall receive, subject to Executive’s continued
compliance with the terms of Section 6(b) of this Agreement regarding
non-interference, his then-current Base Salary, payable in periodic
installments, in the form of salary continuation in accordance with the Company’s
normal payroll practices for the lesser of (i) two (2) years from the date
of termination of employment if Executive’s employment is so terminated at any
time prior to the second anniversary of this Agreement and (ii) one (1)
year from the date of termination of employment if Executive’s employment is so
terminated at any time thereafter during the Term of Employment.  In addition, Executive shall be entitled to
receive (i) any bonus already approved by the Compensation Committee of
the Board of Directors of the Company in accordance with Section 2(b)(i)
of this Agreement and (ii) continued medical benefit coverage for himself
and his eligible dependents until the earlier of the date that Executive
becomes entitled to medical benefits from another employer or the end of the
period of Base Salary continuation, subject to Executive’s payment of
applicable premiums, if any, at the same rate that would have applied had
Executive remained in the employment of the Company.  Executive shall also receive full and immediate
vesting of any unvested portion of the stock option granted in accordance with
this Agreement.  Executive’s eligibility
for salary continuation and medical benefit coverage is conditioned on
Executive having first signed a release agreement in a form acceptable to the
Company containing terms and conditions for the release of any and all claims
against the Company through the effective date of that

 

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Agreement. 
Notwithstanding the foregoing, any payment or benefit (within the
meaning of Section 280G(b)(2) of the Internal Revenue Code (“IRC”)) provided to
Executive under this Section 3(b) (collectively referred to as the “Payment”)
shall not exceed the maximum amount necessary to avoid subjecting the Payment
to the excise tax imposed by IRC Section 4999. 
Executive shall not be required to mitigate the amount of any payment
provided for in this Agreement by seeking other employment or otherwise, and no
such payment shall be offset or reduced by the amount of any compensation or
benefits provided to Executive in any subsequent employment.

 

4.                          TERMINATION
OF EMPLOYMENT

 

a.               Termination for Cause. 
The Company may terminate Executive’s employment for Cause at any time
during the Term of Employment.  Upon a
termination for Cause, the Company shall pay to Executive all compensation to
which Executive is entitled up through the date of termination, subject to any
other rights or remedies of Executive under law; and thereafter all obligations
of the Company under this Agreement shall cease.  For purposes of this Agreement, “Cause” shall
mean:  if Executive has been convicted of
a felony involving fraud or dishonesty, or the termination is evidenced by a
resolution adopted in good faith by a majority of the Board of Directors of the
Company to the effect that Executive (i) intentionally and continually failed
substantially to perform his reasonably assigned duties with the Company, which
failure continued for a period of at least thirty (30) days after a written
notice of demand for substantial performance has been delivered to Executive
specifying the manner in which Executive has failed substantially to perform,
or (ii) intentionally engaged in conduct which is demonstrably and materially
injurious to the Company; provided, that no termination of Executive’s
employment shall be for Cause as set forth in clause (ii) above until there
shall have been delivered to Executive a copy of a written notice setting forth
the conduct set forth in clause (ii) and specifying the particulars thereof in
detail.  No act, nor failure to act,
shall be considered “intentional” unless Executive has acted, or failed to act,
with a lack of good faith and with a lack of reasonable belief that Executive’s
action or failure to act was in the best interest of the Company.

 

b.               By Death. 
Executive’s employment shall terminate automatically upon Executive’s
death.  Upon a termination as a result of
Executive’s death, the Company shall pay to Executive’s beneficiaries or
estate, as appropriate, any compensation then due and owing.  Thereafter, all obligations of the Company
under this Agreement shall cease. 
Nothing in this Section 4.b. shall affect any entitlement of Executive’s
heirs or devisees to the benefits of any life insurance plan or other applicable
benefits to which they are entitled as a result of Executive’s death.

 

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c.               By Disability.  If
Executive suffers from a Disability, then, to the extent permitted by law, the
Company may terminate Executive’s employment. 
“Disability” shall mean that Executive is unable to carry out the
responsibilities and functions of the position held by Executive by reason of
any physical or mental impairment for more than 120 days in any twelve-month
period.  Upon a termination as a result
of Executive’s Disability, the Company shall pay to Executive all compensation
to which he is entitled up through the date of termination, and thereafter all
obligations of the Company under this Agreement shall cease.  Nothing in this Agreement shall affect
Executive’s rights under any disability plan in which Executive is a
participant.

 

d.               For Good Reason. 
Executive’s termination shall be for “Good Reason” if Executive provides
written notice to the Company’s Chief Executive Officer and the Board of
Directors of the Company of the Good Reason within thirty (30) days of the
event constituting Good Reason and provides the Company with a period of twenty
(20) days to cure the event constituting Good Reason and the Company fails to
cure the Good Reason within that period. 
For purposes of this Agreement, “Good Reason” shall mean either (A) a
material reduction in Executive’s Base Salary or (B) a relocation of Executive’s
place of employment by more than fifty (50) miles, provided and only if such
change, reduction or relocation is effected by the Company without Executive’s
consent.

 

5.                          TERMINATION
OBLIGATIONS

 

a.               Return of Property.  Executive agrees that all property (including
without limitation all equipment, tangible proprietary information, documents,
records, notes, contracts and computer-generated materials) furnished to or
created or prepared by Executive incident to Executive’s employment belongs to
the Company and shall be promptly returned to the Company upon termination of
Executive’s employment.

 

b.               Termination and Cooperation.  Upon termination of Executive’s employment with
the Company, Executive shall be deemed to have terminated all employment
positions then held with the Company and its affiliates and from all positions
as a director of any of the Company’s subsidiaries but not as a director of the
Company itself.  Following any
termination of employment, Executive shall cooperate with the Company in the
winding up of pending work on behalf of the Company and the orderly transfer of
work to other employees.  Executive shall
also cooperate with the Company, at the Company’s expense to the extent allowed
by law, in the defense of any action brought by any third party against the
Company that relates to Executive’s employment by the Company, whether brought
before or after Executive’s termination of employment with the Company.

 

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6.                          CONFIDENTIAL
INFORMATION; PROHIBITION ON THIRD PARTY INFORMATION

 

a.               Confidential Information
Agreement.  Executive shall hold in confidence for the
benefit of the Company all secret or confidential information, knowledge or
data, including proprietary information and trade secrets, relating to the
Company and its businesses, which shall have been obtained by Executive prior
to or in the course of Executive’s employment by the Company (“Confidential
Information”), provided, however, that Confidential Information shall not
retain its status as such if the Confidential Information (i) is publicly known
through no act or omission of Executive, (ii) becomes available to Executive on
a non-confidential basis from a source other than the Company, provided that
such source is not bound by a confidentiality agreement with, or other
obligation of secrecy to, the Company or another party, or (iii) is know
by Executive prior to receiving it from the Company, provided that such
information is not subject to another confidentiality agreement with, or other
obligation of secrecy to, the Company or another party.  Executive also shall have the right to
disclose Confidential Information to the extent required by law, provided that
Executive first gives prompt written notice to the Company regarding the
intention to make such disclosure and, provided, further, Executive requests
confidential treatment of such Confidential Information to the fullest extent
permitted by law. Whether before or after termination of Executive’s employment
with the Company, Executive shall not, without the prior written consent of the
Company, communicate or divulge any Confidential Information, other than to the
Company and to those persons or entities designated by the Company or as
otherwise is reasonably necessary for Executive to carry out his or her
responsibilities as an executive of the Company.

 

b.               Non-Interference.  Executive acknowledges that, because of
Executive’s position in the Company, Executive will have access to Confidential
Information belonging to the Company.  To
preserve and protect this information and the assets of the Company, and in
consideration of the severance and benefits provided to Executive under this
Agreement, Executive agrees that during the term of Executive’s employment and
for the longer of either (i) the period during which Executive continues to
receive, or except for Executive’s voluntary waiver of salary continuation or
breach of this Section 6.b. Executive would be entitled to receive, salary
continuation pursuant to the terms of this Agreement and (ii) one (1) year
after the termination of Executive’s employment with the Company, in addition
to Executive’s other obligations hereunder or under any other proprietary
information agreement between Executive and the Company, Executive shall not,
for Executive or any third party, directly or indirectly (a) divert or
attempt to divert from the Company any business of any kind, including without
limitation the solicitation of or interference with any of its customers,
clients, members, business partners or

 

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suppliers, (b) solicit, raid, entice or
induce, either directly or through a third party, any current or former
employee of the Company to be employed by another person, or either directly or
through a third party hire or otherwise employ any current or former employee
of the Company, or (c) work in any capacity that would compete directly
with the Company.  In addition to any
other remedies to which Company would be entitled, in the event of a breach of
this Section 6.b. by Executive, all salary continuation and other benefits
to which Executive would be entitled shall cease.

 

c.               Non-Disclosure of Third Party
Information.  Executive represents and warrants and
covenants that Executive shall not disclose to the Company, or use, or induce
the Company to use, any confidential or proprietary information or trade
secrets of others at any time, and Executive acknowledges and agrees that any
violation of this provision shall be grounds for Executive’s immediate
termination and could subject Executive to substantial civil liabilities and
criminal penalties.  Executive further
specifically and expressly acknowledges that no officer or other employee or
representative of the Company has requested or instructed Executive to disclose
or use any such third party confidential or proprietary information or trade
secrets.

 

7.                          AMENDMENTS;
WAIVERS; REMEDIES

 

This Agreement may not be amended or waived
except by a writing signed by Executive and by a duly authorized representative
of the Company other than Executive. 
Failure to exercise any right under this Agreement shall not constitute
a waiver of such right.  Any waiver of
any breach of this Agreement shall not operate as a waiver of any subsequent
breaches.  All rights or remedies
specified for a party herein shall be cumulative and in addition to all other
rights and remedies of the party hereunder or under applicable law.

 

8.                          ASSIGNMENT;
BINDING EFFECT

 

a.               Assignment. 
The performance of Executive is personal hereunder, and Executive agrees
that Executive shall have no right to assign and shall not assign or purport to
assign any rights or obligations under this Agreement.  This Agreement may be assigned or transferred
by the Company, and nothing in this Agreement shall prevent the consolidation,
merger or sale of the Company or a sale of any or all or substantially all of
its assets.

 

b.               Binding Effect.  Subject to the foregoing restriction on
assignment by Executive, this Agreement shall inure to the benefit of and be
binding upon each of the parties; the affiliates, officers, directors, agents,
successors and assigns of the Company; and the heirs, devisees, spouses, legal
representatives and successors of Executive.

 

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9.                          SEVERABILITY

 

If any provision of this Agreement shall be
held by a court or arbitrator to be invalid, unenforceable, or void, such
provision shall be enforced to the fullest extent permitted by law, and the
remainder of this Agreement shall remain in full force and effect.  In the event that the time period or scope of
any provision is declared by a court or arbitrator of competent jurisdiction to
exceed the maximum time period or scope that such court or arbitrator deems
enforceable, then such court or arbitrator shall reduce the time period or
scope to the maximum time period or scope permitted by law.

 

10.                   ARBITRATION

 

a.               Agreement To Arbitrate
Claims.  The Company and Executive agree that any
existing or future dispute, controversy, claim or action (“dispute” or “claim”)
arising out of the retention or employment of Executive by the Company, the
termination of that employment, or arising under this Agreement shall be
resolved by final and binding arbitration. 
Such arbitration shall occur in accordance with the National Rules for
the Resolution of Employment Disputes of the American Arbitration Association.

 

b.               Scope of Disputes and Claims to
Be Arbitrated.
Company and Executive understand and agree that this Agreement shall apply to
any and all disputes arising from or relating to Executive’s hiring, employment
with or termination of employment by the Company or arising under this
Agreement. This agreement to arbitrate applies to disputes arising in tort or
contract, pursuant to statute, regulation or otherwise, now in existence or
which may in the future be enacted, amended or judicially recognized, including
but not limited to the following:

 

(i)                         claims for fraudulent inducement of
contract or breach of contract or contractual obligation, whether such alleged
contract or obligation be oral, written, express, or implied by fact or law;

 

(ii)                      claims of fraud, or wrongful termination,
including violation of public policy and constructive discharge;

 

(iii)                   claims of discrimination or harassment under any
and all state and federal statutes that prohibit discrimination in employment,
as well as claims for violation of any other state or federal statute except as
set forth below;

 

(iv)                  claims of non-payment or incorrect payment of
wages, commissions, bonuses, severance, Executive fringe benefits, stock
options and the like, whether such claims be pursuant to alleged express or
implied contract or obligation, equity, the California Labor Code, the Fair
Labor Standards Act, the Employee Retirement Income Securities Act, and

 

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any other local, state or federal law concerning
wages, compensation or Executive benefits;

 

(v)                     claims for infliction of emotional distress,
misrepresentation, interference with contract or prospective economic
advantage, violation of public policy, defamation, unfair business practices,
and any other tort or tort-like causes of action relating to or arising from
the employment relationship or the formation or termination thereof; and

 

(vi)                  claims arising out of or relating to the grant,
exercise, vesting and/or issuance of equity in the Company or options to
purchase equity in the Company.

 

c.               Sole and Exclusive Remedy. 
The Company and Executive understand and agree that except for such
limited post-arbitration judicial review as may be permitted by law,
arbitration of such disputes, as provided for herein, shall be the sole and
exclusive mechanism for resolving any and all existing and future disputes, and
that no other forum for dispute resolution will be available to either party.  The only exceptions are the claims identified
below, which may be resolved in any appropriate fora, including courts of law,
as required by the laws then in effect:

 

(i)                         claims for benefits under the workers’
compensation, unemployment insurance and state disability insurance laws; or

 

(ii)                      claims concerning the validity,
infringement or enforceability of any trade secret, patent right, copyright,
trademark, or any other intellectual or confidential property right held or
sought by the Company.

 

d.               Decision of Arbitrator Binding;
Waiver of Trial Before Court, Jury or Government Agency. 
Company and Executive understand and agree that arbitration shall be
instead of a trial before a court or jury, or a hearing before a government
agency.  The Company and Executive
understand and agree that the decision of the arbitrator shall be final and
binding on both the Company and Executive, and it shall provide the exclusive
remedy(ies) for resolving any and all disputes between the Company and
Executive, as provided herein, and it shall be enforceable by any court having
proper jurisdiction.

 

THE COMPANY AND EXECUTIVE FURTHER
UNDERSTAND AND AGREE THAT BY SIGNING THIS AGREEMENT, EACH IS EXPRESSLY WAIVING
ANY AND ALL RIGHTS TO A TRIAL BEFORE A COURT OR JURY OR BEFORE A GOVERNMENT
AGENCY REGARDING ANY DISPUTE OR CLAIM WHICH EACH NOW HAS OR MAY IN THE FUTURE
HAVE, AS PROVIDED FOR HEREIN.

 

e.               Place of Arbitration. 
The Company and Executive understand and agree that arbitration of
disputes provided for herein shall take place in San

 

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Francisco, California.  If, at the time the dispute in question
arises, Executive lives and works more than one hundred (100) miles from San
Francisco, California, then Executive has the option of requesting that the
arbitration take place in the county in which the Company has an executive
office that is nearest to Executive’s residence at the time the dispute in
question arises.

 

f.                 Costs of Arbitration. 
The Company and Executive understand and agree that the arbitrator’s fee
will be borne solely by the Company. 
Additionally, the Company will bear all other costs related to the
arbitration, assuming such costs are not expenses that Executive would be
required to bear if he were bringing an action in a court of law.  The Company and Executive shall each bear
their own attorneys’ fees incurred in connection with the arbitration, and the
arbitrator will not have authority to award attorneys’ fees unless a statute at
issue in the dispute or other appropriate law authorizes the award of attorneys’
fees to the prevailing party, in which case the arbitrator shall have the
authority to make an award of attorneys’ fees as permitted by the applicable
statute.

 

g.              Procedure. 
The arbitration shall be conducted in accordance with the National Rules
for the Resolution of Employment Disputes of the American Arbitration
Association.

 

h.              Written Arbitration Decision.  The
Company and Executive understand and agree that, in any arbitration arising
from this agreement to arbitrate, the arbitrator will be required to issue a
written arbitration decision that clearly sets forth the essential findings on
which that award is based.

 

i.                 Preservation of Remedies.  The
Company and Executive understand and agree that, in any arbitration arising
from this agreement to arbitrate, Executive and the Company will preserve all
remedies to which each would otherwise be entitled in a court of law, except as
limited under the terms of this Agreement.

 

j.                 Necessary Minimum Standard of
Discovery.  The Company and Executive understand and agree
that, in any arbitration arising from this agreement to arbitrate, the Company
and Executive will be entitled to discovery in accordance with the provisions
of California Code of Civil Procedure Section 1283(a).

 

k.             Knowing and Voluntary Agreement
to Arbitrate.  The Company and Executive have been advised
to consult with attorneys of their own choosing before agreeing to arbitrate,
and have had an opportunity to do so.

 

THE COMPANY AND EXECUTIVE HAVE
READ THIS AGREEMENT TO ARBITRATE CAREFULLY AND UNDERSTAND THAT BY SIGNING IT,
EACH IS WAIVING ALL RIGHTS TO A TRIAL OR HEARING BEFORE A COURT OR

 

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JURY OR GOVERNMENT AGENCY OF ANY
AND ALL DISPUTES AS PROVIDED FOR HEREIN.

 

11.                   GOVERNING
LAW

 

a.               Governing Law.  The Company and Executive understand and agree
that this Agreement, including the obligation to arbitrate, and its validity,
construction and performance shall be governed by, and construed in accordance
with, the laws of the State of California without regard to conflict of law
principles.

 

b.               No Employee Benefit Plan.  The
parties specifically intend that this Agreement and the provision of benefits
hereunder shall not constitute an “employee benefit plan” subject to any of the
provisions of the Employee Retirement Income Security Act of 1974, as amended.

 

12.                   INTERPRETATION

 

This Agreement shall be construed as a whole,
according to its fair meaning, and not in favor of or against any party.  Sections and section headings contained in
this Agreement are for reference purposes only, and shall not affect in any
manner the meaning or interpretation of this Agreement.  Whenever the context requires, references to
the singular shall include the plural and the plural the singular.

 

13.                   CERTAIN
OBLIGATIONS SURVIVE TERMINATION OF AGREEMENT

 

Sections 3(b), 5, 6(a),
6(b), and 9 through 15 of this Agreement shall survive the termination of this
Agreement.

 

14.                   ENTIRE
AGREEMENT

 

This Agreement supercedes the Severance
Agreement and any other agreement between the Company and Executive in
connection with Executive’s employment or compensation by the Company, except
this Agreement shall not supersede any proprietary information agreement
between the Company and Executive, and this Agreement is intended to be the
final, complete, and exclusive statement of the terms of Executive’s employment
by the Company and may not be contradicted by evidence of any prior or
contemporaneous statements or agreements, except for agreements specifically
referenced herein.  To the extent that
the practices, policies or procedures of the Company, now or in the future,
apply to Executive and are inconsistent with the terms of this Agreement, the
provisions of this Agreement shall control. 
Any subsequent change in Executive’s duties, position, or compensation
will not affect the validity or scope of this Agreement.

 

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15.                   EXECUTIVE
ACKNOWLEDGEMENT

 

EXECUTIVE ACKNOWLEDGES EXECUTIVE HAS HAD THE
OPPORTUNITY TO CONSULT LEGAL COUNSEL CONCERNING THIS AGREEMENT, THAT EXECUTIVE
HAS READ AND UNDERSTANDS THE AGREEMENT, THAT EXECUTIVE IS FULLY AWARE OF ITS
LEGAL EFFECT, AND THAT EXECUTIVE HAS ENTERED INTO IT FREELY BASED ON EXECUTIVE’S
OWN JUDGMENT AND NOT ON ANY REPRESENTATIONS OR PROMISES OTHER THAN THOSE
CONTAINED IN THIS AGREEMENT.

 

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IN WITNESS WHEREOF,
the parties have duly executed this Agreement as of the date first written
above.

 

	
  Restoration Hardware, inc.:

  	
  Stephen Gordon:

  
	
   

  	
   

  
	
   

  	
   

  
	
  By:

  	
  /s/ Gary Friedman

  	
   

  	
  /s/ S. J. Gordon

  	
   

  
	
   

  	
  Gary Friedman

  	
  S.J. Gordon

  
	
   

  	
   

  
	
  Title:

  	
  Chief Executive Officer

  	
   

  
						

 

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EXHIBIT A

 

A.                                   The
Company and Executive agree that Executive shall seek to devote approximately
80 days per calendar year (or such proportionately lesser number of days for
any partial calendar year during the Term of Employment) in performing services
under this Agreement, provided that each of the Company and Executive acknowledge
that such calendar day amount shall be considered by both parties as a goal
rather than a requirement under this Agreement and that performance of a lesser
or greater amount, as necessary, to perform Executive’s services under this
Agreement shall be the expectation of both parties hereto.

 

B.                                     The
job duties of Executive shall be the following:

 

Supporting the Company in merchandising,
concepting and sourcing vendor goods domestically and internationally.

 

The above shall include, without limitation:

 

1.                           Involvement
(to the extent not conflicting with other activities undertaken by Executive on
behalf of the Company) in those certain regularly scheduled merchandising
meetings, including without limitation as set forth below:

 

a.               “Winter,
Spring, Fall and Holiday Seasonal Concept Meetings” with merchants, the Company’s
product development team, the Company’s product design team and the Company’s
Chief Executive Officer for purposes of strategizing both new concepts and the
Company’s business strategy;

 

b.              “Winter,
Spring, Fall and Holiday Assortment Review Meetings” to define the Company’s
competitive strategy, to review physical samples and to address pro forma
business plan metrics based on agreed upon assortments;

 

c.               The
“Annual Holiday Re-cap Meeting” to review successes and misses as well as
define initial strategies for the next upcoming holiday season;

 

d.              The
“Annual Holiday Buy-Plan Meeting” for sku-by-sku, seasonal
department-by-department inventory commitments and sales plan finalization;

 

e.               The
“Annual Holiday Floor Plan Review Meeting” to review all samples and gain
concurrence on the placement of and planned volume of approved product;

 

f.                 Finalization
of windows and associated marketing meetings for both retail and catalog; and

 

g.              “April
(Spring) and August (Fall) Strategy Offsite Meetings.”

 

2.                           Proactive
domestic and international sourcing trips per Founder/Merchant discretion.

 

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3.                           Domestic
and international travel for sourcing and concepting with merchant teams per
the direction of the Company’s Chief Executive Officer.

 

4.                           Periodic
concepting/brainstorming/idea generation meetings with the Company’s product
design and product development teams.

 

15EXHIBIT 10.4

 

RESTORATION HARDWARE, INC.

NOTICE OF GRANT OF STOCK OPTION

 

Notice is hereby
given of the following option grant (the “Option”) to purchase shares of Common
Stock of Restoration Hardware, Inc. (the “Corporation”):

 

	
  Optionee:

  	
  John W. Tate

  
	
   

  	
   

  
	
  Grant Date:

  	
  August 24,
  2004

  
	
   

  	
   

  
	
  Vesting
  Commencement Date:

  	
  August 24,
  2004

  
	
   

  	
   

  
	
  Exercise
  Price:

  	
  $5.70

  
	
   

  	
   

  
	
  Number of
  Option Shares:

  	
  70,172

  
	
   

  	
   

  
	
  Expiration
  Date:

  	
  August 24,
  2014

  
	
   

  	
   

  
	
  Type of
  Option:

  	
  Incentive
  Stock Option

  

 

Exercise Schedule:  The Option shall become exercisable for
twenty-five percent (25%) of the Option Shares upon Optionee’s completion of
each of the four (4) years of Service measured from and after the Vesting
Commencement Date, with the first such installment to become exercisable on the
first anniversary of the Vesting Commencement Date.  In no event shall the Option become
exercisable for any additional Option Shares after Optionee’s cessation of
Service.

 

Optionee
understands and agrees that the Option is granted subject to and in accordance
with the terms of the Restoration Hardware, Inc. 1998 Stock Incentive Plan
Amended and Restated on October 9, 2002 (the “Plan”).  Optionee further agrees to be bound by the
terms of the Plan and the terms of the Option as set forth in the Stock Option Agreement
attached hereto as Exhibit A. 
A copy of the Plan is available upon request made to the Secretary of
the Corporation at the Corporation’s principal offices.

 

No Employment or
Service Contract. 
Nothing in this notice or in the attached Stock Option Agreement or in
the Plan shall confer upon Optionee any right to continue in Service for any
period of specific duration or interfere with or otherwise restrict in any way
the rights of the Corporation (or any Parent or Subsidiary employing or retaining
Optionee) or of Optionee, which rights are hereby expressly reserved by each,
to terminate Optionee’s Service at any time for any reason, with or without
cause.

 

 

Definitions.  All capitalized terms in this notice shall
have the meaning assigned to them in this notice or in the attached Stock
Option Agreement.

 

	
  DATED:
  August 24, 2004

  	
   

  
	
   

  	
   

  
	
   

  	
  RESTORATION HARDWARE, INC.

  
	
   

  	
  By: 

  	
   /s/Patricia A. McKay

  
	
   

  	
   

  	
   

  
	
   

  	
  Title: Executive Vice
  President and Chief Financial

  Officer

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  /s/ John W. Tate

  
	
   

  	
  John W. Tate, Optionee

  
	
   

  	
   

  
	
   

  	
  Address: 

  	
  530 Belmeade Way Trail

  
	
   

  	
   

  	
  Lewisville, NC 27023

  
	
   

  	
   

  
	
   

  	
   

  
	
  ATTACHMENTS

  	
   

  
	
  Exhibit
  A - Stock Option Agreement

  	
   

  
					

 

 

RESTORATION HARDWARE, INC.

STOCK OPTION AGREEMENT

 

RECITALS

 

A.           The Board has adopted the Plan for the purpose of
retaining the services of selected Employees, non-employee members of the Board
or of the board of directors of any Parent or Subsidiary and consultants and
other independent advisors who provide services to the Corporation (or any
Parent or Subsidiary).

 

B.             Optionee is to render valuable services to the
Corporation (or a Parent or Subsidiary), and this Agreement is executed
pursuant to, and is intended to carry out the purposes of, the Plan in
connection with the Corporation’s grant of an option to Optionee.

 

C.             All capitalized terms in this Agreement shall have
the meaning assigned to them in the attached Appendix.

 

NOW,
THEREFORE, it is hereby agreed as follows:

 

1.               Grant of Option.  The Corporation hereby grants to Optionee, as
of the Grant Date, an option to purchase up to the number of Option Shares
specified in the Grant Notice.  The
Option Shares shall be purchasable from time to time during the option term
specified in Paragraph 2 below at the Exercise Price.

 

2.               Option Term.  This option shall have a maximum term of
ten (10) years measured from the Grant Date and shall accordingly expire
at the close of business on the Expiration Date, unless sooner terminated in
accordance with Paragraph 5 or 6 below.

 

3.               Limited Transferability.  This option shall be neither transferable nor
assignable by Optionee other than by will or by the laws of descent and
distribution following Optionee’s death and may be exercised, during Optionee’s
lifetime, only by Optionee.  However, if
this option is designated a Non-Statutory Option in the Grant Notice, then this
option may, in connection with the Optionee’s estate plan, be assigned in whole
or in part during Optionee’s lifetime to one or more members of the Optionee’s
immediate family or to a trust established for the exclusive benefit of the
Optionee and/or one or more such family members.  The assigned portion shall be exercisable
only by the person or persons who acquire a proprietary interest in the option
pursuant to such assignment.  The terms
applicable to the assigned portion shall be the same as those in effect for
this option immediately prior to such assignment.

 

4.               Date of Exercise.  This option shall become exercisable for the
Option Shares in one or more installments as specified in the Grant
Notice.  As the option becomes
exercisable for such installments, those installments shall accumulate and the
option shall remain exercisable for the accumulated installments until the
Expiration Date or sooner termination of the option term under Paragraph 5
or 6 below.

 

 

5.               Cessation of Service.  The option term specified in Paragraph 2
above shall terminate (and this option shall cease to be outstanding) prior to
the Expiration Date should any of the following provisions become applicable:

 

(a)          Should
Optionee cease to remain in Service for any reason (other than death, Permanent
Disability or Cause) while this option is outstanding, then the period for
exercising this option shall be reduced to a three (3)-month period
commencing with the date of such cessation of Service, but in no event shall
this option be exercisable at any time after the Expiration Date.

 

(b)         Should
Optionee die while holding this option, then the personal representative of
Optionee’s estate or the person or persons to whom the option is transferred
pursuant to Optionee’s will or in accordance with the laws of inheritance shall
have the right to exercise this option. 
Such right shall lapse, and this option shall cease to be outstanding,
upon the earlier of (i) the expiration of the
twelve (12)-month period measured from the date of Optionee’s death or
(ii) the Expiration Date.

 

(c)          Should
Optionee cease Service by reason of Permanent Disability while this option is
outstanding, then the period for exercising this option shall be reduced to a
twelve (12)-month period commencing with the date of such cessation of
Service, but in no event shall this option be exercisable at any time after the
Expiration Date.

 

(d)         During the
limited period of post-Service exercisability, this option may not be exercised
in the aggregate for more than the number of vested Option Shares for which the
option is exercisable at the time of Optionee’s cessation of Service.  Upon the expiration of such limited exercise
period or (if earlier) upon the Expiration Date, this option shall terminate
and cease to be outstanding for any otherwise exercisable Option Shares for
which the option has not been exercised. 
However, this option shall, immediately upon Optionee’s cessation of
Service for any reason, terminate and cease to be outstanding with respect to
any Option Shares for which this option is not otherwise at that time
exercisable.

 

(e)          Should
Optionee’s Service be terminated for Cause, then this option shall terminate
immediately and cease to remain outstanding.

 

6.               Special Acceleration of Option.

 

(a)          Change
of Control.

 

(i)                                     This
option to the extent outstanding at the time of a Change of Control transaction
but not otherwise fully exercisable, shall automatically accelerate so that
this option shall, immediately prior to the effective date of such Change of
Control, become exercisable for all of the Option Shares at the time subject to
this option and may be exercised for any or all of those Option Shares as fully
vested shares of Common Stock.  However,
this option shall not become exercisable on such an

 

2

 

accelerated basis
if and to the extent:  (i) this
option is, in connection with the Change of Control, to be assumed by the
successor corporation (or parent thereof) or otherwise continued in full force
and effect pursuant to the terms of the Change of Control transaction; or
(ii) this option is to be replaced with a cash incentive program of the
successor corporation which preserves the spread existing at the time of the
Change of Control on the Option Shares for which this option is not otherwise
at that time exercisable (the excess of the Fair Market Value of those Option
Shares over the aggregate Exercise Price payable for such shares) and provides
for subsequent payout in accordance with the same option exercise/vesting
schedule set forth in the Grant Notice.

 

(ii)                                  Immediately
following the Change of Control, this option shall terminate and cease to be
outstanding, except to the extent assumed by the successor corporation (or parent
thereof) or otherwise continued in full force and effect pursuant to the terms
of the Change of Control transaction.

 

(iii)                               If
this option is assumed in connection with a Change of Control (or otherwise
continued in full force and effect), then this option shall be appropriately
adjusted, immediately after such Change of Control, to apply to the number and
class of securities or other property which would have been issuable to
Optionee in consummation of such Change of Control had the option been exercised
immediately prior to such Change of Control, and appropriate adjustments shall
also be made to the Exercise Price, provided the aggregate Exercise
Price shall remain the same.

 

(iv)                              If
this option is assumed in connection with a Change of Control (or otherwise
continued in full force and effect) and the Optionee’s Service is terminated
Not for Cause by the Company or the successor corporation (or parent thereof)
within eighteen (18) months after the Change of Control, this option
automatically shall become vested and exercisable for all of the Option Shares
at the time represented by this option.

 

(b)         This
Agreement shall not in any way affect the right of the Corporation to adjust,
reclassify, reorganize or otherwise change its capital or business structure or
to merge, consolidate, dissolve, liquidate or sell or transfer all or any part
of its business or assets.

 

7.               Adjustment in Option Shares.

 

Should any change be made to Common Stock by reason of
any stock split, stock dividend, recapitalization, combination of shares,
exchange of shares or other change affecting the outstanding Common Stock as a
class without the Corporation’s receipt of consideration, appropriate
adjustments shall be made to (i) the total number and/or class of
securities subject to this option and (ii) the Exercise Price in order to
reflect such change and thereby preclude a dilution or enlargement of benefits
hereunder.

 

8.               Stockholder Rights.  The holder of this option shall not have any
stockholder rights with respect to the Option Shares until such person shall
have

 

3

 

exercised the
option, paid the Exercise Price and become a holder of record of the purchased
shares.

 

9.               Manner of Exercising Option.

 

(a)          In order to
exercise this option with respect to all or any part of the Option Shares for
which this option is at the time exercisable, Optionee (or any other person or
persons exercising the option) must take the following actions:

 

(i)                                     Execute
and deliver to the Corporation a Notice of Exercise for the Option Shares for
which the option is exercised;

 

(ii)                                  Pay
the aggregate Exercise Price for the purchased shares in one or more of the
following forms, subject to Applicable Laws:

 

(A)      Cash or check
made payable to the Corporation; or

 

(B)        Shares of
Common Stock held by Optionee (or any other person or persons exercising the
option) for the requisite period necessary to avoid a charge to the
Corporation’s earnings for financial reporting purposes and valued at their
Fair Market Value on the Exercise Date; or

 

(C)        Through a
special sale and remittance procedure pursuant to which Optionee (or any other
person or persons exercising the option) shall concurrently provide irrevocable
instructions (I) to a Corporation-designated brokerage firm to effect the
immediate sale of the purchased shares and remit to the Corporation, out of the
sale proceeds available on the settlement date, sufficient funds to cover the
aggregate Exercise Price payable for the purchased shares plus all applicable federal,
state and local income and employment taxes required to be withheld by the
Corporation by reason of such exercise and (II) to the Corporation to
deliver the certificates for the purchased shares directly to such brokerage
firm in order to complete the sale.

Except to the extent the
sale and remittance procedure is utilized in connection with the option
exercise, payment of the Exercise Price must accompany the Notice of Exercise
delivered to the Corporation in connection with the option exercise;

 

(iii)                               Furnish
to the Corporation appropriate documentation that the person or persons
exercising the option (if other than Optionee) have the right to exercise this
option; and

 

(iv)                              Make
appropriate arrangements with the Corporation (or Parent or Subsidiary
employing or retaining Optionee) for the satisfaction of all federal, state and
local income and employment tax withholding requirements applicable to the
option exercise.

 

4

 

(b)         As soon as
practical after the Exercise Date, the Corporation shall issue to or on behalf
of Optionee (or any other person or persons exercising this option) a
certificate for the purchased Option Shares, with the appropriate legends, if
any, affixed thereto.

 

(c)          In no event
may this option be exercised for any fractional shares of Common Stock.

 

10.         Compliance with Laws and Regulations.

 

(a)          The
exercise of this option and the issuance of the Option Shares upon such
exercise shall be subject to compliance by the Corporation and Optionee with
all applicable requirements of law relating thereto and with all applicable
regulations of any stock exchange (or the Nasdaq National Market, if
applicable) on which Common Stock may be listed for trading at the time of such
exercise and issuance.

 

(b)         The
inability of the Corporation to obtain approval from any regulatory body having
authority deemed by the Corporation to be necessary to the lawful issuance and
sale of any Common Stock pursuant to this option shall relieve the Corporation
of any liability with respect to the non-issuance or sale of Common Stock as to
which such approval shall not have been obtained.  The Corporation, however, shall use its best
efforts to obtain all such approvals.

 

11.         Successors and Assigns.  Except to the extent otherwise provided in
Paragraphs 3 and 6 above, the provisions of this Agreement shall inure to
the benefit of, and be binding upon, the Corporation and its successors and
assigns and Optionee, Optionee’s assigns and the legal representatives, heirs
and legatees of Optionee’s estate.

 

12.         Notices.  Any notice required to be given or delivered
to the Corporation under the terms of this Agreement shall be in writing and
addressed to the Corporation at its principal corporate offices.  Any notice required to be given or delivered
to Optionee shall be in writing and addressed to Optionee at the address
indicated below Optionee’s signature line on the Grant Notice.  All notices shall be deemed effective upon
personal delivery or upon deposit in the U.S. mail, postage prepaid and
properly addressed to the party to be notified.

 

13.         Construction.  This Agreement and the option evidenced
hereby are made and granted pursuant to the Plan and are in all respects
limited by and subject to the terms of the Plan.  All decisions of the Plan Administrator with
respect to any question or issue arising under the Plan or this Agreement shall
be conclusive and binding on all persons having an interest in this
option.  For purposes of this Agreement,
whenever the context requires, the singular number shall include the plural,
and vice versa.

 

14.         Governing Law.  The interpretation, performance and
enforcement of this Agreement shall be governed by the laws of the State of
California without resort to that State’s conflict-of-laws rules.

 

5

 

15.         Excess Shares.  If the Option Shares covered by this
Agreement exceed, as of the Grant Date, the number of shares of Common Stock
which may without stockholder approval be issued under the Plan, then this
option shall be void with respect to those excess shares, unless stockholder
approval of an amendment sufficiently increasing the number of shares of Common
Stock issuable under the Plan is obtained in accordance with the provisions of
the Plan.

 

16.         Additional Terms Applicable to an Incentive Option.  In the event this option is designated an
Incentive Option in the Grant Notice, the following terms and conditions shall
also apply to the grant:

 

(a)          This option
shall cease to qualify for favorable tax treatment as an Incentive Option if
(and to the extent) this option is exercised for one or more Option
Shares:  (A) more than
three (3) months after the date Optionee ceases to be an Employee for any
reason other than death or Permanent Disability; or (B) more than
twelve (12) months after the date Optionee ceases to be an Employee by
reason of Permanent Disability.

 

(b)         No
installment under this option shall qualify for favorable tax treatment as an
Incentive Option if (and to the extent) the aggregate Fair Market Value
(determined at the Grant Date) of the Common Stock for which such installment
first becomes exercisable hereunder would, when added to the aggregate value
(determined as of the respective date or dates of grant) of Common Stock or
other securities for which this option or any other Incentive Options granted
to Optionee prior to the Grant Date (whether under the Plan or any other option
plan of the Corporation or any Parent or Subsidiary) first become exercisable
during the same calendar year, exceed One Hundred Thousand Dollars ($100,000)
in the aggregate.  Should such One
Hundred Thousand Dollar ($100,000) limitation be exceeded in any calendar year,
this option shall nevertheless become exercisable for the excess shares in such
calendar year as a Non-Statutory Option.

 

(c)          Should the
exercisability of this option be accelerated upon a Change of Control
transaction, then this option shall qualify for favorable tax treatment as an
Incentive Option only to the extent the aggregate Fair Market Value (determined
at the Grant Date) of Common Stock for which this option first becomes
exercisable in the calendar year in which the Change of Control occurs does
not, when added to the aggregate value (determined as of the respective date or
dates of grant) of the Common Stock or other securities for which this option
or one or more other Incentive Options granted to Optionee prior to the Grant
Date (whether under the Plan or any other option plan of the Corporation or any
Parent or Subsidiary) first become exercisable during the same calendar year,
exceed One Hundred Thousand Dollars ($100,000) in the aggregate.  Should the applicable One Hundred Thousand
Dollar ($100,000) limitation be exceeded in the calendar year of such Change of
Control, the option may nevertheless be exercised for the excess shares in such
calendar year as a Non-Statutory Option.

 

6

 

(d)         Should
Optionee hold, in addition to this option, one or more other options to
purchase Common Stock which become exercisable for the first time in the same
calendar year as this option, then the foregoing limitations on the
exercisability of such options as Incentive Options shall be applied on the
basis of the order in which such options are granted.

 

7

 

EXHIBIT I

NOTICE OF EXERCISE

 

I hereby notify
Restoration Hardware, Inc. (the “Corporation”) that I elect to purchase
                          
shares of the Corporation’s common stock (the “Purchased Shares”) at the option
exercise price of
$                          
per share (the “Exercise Price”) pursuant to that certain option (the “Option”)
granted to me on August 24, 2004 under the Corporation’s 1998 Stock
Incentive Plan Amended and Restated on October 9, 2002.

 

Concurrently with
the delivery of this Exercise Notice to the Corporation, I shall hereby pay to
the Corporation the Exercise Price for the Purchased Shares in accordance with
the provisions of my agreement with the Corporation (or other documents)
evidencing the Option and shall deliver whatever additional documents may be
required by such agreement as a condition for exercise.  Alternatively, I may utilize the special
broker-dealer sale and remittance procedure specified in my agreement to effect
payment of the Exercise Price.

 

	
                                          ,
  20     

  	
   

  
	
  Date

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Optionee

  
	
   

  	
   

  
	
   

  	
  Address:

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  Print name
  in exact manner

  	
   

  
	
  it is to
  appear on the

  	
   

  
	
  stock
  certificate:

  	
   

  
	
   

  	
   

  
	
  Address to
  which certificate

  	
   

  
	
  is to be
  sent, if different

  	
   

  
	
  from address
  above:

  	
   

  
	
   

  	
   

  
	
  Social
  Security Number:

  	
   

  
	
  Employee
  Number:

  	
   

  

 

 

APPENDIX

 

The following
definitions shall be in effect under the Agreement:

 

A.                                   Agreement shall mean this Stock
Option Agreement.

 

B.                                     Applicable Laws shall mean the
legal requirements relating to the administration of stock option plans, if
any, under applicable provisions of federal securities laws, state corporate
and securities laws, the Code, the rules of any applicable stock exchange or
national market system, and the rules of any foreign jurisdiction applicable to
the granting of stock options and the issuance of shares of Common Stock to
residents therein.

 

C.                                     Board shall mean the Corporation’s
Board of Directors.

 

D.                                    Cause shall mean, in connection with the
termination of the Optionee’s Service by the Corporation, (a) the Optionee
has been convicted of a felony involving fraud, dishonesty or personal injury
to another human being, or (b) the termination of Service is evidenced by
a resolution adopted in good faith by a majority of the members of the Board to
the effect that the Optionee (i) intentionally and continually failed
substantially to perform the Optionee’s reasonably assigned duties with the
Corporation, which failure continued for a period of at least thirty (30) days
after a written notice of demand for substantial performance has been delivered
to the Optionee specifying the manner in which the Optionee has failed
substantially to perform, or (ii) intentionally engaged in conduct which
is demonstrably and materially injurious to the Corporation; provided, that no
termination of the Optionee’s Service shall be for Cause as set forth in clause
(ii) above until there shall have been delivered to the Optionee a copy of a
written notice setting forth that the Optionee was guilty of the conduct set
forth in clause (ii) and specifying the particulars thereof in detail. No act,
nor failure to act, on the Optionee’s part shall be considered “intentional”
unless the Optionee has acted, or failed to act, with a lack of good faith and
with a lack of reasonable belief that the Optionee’s action or failure to act
was in the best interest of the Corporation. 
A termination of the Optionee’s Service shall also be considered for
“Cause” if the termination is evidenced by a resolution adopted in good faith
by a majority of the members of the Board following a notification from the
Optionee, or following the occurrence, of any of the following events: (w) the
Optionee becomes a named subject of a pending criminal proceeding (excluding
traffic violations and other minor offenses); (x) the Optionee becomes the
subject of any order, judgment or decree of any legal tribunal of competent
jurisdiction, permanently or temporarily enjoining the Optionee from, or otherwise
limiting, the following activities: (i) engaging in any type of business
practice; or (ii) engaging in any activity in connection with the purchase or
sale of any security or commodity or in connection with any violation of
federal or state securities laws or federal commodities laws; (y) the Optionee
is found by a court of competent jurisdiction in a civil action or by the
Securities and Exchange Commission to have violated any federal or state
securities law; or (z) the Optionee receives a “Wells
notice”.

 

A-1

 

E.                                      Change of Control shall mean any of
the following:

 

(a)                                  A
merger or consolidation in which securities possessing more than fifty percent
(50%) of the total combined voting power of the Corporation’s outstanding
securities are transferred to a person or persons different from the persons
holding those securities immediately prior to such transaction; or

 

(b)                                 The
sale, transfer or other disposition of all or substantially all of the
Corporation’s assets in complete liquidation or dissolution of the Corporation;
or

 

(c)                                  The
acquisition, directly or indirectly, by any person or related group of persons
(other than the Corporation or a person that directly or indirectly controls,
is controlled by, or is under common control with, the Corporation) of
beneficial ownership (within the meaning of Rule 13d-3 promulgated under
the 1934 Act) of securities possessing more than fifty percent (50%) of the
total combined voting power of the Corporation’s outstanding securities
pursuant to a tender or exchange offer made directly to the Corporation’s
stockholders; or

 

(d)                                 A
change in the composition of the Board over a period of thirty-six (36)
consecutive months or less such that a majority of the Board members ceases, by
reason of one or more contested elections for Board membership, to be comprised
of individuals who either (i) have been Board members continuously since
the beginning of such period or (ii) have been elected or nominated for
election as Board members during such period by at least a majority of the
Board members described in clause (i) who were still in office at the time
the Board approved such election or nomination.

 

F.                                      Code shall mean the Internal
Revenue Code of 1986, as amended.

 

G.                                     Common Stock shall mean shares of
the Corporation’s common stock.

 

H.                                    Corporation shall mean Restoration
Hardware, Inc., a Delaware corporation.

 

I.                                         Employee shall mean an individual
who is in the employ of the Corporation (or any Parent or Subsidiary), subject
to the control and direction of the employer entity as to both the work to be
performed and the manner and method of performance.

 

J.                                        Exercise Date shall mean the date
on which the option shall have been exercised in accordance with
Paragraph 9 of the Agreement.

 

K.                                    Exercise Price shall mean the
exercise price per Option Share as specified in the Grant Notice.

 

A-2

 

L.                                      Expiration Date shall mean the date
on which the option expires as specified in the Grant Notice.

 

M.                                 Fair Market Value per share of
Common Stock on any relevant date shall be determined in accordance with the
following provisions:

 

(a)                                  If
Common Stock is at the time traded on the Nasdaq National Market, then the Fair
Market Value shall be deemed equal to the closing selling price per share of
Common Stock on the date in question, as the price is reported by the National
Association of Securities Dealers on the Nasdaq National Market.  If there is no closing selling price for
Common Stock on the date in question, then the Fair Market Value shall be the
closing selling price on the last preceding date for which a closing selling
price is reported; or

 

(b)                                 If
Common Stock is at the time listed on any Stock Exchange, then the Fair Market
Value shall be deemed equal to the closing selling price per share of Common
Stock on the date in question on the Stock Exchange determined by the Plan
Administrator to be the primary market for Common Stock, as such price is
officially quoted in the composite tape of transactions on such exchange.  If there is no closing selling price for
Common Stock on the date in question, then the Fair Market Value shall be the
closing selling price on the last preceding date for which such quotation
exists.

 

N.                                    Grant Date shall mean the date of
grant of the option as specified in the Grant Notice.

 

O.                                    Grant Notice shall mean the Notice
of Grant of Stock Option accompanying the Agreement, pursuant to which Optionee
has been informed of the basic terms of the option evidenced hereby.

 

P.                                      Incentive Option shall mean an
option which satisfies the requirements of Section 422 of the Code.

 

Q.                                    1934 Act shall mean the Securities
Exchange Act of 1934, as amended.

 

R.                                     Non-Statutory Option shall mean an
option not intended to satisfy the requirements of Section 422 of the
Code.

 

S.                                      Not for Cause shall mean
termination of the Optionee’s Service by the Corporation for reasons other than
for Cause.

 

T.                                     Notice of Exercise shall mean the
notice of exercise in the form attached hereto as Exhibit I.

 

U.                                    Option Shares shall mean the number
of shares of Common Stock subject to the option as specified in the Grant
Notice.

 

A-3

 

V.                                     Optionee shall mean the person to
whom the option is granted as specified in the Grant Notice.

 

W.                                Parent shall mean any corporation
(other than the Corporation) in an unbroken chain of corporations ending with
the Corporation, provided each corporation in the unbroken chain (other than
the Corporation) owns, at the time of the determination, stock possessing fifty
percent (50%) or more of the total combined voting power of all classes of
stock in one of the other corporations in such chain.

 

X.                                    Permanent Disability shall mean
that the Optionee is unable to carry out the responsibilities and functions of
the position held by the Optionee by reason of any physical or mental
impairment for more than 120 days in any twelve-month period.

 

Y.                                     Plan shall mean the Corporation’s
1998 Stock Incentive Plan Amended and Restated on October 9, 2002.

 

Z.                                     Plan Administrator shall mean
either the Board or a committee of the Board acting in its capacity as
administrator of the Plan.

 

AA.                         Service shall mean the Optionee’s
performance of services for the Corporation (or any Parent or Subsidiary) in
the capacity of an Employee, a non-employee member of the board of directors or
a consultant or independent advisor.

 

BB.                             Stock Exchange shall mean the
American Stock Exchange or the New York Stock Exchange.

 

CC.                             Subsidiary shall mean any
corporation (other than the Corporation) in an unbroken chain of corporations
beginning with the Corporation, provided each corporation (other than the last
corporation) in the unbroken chain owns, at the time of the determination,
stock possessing fifty percent (50%) or more of the total combined voting power
of all classes of stock in one of the other corporations in such chain.

 

A-4

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