Document:

exv10w5

 

Exhibit 10.5

ENERGY RECOVERY, INC.

2006 STOCK OPTION/STOCK ISSUANCE PLAN

ARTICLE ONE

GENERAL PROVISIONS

     I. PURPOSE OF THE PLAN

          This 2006 Stock Option/Stock Issuance Plan is intended to promote the interests of Energy
Recovery Inc., a Delaware corporation, by providing eligible persons in the Corporation’s employ or
service with the opportunity to acquire a proprietary interest, or otherwise increase their
proprietary interest, in the Corporation as an incentive for them to continue in such employ or
service.

          Capitalized terms herein shall have the meanings assigned to such terms in the attached
Appendix.

     II. STRUCTURE OF THE PLAN

          A. The Plan shall be divided into two (2) separate equity programs:

               (i) the Option Grant Program under which eligible persons may, at the discretion of the Plan
Administrator, be granted options to purchase shares of Common Stock, and

               (ii) the Stock Issuance Program under which eligible persons may, at the discretion of the
Plan Administrator, be issued shares of Common Stock directly, either through the immediate
purchase of such shares or as a bonus for services rendered the Corporation (or any Parent or
Subsidiary).

          B. The provisions of Articles One and Four shall apply to both equity programs under the Plan
and shall accordingly govern the interests of all persons under the Plan.

     III. ADMINISTRATION OF THE PLAN

          A. The Plan shall be administered by the Board. However, any or all administrative functions
otherwise exercisable by the Board may be delegated to the Committee. Members of the Committee
shall serve for such period of time as the Board may determine and shall be subject to removal by
the Board at any time. The Board may also at any time terminate the functions of the Committee and
reassume all powers and authority previously delegated to the Committee.

          B. The Plan Administrator shall have full power and authority (subject to the provisions of
the Plan) to establish such rules and regulations as it may deem appropriate for proper
administration of the Plan and to make such determinations under, and issue such interpretations
of, the Plan and any outstanding options or stock issuances thereunder as it may deem necessary or
advisable. Decisions of the Plan Administrator shall be final and binding on all parties who have
an interest in the Plan or any option or stock issuance thereunder.

 

 

     IV. ELIGIBILITY

          A. The persons eligible to participate in the Plan are as follows:

               (i) Employees,

               (ii) non-employee members of the Board or the non-employee members of the board of
directors of any Parent or Subsidiary, and

               (iii) consultants and other independent advisors who provide services to the Corporation
(or any Parent or Subsidiary).

          B. The Plan Administrator shall have full authority to determine, (i) in respect of the grants
under the Option Grant Program, which eligible persons are to receive the option grants, the time
or times when those grants are to be made, the number of shares to be covered by each such grant,
the status of the granted option as either an Incentive Option or a Non-Statutory Option, the time
or times when each option is to become exercisable, the vesting schedule (if any) applicable to the
option shares and the maximum term for which the option is to remain outstanding, and (ii) in
respect of stock issuances under the Stock Issuance Program, which eligible persons are to receive
stock issuances, the time or times when those issuances are to be made, the number of shares to be
issued to each Participant, the vesting schedule (if any) applicable to the issued shares and the
consideration to be paid by the Participant for such shares.

          C. The Plan Administrator shall have the absolute discretion either to grant options in
accordance with the Option Grant Program or to effect stock issuances in accordance with the Stock
Issuance Program.

     V. STOCK SUBJECT TO THE PLAN

          A. The stock issuable under the Plan shall be shares of authorized but unissued or reacquired
Common Stock. The maximum number of shares of Common Stock which may be issued over the term of the
Plan shall not exceed eight hundred fifty thousand (850,000) shares.

          B. Shares of Common Stock subject to outstanding options shall be available for subsequent
issuance under the Plan to the extent (i) the options expire or terminate for any reason prior to
exercise in full or (ii) the options are cancelled in accordance with the cancellation-regrant
provisions of Article Two. Unvested shares issued under the Plan and subsequently repurchased by
the Corporation, at the option exercise or direct issue price paid per share, pursuant to the
Corporation’s repurchase rights under the Plan shall be added back to the number of shares of
Common Stock reserved for issuance under the Plan and shall accordingly be available for reissuance
through one or more subsequent option grants or direct stock issuances under the Plan.

          C. Should any change be made to the 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 maximum number and/or class of

2

 

securities issuable under the Plan and (ii) the number and/or class of securities and the exercise
price per share in effect under each outstanding option in order to prevent the dilution or
enlargement of benefits thereunder. The adjustments determined by the Plan Administrator shall be
final, binding and conclusive. In no event shall any such adjustments be made in connection with
the conversion of one or more outstanding shares of the Corporation’s preferred stock into shares
of Common Stock.

3

 

ARTICLE TWO

OPTION GRANT PROGRAM

     I. OPTION TERMS

          Each option shall be evidenced by one or more documents in the form approved by the Plan
Administrator; provided, however, that each such document shall comply with the terms
specified below. Each document evidencing an Incentive Option shall, in addition, be subject to the
provisions of the Plan applicable to such options.

          A. Exercise Price.

               1. The exercise price per share shall be fixed by the Plan Administrator in accordance with
the following provisions:

               (i) The exercise price per share shall not be less than eighty-five percent (85%) of the Fair
Market Value per share of Common Stock on the option grant date.

               (ii) If the person to whom the option is granted is a 10% Stockholder, then the exercise price
per share shall not be less than one hundred ten percent (110%) of the Fair Market Value per share
of Common Stock on the option grant date.

               2. The exercise price shall become immediately due upon exercise of the option and shall,
subject to the provisions of Section I of Article Four and the documents evidencing the option, be
payable in cash or check made payable to the Corporation. Should the Common Stock be registered
under Section 12 of the 1934 Act at the time the option is exercised, then the exercise price may
also be paid as follows:

               (i) in shares of Common Stock held for the requisite period necessary to avoid a charge to the
Corporation’s earnings for financial reporting purposes and valued at Fair Market Value on the
Exercise Date, or

               (ii) to the extent the option is exercised for vested shares, through a special sale and
remittance procedure pursuant to which the Optionee shall concurrently provide irrevocable
instructions (A) 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 (B) 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 such sale and remittance procedure is utilized, payment of the exercise
price for the purchased shares must be made on the Exercise Date.

4

 

          B. Exercise and Term of Options. Each option shall be exercisable at such time or
times, during such period and for such number of shares as shall be determined by the Plan
Administrator and set forth in the documents evidencing the option grant. However, no option shall
have a term in excess of ten (10) years measured from the option grant date.

          C. Effect of Termination of Service.

               1. The following provisions shall govern the exercise of any options held by the Optionee at
the time of cessation of Service or death:

               (i) Should the Optionee cease to remain in Service for any reason other than death, Disability
or Misconduct, then the Optionee shall have a period of one (1) month following the date of such
cessation of Service during which to exercise each outstanding option held by such Optionee.

               (ii) Should Optionee’s Service terminate by reason of Disability, then the Optionee shall have
a period of twelve (12) months following the date of such cessation of Service during which to
exercise each outstanding option held by such Optionee.

               (iii) If the Optionee dies while holding an outstanding option, then the personal
representative of his or her estate or the person or persons to whom the option is transferred
pursuant to the Optionee’s will or the laws of inheritance shall have a twelve (12)-month period
following the date of the Optionee’s death to exercise such option.

               (iv) Under no circumstances, however, shall any such option be exercisable after the specified
expiration of the option term.

               (v) During the applicable post-Service exercise period, the option may not be exercised in the
aggregate for more than the number of vested shares for which the option is exercisable on the date
of the Optionee’s cessation of Service. Upon the expiration of the applicable exercise period or
(if earlier) upon the expiration of the option term, the option shall terminate and cease to be
outstanding for any vested shares for which the option has not been exercised. However, the option
shall, immediately upon the Optionee’s cessation of Service, terminate and cease to be outstanding
in respect of any and all option shares for which the option is not otherwise at the time
exercisable or in which the Optionee is not otherwise at that time vested.

               (vi) Should Optionee’s Service be terminated for Misconduct then all outstanding options held
by the Optionee shall terminate immediately and cease to remain outstanding.

               2. The Plan Administrator shall have the discretion, exercisable either at the time an option
is granted or at any time while the option remains outstanding, to:

5

 

               (i) extend the period of time for which the option is to remain exercisable following
Optionee’s cessation of Service or death from the limited period otherwise in effect for that
option to such greater period of time as the Plan Administrator shall deem appropriate, but in no
event beyond the expiration of the option term, and/or

               (ii) permit the option to be exercised, during the applicable post-Service exercise period,
not only in respect of the number of vested shares of Common Stock for which such option is
exercisable at the time of the Optionee’s cessation of Service but also in respect of one or more
additional installments in which the Optionee would have vested under the option had the Optionee
continued in Service.

          D. Stockholder Rights. The holder of an option shall have no stockholder rights in
respect of the shares subject to the option until such person shall have exercised the option, paid
the exercise price and become the recordholder of the purchased shares.

          E. Unvested Shares. The Plan Administrator shall have the discretion to grant options
which are exercisable for unvested shares of Common Stock. Should the Optionee cease Service while
holding such unvested shares, the Corporation shall have the right to repurchase, at the exercise
price paid per share, any or all of those unvested shares. The terms upon which such repurchase
right shall be exercisable (including the period and procedure for exercise and the appropriate
vesting schedule for the purchased shares) shall be established by the Plan Administrator and set
forth in the document evidencing such repurchase right. The Plan Administrator may not impose a
vesting schedule upon the option grant or any shares of Common Stock subject to that option which
is more restrictive than twenty percent (20%) per year vesting, with the initial vesting to occur
not later than one (1) year after the option grant date. However, such limitation shall not be
applicable to any option grants made to individuals who are officers of the Corporation,
non-employee Board members or independent consultants.

          F. First Refusal Rights. Until such time as the Common Stock is first registered under
Section 12 of the 1934 Act, the Corporation shall have the right of first refusal in respect of any
proposed disposition by the Optionee (or any successor in interest) of any shares of Common Stock
issued under the Plan. Such right of first refusal shall be exercisable in accordance with the
terms established by the Plan Administrator and set forth in the document evidencing such right.

          G. Limited Transferability of Options. During the lifetime of the Optionee, the option
shall be exercisable only by the Optionee and shall not be assignable or transferable
other than by will or by the laws of descent and distribution following the Optionee’s death.

          H. Withholding. The Corporation’s obligation to deliver shares of Common Stock upon
the exercise of any options granted under the Plan shall be subject to the satisfaction of all
applicable Federal, state and local income and employment tax withholding requirements.

6

 

     II. INCENTIVE OPTIONS

          The terms specified below shall be applicable to all Incentive Options. Except as modified by
the provisions of this Section II, all the provisions of the Plan shall be applicable to Incentive
Options. Options which are specifically designated as Non-Statutory Options shall not be subject to
the terms of this Section II.

          A. Eligibility. Incentive Options may only be granted to Employees.

          B. Exercise Price. The exercise price per share shall not be less than one hundred
percent (100%) of the Fair Market Value per share of Common Stock on the option grant date.

          C. Dollar Limitation. The aggregate Fair Market Value of the shares of Common Stock
(determined as of the respective date or dates of grant) for which one or more options granted to
any Employee under the Plan (or any other option plan of the Corporation or any Parent or
Subsidiary) may for the first time become exercisable as Incentive Options during any one (1)
calendar year shall not exceed the sum of One Hundred Thousand Dollars ($100,000). To the extent
the Employee holds two (2) or more such options which become exercisable for the first time in the
same calendar year, the foregoing limitation on the exercisability of such options as Incentive
Options shall be applied on the basis of the order in which such options are granted.

          D.
10% Stockholder. If any Employee to whom an Incentive Option is granted is a 10%
Stockholder, then the option term shall not exceed five (5) years measured from the option grant
date.

     III. CORPORATE TRANSACTION

          A. The shares subject to each option outstanding under the Plan at the time of a Corporate
Transaction shall automatically vest in full so that each such option shall, immediately prior to
the effective date of the Corporate Transaction, become fully exercisable for all of the shares of
Common Stock at the time subject to that option and may be exercised for any or all of those shares
as fully-vested shares of Common Stock. However, the shares subject to an outstanding option shall
not vest on such an accelerated basis if and to the extent: (i) such option is assumed by the
successor corporation (or parent thereof) in the Corporate Transaction and the Corporation’s
repurchase rights in respect of the unvested option shares are concurrently assigned to such
successor corporation (or parent thereof) or (ii) such option is to be replaced with a cash
incentive program of the successor corporation which preserves the spread existing on the unvested
option shares at the time of the Corporate Transaction and provides for subsequent payout in
accordance with the same vesting schedule applicable to those unvested option shares or (iii) the
acceleration of such option is subject to other limitations imposed by the Plan Administrator at
the time of the option grant.

          B. All outstanding repurchase rights shall also terminate automatically, and the shares of
Common Stock subject to those terminated rights shall immediately vest in full, in the event of any
Corporate Transaction, except to the extent: (i) those repurchase rights are assigned to the
successor corporation (or parent thereof) in connection with such Corporate

7

 

Transaction or (ii) such accelerated vesting is precluded by other limitations imposed by the Plan
Administrator at the time the repurchase right is issued.

          C. Immediately following the consummation of the Corporate Transaction, all outstanding
options shall terminate and cease to be outstanding, except to the extent assumed by the successor
corporation (or parent thereof).

          D. Each option which is assumed in connection with a Corporate Transaction shall be
appropriately adjusted, immediately after such Corporate Transaction, to apply to the number and
class of securities which would have been issuable to the Optionee in consummation of such
Corporate Transaction, had the option been exercised immediately prior to such Corporate
Transaction. Appropriate adjustments shall also be made to (i) the number and class of securities
available for issuance under the Plan following the consummation of such Corporate Transaction and
(ii) the exercise price payable per share under each outstanding
option, provided the aggregate exercise price payable for such securities shall remain the same.

          E. The Plan Administrator shall have the discretion exercisable either at the time the option
is granted or at any time while the option remains outstanding, to provide for the automatic
acceleration (in whole or in part) of one or more outstanding options (and the immediate
termination of the Corporation’s repurchase rights in respect of the share subject to those
options) upon the occurrence of a Corporate Transaction, whether or not those options are to be
assumed in the Corporate Transaction.

          F. The Plan Administrator shall also have full power and authority, exercisable either at the
time the option is granted or at any time while the option remains outstanding, to structure such
option so that the shares subject to that option will automatically vest on an accelerated basis
should the Optionee’s Service terminate by reason of an Involuntary Termination within a designated
period (not to exceed eighteen (18) months) following the effective date of any Corporate
Transaction in which the option is assumed and the repurchase rights applicable to those shares do
not otherwise terminate. Any option so accelerated shall remain exercisable for the fully-vested
option shares until the earlier of (i) the expiration of the option term or (ii) the
expiration of the one (l)-year period measured from the effective date of the Involuntary
Termination. In addition, the Plan Administrator may provide that one or more of the Corporation’s
outstanding repurchase rights in respect of shares held by the Optionee at the time of such
Involuntary Termination shall immediately terminate on an accelerated basis, and the shares subject
to those terminated rights shall accordingly vest at that time.

          G. The portion of any Incentive Option accelerated in connection with a Corporate Transaction
shall remain exercisable as an Incentive Option only to the extent the applicable One Hundred
Thousand Dollar limitation is not exceeded. To the extent such dollar
limitation is exceeded, the accelerated portion of such option shall be exercisable as a Non- Statutory Option under the
Federal tax laws.

          H. The grant of options under the Plan shall in no 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.

8

 

     IV. CANCELLATION AND REGRANT OF OPTIONS

          The Plan Administrator shall have the authority to effect, at any time and from time to time,
with the consent of the affected option holders, the cancellation of any or all outstanding options
under the Plan and to grant in substitution therefor new options covering the same or different
number of shares of Common Stock but with an exercise price per share based on the Fair Market
Value per share of Common Stock on the new option grant date.

9

 

ARTICLE THREE

STOCK ISSUANCE PROGRAM

     I. STOCK ISSUANCE TERMS

          Shares of Common Stock may be issued under the Stock Issuance Program through direct and
immediate issuances without any intervening option grants. Each such stock issuance shall be
evidenced by a Stock Issuance Agreement which complies with the terms specified below.

          A. Purchase Price.

               1. The purchase price per share shall be fixed by the Plan Administrator but shall not be less
than eighty-five percent (85%) of the Fair Market Value per share of Common Stock on the issue
date. However, the purchase price per share of Common Stock issued to a 10% Stockholder shall not
be less than one hundred and ten percent (110%) of such Fair Market Value.

               2. Subject to the provisions of Section I of Article Four, shares of Common Stock may be
issued under the Stock Issuance Program for any of the following items of consideration which the
Plan Administrator may deem appropriate in each individual instance:

               (i) cash or check made payable to the Corporation, or

               (ii) past services rendered to the Corporation (or any Parent or Subsidiary).

          B. Vesting Provisions.

               1. Shares of Common Stock issued under the Stock Issuance Program may, in the discretion of
the Plan Administrator, be fully and immediately vested upon issuance or may vest in one or more
installments over the Participant’s period of Service or upon attainment of specified performance
objectives. However, the Plan Administrator may not impose a vesting schedule upon any stock
issuance effected under the Stock Issuance Program which is more restrictive than twenty percent
(20%) per year vesting, with initial vesting to occur not later than one (1) year after the
issuance date. Such limitation shall not apply to any Common Stock issuances made to the officers
of the Corporation, non-employee Board members or independent consultants.

               2. Any new, substituted or additional securities or other property (including money paid other
than as a regular cash dividend) which the Participant may have the right to receive in respect of
the Participant’s unvested shares of Common Stock by reason of any stock dividend, stock split,
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 shall be
issued subject to (i) the same vesting requirements applicable to the Participant’s unvested shares
of Common Stock and (ii) such escrow arrangements as the Plan Administrator shall deem appropriate.

10

 

               3. The Participant shall have full stockholder rights in respect of any shares of Common Stock
issued to the Participant under the Stock Issuance Program, whether or not the Participant’s
interest in those shares is vested. Accordingly, the Participant shall have the right to vote such
shares and to receive any regular cash dividends paid on such shares.

               4. Should the Participant cease to remain in Service while holding one or more unvested shares
of Common Stock issued under the Stock Issuance Program or should the performance objectives not be
attained in respect of one or more such unvested shares of Common Stock, then those shares shall be
immediately surrendered to the Corporation for cancellation, and the Participant shall have no
further stockholder rights in respect of those shares. To the extent the surrendered shares were
previously issued to the Participant for consideration paid in cash or cash equivalent (including
the Participant’s purchase-money indebtedness), the Corporation shall repay to the Participant the
cash consideration paid for the surrendered shares and shall cancel the unpaid principal balance of
any outstanding purchase-money note of the Participant attributable to such surrendered shares.

               5. The Plan Administrator may in its discretion waive the surrender and cancellation of one or
more unvested shares of Common Stock (or other assets attributable thereto) which would otherwise
occur upon the non-completion of the vesting schedule applicable to such shares. Such waiver shall
result in the immediate vesting of the Participant’s interest in the shares of Common Stock as to
which the waiver applies. Such waiver may be effected at any time, whether before or after the
Participant’s cessation of Service or the attainment or non-attainment of the applicable
performance objectives.

          C. First Refusal Rights. Until such time as the Common Stock is first registered under
Section 12 of the 1934 Act, the Corporation shall have the right of first refusal in respect of any
proposed disposition by the Participant (or any successor in interest) of any shares of Common
Stock issued under the Stock Issuance Program. Such right of first refusal shall be exercisable in
accordance with the terms established by the Plan Administrator and set forth in the document
evidencing such right.

     II. CORPORATE TRANSACTION

          A. Upon the occurrence of a Corporate Transaction, all outstanding repurchase rights under the
Stock Issuance Program shall terminate automatically, and the shares of Common Stock subject to
those terminated rights shall immediately vest in full, except to the extent: (i) those repurchase
rights are assigned to the successor corporation (or parent thereof) in connection with such
Corporate Transaction or (ii) such accelerated vesting is precluded by other limitations imposed by
the Plan Administrator at the time the repurchase right is issued.

          B. The Plan Administrator shall have the discretionary authority, exercisable either at the
time the unvested shares are issued or any time while the Corporation’s repurchase rights in
respect of those shares remain outstanding, to provide that those rights shall automatically
terminate on an accelerated basis, and the shares of Common Stock subject to those terminated
rights shall immediately vest, in the event the Participant’s Service should subsequently terminate
by reason of an Involuntary Termination within a designated period (not

11

 

to exceed eighteen (18) months) following the effective date of any Corporate Transaction in which
those repurchase rights are assigned to the successor corporation (or parent thereof).

     III. SHARE ESCROW/LEGENDS

          Unvested shares may, in the Plan Administrator’s discretion, be held in escrow by the
Corporation until the Participant’s interest in such shares vests or may be issued directly to the
Participant with restrictive legends on the certificates evidencing those unvested shares.

12

 

ARTICLE FOUR

MISCELLANEOUS

     I. FINANCING

          The Plan Administrator may permit any Optionee or Participant to pay the option exercise price
or the purchase price for shares issued to such person under the Plan by delivering a
full-recourse, interest-bearing promissory note payable in one or more installments and secured by
the purchased shares. However, any promissory note delivered by a consultant must be secured by
collateral in addition to the purchased shares of Common Stock. In no event shall the maximum
credit available to the Optionee or Participant exceed the sum of (i) the aggregate option
exercise price or purchase price payable for the purchased shares plus (ii) any Federal, state and
local income and employment tax liability incurred by the Optionee or the Participant in connection
with the option exercise or share purchase.

     II. EFFECTIVE DATE AND TERM OF PLAN

          A. The Plan shall become effective when adopted by the Board, but no option granted under the
Plan may be exercised, and no shares shall be issued under the Plan, until the Plan is approved by
the Corporation’s stockholders. If such stockholder approval is not obtained within twelve (12)
months after the date of the Board’s adoption of the Plan, then all options previously granted
under the Plan shall terminate and cease to be outstanding, and no further options shall be granted
and no shares shall be issued under the Plan. Subject to such limitation, the Plan Administrator
may grant options and issue shares under the Plan at any time after the effective date of the Plan
and before the date fixed herein for termination of the Plan.

          B. The Plan shall terminate upon the earliest of (i) the expiration of the ten
(10)-year period measured from the date the Plan is adopted by the Board, (ii) the date on which
all shares available for issuance under the Plan shall have been issued as vested shares or (iii)
the termination of all outstanding options in connection with a Corporate Transaction. All options
and unvested stock issuances outstanding at that time under the Plan shall continue to have full
force and effect in accordance with the provisions of the documents evidencing such options or
issuances.

     III. AMENDMENT OF THE PLAN

          A. The Board shall have complete and exclusive power and authority to amend or modify the Plan
in any or all respects. However, no such amendment or modification shall adversely affect the
rights and obligations in respect of options or unvested stock issuances at the time outstanding
under the Plan unless the Optionee or the Participant consents to such amendment or modification. In addition, certain amendments may require stockholder approval
pursuant to applicable laws and regulations.

          B. Options may be granted under the Option Grant Program and shares may be issued under the
Stock Issuance Program which are in each instance in excess of the number of shares of Common Stock
then available for issuance under the Plan, provided any excess shares actually issued under those
programs shall be held in escrow until there is obtained stockholder approval of an amendment
sufficiently increasing the number of shares of Common

13

 

Stock available for issuance under the Plan. If such stockholder approval is not obtained within
twelve (12) months after the date the first such excess issuances are made, then (i) any
unexercised options granted on the basis of such excess shares shall terminate and cease to be
outstanding and (ii) the Corporation shall promptly refund to the Optionees and the Participants
the exercise or purchase price paid for any excess shares issued under the Plan and held in escrow,
together with interest (at the applicable Short Term Federal Rate) for the period the shares were
held in escrow, and such shares shall thereupon be automatically cancelled and cease to be
outstanding.

     IV. USE OF PROCEEDS

          Any cash proceeds received by the Corporation from the sale of shares of Common Stock under
the Plan shall be used for general corporate purposes.

     V. WITHHOLDING

          The Corporation’s obligation to deliver shares of Common Stock upon the exercise of any
options or upon the issuance or vesting of any shares issued under the Plan shall be subject to the
satisfaction of all applicable Federal, state and local income and employment tax withholding
requirements.

     VI. REGULATORY APPROVALS

          The implementation of the Plan, the granting of any options under the Plan and the issuance of
any shares of Common Stock (i) upon the exercise of any option or (ii) under the Stock Issuance
Program shall be subject to the Corporation’s procurement of all approvals and permits required by
regulatory authorities having jurisdiction over the Plan, the options granted under it and the
shares of Common Stock issued pursuant to it.

     VII. NO EMPLOYMENT OR SERVICE RIGHTS

          Nothing in the Plan shall confer upon the Optionee or the Participant 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 such person) or of
the Optionee or the Participant, which rights are hereby expressly reserved by each, to terminate
such person’s Service at any time for any reason, with or without cause.

     VIII. FINANCIAL REPORTS

          The Corporation shall deliver a balance sheet and an income statement at least annually to
each individual holding an outstanding option under the Plan, unless such individual is a key
Employee whose duties in connection with the Corporation (or any Parent or Subsidiary) assure such
individual access to equivalent information.

14

 

APPENDIX

          The following definitions shall be in effect under the Plan:

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

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

          C. Committee shall mean a committee of two (2) or more Board members
appointed by the Board to exercise one or more administrative
functions under the Plan.

          D. Common Stock shall mean the Corporation’s common stock.

          E. Corporate Transaction shall mean either of the following stockholder-approved
transactions to which the Corporation is a party:

               (i) 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

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

          F. Corporation shall mean Energy Recovery Inc., a Delaware corporation, and any
successor corporation to all or substantially all of the assets or voting stock of Energy Recovery
Inc. which shall by appropriate action adopt the Plan.

          G. Disability shall mean the inability of the Optionee or the Participant to engage in
any substantial gainful activity by reason of any medically determinable physical or mental
impairment and shall be determined by the Plan Administrator on the basis of such medical evidence
as the Plan Administrator deems warranted under the circumstances.

          H. 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.

          I.
Exercise Date shall mean the date on which the Corporation shall have received written notice of the option exercise.

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

               (i) If the Common Stock is at the time traded on the Nasdaq National Market, then the Fair
Market Value shall be the closing selling price per share of Common Stock on the date in question,
as such price is reported

A-1

 

by the National Association of Securities Dealers on the Nasdaq National Market or any successor
system. If there is no closing selling price for the 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.

               (ii) If the Common Stock is at the time listed on any Stock Exchange, then the Fair Market
Value shall be 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 the 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 the 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.

               (iii) If the Common Stock is at the time neither listed on any Stock Exchange nor traded on
the Nasdaq National Market, then the Fair Market Value shall be determined by the Plan
Administrator after taking into account such factors as the Plan Administrator shall deem
appropriate.

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

          L. Involuntary Termination shall mean the termination of the Service of any individual
which occurs by reason of:

               (i) such individual’s involuntary dismissal or discharge by the Corporation for reasons other
than Misconduct, or

               (ii) such individual’s voluntary resignation following (A) a change in his or her position
with the Corporation which materially reduces his or her duties and responsibilities or the level
of management to which he or she reports, (B) a reduction in his or her level of compensation
(including base salary, fringe benefits and target bonuses under any corporate-performance based
bonus or incentive programs) by more than fifteen percent (15%) or (C) a relocation of such
individual’s place of employment by more than fifty (50) miles, provided and only if such change,
reduction or relocation is effected without the individual’s consent.

          M. Misconduct shall mean the commission of any act of fraud, embezzlement or
dishonesty by the Optionee or Participant, any unauthorized use or disclosure by such person of
confidential information or trade secrets of the Corporation (or any
Parent or Subsidiary), or any
other intentional misconduct by such person adversely affecting the business or affairs of the
Corporation (or any Parent or Subsidiary) in a material manner. The foregoing definition shall not
be deemed to be inclusive of all the acts or omissions which the Corporation (or any Parent or
Subsidiary) may consider as grounds for the dismissal or discharge of any Optionee, Participant or
other person in the Service of the Corporation (or any Parent or Subsidiary).

A-2

 

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

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

          P. Option Grant Program shall mean the option grant program in effect under the Plan.

          Q. Optionee shall mean any person to whom an option is granted under the Plan.

          R. 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.

          S. Participant shall mean any person who is issued shares of Common Stock under the
Stock Issuance Program.

          T. Plan shall mean the Corporation’s 2006 Stock Option/Stock Issuance Plan, as set
forth in this document.

          U. Plan Administrator shall mean either the Board or the Committee acting in its
capacity as administrator of the Plan.

          V. Service shall mean the provision of services to the Corporation (or any Parent or
Subsidiary) by a person in the capacity of an Employee, a non-employee member of the board of
directors or a consultant or independent advisor, except to the extent otherwise specifically
provided in the documents evidencing the option grant.

          W. Stock Exchange shall mean either the American Stock Exchange or the New York Stock
Exchange.

          X. Stock Issuance Agreement shall mean the agreement entered into by the Corporation
and the Participant at the time of issuance of shares of Common Stock under the Stock Issuance
Program.

          Y. Stock Issuance Program shall mean the stock issuance program in effect under the
Plan.

          Z. 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-3

 

          AA. 10% Stockholder shall mean the owner of stock (as determined under Code Section
424(d)) possessing more than ten percent (10%) of the total combined voting power of all classes of
stock of the Corporation (or any Parent or Subsidiary).

Plan History

Adopted by the Board of Directors at a Regular Meeting held on May 19, 2006.

Ratified by the Stockholders at the 2006 Board of Directors Meeting held on May 19, 2006.

A-4

 

ENERGY RECOVERY, INC.

STOCK PURCHASE AGREEMENT

          AGREEMENT made this 1st day of February 2005, by and between Energy Recovery,
Inc., a Delaware corporation (“Corporation”), and _______________________, (“Optionee”) under
the Corporation’s 2006 Stock Option/Stock Issuance Plan.

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

     A. EXERCISE OF OPTION

          1. Exercise. Optionee hereby purchases
______________________ shares of Common Stock (the “Purchased Shares”) pursuant to that certain option (the “Option”)
granted Optionee on _______________ (the “Grant Date”) to purchase up to _________ shares
of Common Stock (the “Option Shares”) under the Plan at the exercise price of $__________ per
share (the “Exercise Price”).

          2. Payment. Concurrently with the delivery of this Agreement to the
Corporation, Optionee shall pay the Exercise Price for the Purchased Shares in accordance with the
provisions of the Option Agreement and shall deliver whatever additional documents may be required
by the Option Agreement as a condition for exercise, together with a duly-executed blank Assignment
Separate from Certificate (in the form attached hereto as Exhibit I) with respect to the Purchased
Shares.

          3. Stockholder Rights. Until such time as the Corporation exercises the Repurchase Right
or the First Refusal Right. Optionee (or any successor in interest) shall have all the rights of a
stockholder (including voting, dividend and liquidation rights) with respect to the Purchased
Shares, subject, however, to the transfer restrictions of Articles B and C.

     B. SECURITIES LAW COMPLIANCE

          1. Restricted Securities. The Purchased Shares have not been registered under the
1933 Act and are being issued to Optionee in reliance upon the exemption from such registration
provided by SEC Rule 701 for stock issuances under compensatory benefit plans such as the Plan.
Optionee hereby confirms that Optionee has been informed that the Purchased Shares are restricted
securities under the 1933 Act and may not be resold or transferred unless the Purchased Shares are
first registered under the Federal securities laws or unless an exemption from such registration is
available. Accordingly, Optionee hereby acknowledges that Optionee is prepared to hold the
Purchased Shares for an indefinite period and that Optionee is aware that SEC Rule 144 issued
under the 1933 Act which exempts certain resales of unrestricted securities is not presently
available to exempt the resale of the Purchased Shares from the registration requirements of the
1933 Act.

          2. Restrictions on Disposition of Purchased Shares. Optionee shall make no disposition
of the Purchased Shares (other than a Permitted Transfer) unless and until there is compliance with
all of the following requirements:

 

 

               (i) Optionee shall have provided the Corporation with a written summary of the terms and
conditions of the proposed disposition.

               (ii) Optionee shall have complied with all requirements of this Agreement applicable to
the disposition of the Purchased Shares.

               (iii) Optionee shall have provided the Corporation with written assurances, in form and
substance satisfactory to the Corporation, that (a) the proposed disposition does not require
registration of the Purchased Shares under the 1933 Act or (b) all appropriate action necessary for
compliance with the registration requirements of the 1933 Act or any exemption from registration
available under the 1933 Act (including Rule 144) has been taken.

          The
Corporation shall not be required (i) to transfer on its books any Purchased Shares which
have been sold or transferred in violation of the provisions of this
Agreement or (ii) to treat as the owner of the Purchased Shares, or otherwise to accord voting, dividend or liquidation rights
to, any transferee to whom the Purchased Shares have been transferred in contravention of this
Agreement.

          3. Restrictive Legends. The stock certificates for the Purchased Shares shall
be endorsed with one or more of the following restrictive legends:

“THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933. THE SHARES MAY NOT BE SOLD OR OFFERED FOR SALE IN THE ABSENCE OF (A) AN EFFECTIVE
REGISTRATION STATEMENT FOR THE SHARES UNDER SUCH ACT, (B) A “NO ACTION” LETTER OF THE SECURITIES
AND EXCHANGE COMMISSION IN RESPECT OF SUCH SALE OR OFFER, OR (C) SATISFACTORY ASSURANCES TO THE
CORPORATION THAT REGISTRATION UNDER THE ACT IS NOT REQUIRED IN
RESPECT OF SUCH SALE OR OFFER.”

“THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN REPURCHASE RIGHTS AND RIGHTS OF
FIRST REFUSAL GRANTED TO THE CORPORATION AND ACORDINGLY MAY NOT BE SOLD, ASSIGNED, TRANSFERRED,
ENCUMBERED, OR IN ANY MANNER DISPOSED OF EXCEPT IN CONFORMITY WITH THE TERMS OF A WRITTEN
AGREEMENT DATED _________, 200__ BETWEEN THE CORPORATION AND THE REGISTERED HOLDER OF THE SHARES (OR THE PREDECESSOR IN INTEREST TO THE SHARES).
A COPY OF SUCH AGREEMENT IS MAINTAINED AT THE CORPORATION’S
PRINCIPAL

2

 

          CORPORATE OFFICES.”

     C. TRANSFER RESTRICTIONS

          1. Restriction on Transfer. Except for any Permitted Transfer, Optionee shall not
transfer, assign, encumber or otherwise dispose of any of the Purchased Shares which are subject to
the Repurchase Right. In addition, Purchased Shares which are released from the Repurchase Right
shall not be transferred, assigned, encumbered or otherwise disposed of in contravention of the
First Refusal Right or the Market Stand-Off.

          2. Transferee Obligations. Each person (other than the Corporation) to whom the
Purchased Shares are transferred by means of a Permitted Transfer must as a condition precedent to
the validity of such transfer, acknowledge in writing to the Corporation that such person is bound
by the provisions of this Agreement and that the transferred shares are subject to (i) the
Repurchase Right, (ii) the First Refusal Right and (iii) the Market Stand-Off, to the same extent
such shares would be so subject if retained by Optionee.

          3. Market Stand-Off.

               (a) In connection with any underwritten public offering by the Corporation of its equity
securities pursuant to an effective registration statement filed under the 1933 Act, including the
Corporation’s initial public offering. Owner shall not sell, make any short sale of, loan,
hypothecate, pledge, grant any option for the purchase of, or otherwise dispose or transfer for
value or otherwise agree to engage in any of the foregoing transactions with respect to, any
Purchased Shares without the prior written consent of the Corporation or its underwriters. Such
restriction (the “Market Stand-Off”) shall be in effect for such period of time from and after the
effective date of the final prospectus for the offering as may be requested by the Corporation or
such underwriters. In no event, however, shall such period exceed one hundred eighty (180) days and
the Market Stand-Off shall in all events terminate two (2) years after the effective date of the
Corporation’s initial public offering.

               (b) Owner shall be subject to the Market Stand-Off provided and only if the officers
and directors of the Corporation are also subject to similar restrictions.

               (c) Any new, substituted or additional securities which are by reason of any Recapitalization
or Reorganization distributed with respect to the Purchased Shares shall be immediately subject to
the Market Stand-Off, to the same extent the Purchased Shares are at such time covered by such
provisions.

               (d) In order to enforce the Market Stand-Off, the Corporation may impose stop-transfer
instructions with respect to the Purchased Shares until the end of the applicable stand-off period.

     D. REPURCHASE RIGHT

          1. Grant. The Corporation is hereby granted the right (the “Repurchase
Right”), exercisable at any time during the sixty (60)-day period following the date Optionee
ceases for any reason to remain in Service or (if later) during the sixty (60)-day period following

3

 

the execution date of this Agreement, to repurchase at the Exercise Price any or all of the
Purchased Shares in which Optionee is not, at the time of his or her cessation of Service, vested
in accordance with the Vesting Schedule applicable to those shares or the special vesting
acceleration provisions of Paragraph D.6 of this Agreement (such shares to be hereinafter referred
to as the “Unvested Shares”).

          2.
Exercise of the Repurchase Right. The Repurchase Right shall be exercisable by
written notice delivered to each Owner of the Unvested Shares prior to the expiration of the sixty
(60)-day exercise period. The notice shall indicate the number of Unvested Shares to be repurchased
and the date on which the repurchase is to be effected, such date to be not more than thirty (30)
days after the date of such notice. The certificates representing the Unvested Shares to be
repurchased shall be delivered to the Corporation on or before the close of business on the date
specified for the repurchase. Concurrently with the receipt of such stock certificates, the
Corporation shall pay to Owner, in cash or cash equivalents (including the cancellation of any
purchase-money indebtedness), an amount equal to the Exercise Price previously paid for the
Unvested Shares which are to be repurchased from Owner.

          3. Termination of the Repurchase Right. The Repurchase Right shall terminate with
respect to any Unvested Shares for which it is not timely exercised under Paragraph D.2. In
addition, the Repurchase Right shall terminate and cease to be exercisable with respect to any and
all Purchased Shares in which Optionee vests in accordance with the Vesting Schedule. All Purchased
Shares as to which the Repurchase Right lapses shall, however, remain subject to (i) the First
Refusal Right and (ii) the Market Stand-Off.

          4. Aggregate Vesting Limitation. If the Option is exercised in more than one increment
so that Optionee is a party to one or more other Stock Purchase Agreements (the “Prior Purchase
Agreements”) which are executed prior to the date of this Agreement, then the total number of
Purchased Shares as to which Optionee shall be deemed to have a fully-vested interest under this
Agreement and all Prior Purchase Agreements shall not exceed in the aggregate the number of
Purchased Shares in which Optionee would otherwise at the time be vested, in accordance with the
Vesting Schedule, had all the Purchased Shares (including those acquired under the Prior Purchase
Agreements) been acquired exclusively under this Agreement.

          5. Recapitalization. Any new, substituted or additional securities or other property
(including cash paid other than as a regular cash dividend) which is by reason of any
Recapitalization distributed with respect to the Purchased Shares shall be immediately subject to
the Repurchase Right and any escrow requirements hereunder, but only to the extent the Purchased
Shares are at the time covered by such right or escrow requirements. Appropriate adjustments to
reflect such distribution shall be made to the number and/or class of Purchased Shares subject to
this Agreement and to the price per share to be paid upon the exercise of the Repurchase Right in
order to reflect the effect of any such Recapitalization upon the Corporation’s capital structure;
provided, however, that the aggregate purchase price shall remain the same.

          6. Corporate Transaction.

4

 

               (a) The Repurchase Right shall automatically terminate in its entirety, and all the Purchased
Shares shall vest in full, immediately prior to the consummation of any Corporate Transaction,
except to the extent the Repurchase Right is to be assigned to the successor entity in such
Corporate Transaction.

               (b) To the extent the Repurchase Right remains in effect following a Corporate Transaction,
such right shall apply to any new securities or other property (including any cash payments)
received in exchange for the Purchased Shares in consummation of the Corporate Transaction, but
only to the extent the Purchased Shares are at the time covered by such right. Appropriate
adjustments shall be made to the price per share payable upon exercise of the Repurchase Right to
reflect the effect of the Corporate Transaction upon the Corporation’s capital structure;
provided, however, that the aggregate purchase price shall remain the same. The new
securities or other property (including any cash payments) issued or distributed with respect to
the Purchased Shares in consummation of the Corporate Transaction shall be immediately deposited in
escrow with the Corporation (or the successor entity) and shall not be released from escrow until
Optionee vests in such securities or other property in accordance with the same Vesting Schedule in
effect for the Purchased Shares.

               (c) The Repurchase Right shall automatically lapse in its entirety, and all the Purchased
Shares shall immediately vest in full, upon an Involuntary Termination of Optionee’s Service within
twelve (12) months following the effective date of a Corporate Transaction in which the Repurchase
Right does not otherwise terminate pursuant to Paragraph D.6(a) above.

     E. RIGHT OR FIRST REFUSAL

          1. Grant. The Corporation is hereby granted the right of first refusal (the “First
Refusal Right”), exercisable in connection with any proposed transfer of the Purchased Shares in
which Optionee has vested in accordance with the provisions of Article D. For purposes of this
Article E, the term “transfer” shall include any sale, assignment, pledge, encumbrance or other
disposition of the Purchased Shares intended to be made by Owner, but shall not include any
Permitted Transfer.

          2. Notice of Intended Disposition. In the event any Owner of Purchased Shares in
which Optionee has vested desires to accept a bona fide third-party offer for the transfer of any
or all of such shares (the Purchased Shares subject to such offer to be hereinafter referred to as
the “Target Shares”), Owner shall promptly (i) deliver to the Corporation written notice (the
“Disposition Notice”) of the terms of the offer, including the purchase price and the identity of
the third-party offeror, and (ii) provide satisfactory proof that the disposition of the Target
Shares to such third-party offeror would not be in contravention of the provisions set forth in
Articles B and C.

          3. Exercise of the First Refusal Right. The Corporation shall, for a period of
twenty-five (25) days following receipt of the Disposition Notice, have the right to repurchase any
or all of the Target Shares subject to the Disposition Notice upon the same terms as those
specified therein or upon such other terms (not materially different from those specified in the
Disposition Notice) to which Owner consents. Such right shall be exercisable by delivery of

5

 

written notice (the “Exercise Notice”) to Owner prior to the expiration of the twenty-five (25)-day
exercise period. If such right is exercised with respect to all the Target Shares, then the
Corporation shall effect the repurchase of such shares, including
payment of the purchase price, not
more than five (5) business days after delivery of the Exercise Notice; and at such time the
certificates representing the Target Shares shall be delivered to the Corporation.

          Should the purchase price specified in the Disposition Notice be payable in property other
than cash or evidences of indebtedness, the Corporation shall have
the right to pay the purchase
price in the form of cash equal in amount to the value of such property. If Owner and the
Corporation cannot agree on such cash value within ten (10) days after the Corporation’s receipt of
the Disposition Notice, the valuation shall be made by an appraiser of recognized standing selected
by Owner and the Corporation or, if they cannot agree on an appraiser within twenty (20) days after
the Corporation’s receipt of the Disposition Notice, each shall select an appraiser of recognized
standing and the two (2) appraisers shall designate a third appraiser of recognized standing, whose
appraisal shall be determinative of such value. The cost of such appraisal shall be shared equally
by Owner and the Corporation. The closing shall then be held on the later of (i) the fifth
(5th) business day following delivery of the Exercise Notice or (ii) the fifth (5th) business day
after such valuation shall have been made.

          4.
Non-Exercise of the First Refusal Right. In the event the Exercise Notice is not
given to Owner prior to the expiration of the twenty-five (25)-day exercise period, Owner shall
have a period of thirty (30) days thereafter in which to sell or otherwise dispose of the Target
Shares to the third-party offeror identified in the Disposition Notice upon terms (including the
purchase price) no more favorable to such third-party offeror than those specified in the
Disposition Notice; provided, however, that any such sale or disposition must not be
effected in contravention of the provisions of Articles B and C. The third-party offeror shall
acquire the Target Shares subject to the First Refusal Right, and the acquired shares shall remain
subject to the provisions of Article B and Paragraph C.3. In the event Owner does not effect such
sale or disposition of the Target Shares within the specified thirty (30)-day period, the First
Refusal Right shall continue to be applicable to any subsequent disposition of the Target Shares by
Owner until such right lapses.

          5. Partial Exercise of the First Refusal Right. In the event the Corporation makes a
timely exercise of the First Refusal Right with respect to a portion, but not all, of the Target
Shares specified in the Disposition Notice, Owner shall have the option, exercisable by written
notice to the Corporation delivered within five (5) business days after Owner’s receipt of the
Exercise Notice, to effect the sale of the Target Shares pursuant to either of the following
alternatives:

               (i) sale or other disposition of all the Target Shares to the third-party offeror
identified in the Disposition Notice, but in full compliance with the requirements of Paragraph
E.4, as if the Corporation did not exercise the First Refusal Right; or

               (ii) sale to the Corporation of the portion of the Target Shares which the Corporation has
elected to purchase, such sale to be effected in substantial conformity with the provisions of
Paragraph E.3. The First Refusal

6

 

Right shall continue to be applicable to any subsequent disposition of the remaining Target Shares
until such right lapses.

          Owner’s failure to deliver timely notification to the Corporation shall be deemed to be an
election by Owner to sell the Target Shares pursuant to alternative (i) above.

          6. Recapitalization/Reorganization.

               (a) Any new, substituted or additional securities or other property which is by reason of any
Recapitalization distributed with respect to the Purchased Shares shall be immediately subject to
the First Refusal Right, but only to the extent the Purchased Shares are at the time covered by
such right.

               (b) In the event of a Reorganization, the First Refusal Right shall remain in full force and
effect and shall apply to the new capital stock or other property received in exchange for the
Purchased Shares in consummation of the Reorganization, but only to the extent the Purchased Shares
are at the time covered by such right.

          7. Lapse. The First Refusal Right shall lapse upon the earliest to occur of
(i) the first date on which shares of the Common Stock are held of record by more than five hundred
(500) persons, (ii) a determination is made by the Board that a public market exists for the
outstanding shares of Common Stock or (iii) a firm commitment underwritten public offering,
pursuant to an effective registration statement under the 1933 Act, covering the offer and sale of
the Common Stock in the aggregate amount of at least ten million dollars ($10,000,000). However,
the Market Stand-Off shall continue to remain in full force and effect following the lapse of the
First Refusal Right.

     F. SPECIAL TAX ELECTION

          The acquisition of the Purchased Shares may result in adverse tax consequences which may be
avoided or mitigated by filing an election under Code Section 83(b). Such election must be filed
within thirty (30) days after the date of this Agreement. A description of the tax consequences
applicable to the acquisition of the Purchased Shares and the form for making the Code Section
83(b) election are set forth in Exhibit II. OPTIONEE SHOULD CONSULT WITH HIS OR HER TAX ADVISOR TO
DETERMINE THE TAX CONSEQUENCES OF ACQUIRING THE PURCHASED SHARES AND THE ADVANTAGES AND
DISADVANTAGES OF FILING THE CODE SECTION 83(b) ELECTION. OPTIONEE ACKNOWLEDGES THAT IT IS
OPTIONEE’S SOLE RESPONSIBILITY, AND NOT THE CORPORATION’S TO FILE A TIMELY ELECTION UNDER CODE
SECTION 83(b). EVEN IF OPTIONEE REQUESTS THE CORPORATION OR ITS REPRESENTATIVES TO MAKE THIS FILING
ON HIS OR HER BEHALF.

     G. GENERAL PROVISIONS

          1. Assignment. The Corporation may assign the Repurchase Right and/or the
First Refusal Right to any person or entity selected by the Board, including (without limitation)
one or more stockholders of the Corporation. If the assignee of the Repurchase Right is other than
(i) a wholly owned subsidiary of the Corporation or (ii) the parent corporation

7

 

owning one hundred percent (100%) of the Corporation’s outstanding capital stock, then such
assignee must make a cash payment to the Corporation, upon the assignment of the Repurchase Right,
in an amount equal to the excess (if any) of (i) the Fair Market Value of the Purchased Shares at
the time subject to the assigned Repurchase Right over (ii) the aggregate repurchase price payable
for the Purchased Shares.

          2. No Employment or Service Contract. Nothing in this 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.

          3. Notices. Any notice required to be given under this Agreement shall be in writing
and shall be deemed effective upon personal delivery or upon deposit in the U.S. mail, registered
or certified, postage prepaid and properly addressed to the party entitled to such notice at the
address indicated below such party’s signature line on this Agreement or at such other address as
such party may designate by ten (10) days advance written notice under this paragraph to all other
parties to this Agreement.

          4. No Waiver. The failure of the Corporation in any instance to exercise the
Repurchase Right or the First Refusal Right shall not constitute a waiver of any other repurchase
rights and/or rights of first refusal that may subsequently arise under the provisions of this
Agreement or any other agreement between the Corporation and Optionee. No waiver of any breach or
condition of this Agreement shall be deemed to be a waiver of any other or subsequent breach or
condition, whether of like or different nature.

          5. Cancellation of Shares. If the Corporation shall make available, at the time and
place and in the amount and form provided in this Agreement, the consideration for the Purchased
Shares to be repurchased in accordance with the provisions of this Agreement, then from and after
such time, the person from whom such shares are to be repurchased shall no longer have any rights
as a holder of such shares (other than the right to receive payment of such consideration in
accordance with this Agreement). Such shares shall be deemed purchased in accordance with the
applicable provisions hereof, and the Corporation shall be deemed the owner and holder of such
shares, whether or not the certificates therefor have been delivered as required by this Agreement.

     H. MISCELLANEOUS PROVISIONS

          1. Optionee Undertaking. Optionee hereby agrees to take whatever additional action and
execute whatever additional documents the Corporation may deem necessary or advisable in order to
carry out or effect one or more of the obligations or restrictions imposed on either Optionee or
the Purchased Shares pursuant to the provisions of this Agreement.

          2. Agreement is Entire Contract. This Agreement constitutes the entire contract
between the parties hereto with regard to the subject matter hereof. This Agreement is

8

 

made pursuant to the provisions of the Plan and shall in all respects be construed in conformity
with the terms of the Plan.

          3.
Governing Law. This Agreement shall be governed by, and construed in accordance
with, the laws of the State of California without resort to that State’s conflict-of-laws rules.

          4.
Counterparts. This Agreement may be executed in counterparts, each of which shall be
deemed to be an original, but all of which together shall constitute one and the same instrument.

          5. Successors and Assigns. The provisions of this Agreement shall inure to the benefit
of, and be binding upon, the Corporation and its successors and assigns and upon Optionee,
Optionee’s permitted assigns and the legal representatives, heirs and legatees of Optionee’s
estate, whether or not any such person shall have become a party to this Agreement and have agreed
in writing to join herein and be bound by the terms hereof.

          IN WITNESS WHEREOF, the parties have executed this Agreement on the day and year first
indicated above.

	 	 	 	 	 
	 	ENERGY RECOVERY, INC.

 	 
	 	By:  	 	 
	 	 	 	 
	 	 	Title: 	 	 
	 	 	 	 
	 	Address:	 	 
	 	 	 
	 

	 	 	 	 	 
	 	OPTIONEE

 	 
	 	 	 
	 	By:  	 	 
	 	 	 	 
	 	Address:	 	 
	 	 	 
	 

9

 

SPOUSAL ACKNOWLEDGMENT

          The undersigned spouse of Optionee has read and hereby approves the foregoing Stock Purchase
Agreement. In consideration of the Corporation’s granting Optionee the right to acquire the
Purchased Shares in accordance with the terms of such Agreement, the undersigned hereby agrees to
be irrevocably bound by all the terms of such Agreement, including (without limitation) the right
of the Corporation (or its assigns) to purchase any Purchased Shares in which Optionee is not
vested at time of his or her cessation of Service.

	 	 	 	 	 
	 	OPTIONEE SPOUSE

 	 
	 	 	 
	 	By:  	 	 
	 	 	 	 
	 	Address:	 	 
	 	 	 
	 

10

 

EXHIBIT I

ASSIGNMENT SEPARATE FROM CERTIFICATE

      
    FOR VALUE RECEIVED        
              
               
       
               
              
        hereby
sell(s), assign(s) and transfer(s) unto Energy Recovery, Inc. (the “Corporation”),
               
     
(               
     ) shares of the Common Stock of the Corporation standing in
his or her name on the
books of the Corporation represented by Certificate No.       
              
herewith and do(es) hereby
irrevocably constitute and appoint          
            Attorney to transfer
the said stock on the
books of the Corporation with full power of substitution in the premises.

	 	 	 	 	 	 	 	 	 	 	 
	Dated:
	 	 	 	 	 	 	 	 	 	 
	 

	 	 

	 	 
	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 	 	 
	 

	 	 	 	 	 	Signature:	 	 	 	 
	 

	 	 	 	 	 	 	 	 

	 	 

Instruction: Please do not fill in any blanks other than the signature line. Please sign exactly as
you would like your name to appear on the issued stock certificate. The purpose of this assignment
is to enable the Corporation to exercise the Repurchase Right without requiring additional
signatures on the part of Optionee.

 

 

EXHIBIT II

FEDERAL INCOME TAX CONSEQUENCES AND

SECTION 83(b) TAX ELECTION

          II. Federal Income Tax Consequences and Section 83(b) Election For Exercise of
Non-Statutory Option. If the Purchased Shares are acquired pursuant to the exercise of a
Non-Statutory Option, as specified in the Grant Notice, then under Code Section 83, the excess of
the Fair Market Value of the Purchased Shares on the date any forfeiture restrictions applicable to
such shares lapse over the Exercise Price paid for such shares will be reportable as ordinary
income on the lapse date. For this purpose, the term “forfeiture restrictions” includes the right
of the Corporation to repurchase the Purchased Shares pursuant to the Repurchase Right. However,
Optionee may elect under Code Section 83(b) to be taxed at the time the Purchased Shares are
acquired, rather than when and as such Purchased Shares cease to be subject to such forfeiture
restrictions. Such election must be filed with the Internal Revenue Service within thirty (30) days
after the date of the Agreement. Even if the Fair Market Value of the Purchased Shares on the date
of the Agreement equals the Exercise Price paid (and thus no tax is payable), the election must be
made to avoid adverse tax consequences in the future. The form for making this election is attached
as part of this exhibit. FAILURE TO MAKE THIS FILING WITHIN THE APPLICABLE THIRTY (30)-DAY PERIOD
WILL RESULT IN THE RECOGNITION OF ORDINARY INCOME BY OPTIONEE AS THE FORFEITURE RESTRICTIONS LAPSE.

          III. Federal Income Tax Consequences and Conditional Section 83(b) Election For Exercise
of Incentive Option. If the Purchased Shares are acquired pursuant to the exercise of an
Incentive Option, as specified in the Grant Notice, then the following tax principles shall be
applicable to the Purchased Shares:

          (i) For regular tax purposes, no taxable income will be recognized at the time the
Option is exercised.

          (ii) The excess of (a) the Fair Market Value of the Purchased Shares on the date the
Option is exercised or (if later) on the date any forfeiture restrictions applicable to the
Purchased Shares lapse over (b) the Exercise Price paid for the Purchased Shares will be includible
in Optionee’s taxable income for alternative minimum tax purposes.

          (iii)
If Optionee makes a disqualifying disposition of the Purchased Shares, then Optionee
will recognize ordinary income in the year of such disposition equal in amount to the excess of (a)
the Fair Market Value of the Purchased Shares on the date the Option is exercised or (if later) on
the date any forfeiture restrictions applicable to the Purchased Shares lapse over (b) the Exercise
Price paid for the Purchased Shares. Any additional gain recognized upon the disqualifying
disposition will be either short-term or long-term capital gain depending upon the period for which
the Purchased Shares are held prior to the disposition.

II-1

 

          (iv) For purposes of the foregoing, the term “forfeiture restrictions” will include the
right of the Corporation to repurchase the Purchased Shares pursuant to the Repurchase Right. The
term “disqualifying disposition” means any sale or other disposition 1 of the Purchased
Shares within two (2) years after the Grant Date or within one (1) year after the exercise date of
the Option.

          (v) In the absence of final Treasury Regulations relating to Incentive Options, it is not
certain whether Optionee may, in connection with the exercise of the Option for any Purchased
Shares at the time subject to forfeiture restrictions, file a protective election under Code
Section 83(b) which would limit (a) Optionee’s alternative minimum taxable income upon exercise and
(b) Optionee’s ordinary income upon a disqualifying disposition to the excess of the Fair Market
Value of the Purchased Shares on the date the Option is exercised over the Exercise Price paid for
the Purchased Shares. Accordingly, such election if properly filed will only be allowed to the
extent the final Treasury Regulations permit such a protective election. Page 2 of the attached
form for making the election should be filed with any election made in connection with the exercise
of an Incentive Option.

 

		
	1	Generally, a disposition of stores purchased under an Incentive Option includes
any transfer of legal title, including a transfer by sale, exchange or gift, but does not include a
transfer to the Optionee’s spouse, a transfer into joint ownership with right of survivorship if
Optionee remains one of the joint owners a pledge a transfer by bequest or inheritance or certain
tax free exchanges permitted under the Code.

II-2

 

SECTION 83(b) ELECTION

          This
statement is being made under Section 83(b) of the Internal Revenue Code, pursuant to
Treas. Reg. Section 1.83-2.

	(1)	 	The taxpayer who performed the services is:
	 
	 	 	Name:

Address:

Taxpayer Ident. No.:
	 
	(2)	 	The property with respect to which the election is being made
is                      shares of the
common stock of Energy Recovery, Inc.
	 
	(3)	 	The property was issued on 1 February, 2005..
	 
	(4)	 	The taxable year in which the election is being made is the calendar year 2006.
	 
	(5)	 	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 annual and monthly
installments over a four (4)-year period ending on                     , 200    .
	 
	(6)	 	The fair market value at the time of transfer (determined without regard to any restriction
other than a restriction which by its terms will never lapse) is $0.25 per share.
	 
	(7)	 	The amount paid for such property is
$                     per share.
	 
	(8)	 	A copy of this statement was furnished to Energy Recovery, Inc. for whom taxpayer rendered
the services underlying the transfer of property.
	 
	(9)	 	This statement is executed on                     , 200   .

	 	 	 
	 

	 	 
	Spouse (if any)

	 	Taxpayer

This election must be filed with the Internal Revenue Service Center with which taxpayer files his
or her Federal income tax returns and must be made within thirty (30) days after the execution date
of the Stock Purchase Agreement. This filing should be made by registered or certified mail return
receipt requested. Optionee must retain two (2) copies of the completed form for filing with his or
her Federal and state tax returns for the current tax year and an additional copy for his or her
records.

 

 

          The property described in the above Section 83(b) election is comprised of shares of common
stock acquired pursuant to the exercise of an incentive stock option under Section 422 of the
Internal Revenue Code (the “Code”). Accordingly, it is the intent of the Taxpayer to utilize this
election to achieve the following tax results:

          1. The purpose of this election is to have the alternative minimum taxable
income attributable to the purchased shares measured by the amount by which the fair market
value of such shares at the time of their transfer to the Taxpayer exceeds the purchase price
paid
for the shares. In the absence of this election, such alternative
minimum taxable income would
be measured by the spread between the fair market value of the purchased shares and the
purchase price which exists on the various lapse dates in effect for the forfeiture
restrictions
applicable to such shares. The election is to be effective to the full extent permitted under
the
Code.

          2. Section 421(a)(1) of the Code expressly excludes from income any excess
of the fair market value of the purchased shares over the amount paid for such shares.
Accordingly, this election is also intended to be effective in the event there is a
“disqualifying
disposition” of the shares, within the meaning of Section 421 (b) of the Code, which would
otherwise render the provisions of Section 83(a) of the Code applicable at that time.
Consequently, the Taxpayer hereby elects to have the amount of disqualifying disposition
income measured by the excess of the fair market value of the purchased shares on the date of
transfer to the Taxpayer over the amount paid for such shares. Since Section 421(a) presently
applies to the shares which are the subject of this Section 83(b) election, no taxable income
is
actually recognized for regular tax purposes at this time, and no income taxes are payable, by
the
Taxpayer as a result of this election.

THIS PAGE 2 IS TO BE ATTACHED TO ANY SECTION 83(b) ELECTION FILED IN CONNECTION WITH THE EXERCISE
OF AN INCENTIVE STOCK OPTION UNDER THE FEDERAL TAX LAWS.

2

 

APPENDIX

          The following definitions shall be in effect under the Agreement:

          A. Agreement shall mean this Stock Purchase Agreement.

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

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

          D. Common Stock shall mean the Corporation’s common stock.

          E. Corporate Transaction shall mean either of the following stockholder-approved transactions:

          (i) 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

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

          F. Corporation shall mean Energy Recovery, Inc., a Delaware corporation,
and any successor corporation to all or substantially all of the assets or voting stock of Energy
Recovery, Inc. which shall by appropriate action adopt the Plan.

          G.  Disposition Notice shall have the meaning assigned to such term in

Paragraph E.2.

          H. Exercise Notice shall have the meaning assigned to such term in Paragraph E.3.

          I. Exercise Price shall have the meaning assigned to such term in Paragraph A.l.

          J. Fair
Market Value of a share of Common Stock on any relevant date,
prior to the initial public offering of the Common Stock, shall be determined by the Plan
Administrator after taking into account such factors as it shall deem appropriate.

          K. First Refusal Right shall mean the right granted to the Corporation in
accordance with Article E.

          L. Grant Date shall have the meaning assigned to such term in Paragraph A.1.

 

 

          M. Grant Notice shall mean the Notice of Grant of Stock Option pursuant to which
Optionee has been informed of the basic terms of the Option.

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

          O. Involuntary Termination shall mean the termination of Optionee’s Service
which occurs by reason of:

          (i) Optionee’s involuntary dismissal or discharge by the Corporation for reasons other
than Misconduct, or

          (ii) Optionee’s voluntary resignation following (A) a change in his or her position with
the Corporation which materially reduces his or her level of responsibility, (B) a reduction in
Optionee’s level of compensation (including base salary, fringe benefits and target bonuses under
any corporate-performance based bonus or incentive programs) by more than fifteen percent (15%) or
(C) a relocation of Optionee’s place of employment by more than fifty (50) miles, provided and only
if such change, reduction or relocation is effected by the Corporation without Optionee’s consent.

          P. Market Stand-Off shall mean the market stand-off restriction specified in
Paragraph C. 3.

          Q. Misconduct shall mean the commission of any act of fraud, embezzlement or
dishonesty by Optionee, any unauthorized use or disclosure by Optionee of confidential information
or trade secrets of the Corporation (or any Parent or Subsidiary), or any other intentional
misconduct by Optionee adversely affecting the business or affairs of the Corporation (or any
Parent or Subsidiary) in a material manner. The foregoing definition shall not be deemed to be
inclusive of all the acts or omissions which the Corporation (or any Parent or Subsidiary) may
consider as grounds for the dismissal or discharge of Optionee or any other individual in the
Service of the Corporation (or any Parent or Subsidiary).

          R. 1933 Act shall mean the Securities Act of 1933, as amended.

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

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

          U. Option shall have the meaning assigned to such term in Paragraph A. 1.

          V. Option Agreement shall mean all agreements and other documents evidencing
the Option.

A-2

 

          W. Optionee shall mean the person to whom the Option is granted under the Plan.

          X. Owner shall mean Optionee and all subsequent holders of the Purchased Shares
who derive their chain of ownership through a Permitted Transfer from Optionee.

          Y. 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.

          Z. Permitted Transfer shall mean (i) a gratuitous transfer of the Purchased
Shares, provided and only if Optionee obtains the Corporation’s prior written consent to such
transfer, (ii) a transfer of title to the Purchased Shares effected pursuant to Optionee’s will or
the laws of intestate succession following Optionee’s death or (iii) a transfer to the Corporation
in pledge as security for any purchase-money indebtedness incurred by Optionee in connection with
the acquisition of the Purchased Shares.

          AA. Plan shall mean the Corporation’s 2006 Stock Option/Stock Issuance Plan.

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

          CC. Prior Purchase Agreement shall have the meaning assigned to such term in
Paragraph D.4.

          DD. Purchased Shares shall have the meaning assigned to such term in Paragraph A.
1.

          EE. Recapitalization shall mean any stock split, stock dividend,
recapitalization, combination of shares, exchange of shares or other change affecting the
Corporation’s outstanding Common Stock as a class without the Corporation’s receipt of
consideration.

          FF. Reorganization shall mean any of the following transactions:

          (i) a merger or consolidation in which the Corporation is not the surviving entity,

          (ii) a sale, transfer or other disposition of all or substantially all of the
Corporation’s assets,

          (iii) a reverse merger in which the Corporation is the surviving entity but in which the
Corporation’s outstanding voting securities are transferred

A-3

 

in whole or in part to a person or persons different from the persons holding those securities
immediately prior to the merger, or

          (iv) any transaction effected primarily to change the state in which the Corporation is
incorporated or to create a holding company structure.

          GG. Repurchase Right shall mean the right granted to the Corporation in accordance
with Article D.

          HH. SEC shall mean the Securities and Exchange Commission.

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

          JJ. 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.

          KK. Target
Shares shall have the meaning assigned to such term in Paragraph E.2.

          LL. Vesting Schedule shall mean the vesting schedule specified in the Grant Notice
pursuant to which the Optionee is to vest in the Option Shares in a series of installments over his
or her period of Service.

          MM. Unvested Shares shall have the meaning assigned to such term in Paragraph D.1.

A-4

 

ADDENDUM

TO

STOCK PURCHASE AGREEMENT

          The following provisions are hereby incorporated into, and are hereby made a part of, that
certain Stock Purchase Agreement (the “Purchase Agreement”) by and between Energy Recovery, Inc.
(the “Corporation”) and (“Optionee”) evidencing the shares of Common Stock purchased on this date
by Optionee under the Corporation’s 2006 Stock Option/Stock Issuance Plan, and such provisions
shall be effective immediately. All capitalized terms in this Addendum, to the extent not otherwise
defined herein, shall have the meanings assigned to such terms in the Purchase Agreement.

INVOLUNTARY TERMINATION FOLLOWING

CORPORATE TRANSACTION

	 	I.	 	TO THE EXTENT THE REPURCHASE RIGHT IS ASSIGNED TO THE
SUCCESSOR CORPORATION (OR PARENT THEREOF) IN CONNECTION WITH A CORPORATE TRANSACTION, NO
ACCELERATED VESTING OF THE PURCHASED SHARES SHALL OCCUR UPON SUCH CORPORATE TRANSACTION, AND THE
REPURCHASE RIGHT SHALL CONTINUE TO REMAIN IN FULL FORCE AND EFFECT IN ACCORDANCE WITH THE
PROVISIONS OF THE PURCHASE AGREEMENT. OPTIONEE SHALL, OVER HIS OR HER
PERIOD OF SERVICE FOLLOWING
THE CORPORATE TRANSACTION, CONTINUE TO VEST IN THE PURCHASED SHARES IN ONE OR MORE INSTALLMENTS IN
ACCORDANCE WITH THE PROVISIONS OF THE PURCHASE AGREEMENT. HOWEVER, UPON AN INVOLUNTARY TERMINATION
OF OPTIONEE’S SERVICE WITHIN SIX (6) MONTHS FOLLOWING THE CORPORATE TRANSACTION, THE REPURCHASE
RIGHT SHALL TERMINATE AUTOMATICALLY, AND ALL THE PURCHASED SHARES SHALL IMMEDIATELY VEST IN FULL AT
THAT TIME.
	 
	 	J.	 	FOR PURPOSES OF THIS ADDENDUM, THE FOLLOWING DEFINITIONS SHALL BE IN EFFECT:

          An Involuntary Termination shall mean the termination of Optionee’s Service
by reason of:

          1. Optionee’s involuntary dismissal or discharge by the Corporation for reasons other
than for Misconduct, or

          2. Optionee’s voluntary resignation following (A) a change in his or her position with the
Corporation (or Parent or Subsidiary employing Optionee) which materially reduces his or her duties
and responsibilities or the level of management to which he or she reports, (B) a reduction in
Optionee’s level of compensation (including base salary, fringe benefits and target

 

 

bonuses under any corporate-performance based incentive programs) by more than fifteen percent
(15%) or (C) a relocation of Optionee’s place of employment by more than fifty (50) miles, provided
and only if such change, reduction or relocation is effected by the Corporation without Optionee’s
consent.

          Misconduct shall mean the termination of Optionee’s Service by reason of Optionee’s commission
of any act of fraud, embezzlement or dishonesty, any unauthorized use or disclosure by Optionee of
confidential information or trade secrets of the Corporation (or any Parent or Subsidiary), or any
other intentional misconduct by Optionee adversely affecting the business or affairs of the
Corporation (or any Parent or Subsidiary) in a material manner. The foregoing definition shall not
be deemed to be inclusive of all the acts or omissions which the Corporation (or any Parent or
Subsidiary) may consider as grounds for the dismissal or discharge of Optionee or any other
individual in the Service of the Corporation (or any Parent or Subsidiary).

          IN WITNESS WHEREOF, Energy Recovery, Inc. has caused this Addendum to be executed by its
duly-authorized officer as of the Effective Date specified below.

	 	 	 	 	 
	 	ENERGY RECOVERY, INC.

 	 
	 	By:  	 	 
	 	 	 	 
	 	 	Title:  	  
 	 
	 

EFFECTIVE DATE: 1 February 2005

2

 

ENERGY RECOVERY, INC.

2006 STOCK OPTION AGREEMENT

RECITALS

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

          A. 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.

          B. 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 at
the Exercise Price set forth in the Grant Notice.

          2. Option Term. This option shall have a 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.

          3. Limited
Transferability. During Optionee’s lifetime, this option shall be exercisable only
by Optionee and shall not be assignable or transferable other than by will or by the laws of
descent and distribution following Optionee’s death.

          4. Dates 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.

          5. Cessation of Service. The option term specified in Paragraph 2 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, Disability or
Misconduct) while this option is outstanding, then Optionee shall have a period of one (1) month
(commencing with the date of such cessation of Service) during which to exercise this option, but
in no event shall this option be exercisable at any time after the Expiration Date.

               (b) Should Optionee die while this option is outstanding, 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 Disability while this option is outstanding,
then Optionee shall have a period of twelve (12) months (commencing with the date of such cessation
of Service) during which to exercise this option. In no event shall this option be exercisable at
any time after the Expiration Date.

Note: Exercise of this option on a date later than three (3) months following cessation of
Service due to Disability will result in loss of favorable Incentive Option treatment,
unless such Disability constitutes Permanent Disability. In the event that Incentive Option
treatment is not available, this option will be taxed as a Non-Statutory Option upon exercise.

               (d) During the limited period of post-Service exercisability, this option may
not be exercised in the aggregate for more than the number of Option Shares in which Optionee
is, at the time of Optionee’s cessation of Service, vested pursuant to the Vesting Schedule
specified in the Grant Notice or the special vesting acceleration provisions of Paragraph 6. 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 vested Option Shares for which the
option has not been exercised. To the extent Optionee is not vested in the Option Shares at the
time of Optionee’s cessation of Service, this option shall immediately terminate and cease to be
outstanding in respect of those shares.

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

               (f) In the event of a Corporate Transaction, the provisions of Paragraph 6 shall govern the
period for which this option is to remain exercisable following Optionee’s cessation of Service and
shall supersede any provisions to the contrary in this paragraph.

          6. Accelerated Vesting.

               (a) In the event of any Corporate Transaction, the Option Shares at the time subject to this
option but not otherwise vested shall automatically vest in full so that this option shall,
immediately prior to the effective date of the Corporate Transaction, become fully
exercisable for all of those Option Shares and may be exercised for any or all of those Option

2

 

Shares as
fully-vested shares of Common Stock. However, the Option Shares shall not vest on such an
accelerated basis if and to the extent: (i) this option is assumed by the success or corporation
(or parent thereof) in the Corporate Transaction and the Corporation’s repurchase rights in respect
of the unvested Option Shares are assigned to such successor corporation (or parent thereof) or
(ii) this option is to be replaced with a cash incentive program of the successor corporation which
preserves the spread existing on the unvested Option Shares at the time of the Corporate
Transaction (the excess of the Fair Market Value of those Option Shares over the Exercise Price
payable for such shares) and provides for subsequent payout in accordance with the same Vesting
Schedule applicable to those unvested Option Shares as set forth in the Grant Notice.

               (b) Immediately following the Corporate Transaction, this option shall terminate and cease to
be outstanding, except to the extent assumed by the successor corporation (or parent thereof) in
connection with the Corporate Transaction.

               (c) If this option is assumed in connection with a Corporate Transaction, then this option
shall be appropriately adjusted, immediately after such Corporate Transaction, to apply to the
number and class of securities which would have been issuable to Optionee in consummation of such
Corporate Transaction had the option been exercised immediately prior to such Corporate
Transaction, and appropriate adjustments shall also be made to the Exercise Price, provided
the aggregate Exercise Price shall remain the same.

               (d) Should there occur an Involuntary Termination of Optionee’s Service within twelve (12)
months following a Corporate Transaction in which the Option Shares do not otherwise vest on an
accelerated basis pursuant to Paragraph 6(a), then all the Option Shares subject to this option at
the time of such Involuntary Termination but not otherwise vested shall automatically vest and the
Corporation’s repurchase rights in respect of those shares shall terminate so that this option
shall immediately become exercisable for all the Option Shares as fully-vested shares. The option
shall remain exercisable for any or all of those vested Option Shares until the earlier of
(i) the Expiration Date or (ii) the expiration of the one (l)-year period measured from the date of
the Involuntary Termination.

               (e) 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 the 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
in respect of the Option Shares until such person shall have exercised the option, paid the
Exercise Price and become the record holder of the purchased shares.

3

 

          9. Manner of Exercising Option.

               (a) In order to exercise this option in respect of 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 Purchase Agreement 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:

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

     Should the Common Stock be registered under Section 12 of the 1934 Act at the time the option
is exercised, then the Exercise Price may also be paid as follows:

                              (B) in 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 Fair Market Value on the Exercise Date; or

                              (C) to the extent the option is exercised for vested Option Shares, 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 (a) 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 (b)
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 Purchase Agreement 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.

                    (iv) Execute and deliver to the Corporation such written representations as may be requested
by the Corporation in order for it to comply with the applicable requirements of Federal and state
securities laws.

4

 

                    (v) 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.

               (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 affixed thereto.

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

          10. REPURCHASE RIGHTS. ALL OPTION SHARES ACQUIRED UPON THE EXERCISE OF THIS OPTION
SHALL BE SUBJECT TO CERTAIN RIGHTS OF THE CORPORATION AND ITS ASSIGNS TO REPURCHASE THOSE SHARES IN
ACCORDANCE WITH THE TERMS SPECIFIED IN THE PURCHASE AGREEMENT.

          11. 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 the 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 in respect of the
non-issuance or sale of the 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.

               12. Successors and Assigns. Except to the extent otherwise provided in Paragraphs 3
and 6, 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.

               13. 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.

               14. 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 in respect of any question or issue arising under the

5

 

Plan or this Agreement shall be conclusive and binding on all persons having an interest in this
option.

          15. 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.

          16. Stockholder Approval. If the Option Shares covered by this Agreement exceed, as of
the Grant Date, the number of shares of Common Stock which may be issued under the Plan as last
approved by the stockholders, then this option shall be void in respect of such 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.

          17. 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: (i) more than three (3)
months after the date Optionee ceases to be an Employee for any reason other than death or
Permanent Disability or (ii) more than twelve (12) months after the date Optionee ceases to be an
Employee by reason of Permanent Disability.

               (b) This option shall not become exercisable in the calendar year in which granted if (and to
the extent) the aggregate Fair Market Value (determined at the Grant Date) of the Common Stock for
which this option would otherwise first become exercisable in such calendar year would, when added
to the aggregate value (determined as of the respective date or dates of grant) of the Common Stock
and any other securities for which 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. To the extent the exercisability of this option is deferred by
reason of the foregoing limitation, the deferred portion shall become exercisable in the first
calendar year or years thereafter in which the One Hundred Thousand Dollar ($100,000) limitation of
this Paragraph 18(b) would not be contravened, but such deferral shall in all events end
immediately prior to the effective date of a Corporate Transaction in which this option is not to
be assumed or an Involuntary Termination following a Corporate Transaction in which this option is
assumed, whereupon the option shall become immediately exercisable as a Non-Statutory Option for
the deferred portion of the Option Shares.

               (c) 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.

6

 

	 	 	 	 	 
	 	ENERGY RECOVERY, INC.

 	 
	 	By:  	 	 
	 	 	 	 
	 	 	Title:  	  
	 
	 
	 	 	Address:  
1908 Doolittle Drive

San Leandro, CA 94577

	

 	 

     The Optionee represents that the Optionee is familiar with the terms and provisions of this
Option Agreement and hereby accepts the Option subject to all of the terms and provisions thereof.
The Optionee hereby agrees to accept as binding, conclusive and final all decisions or
interpretations of the Board upon any questions arising under this Option Agreement. The
undersigned acknowledges receipt of a copy of the Plan.

	 	 	 	 	 	 	 	 	 
	 

	 	 	 	 	 	OPTIONEE	 	 
	 

	 	 	 	 
	 	 	 	 
	Date:
	 	 	 	 	 	 	 	 
	 

	 	 
	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	 

	 	 	 	 	 	Optionee Address:	 	 
	 
	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	 

	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	 

	 	 	 	 	 	 	 	 

7

 

APPENDIX

          The following definitions shall be in effect under the Agreement:

          A. Agreement shall mean this Stock Option Agreement.

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

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

          D. Common Stock shall mean the Corporation’s common stock.

          E. Corporate Transaction shall mean either of the following stockholder-
approved transactions to which the Corporation is a party:

               (i) 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

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

          F. Corporation shall mean Energy Recovery, Inc., a Delaware corporation,
and any successor corporation to all or substantially all of the assets or voting stock of
Energy
Recovery, Inc. which shall by appropriate action adopt the Plan.

          G. Disability shall mean the inability of Optionee to engage in any
substantial gainful activity by reason of any medically determinable physical or mental
impairment and shall be determined by the Plan Administrator on the basis of such medical
evidence as the Plan Administrator deems warranted under the circumstances. Disability shall
be deemed to constitute Permanent Disability in the event that such Disability is expected to
result in death or has lasted or can be expected to last for a continuous period of twelve (12)
months or
more.

          H. 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.

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

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

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

A-1

 

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

          (i) If the Common Stock is at the time traded on the Nasdaq
National Market, then the Fair Market Value shall be 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 the 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.

          (ii) If the Common Stock is at the time listed on any Stock
Exchange, then the Fair Market Value shall be 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 the 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 the 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.

          (iii) If the Common Stock is at the time neither listed on any
Stock Exchange nor traded on the Nasdaq National Market, then the Fair Market Value shall be
determined by the Plan Administrator after taking into account such factors as the Plan
Administrator shall deem appropriate.

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

          N. 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.

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

          P. Involuntary Termination shall mean the termination of Optionee’s Service which
occurs by reason of:

          (i) Optionee’s dismissal or discharge by the Corporation for
reasons other than Misconduct, or

          (ii) Optionee’s voluntary resignation following (A) a change in
Optionee’s position with the Corporation (or Parent or Subsidiary employing Optionee) which
materially reduces Optionee’s level of responsibility, (B) a reduction in Optionee’s level of
compensation (including base salary, fringe benefits and target bonuses under any
corporate-performance based bonus or incentive programs) by more than fifteen percent (15%) in the
aggregate or (C) a relocation of Optionee’s place of employment by more than fifty (50) miles from

A-2

 

Optionee’s place of employment immediately prior to the Corporate Transaction, provided and only if
such change, reduction or relocation is effected by the Corporation without Optionee’s consent.

          Q. Misconduct shall mean the commission of any act of fraud, embezzlement or
dishonesty by Optionee, any unauthorized use or disclosure by Optionee of confidential information
or trade secrets of the Corporation (or any Parent or Subsidiary), or any other intentional
misconduct by Optionee adversely affecting the business or affairs of the Corporation (or any
Parent or Subsidiary) in a material manner. The foregoing definition shall not be deemed to be
inclusive of all the acts or omissions which the Corporation (or any Parent or Subsidiary) may
consider as grounds for the dismissal or discharge of Optionee or any other individual in the
Service of the Corporation (or any Parent or Subsidiary).

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

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

          T. Option Shares shall mean the number of shares of Common Stock subject to the
option.

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

          V. 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.

          W. Plan shall mean the Corporation’s 2004 Stock Option/Stock Issuance Plan.

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

          Y. Purchase Agreement shall mean the stock purchase agreement in substantially the
form of Exhibit B to the Grant Notice.

          Z. 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 an independent consultant.

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

          BB. Subsidiary shall mean any corporation (other than the Corporation) in an unbroken
chain of corporations beginning with the Corporation, provided each corporation (other

A-3

 

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.

          CC. Vesting Schedule shall mean the vesting schedule specified in the Grant Notice
pursuant to which the Optionee is to vest in the Option Shares in a series of installments over his
or her period of Service.

A-4exv10w5w1

 

Exhibit 10.5.1

ENERGY RECOVERY, INC.

AMENDMENT TO 2006 STOCK OPTION/STOCK ISSUANCE PLAN

(Amended as of November 8, 2007)
Exhibit A

     Article One, Section V(A) of the Energy Recovery, Inc. 2006 Stock Option/Stock Issuance Plan
(the “Plan”) is hereby amended and restated in its entirety to read:

          “The stock issuable under the Plan shall be shares of authorized but unissued or reacquired
Common Stock. The maximum number of shares of Common Stock which may be issued over the term of the
Plan shall not exceed eight hundred thousand (800,000) shares.”

Source: [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00140-of-00352.parquet"}, [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00140-of-00352.parquet"}]]