Document:

Exhibit
10.3

 

RESTORATION
HARDWARE, INC.

NOTICE OF GRANT OF STOCK OPTION

 

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

 

	
  Optionee:

  	
  Gary G. Friedman

  
	
   

  	
   

  
	
  Grant Date:

  	
  February 5, 2004

  
	
   

  	
   

  
	
  Vesting Commencement
  Date:

  	
  February 5, 2004

  
	
   

  	
   

  
	
  Exercise Price:

  	
  $4.50

  
	
   

  	
   

  
	
  Number of Option
  Shares:

  	
  411,112

  
	
   

  	
   

  
	
  Expiration Date:

  	
  February 4, 2014

  
	
   

  	
   

  
	
  Type of Option:

  	
  Non Statutory Option

  

 

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

 

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

 

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

 

 

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

 

DATED:
                                                ,
2004

 

	
   

  	
  RESTORATION HARDWARE, INC.

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Patricia McKay

  	
   

  
	
   

  	
   

  
	
   

  	
  Title:

  	
    CFO

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  /s/ Gary G. Friedman

  	
   

  
	
   

  	
  Gary G. Friedman, Optionee

  
	
   

  	
   

  
	
   

  	
  Address:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
							

 

 

ATTACHMENTS

Exhibit A - Stock Option Agreement

 

 

RESTORATION
HARDWARE, INC.

STOCK OPTION AGREEMENT

 

RECITALS

 

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

 

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

 

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

 

NOW, THEREFORE, it
is hereby agreed as follows:

 

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

 

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

 

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

 

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

 

 

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

 

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

 

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

 

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

 

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

 

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

 

6.     Special
Acceleration of Option.

 

(a)   Change
in Control.

 

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

 

2

 

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

 

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

 

(b)   Termination
of Service Not for Cause.  In the
event the Optionee’s Service is terminated (i) by the Corporation Not for
Cause or (ii) by the Optionee for Good Reason at any time prior to a
Change in Control, this option automatically shall become vested and
exercisable immediately prior to such termination of Service for all of the
Option Shares at the time represented by this option.

 

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

 

7.     Adjustment
in Option Shares.

 

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

 

8.     Stockholder
Rights.  The holder of
this option shall not have any stockholder rights with respect to the Option
Shares until such person shall have exercised the option, paid the Exercise
Price and become a holder of record of the purchased shares.

 

9.     Manner of
Exercising Option.

 

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

 

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

 

3

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

10.   Compliance
with Laws and Regulations.

 

(a)   The
exercise of this option and the issuance of the Option Shares upon such
exercise shall be subject to compliance by the Corporation and Optionee with
all applicable requirements of law relating thereto and with all applicable 

 

4

 

regulations
of any stock exchange (or the Nasdaq National Market, if applicable) on which
Common Stock may be listed for trading at the time of such exercise and
issuance.

 

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

 

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

 

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

 

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

 

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

 

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

 

5

 

EXHIBIT
I

NOTICE OF EXERCISE

 

I hereby notify
Restoration Hardware, Inc. (the “Corporation”) that I elect to purchase
                        
shares of the Corporation’s common stock (the “Purchased Shares”) at the option
exercise price of
$                      
per share (the “Exercise Price”) pursuant to that certain option (the “Option”)
granted to me on February 5, 2004 under the Corporation’s 1998 Stock
Incentive Plan Amended and Restated on October 9, 2002.

 

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

 

 

                                          ,
20    

Date

 

	
   

  	
   

  	
   

  
	
   

  	
  Optionee

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Address:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Print name in exact
  manner

  it is to appear on the

  stock certificate:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Address to which
  certificate

  is to be sent, if different

  from address above:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Social Security Number:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Employee Number:

  	
   

  	
   

  
				

 

 

APPENDIX

 

The following definitions
shall be in effect under the Agreement:

 

A.            Agreement shall mean this Stock Option
Agreement.

 

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

 

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

 

D.            Cause shall mean a termination of
Service if the Optionee has been convicted of a felony involving fraud,
dishonesty, or physical harm to any person, or the termination is evidenced by
a resolution adopted in good faith by two-thirds of the Board to the effect
that the Optionee (i) intentionally and continually failed substantially to
perform the Optionee’s reasonably assigned duties with the Corporation (other
than a failure resulting from the Optionee’s incapacity due to physical or mental
illness or from the Optionee’s assignment of duties that would constitute Good
Reason (as defined below)), which failure continued for a period of at least
thirty (30) days after a written notice of demand for substantial performance
has been delivered to the Optionee specifying the manner in which the Optionee
has failed substantially to perform, or (ii) intentionally engaged in conduct
which is demonstrably and materially injurious to the Corporation; provided,
that no termination of the Optionee’s employment shall be for Cause as set
forth in clause (ii) above until (a) there shall have been delivered to the
Optionee a copy of a written notice setting forth that the Optionee was guilty
of the conduct set forth in clause (ii) and specifying the particulars thereof
in detail, and (b) the Optionee shall have been provided an opportunity to be
heard in person by the Board (with the assistance of the Optionee’s counsel if
the Optionee so desires). No act, nor failure to act, on the Optionee’s part
shall be considered “intentional” unless the Optionee has acted, or failed to
act, with a lack of good faith and with a lack of reasonable belief that the
Optionee’s action or failure to act was in the best interest of the
Corporation.

 

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

 

(a) An acquisition (other
than directly from the Corporation) of any voting securities of the Corporation
(the “Voting Securities”) by any Person (as the term “person” is used for
purposes of Section 13 or 14 of 1934 Act) immediately after which such Person
has Beneficial Ownership (as the term “beneficial ownership” is defined under
Rule 13d-3 promulgated under the 1934 Act) of fifty percent (50%) or more of
the combined voting power of the Corporation’s then outstanding Voting Securities;
provided, that in determining whether a Change in Control has occurred, Voting
Securities which are acquired in a Non-Control Acquisition (as hereinafter
defined) shall

 

A-1

 

not constitute an acquisition which would cause a Change in Control. A
“Non-Control Acquisition” shall mean an acquisition by (i) an employee benefit
plan (or a trust forming a part thereof) maintained by (1) the Corporation or
(2) any corporation or other Person of which a majority of its voting power or
its equity securities or equity interest is owned directly or indirectly by the
Corporation (a “Non-Change Subsidiary”), (ii) the Corporation or any Non-Change
Subsidiary, or (iii) any Person in connection with a Non-Control Transaction
(as hereinafter defined);

 

(b) The individuals who,
as of February 5, 2004, are members of the Board (the “Incumbent Board”),
cease for any reason to constitute at least a majority of the Board; provided,
that if the appointment, election or nomination for election by the
Corporation’s stockholders of any new director was approved by a vote of at
least two-thirds of the Incumbent Board, such new director shall, for purposes
of this Agreement, be considered a member of the Incumbent Board; and provided,
further, that no individual shall be considered a member of the Incumbent Board
if such individual initially assumed office as a result of either an actual or
threatened “election contest” (involving a solicitation subject to Rule 14a-1
to Rule 14a-10 under the 1934 Act by any person or group of persons for the
purpose of opposing a solicitation subject to Rule 14a-1 to Rule 14a-10 with
respect to the election or removal of directors at any annual or special
meeting of security holders) or other actual or threatened solicitation of
proxies or consents by or on behalf of a Person other than the Board (a “Proxy
Contest”) including by reason of any agreement intended to avoid or settle any
Election Contest or Proxy Contest;

 

(c) A merger,
consolidation or reorganization involving the Corporation, unless such merger,
consolidation or reorganization satisfies the conditions set forth in clauses
(1) and (2) below (any transaction(s) meeting the requirements of clauses (1)
and (2) below being referred to herein as “Non-Control Transactions”):

 

(1) the stockholders of
the Corporation immediately before such merger, consolidation or reorganization
own, directly or indirectly, immediately following such merger, consolidation
or reorganization, at least fifty percent (50%) of the combined voting power of
the outstanding voting securities of the corporation resulting from such
merger, consolidation or reorganization (the “Surviving Corporation”) in
substantially the same proportion as their ownership of the Voting Securities
immediately before such merger, consolidation or reorganization; and

 

(2) the individuals who
were members of the Incumbent Board immediately prior to the execution of the
agreement providing for such merger, consolidation or reorganization constitute
at least a majority of the members of the board of directors of the Surviving
Corporation;

 

(d) A complete
liquidation or dissolution of the Corporation; or

 

A-2

 

(e) An agreement for the
sale or other disposition of all or substantially all of the assets of the
Corporation to any Person (other than a transfer to a Non-Change Subsidiary);
and

 

(f) Any other event that
at least two-thirds of the Incumbent Board in its sole discretion shall
determine constitutes a Change in Control.

 

Notwithstanding the
foregoing, a Change in Control shall not be deemed to occur solely because any
Person (the “Subject Person”) acquired Beneficial Ownership of more than the
permitted amount of the outstanding Voting Securities as a result of the
acquisition of Voting Securities by the Corporation which, by reducing the
number of Voting Securities outstanding, increases the proportional number of
shares Beneficially Owned by the Subject Person; provided, that if a Change in
Control would occur (but for the operation of this sentence) as a result of the
acquisition of Voting Securities by the Corporation, and after such share
acquisition by the Corporation the Subject Person becomes the Beneficial Owner
of any additional Voting Securities which increases the percentage of the then
outstanding Voting Securities Beneficially Owned by the Subject Person, then a
Change in Control shall occur; provided further that no Change in Control shall
be deemed to have occurred under (a) or (c) above merely because individuals
and entities who, individually, as of the date of February 5, 2004 have
Beneficial Ownership of at least 5% of the Voting Securities have, immediately
after the transaction described in (a) or (c) above, Beneficial Ownership, in
the aggregate, of more than 50% of the Voting Securities of the Corporation or
successor or parent thereof if both (i) no one such individual or entity has,
immediately after such a transaction, Beneficial Ownership of more than 50% and
(ii) the transaction does not result in the Corporation or successor or parent
thereof becoming a private company.

 

Notwithstanding anything to the contrary in the Agreement, if the
Optionee’s Service is terminated prior to a Change in Control and the Board
determines that such termination (i) was at the request of a third party who
has indicated an intention or taken steps reasonably calculated to effect a
Change in Control and who subsequently effectuates a Change in Control or (ii)
otherwise occurred in connection with, or in anticipation of, a Change in
Control which actually occurs, then, for all purposes of the Agreement, the
date of a Change in Control with respect to the Optionee shall mean the date
immediately prior to the date of such termination of the Optionee’s Service.

 

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

 

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

 

H.            Compensation and Severance Agreement
shall mean the compensation and severance agreement entered into between the
Optionee and the Corporation, as amended and restated effective as of
February 5, 2004.

 

A-3

 

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

 

J.             Disability shall mean as defined in the
Compensation and Severance Agreement as of February 5, 2004 without regard
to any subsequent amendment of the Compensation and Severance Agreement.

 

K.            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.

 

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

 

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

 

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

 

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

 

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

 

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

 

P.             Good Reason shall mean as defined in the
Compensation and Severance Agreement as of February 5, 2004 without regard
to any subsequent amendment Compensation and Severance Agreement.

 

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

 

A-4

 

R.            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.

 

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 Section 422 of the
Code.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

DD.         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-5Exhibit
10.4

 

RESTORATION HARDWARE, INC.

NOTICE OF GRANT OF STOCK OPTION

 

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

 

	
  Optionee:

  	
  Gary G. Friedman

  
	
   

  	
   

  
	
  Grant Date:

  	
  February 5, 2004

  
	
   

  	
   

  
	
  Vesting Commencement Date:

  	
  February 5, 2004

  
	
   

  	
   

  
	
  Exercise Price:

  	
  $4.50

  
	
   

  	
   

  
	
  Number of Option Shares:

  	
  88,888

  
	
   

  	
   

  
	
  Expiration Date:

  	
  February 4, 2014

  
	
   

  	
   

  
	
  Type of Option:

  	
  Incentive Stock Option

  

 

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

 

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

 

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

 

 

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

 

DATED:
                                                ,
2004

 

	
   

  	
  RESTORATION
  HARDWARE, INC.

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Patricia McKay

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Title:

  	
  CFO

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  /s/ Gary G. Friedman

  
	
   

  	
  Gary G. Friedman, Optionee

  
	
   

  	
   

  
	
   

  	
  Address:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
						

 

 

ATTACHMENTS

Exhibit
A - Stock Option Agreement

 

 

RESTORATION HARDWARE, INC.

STOCK OPTION AGREEMENT

 

RECITALS

 

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

 

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

 

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

 

NOW, THEREFORE, it is hereby agreed as
follows:

 

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

 

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

 

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

 

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

 

 

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

 

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

 

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

 

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

 

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

 

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

 

6.  Special Acceleration of Option.

 

(a)  Change in Control.

 

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

 

2

 

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

 

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

 

(b)  Termination of Service Not for Cause.  In the event the Optionee’s Service is
terminated (i) by the Corporation Not for Cause or (ii) by the
Optionee for Good Reason at any time prior to a Change in Control, this option
automatically shall become vested and exercisable immediately prior to such
termination of Service for all of the Option Shares at the time represented by
this option.

 

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

 

7.  Adjustment in Option Shares.

 

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

 

8.  Stockholder Rights.  The holder of this option shall not have any
stockholder rights with respect to the Option Shares until such person shall
have exercised the option, paid the Exercise Price and become a holder of
record of the purchased shares.

 

9.  Manner of Exercising Option.

 

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

 

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

 

3

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

10.  Compliance with Laws and Regulations.

 

(a)  The exercise of this option and the
issuance of the Option Shares upon such exercise shall be subject to compliance
by the Corporation and Optionee with all applicable requirements of law
relating thereto and with all applicable 

 

4

 

regulations of any stock
exchange (or the Nasdaq National Market, if applicable) on which Common Stock
may be listed for trading at the time of such exercise and issuance.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

5

 

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

 

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

 

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

 

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

 

6

 

EXHIBIT I

NOTICE OF EXERCISE

 

I hereby notify Restoration Hardware, Inc. (the
“Corporation”) that I elect to purchase
                        
shares of the Corporation’s common stock (the “Purchased Shares”) at the option
exercise price of
$                      
per share (the “Exercise Price”) pursuant to that certain option (the “Option”)
granted to me on February 5, 2004 under the Corporation’s 1998 Stock
Incentive Plan Amended and Restated on October 9, 2002.

 

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

 

                                          ,
20    

Date

 

 

	
   

  	
  Optionee

  
	
   

  	
   

  
	
   

  	
  Address:

  
	
   

  	
   

  
	
   

  	
   

  
	
  Print name in exact manner

  it is to appear on the

  stock certificate:

  	
   

  
	
   

  	
   

  
	
  Address to which certificate

  is to be sent, if different

  from address above:

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  Social Security Number:

  	
   

  
	
  Employee Number:

  	
   

  

 

 

APPENDIX

 

The following definitions shall be in effect under the
Agreement:

 

A.            Agreement
shall mean this Stock Option Agreement.

 

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

 

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

 

D.            Cause
shall mean a termination of Service if the Optionee has been convicted of a
felony involving fraud, dishonesty, or physical harm to any person, or the
termination is evidenced by a resolution adopted in good faith by two-thirds of
the Board to the effect that the Optionee (i) intentionally and continually
failed substantially to perform the Optionee’s reasonably assigned duties with
the Corporation (other than a failure resulting from the Optionee’s incapacity
due to physical or mental illness or from the Optionee’s assignment of duties
that would constitute Good Reason (as defined below)), which failure continued
for a period of at least thirty (30) days after a written notice of demand for
substantial performance has been delivered to the Optionee specifying the
manner in which the Optionee has failed substantially to perform, or (ii)
intentionally engaged in conduct which is demonstrably and materially injurious
to the Corporation; provided, that no termination of the Optionee’s employment
shall be for Cause as set forth in clause (ii) above until (a) there shall have
been delivered to the Optionee a copy of a written notice setting forth that
the Optionee was guilty of the conduct set forth in clause (ii) and specifying
the particulars thereof in detail, and (b) the Optionee shall have been
provided an opportunity to be heard in person by the Board (with the assistance
of the Optionee’s counsel if the Optionee so desires). No act, nor failure to
act, on the Optionee’s part shall be considered “intentional” unless the
Optionee has acted, or failed to act, with a lack of good faith and with a lack
of reasonable belief that the Optionee’s action or failure to act was in the
best interest of the Corporation.

 

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

 

(a) An acquisition (other than directly from the
Corporation) of any voting securities of the Corporation (the “Voting
Securities”) by any Person (as the term “person” is used for purposes of
Section 13 or 14 of 1934 Act) immediately after which such Person has
Beneficial Ownership (as the term “beneficial ownership” is defined under Rule
13d-3 promulgated under the 1934 Act) of fifty percent (50%) or more of the
combined voting power of the Corporation’s then outstanding Voting Securities;
provided, that in determining whether a Change in Control has occurred, Voting
Securities which are acquired in a Non-Control Acquisition (as hereinafter
defined) shall 

 

A-1

 

not constitute an acquisition
which would cause a Change in Control. A “Non-Control Acquisition” shall mean
an acquisition by (i) an employee benefit plan (or a trust forming a part
thereof) maintained by (1) the Corporation or (2) any corporation or other
Person of which a majority of its voting power or its equity securities or
equity interest is owned directly or indirectly by the Corporation (a
“Non-Change Subsidiary”), (ii) the Corporation or any Non-Change Subsidiary, or
(iii) any Person in connection with a Non-Control Transaction (as hereinafter
defined);

 

(b) The individuals who, as of February 5, 2004,
are members of the Board (the “Incumbent Board”), cease for any reason to
constitute at least a majority of the Board; provided, that if the appointment,
election or nomination for election by the Corporation’s stockholders of any
new director was approved by a vote of at least two-thirds of the Incumbent
Board, such new director shall, for purposes of this Agreement, be considered a
member of the Incumbent Board; and provided, further, that no individual shall
be considered a member of the Incumbent Board if such individual initially
assumed office as a result of either an actual or threatened “election contest”
(involving a solicitation subject to Rule 14a-1 to Rule 14a-10 under the 1934
Act by any person or group of persons for the purpose of opposing a
solicitation subject to Rule 14a-1 to Rule 14a-10 with respect to the election
or removal of directors at any annual or special meeting of security holders)
or other actual or threatened solicitation of proxies or consents by or on
behalf of a Person other than the Board (a “Proxy Contest”) including by reason
of any agreement intended to avoid or settle any Election Contest or Proxy
Contest;

 

(c) A merger, consolidation or reorganization
involving the Corporation, unless such merger, consolidation or reorganization
satisfies the conditions set forth in clauses (1) and (2) below (any
transaction(s) meeting the requirements of clauses (1) and (2) below being
referred to herein as “Non-Control Transactions”):

 

(1) the stockholders of the Corporation immediately
before such merger, consolidation or reorganization own, directly or
indirectly, immediately following such merger, consolidation or reorganization,
at least fifty percent (50%) of the combined voting power of the outstanding
voting securities of the corporation resulting from such merger, consolidation
or reorganization (the “Surviving Corporation”) in substantially the same
proportion as their ownership of the Voting Securities immediately before such
merger, consolidation or reorganization; and

 

(2) the individuals who were members of the Incumbent
Board immediately prior to the execution of the agreement providing for such
merger, consolidation or reorganization constitute at least a majority of the
members of the board of directors of the Surviving Corporation;

 

(d) A complete liquidation or dissolution of the
Corporation; or

 

A-2

 

(e) An agreement for the sale or other disposition of
all or substantially all of the assets of the Corporation to any Person (other
than a transfer to a Non-Change Subsidiary); and

 

(f) Any other event that at least two-thirds of the
Incumbent Board in its sole discretion shall determine constitutes a Change in
Control.

 

Notwithstanding the foregoing, a Change in Control
shall not be deemed to occur solely because any Person (the “Subject Person”)
acquired Beneficial Ownership of more than the permitted amount of the
outstanding Voting Securities as a result of the acquisition of Voting
Securities by the Corporation which, by reducing the number of Voting
Securities outstanding, increases the proportional number of shares
Beneficially Owned by the Subject Person; provided, that if a Change in Control
would occur (but for the operation of this sentence) as a result of the
acquisition of Voting Securities by the Corporation, and after such share
acquisition by the Corporation the Subject Person becomes the Beneficial Owner
of any additional Voting Securities which increases the percentage of the then
outstanding Voting Securities Beneficially Owned by the Subject Person, then a
Change in Control shall occur; provided further that no Change in Control shall
be deemed to have occurred under (a) or (c) above merely because individuals
and entities who, individually, as of the date of February 5, 2004 have
Beneficial Ownership of at least 5% of the Voting Securities have, immediately
after the transaction described in (a) or (c) above, Beneficial Ownership, in
the aggregate, of more than 50% of the Voting Securities of the Corporation or
successor or parent thereof if both (i) no one such individual or entity has,
immediately after such a transaction, Beneficial Ownership of more than 50% and
(ii) the transaction does not result in the Corporation or successor or parent
thereof becoming a private company.

 

Notwithstanding anything to the contrary in the Agreement, if the
Optionee’s Service is terminated prior to a Change in Control and the Board
determines that such termination (i) was at the request of a third party who
has indicated an intention or taken steps reasonably calculated to effect a
Change in Control and who subsequently effectuates a Change in Control or (ii)
otherwise occurred in connection with, or in anticipation of, a Change in
Control which actually occurs, then, for all purposes of the Agreement, the
date of a Change in Control with respect to the Optionee shall mean the date
immediately prior to the date of such termination of the Optionee’s Service.

 

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

 

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

 

H.            Compensation
and Severance Agreement shall mean the compensation and
severance agreement entered into between the Optionee and the Corporation, as
amended and restated effective as of February 5, 2004.

 

A-3

 

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

 

J.             Disability
shall mean as defined in the Compensation and Severance Agreement as of
February 5, 2004 without regard to any subsequent amendment of the
Compensation and Severance Agreement.

 

K.            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.

 

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

 

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

 

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

 

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

 

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

 

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

 

P.             Good
Reason shall mean as defined in the Compensation and Severance
Agreement as of February 5, 2004 without regard to any subsequent
amendment Compensation and Severance Agreement.

 

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

 

A-4

 

R.            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.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Z.            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.

 

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

 

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

 

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

 

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

 

EE.          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 

 

A-5

 

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-6

Source: [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00067-of-00352.parquet"}, [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00067-of-00352.parquet"}]]