Document:

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                                                                     EXHIBIT 4.1

                             ARTHROCARE CORPORATION
                             ----------------------
                            NONSTATUTORY OPTION PLAN
                            ------------------------

     1.   Purposes of the Plan.  The purposes of this Nonstatutory Option Plan
          --------------------
are:

          .    to attract and retain the best available personnel for positions
               of substantial responsibility,

          .    to provide additional incentive to Employees and Consultants, and

          .    to promote the success of the Company's business.

Options granted under the Plan may be Nonstatutory Stock Options.  Incentive
Stock Options may not be granted under the Plan.  Stock Purchase Rights may also
be granted under the Plan.  Options and Stock Purchase Rights may not be granted
under the Plan to Officers and Directors.

     2.   Definitions.  As used herein, the following definitions shall apply:
          -----------

          (a)  "Administrator" means the Board or any Committee administering
                ------------
the Plan, in accordance with Section 4 of the Plan.

          (b)  "Applicable Laws" means the legal requirements relating to the
                ---------------
administration of stock option plans under state corporate and securities laws
and the Code.

          (c)  "Board" means the Board of Directors of the Company.
                -----

          (d)  "Code" means the Internal Revenue Code of 1986, as amended.
                ----

          (e)  "Committee" means a Committee appointed by the Board in
                ---------
accordance with Section 4 of the Plan.

          (f)  "Common Stock" means the Common Stock of the Company.
                ------------

          (g)  "Company" means ArthroCare Corporation, a Delaware corporation.
                -------

          (h)  "Consultant" means any person, including an advisor, engaged by
                ----------
the Company or a Parent or Subsidiary to render services and who is compensated
for such services, provided that the term "Consultant" shall not include
Employees, Directors or Officers.

          (i)  "Continuous Status as an Employee or Consultant" means that the
                ----------------------------------------------
employment or consulting relationship with the Company or any Parent or
Subsidiary is not interrupted or terminated. Continuous Status as an Employee or
Consultant shall not be considered interrupted in the case of (i) any leave of
absence approved by the Company, including sick leave, military leave, or any
other personal leave or (ii) transfers between locations of the Company or
between the Company, its Parent, its Subsidiaries or its successor.

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          (j)  "Director" means a member of the Board.
                --------

          (k)  "Disability" means total and permanent disability as defined in
                ----------
Section 22(e)(3) of the Code.

          (l)  "Employee" means any person employed by the Company or any
                --------
Parent or Subsidiary of the Company; provided, however, that the term Employee
shall not include Officers or Directors.

          (m)  "Exchange Act" means the Securities Exchange Act of 1934, as
                ------------
amended.

          (n)  "Fair Market Value" means, as of any date, the value of Common
                -----------------
Stock determined as follows:

               (i)    if the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the National
Market System of the National Association of Securities Dealers, Inc. Automated
Quotation ("NASDAQ") System, the Fair Market Value of a Share of Common Stock
shall be the closing sales price for such stock (or the closing bid, if no sales
were reported) as quoted on such system or exchange (or the exchange with the
greatest volume of trading in Common Stock) on the last market trading day prior
to the day of determination, as reported in The Wall Street Journal or such
other source as the Administrator deems reliable;

               (ii)   If the Common Stock is quoted on the NASDAQ System (but
not on the National Market System thereof) or is regularly quoted by a
recognized securities dealer but selling prices are not reported, the Fair
Market Value of a Share of Common Stock shall be the mean between the high bid
and low asked prices for the Common Stock on the last market trading day prior
to the day of determination, as reported in The Wall Street Journal or such
other source as the Administrator deems reliable;

               (iii)  In the absence of an established market for the Common
Stock, the Fair Market Value shall be determined in good faith by the
Administrator.

          (o)  "Incentive Stock Option" means an Option intended to qualify as
                ----------------------
an incentive stock option within the meaning of Section 422 of the Code and the
regulations promulgated thereunder.

          (p)  "Nonstatutory Stock Option" means an Option not intended to
                -------------------------
qualify as an Incentive Stock Option.

          (q)  "Notice of Grant" means a written notice evidencing certain
                ---------------
terms and conditions of an individual Option or Stock Purchase Right grant. The
Notice of Grant is part of the Option Agreement.

          (r)  "Officer" means a person who is an officer of the Company within
                -------
the meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.

          (s)  "Option" means a stock option granted pursuant to the Plan.
                ------

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          (t)  "Option Agreement" means a written agreement between the Company
                ----------------
and an Optionee evidencing the terms and conditions of an individual Option
grant. The Option Agreement is subject to the terms and conditions of the Plan.

          (u)  "Option Exchange Program" means a program whereby outstanding
                -----------------------
options are surrendered in exchange for options with a lower exercise price.

          (v)  "Optioned Stock" means the Common Stock subject to an Option or
                --------------
Stock Purchase Right.

          (w)  "Optionee" means an Employee or Consultant who holds an
                --------
outstanding Option or Stock Purchase right.

          (x)  "Parent" means a "parent corporation," whether now or hereafter
                ------
existing, as defined in Section 424(e) of the Code.

          (y)  "Plan" means this Nonstatutory Option Plan.
                ----

          (z)  "Restricted Stock" means share of Common Stock acquired pursuant
                ----------------
to a grant of Stock Purchase Rights under Section 11 below.

          (aa) "Restricted Stock Purchase Agreement" means a written agreement
                -----------------------------------
between the Company and the Optionee evidencing the terms and restrictions
applying to stock purchased under a Stock Purchase Right.  The Restricted Stock
Purchase Agreement is subject to the terms and conditions of the Plan and the
Notice of Grant.

          (bb) "Rule 16b-3" means Rule 16b-3 of the Exchange Act or any
                ----------
successor to Rule 16b-3, as in effect when discretion is being exercised with
respect to the Plan.

          (cc) "Share" means a share of the Common Stock, as adjusted in
                -----
accordance with Section 13 of the Plan.

          (dd) "Stock Purchase Right" means the right to purchase Common Stock
                --------------------
pursuant to Section 11 of the Plan, as evidenced by a Notice of Grant.

          (ee) "Subsidiary" means a "subsidiary corporation," whether now or
                ----------
hereafter existing, as defined in Section 424(f) of the Code.

     3.   Stock Subject to the Plan.  Subject to the provisions of Section 13 of
          -------------------------
the Plan, the maximum aggregate number of Shares which may be optioned and sold
under the Plan is 500,000 Shares.  The Shares may be authorized, but unissued,
or reacquired Common Stock.

          If an Option or Stock Purchase Right expires or becomes unexercisable
without having been exercised in full, or is surrendered pursuant to an Option
Exchange Program, the unpurchased Shares which were subject thereto shall become
available for future grant or sale under the Plan (unless the Plan has
terminated); provided, however; that Shares have actually been issued, whether
             --------
upon exercise of an Option or Stock Purchase Right, shall not be returned to the
Plan and shall not become available for future distribution under the Plan,
except that if Shares of Restricted Stock are repurchased by the Company at
their original purchase price, and the original purchaser of such Shares did not

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receive any benefits of ownership of such Shares, such Shares shall become
available for future grant under the Plan.  For purposes of the preceding
sentence, voting rights shall not be considered a benefit of ownership of
Shares.

     4.  Administration of the Plan.
         --------------------------

          (a)   The Plan shall be administered by (A) the Board or (B) a
committee designated by the Board, which committee shall be constituted to
satisfy Applicable Laws. Once appointed, such Committee shall serve in its
designated capacity until otherwise directed by the Board. The Board may
increase the size of the Committee and appoint additional members, remove
members (with or without cause) and substitute new members, fill vacancies
(however caused), and remove all members of the Committee and thereafter
directly administer the Plan, all to the extent permitted by Applicable Laws.

          (b)   Powers of the Administrator.  Subject to the provisions of the
                ---------------------------
Plan, and in the case of a Committee, subject to the specific duties delegated
by the Board to such Committee, the Administrator shall have the authority, in
its discretion:

               (i)    to determine the Fair Market Value of the Common Stock, in
accordance with Section 2(n) of the Plan;

               (ii)   to select the Consultants and Employees to whom Options
and Stock Purchase Rights may be granted hereunder;

               (iii)  to determine whether and to what extent Options and Stock
Purchase Rights or any combination thereof, are granted hereunder;

               (iv)   to determine the number of shares of Common Stock to be
covered by each Option and Stock Purchase Right granted hereunder;

               (v)    to approve forms of agreement for use under the Plan;

               (vi)   to determine the terms and conditions, not inconsistent
with the terms of the Plan, of any award granted hereunder. Such terms and
conditions include, but are not limited to, the exercise price, the time or
times when Options or Stock Purchase Rights may be exercised (which may be based
on performance criteria), any vesting acceleration or waiver of forfeiture
restrictions and any restriction or limitation regarding any Option or Stock
Purchase Right or the shares of Common Stock relating thereto, based in each
case on such factors as the Administrator, in its sole discretion, shall
determine;

               (vii)  to reduce the exercise price of any Option or Stock
Purchase Right to the then current Fair Market Value if the Fair Market Value of
the Common Stock covered by such Option or Stock Purchase Right shall have
declined since the date the Option or Stock Purchase Right was granted;

               (viii) to construe and interpret the terms of the Plan and
awards granted pursuant to the Plan;

               (ix)   to prescribe, amend and rescind rules and regulations
relating to the plan;

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               (x)    to modify and amend each Option or Stock Purchase Right
(subject to Section 15(c) of the Plan);

               (xi)   to authorize any person to execute on behalf of the
Company any instrument required to effect the grant of an Option or Stock
Purchase Right previously granted by the Administrator;

               (xii)  to institute an Option Exchange Program;

               (xiii) to determine the terms and restrictions applicable to
Options and Stock Purchase Rights and any Restricted Stock;

               (xiv)  to allow Optionees to satisfy withholding tax obligations
by electing to have the Company withhold from the Shares to be issued upon
exercise of an Option or Stock Purchase Right that number of Shares having a
Fair Market Value equal to the minimum amount required to be withheld based on
the statutory withholding rates for federal and state tax purposes that apply to
supplemental taxable income. The Fair Market Value of the Shares to be withheld
shall be determined on the date that the amount of tax to be withheld is to be
determined. All elections by Optionees to have Shares withheld for this purpose
shall be made in such form and under such conditions as the Administrator may
deem necessary or advisable; and

               (xv)   to make all other determinations deemed necessary or
advisable for administering the Plan.

          (c)  Effect of Administrator's Decision.  The Administrator's
               ----------------------------------
decisions, determinations and interpretations shall be final and binding on all
Optionees and any other holders of Options or Stock Purchase Rights.

     5.   Eligibility.  Options and Stock Purchase Rights may be granted to
          -----------
Employees and Consultants.  If otherwise eligible, an Employee or Consultant who
has been granted an Option or Stock Purchase Right may be granted additional
Options or Stock Purchase Rights.

     6.   Limitations.  Neither the Plan or any Option or Stock Purchase Right
          -----------
shall confer upon an Optionee any right with respect to continuing the
Optionee's employment or consulting relationship with the Company, nor shall
they interfere in any way with the Optionee's right or the Company's right to
terminate such employment or consulting relationship at any time, with or
without cause.

     7.   Term of Plan.  The Plan shall become effective upon its adoption by
          ------------
the Board.  It shall continue in effect for a term of ten (10) years unless
terminated earlier under Section 15 of the Plan.

     8.   Term of Option.  The term of each Option shall be stated in the Notice
          --------------
of Grant.

     9.   Option Exercise Price and Consideration.
          ---------------------------------------

          (a)  Exercise Price.  The per share exercise price for the Shares to
               --------------
be issued pursuant to exercise of an Option shall be determined by the
Administrator.

          (b)  Waiting Period and Exercise Dates.  At the time an Option is
               ---------------------------------
granted, the Administrator shall fix the period within which the Option may be
exercised and shall determine any

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conditions which must be satisfied before the Option may be exercised. In so
doing, the Administrator may specify that an Option may not be exercised until
the completion of a service period.

          (c)  Form of Consideration.  The Administrator shall determine the
               ---------------------
acceptable form of consideration for exercising an Option, including the method
of payment.  Such consideration may consist entirely of

               (i)   cash;

               (ii)  check;

               (iii) delivery of a properly executed exercise notice together
with such other documentation as the Administrator and the broker, if
applicable, shall require to effect an exercise of the Option and delivery to
the Company of the sale or loan proceeds required to pay the exercise price;

               (iv)  a reduction in the amount of any Company liability to the
Optionee, including any liability attributable to the Optionee's participation
in any Company-sponsored deferred compensation program or arrangement;

               (v)   any combination of the foregoing methods of payment; of

               (vi)  such other consideration and method of payment for the
issuance of Shares to the extent permitted by Applicable Laws.

     10.  Exercise of Option.
          ------------------

          (a)  Procedure for Exercise: Rights as a Shareholder.  Any Option
               -----------------------------------------------
granted hereunder shall be exercisable according to the terms of the Plan and at
such times and under such conditions as determined by the Administrator and set
forth in the Option Agreement.

          An Option may not be exercised for a fraction of a Share.

          An Option shall be deemed exercised when the Company receives:  (i)
written notice of exercise (in accordance with the Option Agreement) from the
person entitled to exercise the Option, and (ii) full payment for the Shares
with respect to which the Option is exercised, including payment of any
applicable withholding tax, which in the discretion of the Administrator may be
in the form of consideration used by the Optionee to pay for such Shares under
Section 9(c).  Full payment may consist of any consideration and method of
payment authorized by the Administrator and permitted by the Option Agreement
and the Plan.  Shares issued upon exercise of an Option shall be issued in the
name of the Optionee or, if requested by the Optionee, in the name of the
Optionee and his or her spouse.  Until the stock certificate evidencing such
Shares is issued (as evidenced by the appropriate entry on the books of the
Company or of a duly authorized transfer agent of the Company), no right to vote
or receive dividends or any other rights as a shareholder shall exist with
respect to the Optioned Stock, notwithstanding the exercise of the Option.  The
Company shall issue (or cause to be issued) such stock certificate promptly
after the Option is exercised.  No adjustment will be made for a dividend or
other right for which the record date is prior to the date the stock certificate
is issued, except as provided in Section 13 of the Plan.

                                      14
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          Exercising an Option in any manner shall decrease the number of Shares
thereafter available, both for purposes of the Plan and for sale under the
Option, by the number of Shares as to which the Option is exercised.

          (b)  Termination of Employment or Consulting Relationship.  Upon
               ----------------------------------------------------
termination of an Optionee's Continuous Status as an Employee or Consultant,
other than upon the Optionee's death or Disability, the Optionee may exercise
his or her Option, but only within such period of time as is specified in the
Notice of Grant, and only to the extent that the Optionee was entitled to
exercise it at the date of termination (but in no event later than the
expiration of the term of such Option as set forth in the Notice of Grant).  In
the absence of a specified time in the Notice of Grant, the Option shall remain
exercisable for 90 days following the Optionee's termination of Continuous
Status as an Employee or Consultant.  If, at the date of termination, the
Optionee is not entitled to exercise his or her entire Option, the Shares
covered by the unexercisable portion of the Option shall revert to the Plan.
If, after termination, the Optionee does not exercise his or her Option within
the time specified by the Administrator, the Option shall terminate, and the
Shares covered by such Option shall revert to the Plan.

          (c)  Disability of Optionee.  In the event that an Optionee's
               ----------------------
Continuous Status as an Employee or Consultant terminates as a result of the
Optionee's Disability, the Optionee may exercise his or her Option at any time
within twelve (12) months from the date of such termination, but only to the
extent that the Optionee was entitled to exercise it at the date of such
termination (but in no event later than the expiration of the term of such
Option as set forth in the Notice of Grant).  If, at the date of termination,
the Optionee is not entitled to exercise his or her entire Option, the Shares
covered by the unexercisable portion of the Option shall revert to the Plan.
If, after termination, the Optionee does not exercise his or her Option within
the time specified herein, the Option shall terminate, and the Shares covered by
such Option shall revert to the Plan.

          (d)  Death of Optionee.  In the event of the death of an Optionee, the
               -----------------
Option may be exercised at any time within twelve (12) months following the date
of death (but in no event later than the expiration of the term of such Option
as set forth in the Notice of Grant), by the Optionee's estate or by a person
who acquired the right to exercise the Option by bequest or inheritance, but
only to the extent that the Optionee was entitled to exercise the Option at the
date of death.  If, at the time of death, the Optionee was not entitled to
exercise his or her entire Option, the Shares covered by the unexercisable
portion of the Option shall immediately revert to the Plan.  If, after death,
the Optionee's estate or a person who acquired the right to exercise the Option
by bequest or inheritance does not exercise the Option within the time specified
herein, the Option shall terminate, and the Shares covered by such Option shall
revert to the Plan.

          (e)  Rule 16b-3.  Options granted to individuals subject to Section 16
               ----------
of the Exchange Act ("Insiders") must comply with the applicable provisions of
Rule l6b-3 and shall contain such additional conditions or restrictions as may
be required thereunder to qualify for the maximum exemption from Section 16 of
the Exchange Act with respect to Plan transactions.

     11.  Stock Purchase Rights.
          ---------------------

          (a)  Rights to Purchase.  Stock Purchase Rights may be issued either
               ------------------
alone, in addition to, or in tandem with other awards granted under the Plan
and/or cash awards made outside of the Plan.  After the Administrator determines
that it will offer Stock Purchase Rights under the Plan, it shall advise the
offeree in writing, by means of a Notice of Grant, of the terms, conditions and
restrictions related to the offer, including the number of Shares that the
offeree shall be entitled to

                                      15
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purchase, the price to be paid, and the time within which the offeree must
accept such offer, which shall in no event exceed six (6) months from the date
upon which the Administrator made the determination to grant the Stock Purchase
Right. The offer shall be accepted by execution of a Restricted Stock Purchase
Agreement in the form determined by the Administrator.

          (b)  Repurchase Option.  Unless the Administrator determines
               -----------------
otherwise, the Restricted Stock Purchase Agreement shall grant the Company a
repurchase option exercisable upon the voluntary or involuntary termination of
the purchaser's employment with the Company for any reason (including death or
Disability). The purchase price for Shares repurchased pursuant to the
Restricted Stock purchase agreement shall be the original price paid by the
purchaser and may be paid by cancellation of any indebtedness of the purchaser
to the Company. The repurchase option shall lapse at a rate determined by the
Administrator.

          (c)  Rule 16b-3.  Stock Purchase Rights granted to Insiders, and
               ----------
Shares purchased by Insiders in connection with Stock Purchase Rights, shall be
subject to any restrictions applicable thereto in compliance with Rule 16b-3. An
Insider may only purchase Shares pursuant to the grant of a Stock Purchase
Right, and may only sell Shares purchased pursuant to the grant of a Stock
Purchase Right, during such time or times as are permitted by Rule 16b-3.

          (d)  Other Provisions.  The Restricted Stock Purchase Agreement shall
               ----------------
contain such other terms, provisions and conditions not inconsistent with the
Plan as may be determined by the Administrator in its sole discretion.  In
addition, the provisions of Restricted Stock Purchase Agreements need not be the
same with respect to each purchaser.

          (e)  Rights as a Shareholder.  Once the Stock Purchase Right is
               -----------------------
exercised, the purchaser shall have the rights equivalent to those of a
shareholder, and shall be a shareholder when his or her purchase is entered upon
the records of the duly authorized transfer agent of the Company.  No adjustment
will be made for a dividend or other right for which the record date is prior to
the date the Stock Purchase Right is exercised, except as provided in Section 13
of the Plan.

     12.  Non-Transferability of Options and Stock Purchase Rights.  An Option
          --------------------------------------------------------
or Stock Purchase Right may not be sold, pledged, assigned, hypothecated,
transferred, or disposed of in any manner other than by will or by the laws of
descent or distribution and may be exercised, during the lifetime of the
Optionee, only by the Optionee.

     13.  Adjustments Upon Changes in Capitalization, Dissolution, Merger, Asset
          ----------------------------------------------------------------------
          Sale or Change of Control.
          -------------------------

          (a)  Changes in Capitalization.  Subject to any required action by the
               -------------------------
shareholders of the Company, the number of shares of Common Stock covered by
each outstanding Option and Stock Purchase Right, and the number of shares of
Common Stock which have been authorized for issuance under the Plan but as to
which no Options or Stock Purchase Rights have yet been granted or which have
been returned to the Plan upon cancellation or expiration of an Option or Stock
Purchase Right, as well as the price per share of Common Stock covered by each
such outstanding Option or Stock Purchase Right, shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of issued shares of Common Stock effected without receipt
of consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected

                                      16
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without receipt of consideration." Such adjustment shall be made by the Board,
whose determination in that respect shall be final, binding and conclusive.
Except as expressly provided herein, no issuance by the Company of shares of
stock of any class, or securities convertible into shares of stock of any class,
shall affect, and no adjustment by reason of such issuance shall be made with
respect to, the number or price of shares of Common Stock subject to an Option
or Stock Purchase Right.

          (b)  Dissolution or Liquidation.  In the event of the proposed
               --------------------------
dissolution or liquidation of the Company, to the extent that an Option or Stock
Purchase Right has not been previously exercised, it will terminate immediately
prior to the consummation of such proposed action.  The Board may, in the
exercise of its sole discretion in such instances, declare that any Option or
Stock Purchase Right shall terminate as of a date fixed by the Board and give
each Optionee the right to exercise his or her Option or Stock Purchase Right as
to all or any part of the Optioned Stock, including Shares as to which the
Option or Stock Purchase Right would not otherwise be exercisable.

          (c)  Merger or Asset Sale.  In the event of a merger of the Company
               --------------------
with or into another corporation, or the sale of substantially all of the assets
of the Company, each outstanding Option and Stock Purchase Right shall be
assumed or an equivalent option or right shall be substituted by the successor
corporation or a Parent or Subsidiary of the successor corporation.  The
Administrator may, in lieu of such assumption or substitution, provide for the
Optionee to have the right to exercise the Option or Stock Purchase Right as to
all or a portion of the Optioned Stock, including Shares as to which it would
not otherwise be exercisable.  If the Administrator makes an Option or Stock
Purchase Right exercisable in lieu of assumption or substitution in the event of
a merger or sale of assets, the Administrator shall notify the Optionee that the
Option or Stock Purchase Right shall be fully exercisable for a period of
fifteen (15) days from the date of such notice, and the Option or Stock Purchase
Right will terminate upon the expiration of such period.  For the purposes of
this paragraph, the Option or Stock Purchase Right shall be considered assumed
if, following the merger or sale of assets, the option or right confers the
right to purchase, for each Share of Optioned Stock subject to the Option or
Stock Purchase Right immediately prior to the merger or sale of assets, the
consideration (whether stock, cash, or other securities or property) received in
the merger or sale of assets by holders of Common Stock for each Share held on
the effective date of the transaction (and if holders were offered a choice of
consideration, the type of consideration chosen by the holders of a majority of
the outstanding Shares); provided, however, that if such consideration received
in the merger or sale of assets was not solely common stock of the successor
corporation or its Parent, the Administrator may, with the consent of the
successor corporation, provide for the consideration to be received upon the
exercise of the Option or Stock Purchase Right, for each Share of Optioned Stock
subject to the Option or Stock Purchase Right, to be solely common stock of the
successor corporation or its Parent equal in fair market value to the per share
consideration received by holders of Common Stock in the merger or sale of
assets.

     14.  Date of Grant.  The date of grant of an Option or Stock Purchase Right
          -------------
shall be, for all purposes, the date on which the Administrator makes the
determination granting such Option or Stock Purchase Right, or such other later
date as is determined by the Administrator.  Notice of the determination shall
be provided to each Optionee within a reasonable time after the date of such
grant.

     15.  Amendment and Termination of the Plan.
          -------------------------------------

          (a)  Amendment and Termination.  The Board may at any time amend,
               -------------------------
alter, suspend or terminate the Plan.

                                      17
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          (b)  Effect of Amendment or Termination.  No amendment, alteration,
               ----------------------------------
suspension or termination of the Plan shall impair the rights of any Optionee,
unless mutually agreed otherwise between the Optionee and the Administrator,
which agreement must be in writing and signed by the Optionee and the Company.

     16.  Conditions Upon Issuance of Shares.
          ----------------------------------

          (a)  Legal Compliance.  Shares shall not be issued pursuant to the
               ----------------
exercise of an Option or Stock Purchase Right unless the exercise of such Option
or Stock Purchase Right and the issuance and delivery of such Shares shall
comply with all relevant provisions of law, including, without limitation, the
Securities Act of 1933, as amended, the Exchange Act, the rules and regulations
promulgated thereunder, Applicable Laws, and the requirements of any stock
exchange or quotation system upon which the Shares may then be fisted or quoted,
and shall be further subject to the approval of counsel for the Company with
respect to such compliance.

          (b)  Investment Representations.  As a condition to the exercise of an
               --------------------------
Option or Stock Purchase Right, the Company may require the person exercising
such Option or Stock Purchase Right to represent and warrant at the time of any
such exercise that the Shares are being purchased only for investment and
without any present intention to sell or distribute such Shares if, in the
opinion of counsel for the Company, such a representation is required.

     17.  Liability of Company.
          --------------------

          (a)  Inability to Obtain Authority.  The inability of the Company to
               -----------------------------
obtain authority from any regulatory body having jurisdiction, which authority
is deemed by the Company's counsel to be necessary to the lawful issuance and
sale of any Shares hereunder, shall relieve the Company of any liability in
respect of the failure to issue or sell such Shares as to which such requisite
authority shall not have been obtained.

          (b)  Grants Exceeding Allotted Shares.  If the Optioned Stock covered
               --------------------------------
by an Option or Stock Purchase Right exceeds, as of the date of grant, the
number of Shares which may be issued under the Plan, such Option or Stock
Purchase Right shall be void with respect to such excess Optioned Stock, unless
an amendment sufficiently increasing the number of Shares subject to the Plan is
adopted in accordance with Section 15(a) of the Plan.

     18.  Reservation of Shares.  The Company, during the term of this Plan,
          ---------------------
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.

                                      18<PAGE>

                                                                   Exhibit 10.26

                               December 15, 2000

Todd Hinders

Dear Todd,

     On behalf of Loudeye Technologies, Inc., a Delaware corporation (the
"Company"), I am pleased to offer you the position of Vice President of Sales of
 -------
the Company.  Speaking for myself, as well as the other members of the Company's
management team, we are all very impressed with your credentials and we look
forward to your future success in this position.

     The terms of your new position with the Company are as set forth below:

          1.   Position.
          -------------

               a.   You will become the Vice President of North American Sales
               --
                    of the Company, working out of the Company's office in
                    Seattle, Washington . You will report to the Company's CEO.

               b.   You agree to the best of your ability and experience that
               --
                    you will at all times loyally and conscientiously perform
                    all of the duties and obligations required of and from you
                    pursuant to the express and implicit terms hereof, and to
                    the reasonable satisfaction of the Company. During the term
                    of your employment, you further agree that you will devote
                    all of your business time and attention to the business of
                    the Company, the Company will be entitled to all of the
                    benefits and profits arising from or incident to all such
                    work services and advice, you will not render commercial or
                    professional services of any nature to any person or
                    organization, whether or not for compensation, without the
                    prior written consent of the Company's Board of Directors,
                    and you will not directly or indirectly engage or
                    participate in any business that is competitive in any
                    manner with the business of the Company. Nothing in this
                    letter agreement will prevent you from accepting speaking or
                    presentation engagements in exchange for honoraria or from
                    serving on boards of charitable organizations, or from
                    owning no more than one percent (1%) of the outstanding
                    equity securities of a corporation whose stock is listed on
                    a national stock exchange.
<PAGE>

Page 2

          2.   Start Date.  Subject to fulfillment of any conditions imposed by
               ----------
               this letter agreement, you will commence this new position with
               the Company on December 11, 2000.

          3.   Proof of Right to Work.  For purposes of federal immigration law,
          ---------------------------
               you will be required to provide to the Company documentary
               evidence of you identity and eligibility for employment in the
               United States.  Such documentation must be provided to us within
               three (3) business days of your date of hire, or our employment
               relationship with you may be terminated.

          4.   Compensation.
          -----------------

               a.   Base Salary.  You will be paid a monthly salary of
                    -------------
                    $10,833.33, which is equivalent to $130,000.00 on an
                    annualized basis.  Your salary will be payable in two equal
                    payments per month pursuant to the Company's regular payroll
                    policy (or in the same manner as other employees of the
                    Company).

               b.   Annual Review.  Your base salary will be reviewed in March
               ------------------
                    as part of the Company's normal salary review process.

               c.   Bonus.  You will receive a commission bonus of approximately
                    -----
                    $25,000.00 per quarter ($100,000.00 annually), the structure
                    of which to be determined by you and the Company's CEO.

          5.   Stock Options.  You will be eligible to participate in any stock
               -------------
               option or other incentive programs available to officers or
               employees of the Company. Your initial grant amount will be a
               total of 200,000 Nonqualified Stock Options, with 100,000 shares
               with a grant date of November 21, 2000, and the remaining 100,000
               shares will be granted in January, 2001.  Each of these options
               shall have a ten-year term and shall be exercisable at the rate
               of 12.5% of the shares quarterly on each three month anniversary
               of the Vesting Commencement Date, (which shall be November 21,
               2000), for so long as you remain an employee of or consultant to
               the Company.  If the Company experiences a change in control and
               effective upon the closing of the change of control, the vesting
               and exercisability of these options will accelerate with respect
               to 50% of the total number of shares originally subject to these
               options.  The amount of vesting acceleration in the preceding
               sentence is in addition to any vesting acceleration that applies
               to the options under the terms of the Company's stock plan,
               provided that except as set forth in the following sentence, the
               maximum number of shares that may be accelerated shall not exceed
               50% of the total number of shares originally subject to the
               options.  In addition, if you are terminated without Cause or you
               resign for Good Reason within twelve months after a change in
               control, vesting will accelerate with respect to 100% of the
               shares underlying these options.
<PAGE>

Page 3

               "Cause" for termination of your employment shall exist if you
                -----
               willfully fail to substantially perform your duties and
               responsibilities to the Company, have repeated unexplained or
               unjustified absences from the Company, commit any act of fraud,
               embezzlement, dishonesty or other willful misconduct that causes
               or would likely cause material injury to the Company, use or
               disclose without authorization any proprietary information or
               trade secrets of the Company (or other parties to whom you owe an
               obligation of confidentiality as a result of your relationship
               with the Company), or willfully breach your obligations under any
               agreement with the Company including the Confidentiality
               Agreement (see para. 6 below).

               You will be considered to resign for "Good Reason" if you resign
                                                     -----------
               your employment with the Company within 30 days following a
               material reduction in your job responsibilities, duties or title
               (provided that neither a change in title nor reassignment
               following a change of control to a position substantially similar
               to the position you held prior to the change of control
               constitutes such a reduction), without your approval the Company
               requires you to change your place of work to a location more than
               35 miles from your work place prior the change of control, or a
               material reduction in your then-current base salary (provided
               that an across the board reduction in salaries of all other
               similarly-placed employees by the same percentage as part of a
               general salary reduction does not constitute such a salary
               reduction).

               For purposes of the preceding two paragraphs, the term "Company"
               shall be interpreted to include affiliates and successors to the
               Company, if appropriate.

          5.   Benefits.
          -------------

               a.   Insurance Benefits.  The Company will provide you with
               -----------------------
                    standard medical and optional dental and vision insurance
                    benefits.  You will be eligible to purchase coverage for
                    your dependents under the Company's medical, dental, and
                    vision insurance program.  The Company will subsidize 100%
                    of these premiums.  In addition, the Company currently
                    indemnifies all officers and directors to the maximum extent
                    permitted by law, and you will be requested to enter into
                    the Company's standard form of Indemnification Agreement
                    giving you such protection.  Pursuant to the Indemnification
                    Agreement, the Company will agree to advance any expenses
                    for which indemnification is available to the extent allowed
                    by applicable law.
<PAGE>

Page 4

               6.   Proprietary Information and Inventions Agreement.  Your
                    ------------------------------------------------
                    acceptance of this offer and commencement of employment with
                    the Company is contingent upon the execution, and delivery
                    to an officer of the Company, of the Company's Proprietary
                    Information and Inventions Agreement, a copy of which is
                    enclosed for your review and execution (the "Confidentiality
                                                                 ---------------
                    Agreement"), prior to or on your Start Date.
                    ---------

               7.   Confidentiality of Terms.  You agree to follow the Company's
               -----------------------------
                    strict policy that employees must not disclose, either
                    directly or indirectly, any information, including any of
                    the terms of this agreement, regarding salary, bonuses, or
                    stock purchase or option allocations to any person;
                    provided, however, that you may discuss such terms with
                    members of your immediate family and any legal, tax or
                    accounting specialists who provide you with individual
                    legal, tax or accounting advice.

               8.   Severance Agreement. If your employment is terminated by the
               ------------------------
                    Company or its successor for any reason other than cause, as
                    determined by the Company's Board of Directors, you will be
                    entitled to receive continuation of your base salary and
                    reimbursement of your insurance benefit expenses for six
                    months following the date of termination of your employment.

               9.   At-Will Employment. Notwithstanding the Company's obligation
                    ------------------
                    described in Section 8 above, your employment with the
                    Company will be on an "at will" basis, meaning that either
                    you or the Company may terminate your employment at any time
                    for any reason or no reason, without further obligation or
                    liability.
<PAGE>

Page 5

     We are all delighted to be able to extend you this offer and look forward
to working with you.  To indicate your acceptance of the Company's offer, please
sign and date this letter in the space provided below and return it to me, along
with a signed and dated copy of the Proprietary Information and Inventions
Agreement.  This letter, together with the Proprietary Information and
Inventions Agreement, sets forth the terms of your employment with the Company
and supersedes any prior representations or agreements, whether written or oral.
This letter may not be modified or amended except by a written agreement, signed
by the Company and by you.

                                                Very truly yours,

                                                LOUDEYE TECHNOLOGIES

                                                /s/ Tiffany Baird

                                                Tiffany Baird
                                                Minister of the People

ACCEPTED AND AGREED:

Todd Hinders

/s/ Todd Hinders
--------------------------------
Signature

2/26/01
--------------------------------
Date

Enclosure:  Proprietary Information and Inventions Agreement

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