Document:

Exhibit
        4.2

      

      THIS
        NOTE AND THE SECURITIES ISSUABLE UPON THE CONVERSION HEREOF HAVE NOT BEEN
        REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR UNDER
        ANY APPLICABLE STATE SECURITIES LAWS. THEY MAY NOT BE SOLD, OFFERED FOR SALE,
        PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT
        AS
        TO THE SECURITIES OR AN EXEMPTION THEREFROM UNDER SUCH ACT AND UNDER ANY
        APPLICABLE STATE SECURITIES LAWS. THE COMPANY, IN ITS SOLE DISCRETION, SHALL
        HAVE THE RIGHT TO REQUIRE AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO
        THE
        COMPANY TO THE EFFECT THAT REGISTRATION UNDER THE ACT IS NOT REQUIRED IN
        CONNECTION WITH ANY PROPOSED TRANSFER NOR IS SUCH TRANSFER IN VIOLATION OF
        ANY
        APPLICABLE STATE SECURITIES LAWS. THIS LEGEND SHALL BE ENDORSED UPON ANY
        NOTE
        ISSUED IN EXCHANGE FOR THIS NOTE.

      

      SMART
        ONLINE, INC.

      

      CONVERTIBLE
        SECURED SUBORDINATED PROMISSORY NOTE

       

      
        	
                $[_______________]

              	
                November
                  14, 2007

              

      

      Durham,
        NC

      

      

      FOR
        VALUE
        RECEIVED, Smart Online, Inc., a Delaware corporation (the “Company”)
        promises to pay to [____________________] (“Investor”),
        or
        its registered assigns, in lawful money of the United States of America the
        principal sum of [__________] Dollars ($[_________]), or such lesser amount
        as
        shall equal the outstanding principal amount hereof, together with interest
        from
        the date of this Note on the unpaid principal balance at a rate equal to
        8.00%
        per annum, computed on the basis of the actual number of days elapsed and
        a year
        of 360 days. All unpaid principal, together with any then unpaid and accrued
        interest and other amounts payable hereunder, shall be due and payable on
        the
        earlier of (i) November 14, 2010 (the “Maturity
        Date”),
        (ii)
        a Change of Control or (iii) when, upon or after the occurrence of an Event
        of Default (as defined below), such amounts are declared due and payable
        by
        Investor or made automatically due and payable in accordance with the terms
        hereof. 

      

      This
        Note
        is one of the “Notes” issued pursuant to the Convertible Secured 
        Subordinated Note Purchase Agreement of even date herewith (as amended, modified
        or supplemented, the “Note
        Purchase Agreement”)
        between the Company and the Investors (as defined in the Note Purchase
        Agreement). Capitalized terms used herein and not otherwise defined shall
        have
        the meanings assigned thereto in the Note Purchase Agreement. This Note and
        the
        Investor are subject to certain restrictions, and are entitled to certain
        rights
        and privileges, set forth in the Note Purchase Agreement.

       

      
        
           

        

        
           

          
            

          

        

        
           

        

      

       

      THE
        OBLIGATIONS DUE UNDER THIS NOTE ARE SECURED BY A SECURITY AGREEMENT (THE
        “SECURITY
        AGREEMENT”)
        DATED
        AS OF THE DATE HEREOF AND EXECUTED BY COMPANY FOR THE BENEFIT OF INVESTOR.
        ADDITIONAL RIGHTS OF INVESTOR ARE SET FORTH IN THE SECURITY
        AGREEMENT.

      

      The
        following is a statement of the rights of Investor and the conditions to
        which
        this Note is subject, and to which Investor, by the acceptance of this Note,
        agrees:

      

      1. Definitions.
        As used
        in this Note, the following capitalized terms have the following
        meanings:

      

      (a) “Business
        Day”
shall
        mean any day other than a Saturday or Sunday or other day on which the New
        York
        Stock Exchange is permitted or required by law to close.

      

      (b) the
        “Company”
        includes the corporation initially executing this Note and any Person which
        shall succeed to or assume the obligations of the Company under this
        Note.

      

      (c) “Conversion
        Price” shall mean
        120% multiplied by the lower of (i) the average of the closing bid and
        asked prices of the Common Stock quoted in the Over-The-Counter Market Summary
        averaged over the five (5) trading days prior to the Initial Closing Date
        (as adjusted for stock splits, dividends or combinations,
        recapitalizations or similar events), and (ii) the average of the
        closing bid and asked prices of the Common Stock quoted in the Over-The-Counter
        Market Summary averaged over the five (5) trading days prior to the date of
        issuance of the Note or, if the Common Stock is not traded on the
        Over-The-Counter market, the closing price of the Common Stock
        reported on the Nasdaq National Market or the principal exchange on which
        the
        Common Stock is listed, in each such case averaged over the five (5) trading
        days prior to the date of issuance of the Note (as adjusted for stock
        splits, dividends or combinations, recapitalizations or similar
        events).

      

      (d) “Change
        of Control”
shall
        mean (i) any consolidation or merger or other transaction or series of
        transactions involving the Company pursuant to which the Company’s stockholders
        own less than fifty percent (50%) of the voting securities of the surviving
        entity (other than an equity financing) or (ii) the sale of all or substantially
        all of the assets of the Company.

      

      (e) “Event
        of Default”
has
        the
        meaning given in Section 4
        hereof.

      

      (f) “Lien”
shall
        mean, with respect to any property, any security interest, mortgage, pledge,
        lien, claim, charge or other encumbrance in, of, or on such property or the
        income therefrom, including, without limitation, the interest of a vendor
        or
        lessor under a conditional sale agreement, capital lease or other title
        retention agreement, or any agreement to provide any of the foregoing, and
        the
        filing of any financing statement or similar instrument under the Uniform
        Commercial Code or comparable law of any jurisdiction.

      

      (g) “Note
        Purchase Agreement”
has
        the
        meaning given in the introductory paragraph hereof.

       

      
        
           

        

        
          -2-

          
            

          

        

        
           

        

      

       

      (h) “Obligations”
shall
        mean and include all loans, advances, debts, liabilities and obligations,
        howsoever arising, owed by the Company to Investor of every kind and description
        (whether or not evidenced by any note or instrument and whether or not for
        the
        payment of money), now existing or hereafter arising under or pursuant to
        the
        terms of this Note, the Note Purchase Agreement and the Security Agreement,
        including, all interest, fees, charges, expenses, attorneys’ fees and costs and
        accountants’ fees and costs chargeable to and payable by the Company hereunder
        and thereunder, in each case, whether direct or indirect, absolute or
        contingent, due or to become due, and whether or not arising after the
        commencement of a proceeding under Title 11 of the United States Code (11
        U. S. C. Section 101 et
        seq.),
        as
        amended from time to time (including post-petition interest) and whether
        or not
        allowed or allowable as a claim in any such proceeding. 

      

      (i) “Person”
shall
        mean and include an individual, a partnership, a corporation (including a
        business trust), a joint stock company, a limited liability company, an
        unincorporated association, a joint venture or other entity or a governmental
        authority.

      

      (j) “Requisite
        Percentage”
shall
        mean, at least a majority of the aggregate outstanding principal amount of
        the Notes issued pursuant to the Note Purchase Agreement.

      

      (k) “Securities
        Act”
shall
        mean the Securities Act of 1933, as amended.

      

      (l) “Security
        Agreement”
has
        the
        meaning given in the introductory paragraphs to this Note.

      

      (m) “Transaction
        Documents”
shall
        mean this Note, each of the other Notes issued under the Note Purchase
        Agreement, the Note Purchase Agreement, the Registration Rights Agreement
        and
        the Security Agreement.

      

      2. Interest.
        Accrued
        interest on this Note shall be payable in cash in quarterly installments
        commencing on the third month anniversary of the date of issuance of this
        Note
        with the final installment payable on the Maturity Date. 

      

      3. Prepayment.
        This
        Note may not be prepaid without the consent of a Requisite Percentage. Any
        prepayment must be made in connection with the prepayment of all outstanding
        Notes. 

      

      4. Events
        of Default.
        The
        occurrence of any of the following shall constitute an “Event
        of Default”
under
        this Note and the other Transaction Documents:

      

      (a) Failure
        to Pay.
        The
        Company shall fail to pay (i) when due any principal or interest payment on
        the due date hereunder or (ii) any other payment required under the terms
        of this Note or any other Transaction Document on the date due and, with
        respect
        to this subclause (ii) only, such payment shall not have been made within
        five
        (5) days of the Company’s receipt of written notice to the Company of such
        failure to pay;

      

      (b) Non-Performance
        of Affirmative Covenants.
        The
        Company shall default in the due observance or performance of any material
        covenant set forth in the Note, the Note Purchase Agreement on the Security
        Agreement, which default shall continue uncured for 15 days after receipt
        of
        written notice to the Company thereof;

       

      
        
           

        

        
          -3-

          
            

          

        

        
           

        

      

       

      (c) Voluntary
        Bankruptcy or Insolvency Proceedings. The
        Company shall (i) apply for or consent to the appointment of a receiver,
        trustee, liquidator or custodian of itself or of all or a substantial part
        of
        its property, (ii) be unable, or admit in writing its inability, to pay its
        debts generally as they mature, (iii) make a general assignment for the
        benefit of its or any of its creditors, (iv) be dissolved or liquidated,
        (v) become insolvent (as such term may be defined or interpreted under any
        applicable statute), (vi) commence a voluntary case or other proceeding
        seeking liquidation, reorganization or other relief with respect to itself
        or
        its debts under any bankruptcy, insolvency or other similar law now or hereafter
        in effect or consent to any such relief or to the appointment of or taking
        possession of its property by any official in an involuntary case or other
        proceeding commenced against it, or (vii) take any action for the purpose
        of effecting any of the foregoing; 

      

      (d) Involuntary
        Bankruptcy or Insolvency Proceedings. Proceedings
        for the appointment of a receiver, trustee, liquidator or custodian of the
        Company or of all or a substantial part of the property thereof, or an
        involuntary case or other proceedings seeking liquidation, reorganization
        or
        other relief with respect to the Company or the debts thereof under any
        bankruptcy, insolvency or other similar law now or hereafter in effect shall
        be
        commenced and an order for relief entered or such proceeding shall not be
        dismissed or discharged within 30 days of commencement; 

      

      (e) Misrepresentations.
        Any of
        the representations and warranties of the Company in the Note Purchase Agreement
        or the Security Agreement proves to have been false or misleading in any
        material respect when made or furnished or deemed made; 

      

      (f) Judgments.
        One or
        more judgments, decrees or orders (excluding settlement orders) for the payment
        of money shall be entered against the Company or any of its subsidiaries
        involving in the aggregate a liability of $1,000,000 or more, and any such
        judgment, decree or order shall continue without discharge or stay for a
        period
        of sixty (60) days; or

      

      (g)  Cross-Defaults.
        The
        Company or any of its subsidiaries shall default in the performance or
        observance of any agreement or instrument relating to any indebtedness, or
        any
        other event shall occur or condition exist, and the effect of such default,
        event or condition is to cause or permit the holder or holders of any such
        indebtedness to cause indebtedness, in excess of $500,000 individually or
        in the
        aggregate, to become due prior to its stated maturity. 

      

      5. Rights
        of Investor upon Default.
        Upon
        the occurrence or existence of any Event of Default (other than an Event
        of
        Default described in Sections 4(c)
        or
4(d))
        and at
        any time thereafter during the continuance of such Event of Default, Investor
        may, with the consent of the Agent, by written notice to the Company, declare
        all outstanding Obligations payable by the Company hereunder to be immediately
        due and payable without presentment, demand, protest or any other notice
        of any
        kind, all of which are hereby expressly waived. Upon the occurrence or existence
        of any Event of Default described in Sections 4(c)
        and
4(d), immediately
        and without notice, all outstanding Obligations payable by the Company hereunder
        shall automatically become immediately due and payable, without presentment,
        demand, protest or any other notice of any kind, all of which are hereby
        expressly waived. In addition to the foregoing remedies, upon the occurrence
        or
        existence of any Event of Default and subject to the consent of the Agent,
        Investor may exercise any other right power or remedy granted to it by the
        Transaction Documents or otherwise permitted to it by law, either by suit
        in
        equity or by action at law, or both.

       

      
        
           

        

        
          -4-

          
            

          

        

        
           

        

      

       

      6. Conversion.

      

      (a) Optional
        Conversion.
        At the
        Maturity Date, each Investor shall have the option to convert the entire
        principal amount of this Note then outstanding into Common Stock. The number
        of
        shares of Common Stock that this Note may be converted into shall be determined
        by dividing the principal amount then outstanding by the Conversion Price
        at the
        time of conversion. If the Investor elects to convert this Note at maturity,
        it
        shall provide the Company with written notice of its election at least one
        (1)
        day prior to the Maturity Date. Upon conversion, the Investor shall deliver
        to
        the Company the original of this Note (or a notice to the effect that the
        original Note has been lost, stolen or destroyed and an agreement reasonably
        acceptable to the Company whereby the holder agrees to indemnify the Company
        from any loss incurred by it in connection with this Note). However, upon
        such
        conversion of this Note, this Note shall be deemed converted and of no further
        force and effect, whether or not the Note is delivered for cancellation as
        set
        forth in the preceding sentence. If there shall occur a Change of Control,
        the
        Company shall give written notice to the Investor at least five (5) days
        prior
        to any closing thereof and the Investor’s election to convert this Note shall be
        conditional upon the consummation thereof.

      

      (b) Mechanics
        of Optional Conversion.
        As soon
        as practicable following surrender by the Investor of the original of its
        Note,
        the Company shall issue and deliver to Investor a certificate or certificates
        for the shares of Common Stock into which the Note has been converted (bearing
        such legends as may be required or advisable in the opinion of counsel to
        the
        Company). Such conversion shall be deemed to have been made immediately prior
        to
        the close of business on the Maturity Date, and the Investor shall be treated
        for all purposes as the record holder or holders of such Common Stock on
        such
        date.

      

      (c) Fractional
        Shares; Interest; Effect of Conversion. No
        fractional shares shall be issued upon conversion of this Note. In lieu of
        the
        Company issuing any fractional shares to Investor upon the conversion of
        this
        Note, the Company shall pay to Investor an amount equal to the product obtained
        by multiplying the Conversion Price by the fraction of a share not issued
        pursuant to the previous sentence. Upon conversion of this Note in full and
        the
        payment of any amounts specified in this Section 6(c),
        the
        Company shall be forever released from all its obligations and liabilities
        under
        this Note.

      

      7. Successors
        and Assigns.
        Subject
        to the restrictions on transfer described in Sections 9
        and
10
        below,
        the rights and obligations of the Company and Investor shall be binding upon
        and
        benefit the successors, assigns, heirs, administrators and transferees of
        the
        parties.

      

      8. Waiver
        and Amendment.
        Any
        provision of this Note may be amended, waived or modified upon the written
        consent of the Company and the holders of a Requisite Percentage.

       

      
        
           

        

        
          -5-

          
            

          

        

        
           

        

      

       

      9. Transfer
        of this Note or Securities Issuable on Conversion
        Hereof.
        With
        respect to any offer, sale or other disposition of this Note or securities
        into
        which such Note may be converted, Investor will give written notice to the
        Company prior thereto, describing briefly the manner thereof, together with
        (unless waived by the Company) a written opinion of Investor’s counsel, or other
        evidence if reasonably satisfactory to the Company, to the effect that such
        offer, sale or other distribution may be effected without registration or
        qualification (under any federal or state law then in effect). Upon receiving
        such written notice and reasonably satisfactory opinion, if so requested,
        or
        other evidence, the Company, as promptly as practicable, shall notify Investor
        that Investor may sell or otherwise dispose of this Note or such securities,
        all
        in accordance with the terms of the notice delivered to the Company. If a
        determination has been made pursuant to this Section 9
        that the
        opinion of counsel for Investor, or other evidence, is not reasonably
        satisfactory to the Company, the Company shall so notify Investor promptly
        after
        such determination has been made. Each Note thus transferred and each
        certificate representing the securities thus transferred shall bear a legend
        as
        to the applicable restrictions on transferability in order to ensure compliance
        with the Securities Act, unless in the opinion of counsel for the Company
        such
        legend is not required in order to ensure compliance with the Securities
        Act.
        The Company may issue stop transfer instructions to its transfer agent in
        connection with such restrictions. Subject to the foregoing, transfers of
        this
        Note shall be registered upon registration books maintained for such purpose
        by
        or on behalf of the Company. Prior to presentation of this Note for registration
        of transfer, the Company shall treat the registered holder hereof as the
        owner
        and holder of this Note for the purpose of receiving all payments of principal
        and interest hereon and for all other purposes whatsoever, whether or not
        this
        Note shall be overdue and the Company shall not be affected by notice to
        the
        contrary. Notwithstanding anything in this Section 9 to the contrary, no
        opinion
        of counsel shall be required with respect to any transfer by an Investor
        to its
        officers, directors, partners, members or other affiliates.

      

      10. Assignment
        by the Company.
        Neither
        this Note nor any of the rights, interests or obligations hereunder may be
        assigned, by operation of law or otherwise, in whole or in part, by the Company
        without the prior written consent of the holders of a Requisite
        Percentage.

      

      11. Notices.
        All
        notices, requests, demands, consents, instructions or other communications
        required or permitted hereunder shall in writing and faxed, mailed or delivered
        to each party at the respective addresses of the parties as set forth in
        the
        Note Purchase Agreement, or at such other address or facsimile number as
        the
        Company shall have furnished to Investor in writing. All such notices and
        communications will be deemed effectively given the earlier of (i) when
        received, (ii) when delivered personally, (iii) one business day after
        being delivered by facsimile (with receipt of appropriate confirmation),
        (iv) one business day after being deposited with an overnight courier
        service of recognized standing or (v) two days after being deposited in the
        U.S. mail, first class with postage prepaid.

      

      12. Pari
        Passu Notes.
        Investor
        acknowledges and agrees that the payment of all or any portion of the
        outstanding principal amount of this Note and all interest hereon shall be
        pari
        passu in
        right
        of payment and in all other respects to the other Notes issued pursuant to
        the
        Note Purchase Agreement or pursuant to the terms of such Notes. In the event
        Investor receives payments in excess of its pro rata share of the Company’s
        payments to the Investors of all of the Notes, then Investor shall hold in
        trust
        all such excess payments for the benefit of the holders of the other Notes
        and
        shall pay such amounts held in trust to such other holders upon demand by
        such
        holders.

       

      
        
           

        

        
          -6-

          
            

          

        

        
           

        

      

       

      13. Usury.
        In the
        event any interest is paid on this Note which is deemed to be in excess of
        the
        then legal maximum rate, then that portion of the interest payment representing
        an amount in excess of the then legal maximum rate shall be deemed a payment
        of
        principal and applied against the principal of this Note.

      

      14. Waivers.
        The
        Company hereby waives notice of default, presentment or demand for payment,
        protest or notice of nonpayment or dishonor and all other notices or demands
        relative to this instrument.

      

      15. Remedies
        Cumulative.
        The
        remedies of Investor as provided herein and in the Note Purchase Agreement
        and
        in any other documents governing or securing repayment hereof shall be
        cumulative and concurrent and may be pursued singly, successively, or together,
        at the sole discretion of Investor to the extent provided herein and in the
        Note
        Purchase Agreement and may be exercised as often as occasion therefore shall
        arise. No act or omission of the Investor, including specifically, but without
        limitation, any failure to exercise any right, remedy or recourse, shall
        be
        effective as a waiver of any right of the Investor hereunder, unless set
        forth
        in a written document executed by the Investor, and then only to the extent
        specifically recited therein. A waiver or release with reference to one event
        shall not be construed as continuing, as a bar to, or as a waiver or release
        of
        any subsequent right, remedy or recourse as to any subsequent event. All
        notices, waivers, releases and/or consents by an Investor shall be directed
        to
        the Company only through the Agent.

      

      16. No
        Rights of a Stockholder.
        Nothing
        contained in this Note shall be construed as conferring upon the Investor
        or any
        other Person the right to vote or consent or to receive notice as an stockholder
        in respect of meetings of stockholders for the election of directors of the
        Company or any other matters or any rights whatsoever as a stockholder of
        the
        Company prior to the time that this Note is converted pursuant to Section
        6.

      

      17. Governing
        Law.
        This
        Note and all actions arising out of or in connection with this Note shall
        be
        governed by and construed in accordance with the laws of the State of Delaware,
        without regard to the conflicts of law provisions of the State of Delaware,
        or
        of any other state.

      

      (Signature
        Page Follows)

      

      
        
           

        

        
          -7-

          
            

          

        

        
           

        

      

      

      The
        Company has caused this Note to be issued as of the date first written
        above.

      

      SMART
        ONLINE, INC.

      a
        Delaware corporation

      

      By:
        _______________________________

      

      Name:
        _____________________________

      

      Title:
        ______________________________

      

      

      

      

      

      

      

      
        
           

        

        
          -8-Exhibit
      10.4

    EMPLOYMENT
      AGREEMENT

    

    THIS
      EMPLOYMENT AGREEMENT (the “Agreement”) by and between Smart Online, Inc. a
      Delaware corporation (the “Company”), and Joseph Trepanier (the “Employee”),
      dated as of the 15th
      day of
      August, 2007.

    

    WITNESSETH
      THAT

    

    WHEREAS,
      the Company and the Employee wish to contract for the employment by the Company
      of the Employee, and the Employee wishes to serve the Company, in the capacities
      and on the terms and conditions set forth in this Agreement;

    

    WHEREAS,
      the Company is an enterprise whose success is attributable largely to the
      creation and maintenance of certain Confidential Data (as defined below) and
      during the period of employment the Employee will be situated to have access
      to
      and be knowledgeable with respect to the Confidential Data as well as the
      customers of the Company; and 

    

    WHEREAS,
      Company has a legitimate protectible business interest in the creation and
      maintenance of its Confidential Data and the protection of the identity of,
      and
      related information concerning, its customers and the Company’s customer lists;
      and

    

    WHEREAS,
      the Company wishes to protect its Confidential Data from disclosure by the
      Employee by means of the restrictive covenants contained in this Agreement
      and
      the Employee agrees to such covenants in exchange for the Company’s commitment
      to continue to employ the Employee and for other additional consideration agreed
      to between the parties;

    

    NOW,
      THEREFORE, it is hereby agreed as follows:

    

    1. EMPLOYMENT
      PERIOD. The Company shall employ the Employee, and the Employee shall serve
      the
      Company, on the terms and conditions set forth in this Agreement. Such
      employment pursuant to the terms of this Agreement shall commence on August
      15,
      2007, and shall terminate as provided under the terms of this Agreement. The
      term during which this Agreement is in effect is referred to herein as the
      “Employment Period.”

    

    2. POSITION
      AND DUTIES.

    

    (a) During
      the Employment Period, the Employee shall serve as a full-time employee of
      the
      Company as Chief Operating Officer with such duties and responsibilities as
      are
      customarily assigned to such position and such other duties and responsibilities
      not inconsistent therewith as may from time to time be assigned to him by the
      President, Chief Executive Officer or Board of Directors.

    

    (b) During
      the Employment Period, the Employee shall devote his loyalty, attention, and
      time to the business and affairs of the Company and, to the extent necessary
      to
      discharge the responsibilities assigned to the Employee under this Agreement,
      use the Employee’s best efforts to carry out such responsibilities faithfully
      and efficiently. 

     

    
      
         

      

      
         

        
          

        

      

      
         

      

    

     

    (c) The
      Employee’s services shall be performed primarily at the Company’s headquarters
      in Durham, North Carolina.

    

    3. COMPENSATION.

    

    (a) Base
      Salary. The Employee’s base salary shall be $163,000 per annum, payable monthly,
      which salary shall be reevaluated annually and is subject to such increases
      as
      the Board of Directors or any committee thereof approves. The term “Annual Base
      Salary” shall refer to the base salary prevailing during the applicable period
      until such time of any increase in base salary whereupon it shall thereafter
      refer to such increased amount. 

    

    (b) Restricted
      Stock Award. Upon the commencement of this Agreement, the Employee shall be
      granted a restricted stock award for 25,000 shares of common stock of the
      Company. This grant will be subject to the Company’s “2004 Equity Compensation
      Plan” and the Employee shall enter into a “Restricted Stock Agreement” in
      substantially the form attached hereto as Exhibit
      A.

    

    (c) Other
      Benefits. In addition, during the Employment Period the Employee shall be
      entitled to participate, in accordance with the relevant provisions thereof,
      in
      all applicable incentive, savings, and retirement plans, practices, policies,
      and programs of the Company for which senior management employees are eligible
      generally.

    

    (d) All
      compensation hereunder shall be subject to all applicable federal and state
      withholding, payroll and other taxes.

     

    4. TERMINATION
      OF EMPLOYMENT.

    

    (a) Death
      or
      Disability. The Employee’s employment shall terminate automatically upon the
      Employee’s death during the Employment Period. The Company shall be entitled to
      terminate the Employee’s employment because of the Employee’s Disability during
      the Employment Period. “Disability” means that the Employee has been unable, for
      a period of thirty (30) consecutive calendar days, to perform the Employee’s
      duties under this Agreement, as a result of physical or mental illness or
      injury. A termination of the Employee’s employment by the Company for Disability
      shall be communicated to the Employee by written notice, and shall be effective
      on the date of receipt of such notice by the Employee (the “Disability Effective
      Date”).

    

    (b) By
      the
      Company.

    

    (i) The
      Company may terminate the Employee’s employment during the Employment Period for
      Cause or without Cause. A termination of the Employee’s employment with Cause
      shall be effective when communicated to the Employee by written or verbal
      notice. “Cause” means unacceptable conduct, including but not limited
      to:

     

    
      
         

      

      
        2

        
          

        

      

      
         

      

    

     

    A. participation
      in a fraud or act of dishonesty against the Company;

    

    B. any
      chemical dependence which affects the performance of his duties and
      responsibilities to the Company;

    

    C. breach
      of
      Employee’s fiduciary obligations to the Company;

    

    D. Employee
      willfully fails to perform his duties;

    

    E. breach
      of
      the Company’s policies or any material provision of this Agreement;

    

    F. misconduct
      resulting in loss to the Company or damage to the reputation of the Company;
      or

    

    G. conduct
      by the Employee which, in the determination of the Company’s Board of Directors,
      demonstrates unfitness to serve.

    

    (ii) “Without
      Cause” means termination of Employee’s employment for a reason other than that
      listed in Paragraph 4(b)(i) above. A termination of the Employee’s employment
      Without Cause shall be effective when communicated to the Employee by verbal
      or
      written notice.

    

    (c) By
      the
      Employee. The Employee may signify his intention to terminate his employment
      at
      any time upon the giving of sixty (60) days’ notice (“Notice Period”) to the
      Company of his intent to do so. Upon the expiration of the Notice Period the
      termination will be effective and the Date of Termination will be effective
      as
      referred to below. The Company reserves the right to accelerate the effective
      “Date of Termination” in its discretion after the inception of the Notice
      Period.

    

    (d) Date
      of
      Termination. The “Date of Termination” means the date of the Employee’s death,
      the Disability Effective Date, the date on which the termination of the
      Employee’s employment by the Company for Cause or Without Cause is effective, or
      the date on which the termination of the Employee’s employment by the Employee
      is effective, as the case may be.

    

    5. OBLIGATIONS
      OF THE COMPANY UPON TERMINATION.

    

    (a) Termination
      by the Company Without Cause or by the Employee for Good Reason. If the Company
      terminates the employment of the Employee without Cause (as defined in Section
      4(b) above) or if the Employee terminates his employment for Good Reason (as
      defined below):

     

    
      
         

      

      
        3

        
          

        

      

      
         

      

    

     

    
      	 	
              (i)

            	
              the
                Company shall pay the Employee the portion of his base salary in
                termination as he may be entitled to receive for services rendered
                prior
                to the date of such termination;
                and

            

    

    

    
      	 	
              (ii)

            	
              for
                a period of sixty (60) days following the date on which the Employee’s
                employment with the Company terminates, the Company shall continue
                to pay
                the Employee his base salary in effect at the time of his termination
                of
                employment and shall continue to provide the Employee with all benefits
                specified in this Agreement, with no adverse tax consequences to
                the
                Employee, as if he had remained employed by the Company pursuant
                to this
                Agreement during the entire sixty (60) day
                period.

            

    

    

    For
      purposes of this Agreement, the Employee shall be deemed to have terminated
      his
      employment for “Good Reason” if he voluntarily terminates his employment with
      the Company under any of the following circumstances:

    

    
      	 	
              (i)

            	
              any
                demotion or diminution in the Employee’s position, title, reporting
                position or duties;

            

    

    

    
      	 	
              (ii)

            	
              relocation
                of the Employee’s office to a location more than thirty (30) miles outside
                of Research Triangle Park, North Carolina;
                or

            

    

    

    
      	 	
              (iii)

            	
              any
                material, continuing breach of this Agreement by the
                Company.

            

    

    

    (b) By
      the
      Company for Cause; By the Employee; Death or Disability; Following Change in
      Control. If the Employee’s employment is terminated by the Company for Cause
      during the Employment Period, if Employee terminates employment during the
      Employment Period, if the Employee’s employment is terminated following in
      connection with a Change in Control (as defined below), or if the Employee’s
      employment is terminated by reason of the Employee’s death or disability during
      the Employment Period, the Company shall pay the Employee the Annual Base Salary
      (then in effect) through the Date of Termination and the Company shall have
      no
      further obligations under this Agreement.

    

    For
      purposes of this Agreement, a “Change in Control” shall be deemed to have
      occurred if:

    

    
      	 	
              (i)

            	
              the
                direct or indirect beneficial ownership (within the meaning of Section
                13(d) of the Act and Regulation 13D thereunder) of fifty percent
                (50%) or
                more of the Company’s common stock is acquired or becomes held by any
                person or group of persons (within the meaning of Section 13(d)(3)
                of the
                Act), but excluding the Company and any employee benefit plan sponsored
                or
                maintained by the Company; or

            

    

     

    
      
         

      

      
        4

        
          

        

      

      
         

      

    

     

    
      	 	
              (ii)

            	
              assets
                or earning power constituting more than fifty percent (50%) of the
                assets
                or earning power of the Company and its subsidiaries (taken as a
                whole) is
                sold, mortgaged, leased or otherwise transferred, in one or more
                transactions not in the ordinary course of the Company’s business, to any
                such person or group of persons.

            

    

    

    Provided,
      however,
      that a
      Change in Control shall not be deemed to have occurred upon an investment by
      one
      or more venture capital funds, Small Business Investment Companies (as defined
      in the Small Business Investment Act of 1958, as amended) or similar financial
      investors.

    

    6. EXPENSES.
      The Company agrees to reimburse the Employee for reasonable and necessary
      expenses incurred by the Employee in the furtherance of the Company’s business
      in accordance with such procedures as the Company may from time to time
      establish. 

    

    7. REPRESENTATIONS
      AND WARRANTIES OF THE EMPLOYEE. The Employee represents and warrants
      that:

    

    (a) the
      Employee is under no contractual or other restriction or obligation which is
      inconsistent with the execution of this Agreement, the performance of duties
      hereunder or other rights of the Company hereunder; and

    

    (b) to
      the
      best of the Employee’s knowledge, the Employee is under no physical or mental
      disability which will render him incapable of performing the essential functions
      involved in his anticipated duties or that would otherwise hinder the
      performance of duties under this Agreement.

    

    8. COVENANT
      NOT TO COMPETE. The Employee covenants that during the “Noncompetition Period,”
as defined in paragraph 14, and within the “Noncompetition Area,” as
      defined in paragraph 15, he shall not, directly or indirectly, as
      principal, agent, consultant, trustee or through the agency of any corporation,
      partnership, association, or agency engage in the “Business,” as defined in
      paragraph 16. Specifically, but without limiting the foregoing, the
      Employee agrees that during such period and within such area, he shall not
      do
      any of the following: (a) be the owner of the outstanding capital stock of
      any
      corporation which conducts a business of a like or similar nature to the
“Business” (other than stock of a corporation traded on a national securities
      exchange or automated quotation system); (b) be an officer or director of any
      corporation which conducts a business of a like or similar nature to the
“Business”; (c) be a member of any partnership which conducts a business of a
      like or similar nature to the “Business”; or (d) be a consultant to, an owner of
      or an employee of any other business which conducts a business of a like or
      similar nature to the Business.

     

    
      
         

      

      
        5

        
          

        

      

      
         

      

    

    9. NONDISCLOSURE
      COVENANT.

    

    (a)
       The
      parties acknowledge that the Company is an enterprise whose success is
      attributable largely to the ownership, use and development of certain valuable
      confidential and proprietary information (the “Confidential Data”), and that the
      Employee’s employment with the Company will involve the Employee’s access to and
      work with such information. The Employee acknowledges that his relationship
      with
      the Company is a confidential relationship. The Employee covenants and agrees
      that (i) he shall keep and maintain the Confidential Data in strictest
      confidence, and (ii) he shall not, either directly or indirectly, use any
      Confidential Data for his own benefit, or divulge, disclose, or communicate
      any
      Confidential Data in any manner whatsoever to any person or entity other than
      the employees or agents of the Company having a need to know such Confidential
      Data, and only to the extent necessary to perform their responsibilities on
      behalf of the Company, and other than in the performance of the Employee’s
      duties in the employment by the Company. The Employee’s agreement not to
      disclose Confidential Data shall apply to all Confidential Data, whether or
      not
      the Employee participated in the development thereof. Upon termination of
      employment for any reason, the Employee will return to the Company all
      documents, notes, programs, data and any other materials (including any copies
      thereof) in his/her possession.

    

    (b) For
      purposes of this Agreement, the term “Confidential Data” shall include any and
      all information related to the business of the Company, or to its products,
      sales or businesses which is not general public knowledge, specifically
      including (but without limiting the generality of the foregoing) all financial
      and accounting data; computer software; processes; formulae; inventions;
      methods; trade secrets; computer programs; engineering or technical data,
      drawings, or designs; manufacturing techniques; patents, patent applications,
      copyrights and copyright applications (in any such case, whether registered
      or
      to be registered in the United States of America or elsewhere) applied for,
      issued to or owned by the Company; information concerning pricing and pricing
      policies; marketing techniques; suppliers; methods and manner of operations;
      and
      information relating to the identity, needs and location of all past, present
      and prospective customers. The parties stipulate that as between them the
      above-described matters are important and confidential and gravely affect the
      successful conduct of the business of the Company and that any breach of the
      terms of this paragraph shall be a material breach of this
      Agreement.

     

    10. NONSOLICITATION
      COVENANT. The Employee covenants that during the Noncompetition Period he shall
      not directly or indirectly, on behalf of himself or on behalf of any other
      person, firm, partnership, corporation, association or other entity, call upon
      any of the customers or clients of the Company for the purpose of soliciting
      or
      providing any product or service similar to that provided by the Company nor
      will he, in any way, directly or indirectly, for himself, or on behalf of any
      other person, firm, partnership, corporation, association, or other entity,
      solicit, divert or take away, or attempt to solicit, divert, or take away any
      of
      the customers, clients, business, or patrons of the Company. The Employee
      further covenants that during the Noncompetition Period he shall not induce
      or
      attempt to induce any person to leave the employ of the Company.

     

    
      
         

      

      
        6

        
          

        

      

      
         

      

    

     

    11. INVENTIONS.
      All inventions, designs, improvements and developments made by the Employee,
      either solely or in collaboration with others, during his employment with the
      Company, whether or not during working hours, and relating to any methods,
      apparatus or products which are manufactured, sold, leased, used or developed
      by
      the Company or which pertain to the Business (the “Developments”), shall become
      and remain the property of the Company. The Employee shall disclose promptly
      in
      writing to the Company all such Developments. The Employee acknowledges and
      agrees that all Developments shall be deemed “works made for hire” within the
      meaning of the United States Copyright Act, as amended. If, for any reason,
      such
      Developments are not deemed works made for hire, the Employee shall assign,
      and
      hereby assigns, to the Company, all of the Employee’s right, title and interest
      (including, but not limited to, copyright and all rights of inventorship) in
      and
      to such Developments. At the request and expense of the Company, whether during
      or after employment hereunder, the Employee shall make, execute and deliver
      all
      application papers, assignments or instruments, and perform or cause to be
      performed such other lawful acts as the Company may deem necessary or desirable
      in making or prosecuting applications, domestic or foreign, for patents
      (including reissues, continuations and extensions thereof) and copyrights
      related to such Developments or in vesting in the Company full legal title
      to
      such Developments. The Employee shall assist and cooperate with the Company
      or
      its representatives in any controversy or legal proceeding relating to such
      Developments, or to any patents, copyrights or trade secrets with respect
      thereto. If for any reason the Employee refuses or is unable to assist the
      Company in obtaining or enforcing its rights with respect to such Developments,
      the Employee hereby irrevocably designates and appoints the Company and its
      duly
      authorized agents as the Employee’s agents and attorneys-in-fact to execute and
      file any documents and to do all other lawful acts necessary to protect the
      Company’s rights in the Developments. The Employee expressly acknowledges that
      the special foregoing power of attorney is coupled with an interest and is
      therefore irrevocable and shall survive (i) the Employee’s death or incompetency
      and (ii) any termination of this Agreement.

    

    12. INDEPENDENT
      COVENANTS. Each of the covenants on the part of the Employee contained in
      paragraphs 8, 9, 10, and 11 of this Agreement shall be construed as an agreement
      independent of each other such covenant. The existence of any claim or cause
      of
      action of the Employee against the Company, whether predicated on this Agreement
      or otherwise, shall not constitute a defense to the enforcement by the Company
      of any such covenant.

    

    13. REASONABLENESS;
      INJUNCTION. The Employee acknowledges that the covenants contained in this
      agreement are reasonably necessary and designed for the protection of the
      Company and its business, and that such covenants are reasonably limited with
      respect to the activities prohibited, the duration thereof, the geographic
      area
      thereof, the scope thereof and the effect thereof on the Employee and the
      general public. The Employee further acknowledges that violation of the
      covenants would immeasurably and irreparably damage the Company, and by reason
      thereof the Employee agrees that for violation or threatened violation of any
      of
      the provisions of this Agreement, the Company shall, in addition to any other
      rights and remedies available to it, at law or otherwise, by entitled to any
      injunction to be issued by any court of competent jurisdiction enjoining and
      restraining the Employee from committing any violation or threatened violation
      of this Agreement. The Employee consents to the issuance of such
      injunction.

     

    
      
         

      

      
        7

        
          

        

      

      
         

      

    

     

    14. NONCOMPETITION
      PERIOD. This Agreement shall remain enforceable during the Employee’s employment
      with the Company and for a period of two years after termination of the
      Employee’s employment for any reason (such period not to include any period(s)
      of violation or period(s) of time required for litigation to enforce the
      covenants set forth herein).

    

    15. NONCOMPETITION
      AREA.

    

    (a) The
      Employee acknowledges and agrees that the Company does business on an
      international basis and that the Employee will assist Company in developing
      Company’s business in both the United States and Europe, with customers
      throughout the United States and additionally existing in Europe, particularly
      servicing France, Spain, the United Kingdom and Germany, and that any breach
      of
      the Employee’s covenants contained herein would materially damage the Company,
      regardless of the area of the world in which the activities constituting such
      breach were to occur. Accordingly, the terms and provisions of this Agreement
      shall apply in the following Noncompetition Area:

    

    (b) The
      State
      of North Carolina;

    

    (c) Any
      state
      other than North Carolina where Company conducts the “Business” and in or for
      which the Employee assists or performs services assisting Company;

    

    (d) Any
      political subdivision of foreign countries where Company does “Business” or will
      do “Business” during the period of employment; and 

    

    (e) Any
      other
      state, country, or political subdivision where Company does “Business” and in or
      for which the Employee assists or performs services assisting
      Company.

    

    16. BUSINESS.
      For the purposes of this Agreement, the “Business” shall include any business,
      service, or product engaged in, provided, or produced by the Company from the
      date of this Agreement to the date of the termination of the employment,
      including, but not limited to: (i) the business of development, production,
      marketing, design, manufacturing, leasing or selling software related to
      business plans, legal services, whether for use by professionals or consumers;
      (ii) providing
      web-hosted applications and technology infrastructure syndication and/or (iii)
      any other business conducted by the Company immediately prior to the date of
      termination of Employee’s employment or in which the Company shall at the time
      of termination of Employee’s employment with the Company be actively preparing
      to enter.

     

    17. MISCELLANEOUS.

    

    (a) This
      Agreement shall be subject to and governed by the substantive laws of the State
      of North Carolina, without giving effect to the conflicts of laws provisions
      thereof. The Employee hereby submits to the jurisdiction and venue of the state
      and federal courts of North Carolina.

     

    
      
         

      

      
        8

        
          

        

      

      
         

      

    

     

    (b) The
      Company’s failure to insist upon strict compliance with any provision of this
      Agreement shall not be deemed a waiver of such provision or any other
      provision.

    

    (c) This
      Agreement may not be modified except by an agreement in writing executed by
      the
      parties. The parties expressly waive their right to orally modify this
      provision.

     

    (d) The
      invalidity or unenforceability of any provision of this Agreement shall not
      affect the validity or enforceability of any other provision.

    

    (e) This
      Agreement shall not be assignable without the written consent of the Company
      and
      the Employee.

    

    (f) This
      Agreement shall inure to the benefit of and be binding upon the Company and
      it
      successors and assigns.

     

    (g) This
      Agreement expresses the whole and entire Employment Agreement between the
      parties and supersedes and replaces any prior employment Agreement,
      understanding or arrangement between Company and the Employee.

     

     

    
      
         

      

      
        9

        
          

        

      

      
         

      

    

     

    
 

    IN
      WITNESS WHEREOF, the parties executed this Agreement as of the day and year
      first above written.

    

    SMART
      ONLINE, INC.

     

    By:
      /s/
      Dennis Michael Nouri

    Name:           

    Title:
      

    

    

    

    EMPLOYEE

    

    

    /s/
      Joseph F. Trepanier

    Name:

    

     

    
      
         

      

      
        10

        
          

        

      

      
         

      

    

    EXHIBIT
      A

    

    Restricted
      Stock Agreement

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    
      
         

      

      
        11

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