Document:

EX-10.1

EXHIBIT 10.1

ALLIED CAPITAL CORPORATION

THE 2005 ALLIED CAPITAL CORPORATION

NON-QUALIFIED DEFERRED COMPENSATION PLAN

Effective January 1, 2005

1

THE 2005 ALLIED CAPITAL CORPORATION

NON-QUALIFIED DEFERRED COMPENSATION PLAN

Table of Contents

Page

	 	 	 	 	 	 	 	 	 
	PREAMBLE
	 	 	 	 	 	 	1	 
	 
	 	 	 	 	 	 	 	 
	ARTICLE I — GENERAL
	 	 	 	 	 	 	 	 
	Section 1.1	 	Effective Date..........................................................2

	 	 	 

	Section 1.2
	 	Purpose
	 	 	2	 
	Section 1.3
	 	Intent
	 	 	2	 

	 	 	 	 	 	 	 	 	 
	ARTICLE II — DEFINITIONS AND USAGE
	 	 	 	 
	Section 2.1
	 	Definitions
	 	 	3	 
	Section 2.2
	 	Usage
	 	 	5	 

	 	 	 	 	 	 	 	 	 
	ARTICLE III — ELIGIBILITY AND PARTICIPATION
	 	 	 	 
	Section 3.1
	 	Eligibility
	 	 	6	 
	Section 3.2
	 	Participation
	 	 	6	 
	Section 3.3	 	Termination of Participation..........................................6

	 	 	 

	ARTICLE IV — PLAN BENEFIT
Section 4.1
	 	Plan Benefit
	 	 	8	 
	 
	 	 	 	 	 	 	 	 
	Section 4.2
	 	Accounts
	 	 	8	 
	Section 4.3
	 	Multiple Accounts
	 	 	8	 
	Section 4.4
	 	Deferral Agreements
	 	 	8	 
	Section 4.5
	 	Employer Contributions
	 	 	9	 
	Section 4.6
	 	Investment Procedure
	 	 	9	 
	Section 4.7
	 	Valuation of Accounts
	 	 	9	 

THE 2005 ALLIED CAPITAL CORPORATION

NON-QUALIFIED DEFERRED COMPENSATION PLAN

Table of Contents (continued)

	 	 	 
	 	 	Page
	ARTICLE V — VESTING AND DISTRIBUTION

	 
	 	 
	Section 5.1

	 	Vesting11
	
 
	 	 
	Section 5.2

	 	Distributable Events11
	
 
	 	 
	Section 5.3

	 	Amount of Plan Benefits11
	
 
	 	 
	Section 5.4

	 	Plan Benefit Payment Options11
	
 
	 	 
	Section 5.5

	 	Timing of Benefit Payments12
	
 
	 	 
	Section 5.6

	 	Form of Benefit Payments12
	
 
	 	 
	Section 5.7

	 	Plan Benefit Payment Election Procedures........................13
	
 
	 	 
	Section 5.8

	 	Form of Benefit Payments Upon Death13
	
 
	 	 
	Section 5.9

	 	Designation of Beneficiary13
	
 
	 	 
	Section 5.10

	 	Hardship Distributions13
	
 
	 	 
	Section 5.11

	 	Termination of the Plan .............................................13
	
 
	 	 

	 	 	 	 	 	 	 	 	 
	ARTICLE VI — ADMINISTRATION
	 	 	 	 
	Section 6.1
	 	General
	 	 	15	 
	Section 6.2
	 	Administrative Rules
	 	 	15	 
	Section 6.3
	 	Duties
	 	 	15	 
	Section 6.4
	 	Fees
	 	 	16	 

	 	 	 	 	 	 	 	 	 
	ARTICLE VII — CLAIMS PROCEDURE
	 	 	 	 
	Section 7.1
	 	General
	 	 	17	 
	Section 7.2
	 	Denials
	 	 	17	 
	Section 7.3
	 	Notice
	 	 	17	 
	Section 7.4
	 	Appeals Procedure
	 	 	17	 
	Section 7.5
	 	Review
	 	 	17	 

	 	 	 	 	 	 	 	 	 
	ARTICLE VIII — CHANGE IN CONTROL
	 	 	 	 
	Section 8.1
	 	In General
	 	 	18	 
	Section 8.2
	 	Definition of “Change in Control”
	 	 	18	 
	ARTICLE IX — TRUST
Section 9.1
	 	Trust
	 	 	19	 
	 
	 	 	 	 	 	 	 	 
	Section 9.2
	 	Contributions and Expenses
	 	 	19	 
	Section 9.3
	 	Trustee Duties
	 	 	19	 
	Section 9.4
	 	Reversion to the Employer
	 	 	19	 

	 	 	 	 	 	 	 	 	 
	ARTICLE X — MISCELLANEOUS PROVISIONS
	 	 	 	 
	Section 10.1	 	Modification, Amendment, Discontinuance, and Termination..20

	 	 	 

	Section 10.2
	 	No Assignment
	 	 	20	 

THE 2005 ALLIED CAPITAL CORPORATION

NON-QUALIFIED DEFERRED COMPENSATION PLAN

Table of Contents (continued)

	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	Page
	Section 10.3
	 	Successors and Assigns
	 	 	20	 
	Section 10.4
	 	Governing Law
	 	 	20	 
	Section 10.5
	 	No Guarantee of Employment
	 	 	20	 
	Section 10.6
	 	Severability
	 	 	20	 
	Section 10.7
	 	Notification of Addresses
	 	 	20	 
	Section 10.8
	 	Bonding
	 	 	21	 

APPENDIX A

Companies that have adopted the Plan 22

2

THE 2005 ALLIED CAPITAL CORPORATION

NON-QUALIFIED DEFERRED COMPENSATION PLAN

PREAMBLE

WHEREAS, the Employer recognizes the unique qualifications of its Executives, employees, Directors
and Consultants and the valuable services that they have provided to or for the Employer; and

WHEREAS, the Employer desires to provide retirement benefits to its Executives and employees based
upon compensation earned by them in excess of the compensation limit imposed on qualified
retirement plans by section 401(a)(17) of the Internal Revenue Code and without regard to the
limitation on benefits or contributions under section 415 of the Internal Revenue Code; and

WHEREAS, the Employer also desires to allow its Executives, Directors and Consultants to defer
compensation that would otherwise be paid to them for purposes of saving for retirement; and

WHEREAS, the Employer has previously adopted the amended and restated Non-Qualified Deferred
Compensation Plan of Allied Capital Corporation, which plan was frozen to new deferrals effective
December 31, 2004; and

WHEREAS, the Employer now desires to adopt a new 2005 Allied Capital Corporation Non-Qualified
Deferred Compensation Plan in order to be compliant with the requirements of new Section 409A of
the Internal Revenue Code, effective as of January 1, 2005;

NOW, THEREFORE, in consideration of the premises and of the provisions hereinafter set forth, the
2005 Allied Capital Corporation Non-Qualified Deferred Compensation Plan (the “Plan”) shall be and
hereby is adopted as follows:

3

ARTICLE I

GENERAL

Section 1.1 Effective Date. The provisions of this Plan shall be effective as of January
1, 2005. The rights, if any, of any person whose status as an employee, Executive, Director or
Consultant of the Employer terminates shall be determined pursuant to the Plan as in effect on the
date such employee, Executive, Director or Consultant terminates, unless a subsequently adopted
provision of the Plan is made specifically applicable to such person.

Section 1.2 Purpose. The purpose of the Plan is to provide retirement income to Executives
and employees based upon their compensation from the Company in excess of the amount of
compensation that may be taken into account by a qualified retirement plan described in section
401(a) of the Code and without regard to the limitation on benefits or contributions under section
415 of the Code.

The Plan shall also provide Executives, Directors and certain Consultants with the opportunity to
defer receipt of amounts otherwise payable by the Company.

Section 1.3 Intent. The Plan is intended to be an unfunded plan for the purpose of
providing deferred compensation to a select group of management or highly compensated employees as
such group is described under Sections 201(2), 301(a)(3), and 401(a)(1) of ERISA, and a select
group of consultants. The Plan is not intended to be a plan described in Section 401(a) of the
Code. The obligation of the Company to make payments under this Plan constitutes nothing more than
an unsecured promise of the Company to make such payments, and any property of the Company that may
be set aside for the payment of benefits under the Plan shall, in the event of the Company’s
bankruptcy or insolvency, remain subject to the claims of the Company’s general creditors until
such benefits are distributed in accordance with Article V herein.

4

ARTICLE II

DEFINITIONS AND USAGE

Section 2.1 Definitions. Wherever used in the Plan, the following words and phrases shall
have the meaning set forth below unless the context plainly requires a different meaning:

“Account” means the account established on behalf of each Participant as described
in Section 4.2 of the Plan.

“Administrator” means the Compensation Committee of the Board, or such other person
or persons as designated by the Board.

“Beneficiary” means those persons designated as a Beneficiary by the Participant.

“Board” means the Board of Directors of Allied Capital Corporation.

“Bonus” means any amount paid to an Executive which is designated by the Employer
as an annual bonus, or any amount paid to a Consultant or Director.

“Bonus Deferral Election” means an election made pursuant to Section 4.4(b) of the
Plan.

“Change in Control” of the Company is defined in Section 8.2 of the Plan.

“Code” means the Internal Revenue Code of 1986, as amended from time to time.

“Company” means Allied Capital Corporation, AC Corporation, and any named
subsidiaries or related parties adopting the Plan as listed in Appendix A hereto or any
successor thereto.

“Compensation” means “Compensation” as defined under the Retirement Plan. However,
for purposes of this Plan, “Compensation” shall not include Bonuses and shall be determined
without regard to the limitations imposed by Code Section 401(a)(17).

“Compensation Committee” means the Compensation Committee of the Board of Directors
of Allied Capital Corporation.

“Compensation Deferral Election” means an election made pursuant to Section 4.4(a)
of the Plan.

“Consultant” means any individual providing services for the Employer in a capacity
other than as a common law employee of the Employer.

“Deferral Agreement” means an agreement entered into between an Executive, a
Director or a Consultant and the Employer for the purposes set forth in Articles IV and V.

“Director” means any member of the Board of Directors of Allied Capital Corporation
who is not also an Executive.

“Disability” means the Participant’s inability to engage in any substantial gainful
activity by reason of any medically determinable physical or mental impairment which can be
expected to result in death or can be expected to last for a continuous period of not less
than twelve (12) months, or by reason of any medically determinable physical or mental
impairment which can be expected to result in death or can be expected to last for a
continuous period of not less than twelve (12) months, receiving income replacement
benefits for a period of not less than three (3) months under an accident and health plan
covering employees of the Employer. A Participant who incurs a Disability shall be deemed
to have a Termination of Employment with the Employer at the time that the Administrator
reasonably determines the Participant has incurred a Disability.

“Employer” means Allied Capital Corporation, AC Corporation, and any named
subsidiaries or related parties adopting the Plan as listed in any Appendix A hereto or any
successor hereto.

“Executive” means any common law employee of the Employer having attained the
status of an officer of at least the Senior Vice President level in the Company and any
employee of the Employer with an Account balance in the Prior Plan as of January 30, 2004.

“ERISA” means the Employee Retirement Income Security Act of 1974, as amended from
time to time.

“Excess Recognized Compensation” means the excess, if any, of an employee’s or
Executive’s recognized Compensation and Bonus for the Plan Year over the $210,000 limit (as
adjusted from time to time for cost of living increases) of Section 401(a)(17) of the Code
but without any reduction to reflect amounts deferred under this Plan.

“Participant” means any eligible Consultant of the Employer, Director, eligible
Executive, or employee who has Excess Recognized Compensation in any Plan Year, who has
been designated by the Compensation Committee as a Participant in the Plan, or a person who
was such a Participant at the time of his Termination of Employment, death, or upon a
Change in Control, or a Beneficiary who is presently entitled to benefits under the Plan in
accordance with its terms.

“Plan” means this 2005 Allied Capital Corporation Non-Qualified Deferred
Compensation Plan, as adopted effective January 1, 2005 and as amended from time to time.

“Plan Benefit” means the benefit of a Participant as determined under Article IV of
the Plan.

“Plan Year” means the calendar year.

“Prior Plan” means the Allied Capital Corporation Non-Qualified Deferred
Compensation Plan, as amended and restated as of January 30, 2004 and as frozen to any new
deferrals effective December 31, 2004.

“Retirement Plan” means the Allied Capital 401(k) Plan.

“Termination of Employment” for an employee means separation from service with the
Employer as a result of resignation, involuntary discharge, Disability, or death; for a
Consultant means the termination of all contracts with the Employer; and for a Director
means his resignation from or other termination of his membership on the Board.

“Trust” means a trust which may be established by the Employer in accordance
with Article IX to provide the benefits described in this Plan.

“Trustee” means the corporation or individual(s) selected by the Employer to serve
as trustee for the Trust.

Section 2.2 Usage. Except where otherwise indicated by the context, any masculine
terminology used herein shall also include the feminine and vice versa, and the definition of any
term herein in the singular shall also include the plural and vice versa.

5

ARTICLE III

ELIGIBILITY AND PARTICIPATION

Section 3.1 Eligibility. For purposes of making a deferral election pursuant to Section
4.4, any Executive, Director or Consultant of the Employer shall be eligible to participate in the
Plan at such time and for such period as designated by the Compensation Committee.

For purposes of receiving an Employer contribution pursuant to Section 4.5, any Executive or
employee with Excess Recognized Compensation is eligible to participate in the Plan at such time
and for such period as designated by the Compensation Committee.

Notwithstanding the above, all Participants must be members of a select group of management or
highly compensated employees as such group is described under sections 201(2), 301(a)(3), and
401(a)(1) of ERISA, as interpreted by the Department of Labor or a court of competent jurisdiction.

Section 3.2 Participation. An employee, Executive, Director or Consultant who is eligible
to participate in the Plan pursuant to Section 3.1 shall become a Participant at such time and for
the period so designated by the Compensation Committee. The participation of any Participant may
be suspended or terminated by the Compensation Committee, at any time; provided, however, that for
any Participant who has entered into a Deferral Agreement, a suspension or termination shall not
apply to that Deferral Agreement until the first day of the Plan Year next following the
Compensation Committee’s action unless the Plan is terminated pursuant to Section 5.11.
Additionally, the participation of any Participant may be terminated if the Participant has
received a hardship distribution upon an unforeseeable emergency as defined in Section 5.10, or if
termination is required for the Participant to obtain a hardship distribution under a 401(k) Plan
An employee, Executive, Director or Consultant shall cease to be a Participant upon his Termination
of Employment with the Company and when the balance in his Account has been distributed to him or
on his behalf.

If, at any time, an Executive or an employee is determined or reasonably believed, based on a
judicial or administrative determination or opinion of counsel, not to qualify as “management” or a
“highly compensated employee” under ERISA Sections 201(2), 301(a)(3), and 401(a)(1), the Executive
or employee shall cease to be eligible for Employer contributions as of the date of that
determination and any Compensation or Bonus Deferral Election shall cease as of the first day of
the Plan Year next following the date of that determination. Notwithstanding the foregoing, the
Plan Benefit to which he is entitled shall only be distributed to him in accordance with the
provisions of Article V of the Plan.

Section 3.3 Termination of Participation. During the first Plan Year, a Participant who
has made a deferral election for that Plan Year may make an election to cancel such deferral
election, terminate participation in the Plan, and receive a distribution of his Account in
accordance with Q&A 20 of Internal Revenue Service Notice 2005-1 or a payment election in
accordance with Q&A 19(c) of Notice 2005-1, subject to the approval of the Compensation Committee.

6

ARTICLE IV

PLAN BENEFIT

Section 4.1 Plan Benefit. A Participant’s Plan Benefit shall be equal to the total amount
credited to the Participant’s Account under this Article IV. Such Plan Benefit shall become
nonforfeitable and payable to the Participant as provided under Article V.

Section 4.2 Accounts. For each Participant, the Company shall establish and maintain a
Participant Account on the books of the Company. All amounts which are credited to the Account
shall be credited solely for purposes of accounting and computation, and shall remain assets of the
Employer subject to the claims of the Employer’s general creditors. A Participant’s Account shall
be reduced by an amount equal to any Plan Benefit previously distributed to him pursuant to Article
V.

Section 4.3 Multiple Accounts. At the discretion of the Administrator, a Participant may
have more than one account, as in the case of a former Executive who may again have become a
Participant as a result of serving in the capacity of a Consultant. Credits to each such Account
shall be determined by deferral elections made under separate Deferral Agreements, as described in
Section 4.4 of the Plan. The determination as to the period for the commencement of the
distribution of Plan Benefits under Article V of the Plan shall be made separately with respect to
each such Account.

Section 4.4 Deferral Agreement. To be eligible to make a Deferral Election under the terms
of this Plan, an Executive, a Director or a Consultant, with the consent of the Company, shall
enter into a Deferral Agreement setting forth the amount or percentage of eligible Compensation,
Bonuses or other amounts to be deferred. The Deferral Agreement must be made prior to the Plan Year
in which the eligible Compensation, Bonuses or other amounts to be deferred will be earned. For
each Plan Year, each eligible Executive, Director or Consultant may make the following deferral
elections:

	 	(a)	 	Compensation Deferral Election. Prior to the beginning of the
Plan Year in which the Compensation to be deferred will be earned, or, for newly
eligible participants, within thirty days after becoming eligible to participate, an
eligible Executive may authorize the Employer to reduce his or her Compensation by
any specific amount or percentage as specified in a Deferral Agreement in effect for
each Plan Year (in lieu of receiving cash Compensation), and to have such amount
credited to the Executive’s Account under this Article IV. The Deferral Agreement
shall be effective only with respect to Compensation earned after the agreement
becomes effective. No more than one Compensation Deferral Election may be made with
respect to each Plan Year, and once made the Compensation Deferral Election may not
be modified or revoked by the Executive with respect to that Plan Year.

	 	(b)	 	Bonus Deferral Election. An eligible Executive, Director or
Consultant may authorize the Employer to reduce his or her Bonus by any specific
amount or percentage as specified in a Deferral Agreement in effect for each Plan
Year (in lieu of receiving a cash Bonus) prior to the Plan Year in which the Bonus
to be deferred will be earned, and to have such amount credited to the Participant’s
Account under this Article IV. No more than one Bonus Deferral Election may be made
with respect to each Plan Year, and once made the Bonus Deferral Election may not be
modified or revoked by the Executive, Director, or Consultant with respect to that
Plan Year.

Section 4.5 Employer Contributions. The Employer, in its discretion, from time to time,
shall credit to the Account of each Executive or employee with Excess Recognized Compensation that
portion of the contribution attributable to his or her Excess Recognized Compensation that would
have been made to the Retirement Plan but for the application of Code Section 401(a)(17). The
Employer may also credit such sums to Participants’ Accounts under the Plan from time to time as it
deems appropriate.

Section 4.6 Investment Procedure. The Employer and each Participant may, at the discretion
of the Employer, execute an agreement which reflects the deemed investment of the portion of the
Participant’s Account which shall be applied to the payment of the Participant’s Plan Benefit under
the Plan. The Administrator shall retain overriding discretion over the selection of investment
vehicles that the Participant may elect pursuant to such an agreement, and the Administrator may
change, alter or modify its investment policy as it deems appropriate, from time to time. Any such
change, alteration or modification shall be communicated to the Participants under procedures
adopted by the Administrator.

Section 4.7 Valuation of Accounts. The value of a Participant’s Account shall be
determined from time to time by the Administrator in the following manner.

	 	(a)	 	During any period of time in which a Participant’s Account is deemed
invested in whole or in part pursuant to the agreement with the Participant (in the
manner described in Section 4.6), the income and expenses, gains and losses, both
realized and unrealized, from such deemed investments shall be determined by the
Administrator. The amount so determined shall be credited to the Account of the
Participant proportionately in accordance with procedures established by the
Administrator.

	 	(b)	 	If no election is made, the Participant’s Account shall be deemed
invested in a default investment designated by the Administrator, from time to time.

	 	(c)	 	All benefits and deferrals on behalf of a Participant shall be credited
to the Account of the Participant in accordance with this Article IV.

	 	(d)	 	Each Participant’s Account shall be valued as of the last day of each
Plan Year or more frequently as determined by the Administrator.

	 	(e)	 	All credits to a Participant’s Account under this Section 4.7 shall be
deemed to have been made on the applicable valuation date in the order of priority
set forth in this Section 4.7, even though actually determined at a later date.

ARTICLE V

VESTING AND DISTRIBUTION

Section 5.1 Vesting. Amounts credited or paid to the Plan shall at all times be 100%
vested and non-forfeitable.

Section 5.2 Distributable Events. Except as otherwise provided in this Plan, a
Participant’s Plan Benefit shall become distributable upon the earliest of one of the following
events:

	 	1.	 	Termination of Employment;

	 	2.	 	Change in Control (as defined in Section 8.2);

	 	3.	 	Future determined date

	 	4.	 	Termination of the Plan (in accordance with the provisions of Section
5.11); or

	 	5.	 	Unforeseeable emergency (as defined in Section 5.10).

Subject to Section 5.7, a Participant may specify a future determined date on which his Plan
Benefit shall become distributable in a Plan Benefit and Payment Commencement Agreement. The date
specified shall be at least two years from the date the agreement is signed, and the agreement must
be completed and signed prior to the beginning of the first Plan Year in which the Compensation or
Bonus to be deferred will be earned, or, for newly eligible Participants, within thirty days of
their eligibility date. Once a Participant has elected to specify or forego specifying a future
determined date, the election is effective for the entirety of the Participant’s Account and may
not be modified. However, in the event that an individual continues as a Participant after the
date specified in his initial agreement, he may complete and sign an agreement specifying either a
future determined date as of which subsequent deferrals shall be distributable or that subsequent
deferrals shall be distributable upon his Termination of Employment. The agreement relating to the
subsequent deferrals shall be effective for any deferrals made pursuant to a Compensation or Bonus
Deferral Election and any Employer contributions for the next Plan Year beginning after the date
the subsequent agreement is completed and signed and subsequent Plan Years, shall apply to the
Participant’s entire Account, and may not be modified once made.

Section 5.3 Amount of Plan Benefits. A Participant’s Plan Benefit shall equal the total
amount credited to the Participant’s Account in accordance with Article IV.

Section 5.4 Plan Benefit Payment Options. Prior to the beginning of the first Plan Year in
which the Compensation or Bonus to be deferred will be earned, or, for newly eligible Participants,
within thirty days of their eligibility date, and subject to the provisions of Section 5.7, a
Participant may elect one of the following Plan Benefit payment options. Once a payment option has
been elected, the election is effective for the entirety of the Participant’s Account and may not
be modified.

	 	(a)	 	Lump Sum. A participant may elect to receive his Plan Benefit in a single
lump sum distribution. This lump sum payment shall be the Plan’s default option, i.e., if
no signed election form is on file.

	 	(b)	 	Installments. Alternatively, a Participant may elect to receive his Plan
Benefit in equal annual installments over a period of not greater than three years.

Notwithstanding the preceding provisions of this Section 5.4, if a Participant’s Plan Benefit
account balance is $50,000 or less at the time of a distributable event, he or she must receive the
Plan Benefit in a lump sum payment.

Section 5.5 Timing of Benefit Payments. Upon the occurrence of the earliest of the
distributable events described in Section 5.2, a Participant will receive a distribution of his
Plan Benefit in accordance with the following provisions.

	 	(a)	 	Termination of Employment. If the distributable event is a Termination of
Employment, the Participant will receive a distribution of his Plan Benefit in accordance
with Section 5.4. Such payment will commence no sooner than six months after the most
recent valuation date after the distributable event.

	 	(b)	 	Change in Control. If the distributable event is a Change in Control, the
Participant shall be paid the entire amount of his Plan Benefit in a single lump sum
distribution as soon as administratively possible. In addition, notwithstanding the
provisions of Section 5.4(b), any outstanding benefits payable as of the date of the
Change in Control as a result of any other prior distributable event as described in
Section 5.2 shall be paid immediately to the Participant or his Beneficiary, as
applicable, in a single lump sum.

	 	(c)	 	Future Determined Date. If the distributable event is a Future Determined
Date, the Participant shall receive a distribution of his Plan Benefit as soon as
administratively possible following the event and in accordance with Section 5.4.

	 	(d)	 	Termination of the Plan. If the distributable event is termination of the
Plan, the Participant will receive a distribution of his Plan Benefit in accordance with
Section 5.11.

	 	(e)	 	Hardship Distribution. If the distributable event is an unforeseeable
emergency that gives rise to a hardship distribution, the Participant will receive a
distribution in accordance with Section 5.10.

Notwithstanding the foregoing, if a Participant has elected to terminate participation in
accordance with Section 3.3, any amounts credited to the Participant’s Account shall be immediately
payable to him without regard to the provisions regarding Timing of Benefit Payments, subject to
the approval of the Compensation Committee.

Section 5.6 Form of Benefit Payments. Plan Benefits will be paid in the form of cash;
provided, however, that the Trustee shall be authorized to make provision for the reporting and
withholding of any federal, state or local taxes that may be required to be withheld and paid by
the Company.

Section 5.7 Plan Benefit Payment Election Procedures. For purposes of making the elections
provided in Sections 5.2 and 5.4, each Participant shall be provided with an election form prepared
by the Administrator. If an election form is not properly executed as provided herein, the
Participant will be deemed to have elected to receive his or her Plan Benefits upon Termination of
Employment in a lump sum.

Section 5.8 Form of Benefit Payments Upon Death. Upon the death of a Participant who has
not yet received a distribution of all benefits under this Plan, the Participant’s Beneficiary or
Beneficiaries shall receive the remaining Plan Benefit in a single lump-sum, payable as soon as
administratively feasible.

Section 5.9 Designation of Beneficiary. A Participant may, on such form as may be provided
by the Administrator, designate one or more primary and contingent Beneficiaries to receive the
Plan Benefit which may be payable hereunder following the Participant’s death, and may designate
the proportions in which such Beneficiaries are to receive such payments. A Participant may change
such designations from time to time, and the last written designation filed with the Administrator
prior to the Participant’s death shall control. If a Participant fails to specifically designate a
Beneficiary or, if no designated Beneficiary survives the Participant, payment shall be made to the
Participant’s estate in a single lump-sum, notwithstanding any other provision of this Plan.

Section 5.10 Hardship Distributions. A distribution in an amount no greater than a
Participant’s Account balance may be made to, and at the election of, a Participant in the event of
an unforeseeable emergency. An unforeseeable emergency is defined as a severe financial hardship
to the Participant resulting from an illness or accident of the Participant, the Participant’s
spouse, or a dependent (as defined in Code Section 152(a)) of the Participant, loss of the
Participant’s property due to casualty, or other similar extraordinary and unforeseeable
circumstances arising as a result of events beyond the control of the Participant. The
determination as to what constitutes an unforeseeable emergency shall be made by the Compensation
Committee.

The following restrictions apply to a Participant who receives a hardship distribution: (a) the
distribution may not exceed the amount necessary to satisfy the Participant’s emergency (including
any amounts necessary to pay any federal, state or local income taxes or penalties reasonably
anticipated to result from the distribution); and (b) the Participant must have obtained all
distributions, other than hardship distributions, and all nontaxable loans (determined at the time
of the loan) currently available under all qualified plans maintained by the Employer. A hardship
distribution on account of an unforeseeable emergency shall be made from this Plan prior to any
hardship withdrawal made from the Retirement Plan.

Section 5.11 Termination of the Plan. Distributions upon termination of the Plan may
occur under the following circumstances:

	 	(a)	 	Within 12 months of a taxable corporate dissolution or with the approval of a
bankruptcy court, provided that all amounts deferred under the Plan are includible in
gross income of the Participants in the later of the calendar year in which the Plan
termination occurs or the first calendar year in which the payment is administratively
practicable.

	 	(b)	 	Within the 30 days preceding or the 12 months following a Change in Control, as
defined in Section 8.2, provided all substantially similar arrangements sponsored by the
Company are also terminated and that all participants in such arrangements receive all
amounts of deferred compensation under all of the terminated plans within 12 months of the
date of termination of the Plan.

	 	(c)	 	At the Company’s discretion, provided that

	 	1.	 	All plans that would be aggregated with the Plan under Proposed
Treasury Regulation §1.409A-1(c) (or any successor provision of the regulations)
if the same employee, Consultant, or Director or other service provider
participated in all such arrangements are also terminated,

	 	2.	 	No payments other than payments that would be payable under the terms
of the terminated plan if the termination had not occurred are made within 12
months of the termination of the arrangements,

	 	3.	 	All payments are made within 24 months of the termination of the
plans, and

	 	4.	 	The Company does not adopt a new arrangement that would be aggregated
with any of the terminated plans if the same employee, Consultant, or Director or
other service provider participated in both such arrangements, at any time within
5 years following the date of termination of the Plan.

7

ARTICLE VI

ADMINISTRATION

Section 6.1 General. Except as otherwise specifically provided in the Plan, the
Administrator shall be responsible for administration of the Plan. The Administrator shall be the
“named fiduciary” within the meaning of Section 402(c)(2) of ERISA. The Administrator, in the
exercise of its discretion, may delegate to any employee or employees of the Company the authority
to act as the Administrator’s agent with respect to any matter within the control of the
Administrator, provided that such delegation of authority shall be subject to revocation by the
Administrator. Any act that the Administrator is required or authorized to perform under the terms
of this Plan, including any communication to be made or received by the Administrator, may be
performed by an agent of the Administrator, provided such person is acting within the scope of that
person’s delegation of authority from the Administrator.

Section 6.2 Administrative Rules. The Administrator may adopt such rules of procedure as
it deems desirable for the conduct of its affairs, except to the extent that such rules conflict
with the provisions of the Plan.

Section 6.3 Duties. The Administrator shall have the following rights, powers and duties:

	 	(a)	 	The decision of the Administrator in matters within its jurisdiction
shall be final, binding and conclusive upon the Employer and upon any other person
affected by such decision, subject to the claims procedure hereinafter set forth.

	 	(b)	 	The Administrator shall have the duty and authority to interpret and
construe the provisions of the Plan, to decide any question which may arise
regarding the rights of Participants and Beneficiaries and the amount of their
respective interests, to adopt such rules and to exercise such powers as the
Administrator may deem necessary for the administration of the Plan, and to exercise
any other rights, powers or privileges granted to the Administrator by the terms of
the Plan.

	 	(c)	 	The Administrator shall maintain full and complete records of its
decisions. Its records shall contain all relevant data pertaining to the Participant
and his rights and duties under the Plan. The Administrator shall have the duty to
maintain Account records of all Participants. The Administrator shall also have the
duty to report pertinent information regarding Participant Accounts to Participants
at least annually.

	 	(d)	 	The Administrator shall cause the principal provisions of the Plan to be
communicated to the Participants, and a copy of the Plan and other documents shall
be available at the principal office of the Employer for inspection by the
Participants at reasonable times determined by the Administrator.

	 	(e)	 	The Administrator shall periodically report to the Board with respect to
the status of the Plan.

Section 6.4 Fees. No fee or compensation shall be paid to any person for services as the
Administrator.

8

ARTICLE VII

CLAIMS PROCEDURE

Section 7.1 General. Any claim for Plan Benefits under the Plan shall be filed by the
claimant on the form prescribed for such purpose with the Administrator.

Section 7.2 Denials. If a claim for Plan Benefits under the Plan is wholly or partially
denied, notice of the decision shall be furnished to the claimant by the Administrator within sixty
days after receipt of the claim by the Administrator, unless special circumstances require an
extension of time of sixty days (for a total of 120 days).

Section 7.3 Notice. Any claimant who is denied a claim for Plan Benefits shall be
furnished written notice setting forth:

	 	(a)	 	the specific reason or reasons for the denial;

	 	(b)	 	specific reference to the pertinent provision of the Plan upon which the
denial is based;

	 	(c)	 	a description of any additional material or information necessary for the
claimant to perfect the claim; and

	 	(d)	 	an explanation of the claim review procedure under Section 7.5.

Section 7.4 Appeals Procedure. In order that a claimant may appeal a denial of a claim,
the claimant or the claimant’s duly authorized representative may:

	 	(a)	 	request a review by written application to the Administrator, or its
designate, no later than sixty days after receipt by the claimant of written
notification of denial of a claim;

	 	(b)	 	review pertinent documents; and

	 	(c)	 	submit issues and comments in writing.

Section 7.5 Review. A decision on review of a denied claim shall be made by the
Administrator not later than sixty days after receipt of a request for review, unless special
circumstances require an extension of time for processing, in which case a decision shall be
rendered within a reasonable period of time, but not later than 120 days after receipt of a request
for review. The decision on review shall be in writing and shall include the specific reason(s)
for the decision and the specific reference(s) to the pertinent provisions of the Plan on which the
decision is based.

ARTICLE VIII

CHANGE IN CONTROL

Section 8.1. In General. In the event of a “Change in Control” as defined in Section 8.2
of the Plan, all amounts in all Participant Accounts will be distributed to the Participants in
Accordance with Article V.

Section 8.2. Definition of “Change in Control”. A “Change in Control” means (i) the sale
or other disposition of at least forty percent (40%) of the Company’s assets; or (ii) the
acquisition, whether directly, indirectly, beneficially (within the meaning of Rule 13d-3 of the
1934 Act), or of record, as a result of a merger, consolidation or otherwise, of securities of the
Company representing 50 percent (50%) or more of the total fair market value or aggregate voting
power of the Company’s then outstanding common stock by any person (within the meaning of Section
13(d) and 14(d) of the 1934 Act), including, but not limited to, any corporation or group of
persons acting in concert, other than (A) the Company or its subsidiaries and/or (B) any employee
pension benefit plan (within the meaning of Section 3(2) of the Employee Retirement Income Security
Act of 1974) of the Company or its subsidiaries, including a trust established pursuant to any such
plan; or (iii) the individuals who were members of the Board as of the Effective Date (the
“Incumbent Board”) cease to constitute at least two-thirds (2/3) of the Board; provided, however,
that any director appointed by at least two-thirds (2/3) of the then Incumbent Board or nominated
by at least two-thirds (2/3) of the Nominating Committee of the Board (if a majority of the members
of the Nominating Committee are then Incumbent Board or appointees thereof), other than any
director appointed or nominated in connection with, or as a result of, a threatened or actual proxy
or control contest, shall be deemed to constitute a member of the Incumbent Board.

9

ARTICLE IX

TRUST

Section 9.1 Trust. A trust to be known as the Allied Capital Corporation Deferred
Compensation Trust (the “Trust”) has been established by the execution of a Trust agreement with
one or more Trustees and is intended to be maintained as a “grantor trust” under Code Section 677.
The assets of the Trust will be held, invested and disposed of by the Trustee, in accordance with
the terms of the Plan and the terms of the Trust, for the purpose of providing Plan Benefits for
the Participants. Notwithstanding any provision of the Plan or the Trust to the contrary, the
assets of the Trust shall at all times be subject to the claims of the Employer’s general creditors
in the event of insolvency or bankruptcy.

Section 9.2 Contributions and Expenses. The Employer, in its sole discretion, and from
time to time, may make contributions to the Trust. All Plan Benefits under the Plan and expenses
chargeable to the Plan, to the extent not paid directly by the Employer, shall be paid from the
Trust.

Section 9.3 Trustee Duties. The powers, duties and responsibilities of the Trustee shall
be as set forth in the Trust agreement and nothing contained in the Plan, either expressly or by
implication, shall impose any additional powers, duties or responsibilities upon the Trustee.

Section 9.4 Reversion to the Employer. Subject to Sections 1.3 and 9.1, the Employer shall
have no beneficial interest in the Trust and no part of the Trust shall ever revert or be repaid to
the Employer, directly or indirectly.

10

ARTICLE X

MISCELLANEOUS PROVISIONS

Section 10.1  Modification, Amendment, Discontinuance, and Termination. The Board retains
the right to modify or amend the Plan at any time and from time to time and the right to
discontinue or terminate the Plan at any time and from time to time; provided, however, that no
modification, amendment, discontinuance or termination shall adversely affect the rights of
Participants and Beneficiaries to receive amounts credited to the Accounts maintained on their
behalf before such modification, amendment, discontinuance or termination. Notice of every such
modification, amendment, discontinuance or termination shall be given in writing to each
Participant and to each Beneficiary then entitled to Plan Benefits. In the case of termination of
the Plan, any amounts credited to the Account of a Participant shall be distributed in full to such
Participant (or Beneficiary, if the Participant is deceased) as soon as reasonably practicable
following such termination, in accordance with the provisions of Section 5.11 of the Plan.

Section 10.2 No Assignment. The Participant shall not have the power to pledge, transfer,
assign, anticipate, mortgage or otherwise encumber or dispose of in advance any interest in amounts
payable hereunder or any of the payments provided for herein, nor shall any interest in amounts
payable hereunder or in any payments be subject to seizure for payments of any debts, judgments,
alimony or separate maintenance, or be reached or transferred by operation of law in the event of
bankruptcy, insolvency or otherwise, other than by will or the laws of intestacy.

Section 10.3 Successors and Assigns. The provisions of the Plan are binding upon and inure
to the benefit of the Employer, its successors and assigns, and the Participant, his Beneficiaries,
heirs, legal representatives and assigns.

Section 10.4 Governing Law. The Plan shall be subject to and construed in accordance with
the laws of the State of Maryland to the extent not preempted by the provisions of ERISA.

Section 10.5 No Guarantee of Employment. Nothing contained in the Plan shall be construed
as a contract of employment or deemed to give any Participant the right to be retained in the
employ of an Employer or any equity or other interest in the assets, business or affairs of the
Employer.

Section 10.6 Severability. If any provision of the Plan shall be held illegal or invalid
for any reason, such illegality or invalidity shall not affect the remaining provisions of the
Plan, but the Plan shall be construed and enforced as if such illegal or invalid provision had
never been included herein.

Section 10.7 Notification of Addresses. Each Participant and each Beneficiary shall file
with the Administrator, from time to time, in writing, the post office address of the Participant,
the post office address of each Beneficiary, and each change of post office address. Any
communication, statement or notice addressed to the last post office address filed with the
Administrator (or if no such address was filed with the Administrator, then to the last post office
address of the Participant or Beneficiary as shown on the Employer’s records) shall be binding on
the Participant and each Beneficiary for all purposes of the Plan and neither the Administrator nor
the Employer shall be obligated to search for or ascertain the whereabouts of any Participant or
Beneficiary.

Section 10.8 Bonding. The Administrator and all agents and advisors employed by it shall
not be required to be bonded, except as otherwise required by ERISA.

The undersigned, pursuant to the approval of the Board, does hereby execute the 2005 Allied Capital
Corporation Non-Qualified Deferred Compensation Plan on this 9th day of December 2005.

Allied Capital Corporation

	 	 	 	 	 
	Attest:___/s/ Suzanne V. Sparrow	 	 	By:_/s/ Kelly A. Anderson 
	(Signature)	 	 	(Signature)
	Suzanne V. Sparrow	 	 	Kelly A. Anderson
	(Print Name)	 	 	(Print Name)

11

Appendix A

Companies that have adopted the Plan

	 	1.	 	Allied Capital Corporation

	 	2.	 	A.C. Corporation

12EX-10.2

EXHIBIT 10.2

ALLIED CAPITAL CORPORATION

THE 2005 ALLIED CAPITAL CORPORATION

NON-QUALIFIED DEFERRED COMPENSATION PLAN II

Effective January 1, 2005

1

THE 2005 ALLIED CAPITAL CORPORATION

NON-QUALIFIED DEFERRED COMPENSATION PLAN II

Table of Contents

Page

	 	 	 	 	 	 	 	 	 
	PREAMBLE
	 	 	 	 	 	 	1	 
	ARTICLE I — GENERAL
	 	 	 	 	 	 	 	 
	Section 1.1
	 	Effective Date
	 	 	.1	 
	Section 1.2
	 	Purpose
	 	 	1	 
	Section 1.3
	 	Intent
	 	 	1	 

	 	 	 	 	 	 	 	 	 
	ARTICLE II — DEFINITIONS AND USAGE
	 	 	 	 
	Section 2.1
	 	Definitions
	 	 	2	 
	Section 2.2
	 	Usage
	 	 	3	 

	 	 	 	 	 	 	 	 	 
	ARTICLE III — ELIGIBILITY AND PARTICIPATION
	 	 	 	 
	Section 3.1
	 	Eligibility
	 	 	3	 
	Section 3.2
	 	Participation
	 	 	3	 
	Section 3.3
	 	Termination of Participation
	 	 	.4	 

	 	 	 	 	 	 	 	 	 
	ARTICLE IV — PLAN BENEFIT
Section 4.1
	 	Plan Benefit
	 	 	4	 
	Section 4.2
	 	Accounts
	 	 	4	 
	Section 4.3
	 	Employer Contributions
	 	 	4	 
	Section 4.4
	 	Investment Procedure
	 	 	4	 
	Section 4.5
	 	Valuation of Accounts
	 	 	4	 

	 	 	 	 	 	 	 	 	 
	ARTICLE V — VESTING AND DISTRIBUTION
	 	 	 	 
	Section 5.1
	 	Vesting
	 	 	5	 
	Section 5.2
	 	Distributable Events
	 	 	5	 
	Section 5.3
	 	Amount of Plan Benefits
	 	 	5	 
	Section 5.4
	 	Payment of Plan Benefits
	 	 	5	 
	Section 5.5
	 	Form of Benefit Payments
	 	 	6	 
	Section 5.6
	 	Designation of Beneficiary
	 	 	6	 
	Section 5.7
	 	Termination of the Plan
	 	 	6	 

	 	 	 	 	 	 	 	 	 
	ARTICLE VI — ADMINISTRATION
	 	 	 	 
	Section 6.1
	 	General
	 	 	7	 
	Section 6.2
	 	Administrative Rules
	 	 	7	 
	Section 6.3
	 	Duties
	 	 	7	 
	Section 6.4
	 	Fees
	 	 	8	 

THE 2005 ALLIED CAPITAL CORPORATION

NON-QUALIFIED DEFERRED COMPENSATION PLAN II

Table of Contents (continued)

	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	Page
	ARTICLE VII — CLAIMS PROCEDURE
	 	 	 	 
	Section 7.1
	 	General
	 	 	8	 
	Section 7.2
	 	Denials
	 	 	8	 
	Section 7.3
	 	Notice
	 	 	8	 
	Section 7.4
	 	Appeals Procedure
	 	 	8	 
	Section 7.5
	 	Review
	 	 	8	 

	 	 	 	 	 	 	 	 	 
	ARTICLE VIII — CHANGE IN CONTROL
	 	 	 	 
	Section 8.1
	 	In General
	 	 	9	 
	Section 8.2
	 	Definition of “Change in Control”
	 	 	9	 
	ARTICLE IX — TRUST
Section 9.1
	 	Trust
	 	 	9	 
	Section 9.2
	 	Contributions and Expenses
	 	 	9	 
	Section 9.3
	 	Trustee Duties
	 	 	9	 
	Section 9.4
	 	Reversion to the Employer
	 	 	9	 

	 	 	 	 	 	 	 	 	 
	ARTICLE X — MISCELLANEOUS PROVISIONS
	 	 	 	 
	Section 10.1
	 	Modification, Amendment, Discontinuance, and Termination
	 	 	.10	 
	Section 10.2
	 	No Assignment
	 	 	10	 
	Section 10.3
	 	Successors and Assigns
	 	 	10	 
	Section 10.4
	 	Governing Law
	 	 	10	 
	Section 10.5
	 	No Guarantee of Employment
	 	 	10	 
	Section 10.6
	 	Severability
	 	 	10	 
	Section 10.7
	 	Notification of Addresses
	 	 	10	 
	Section 10.8
	 	Bonding
	 	 	10	 

2

THE 2005 ALLIED CAPITAL CORPORATION

NON-QUALIFIED DEFERRED COMPENSATION PLAN II

PREAMBLE

WHEREAS, the Employer recognizes the unique qualifications of its Executives and the valuable
services that they have provided to or for the Employer; and

WHEREAS, the Employer desires to provide long-term incentive compensation to its Executives to
achieve recruitment and retention objectives and to achieve economic parity with executive
compensation plans in companies against which it competes for talent; and

WHEREAS, the Employer has previously adopted the Allied Capital Corporation Non-Qualified
Deferred Compensation Plan II, which plan was frozen to new contributions effective December 31,
2004; and

WHEREAS, the Employer now desires to adopt the 2005 Allied Capital Corporation Non-qualified
Deferred Compensation Plan II in order to be compliant with the requirements of new Section 409A of
the Internal Revenue Code, effective as of January 1, 2005;

NOW, THEREFORE, in consideration of the premises and of the provisions hereinafter set forth,
the 2005 Allied Capital Corporation Non-Qualified Deferred Compensation Plan II (the “Plan”) shall
be and hereby is adopted as follows:

ARTICLE I

GENERAL

SECTION 1.1 Effective Date. The provisions of this Plan shall be effective as of January 1,
2005.

SECTION 1.2 Purpose. The purpose of the Plan is to provide long-term incentive compensation to
Executives of the Employer in order to achieve recruitment and retention objectives and to achieve
economic parity with executive compensation plans in companies against which it competes for
talent.

SECTION 1.3 Intent. The Plan is intended to be an unfunded plan for the purpose of providing
deferred compensation to a select group of management or highly compensated employees as such group
is described under Sections 201(2), 301(a)(3), and 401(a)(1) of ERISA. The Plan is not intended to
be a plan described in Section 401(a) of the Code. The obligation of the Company to make payments
under this Plan constitutes nothing more than an unsecured promise of the Company to make such
payments and any property of the Company that may be set aside for the payment of benefits under
the Plan shall, in the event of the Company’s bankruptcy or insolvency, remain subject to the
claims of the Company’s general creditors until such benefits are distributed in accordance with
Article V herein.

ARTICLE II

DEFINITIONS AND USAGE

SECTION 2.1 Definitions. Wherever used in the Plan, the following words and phrases shall
have the meaning set forth below unless the context plainly requires a different meaning:

“Account” means the account established on behalf of each Participant as described in Section
4.2 of the Plan.

“Administrator” means the Compensation Committee of the Board, or such other person or persons
as designated by the Board.

“Beneficiary” means those persons designated as a Beneficiary by the Participant.

“Board” means the Board of Directors of Allied Capital Corporation.

“Change in Control” of the Company is defined in Section 8.2 of the Plan.

“Code” means the Internal Revenue Code of 1986, as amended from time to time.

“Company” means Allied Capital Corporation, AC Corporation, and any named subsidiaries or
related parties adopting the Plan or any successor thereto.

“Compensation Committee” means the Compensation Committee of the Board of Directors of Allied
Capital Corporation.

“Covered Employee” shall mean any person who is employed by the Company within six months
prior to the Participant’s Termination Date until at least six (6) months after the person’s
employment with the Company ends.

“Disability” means the Participant’s inability to engage in any substantial gainful activity
by reason of any medically determinable physical or mental impairment which can be expected to
result in death or can be expected to last for a continuous period of not less than twelve (12)
months, or by reason of any medically determinable physical or mental impairment which can be
expected to result in death or can be expected to last for a continuous period of not less than
twelve (12) months, receiving income replacement benefits for a period of not less than three (3)
months under an accident and health plan covering employees of the Employer. A Participant who
incurs a Disability shall be deemed to have a Termination of Employment with the Employer at the
time that the Administrator reasonably determines the Participant has incurred a Disability.

“Employer” means Allied Capital Corporation, AC Corporation, and any named subsidiaries or
related parties adopting the Plan or any successor thereto.

“ERISA” means the Employee Retirement Income Security Act of 1974, as amended from time to
time.

“Executive” means any common law employee of the Employer having attained the status of an
officer of at least the Senior Vice President level in the Company.

“Good Reason” means “good reason” as such term may be defined in an employee’s employment
agreement, provided that such agreement is currently in effect at the time of a distributable event
as described in Section 5.2.

“Participant” means an Executive of the Employer designated by the Compensation Committee for
participation in the Plan, or a person who was such a Participant at the time of his Termination of
Employment, death, or upon a Change in Control, or a Beneficiary, who is presently entitled to
benefits under the Plan in accordance with its terms.

“Plan” means this 2005 Allied Capital Corporation Non-qualified Deferred Compensation Plan II,
as amended from time to time.

“Plan Benefit” means the benefit of a Participant as described under Article IV of the Plan.

“Plan Year” means the calendar year.

“Solicitation” means the Participant, directly or indirectly, individually or as part of or on
behalf of any person, company, employer or other entity other than the Company (a) solicits,
encourages or attempts to persuade any consultant, vendor, client or customer of the Company to
terminate or adversely modify its existing relationship with the Company, except where the
Participant is authorized by the Company to do so and has a reasonably good faith belief that such
termination or modification is in the best interests of the Company; or (b) hires or solicits for
hire (other than on behalf of the Company) a Covered Employee. If any Covered Employee accepts
employment with any person, company, employer or other entity other than the Company of which the
Participant is an officer, director, employee, partner, shareholder (other than of less than 5% of
the stock in a publicly traded company) or joint venturer, it will be presumed that the Participant
engaged in Solicitation of the Covered Employee. This presumption may be overcome by the
Participant showing by a preponderance of the evidence to the satisfaction of the Administrator
that the Participant was not directly or indirectly involved in soliciting or encouraging the
Covered Employee to leave employment with the Company.

“Termination of Employment” means a Participant’s separation from service with the Employer as
a result of resignation, involuntary discharge, death, or Disability.

“Trust” means a trust which may be established by the Employer in accordance with Article IX
to provide the benefits described in this Plan.

“Trustee” means the corporation or individual(s) selected by the Employer to serve as trustee
for the Trust.

SECTION 2.2 Usage. Except where otherwise indicated by the context, any masculine terminology
used herein shall also include the feminine and vice versa, and the definition of any term herein
in the singular shall also include the plural and vice versa.

ARTICLE III

ELIGIBILITY AND PARTICIPATION

SECTION 3.1 Eligibility. Any Executive of the Employer shall be eligible to participate in
the Plan at such time and for such period as designated by the Compensation Committee; provided,
however, that the Executive is a members of a select group of management or highly compensated
employees as such group is described under sections 201(2), 301(a)(3), and 401(a)(1) of ERISA, as
interpreted by the Department of Labor or a court of competent jurisdiction.

SECTION 3.2 Participation. An Executive who is eligible to participate in the Plan pursuant
to Section 3.1 shall become a Participant at such time and for the period so designated by the
Compensation Committee. The participation of any Participant may be suspended or terminated by the
Compensation Committee, at any time. An Executive shall cease to be a Participant upon his
Termination of Employment with the Company and when the balance in his Account has been distributed
to him or on his behalf.

If, at any time, an Executive is determined or reasonably believed, based on a judicial or
administrative determination or opinion of counsel, not to qualify as “management” or a “highly
compensated employee” under ERISA Sections 201(2), 301(a)(3), and 401(a)(1), the Executive shall
cease participation in the Plan as of the date of that determination. Notwithstanding the
foregoing, the Plan Benefit to which he is entitled shall only be distributed to him in accordance
with the provisions of Article V of the Plan.

SECTION 3.3 Termination of Participation. During the first Plan Year, a Participant may make
an election to terminate participation in the Plan and receive a distribution of his Account, in
accordance with Q&A 20 of Internal Revenue Service Notice 2005-1, subject to the approval of the
Compensation Committee.

ARTICLE IV

PLAN BENEFIT

SECTION 4.1 Plan Benefit. A Participant’s Plan Benefit shall be equal to the total amount
credited to the Participant’s Account under this Article IV. Such Plan Benefit shall become payable
to the Participant as provided under Article V.

SECTION 4.2 Accounts. For each Participant, the Company shall establish and maintain a
Participant Account on the books of the Company. All amounts which are credited to the Account
shall be credited solely for purposes of accounting and computation, and shall remain assets of the
Employer subject to the claims of the Employer’s general creditors.

SECTION 4.3 Employer Contributions. The Employer will determine an annual Individual
Performance Award (IPA) for a participant and will contribute to the Trust on a quarterly basis an
amount equal to one quarter (25%) of the IPA in cash. The Trustee will then use the cash in the
Trust to purchase shares of Allied Capital Corporation in the open market and allocate those shares
to individual Participant Accounts.

SECTION 4.4 Investment Procedure. A Participant’s Account may only be invested in the common
stock of Allied Capital Corporation until such time as a distributable event (as listed in Section
5.2) occurs. Subsequent to a distributable event, the Employer and each Participant may, at the
discretion of the Employer, redirect the Participant’s account to other investment vehicles.
Notwithstanding the foregoing, however, any redirection of account balances will be subject to
trading window restrictions and may not be made until at least sixty (60) days after the
distributable event. The Administrator shall retain overriding discretion over the selection of
investment vehicles and the Administrator may change, alter or modify its investment policy as it
deems appropriate, from time to time, to maximize benefits under the Plan. Any such change,
alteration or modification shall be communicated to the Participants under procedures adopted by
the Administrator.

SECTION 4.5 Valuation of Accounts. The value of a Participant’s Account shall be determined
from time to time by the Trustee in the following manner.

(a) During any period of time in which a Participant’s Account is deemed invested in whole or
in part pursuant to the agreement with the Participant (in the manner described in Section 4.4),
the income and expenses, gains and losses, both realized and unrealized, from such deemed
investments shall be determined by the Trustee. The amount so determined shall be credited to the
Account of the Participant proportionately in accordance with procedures established by the
Administrator.

(b) Each Participant’s Account shall be valued as of the last day of each Plan Year or more
frequently as determined by the Administrator.

ARTICLE V

VESTING AND DISTRIBUTION

SECTION 5.1 Vesting. Amounts paid to the Plan shall at all times be 100% vested.

SECTION 5.2 Distributable Events. Except as otherwise provided in this Plan, a Participant’s
Plan Benefit shall become distributable upon the occurrence of the earliest of the following
events:

1. Termination of Employment

2. Change in Control (as defined in Section 8.2)

3. Termination of the Plan (in accordance with the provisions of Section 5.7)

SECTION 5.3 Amount of Plan Benefits. A Participant’s Plan Benefit shall equal the total
amount credited to the Participant’s Account in accordance with Article IV, except to the extent
the Participant’s Plan Benefit is reduced in accordance with Section 5.4 below.

SECTION 5.4 Payment of Plan Benefits. Upon the occurrence of one of the distributable events
described in Section 5.2, a Participant will receive distribution of his Plan Benefit in accordance
with the following; provided, however, that the Administrator shall be authorized to make provision
for the reporting and withholding of any federal, state or local taxes that may be required.

(a) If the distributable event is Termination of Employment occurring as a result of the
resignation (other than for Good Reason, which shall be governed by Section 5.4(c)), involuntary
discharge or Disability of the Participant, the Participant shall be paid one third of his Plan
Benefit in a lump sum no sooner than six (6) months following the Termination of Employment (First
Payment); one half of the then remaining balance of his Plan Benefit within thirty (30) days
following the one (1) year anniversary of his Termination of Employment (Second Payment), and the
remainder of his Plan Benefit within thirty (30) days following the two (2) year anniversary of his
Termination of Employment (Third Payment). Notwithstanding the foregoing, however, if the
Administrator makes a reasonable determination that the Participant has engaged in Solicitation
during the period beginning on the date of Termination of Employment and ending on the one (1) year
anniversary of the Termination of Employment, the Second Payment and the Third Payment shall each
be forfeited to the Company and no further amount shall be payable to the Participant. Furthermore,
if the Administrator makes a reasonable determination that the Participant has first begun to
engage in Solicitation during the period beginning on the one (1) year anniversary of the
Termination of Employment and ending on the two (2) year anniversary of the Termination of
Employment, the Third Payment shall be forfeited to the Company and no further amount shall be
payable to the Participant.

(b) If the distributable event is Death, the Participant’s Beneficiary or Beneficiaries shall
be paid one third of his Plan Benefit in a lump sum within thirty (30) days following the
distributable event; one half of the then current balance within thirty (30) days following the one
(1) year anniversary of the distributable event, and the remainder of his Plan Benefit within
thirty (30) days following the two (2) year anniversary of the distributable event.

(c) If the distributable event is a Change in Control, the Participant shall be paid the
entire amount of his Plan Benefit in a single lump sum distribution immediately. In addition,
notwithstanding the provisions of Sections 5.4(a) and 5.4(b), any outstanding benefits payable as a
result of any other prior distributable event as described in Section 5.2 that have not been paid
as of the date of the Change in Control shall be paid immediately to the Participant or his
Beneficiary, as applicable, in a single lump sum distribution.

(d) If the distributable event is Termination of Employment for Good Reason, the Participant
shall be paid the entire amount of his Plan Benefit in a single lump sum distribution payable no
sooner than six (6) months following the Termination of Employment.

(e) If a Participant has elected to terminate participation in accordance with Section 3.3,
any amounts credited to the Participant’s Account shall be immediately payable to him without
regard to the provisions regarding Payment of Plan Benefits, subject to the approval of the
Compensation Committee.

SECTION 5.5 Form of Benefit Payments. Plan Benefits shall be paid in the form of cash; or to
the extent the Participant’s Plan Benefits are invested in the common stock of Allied Capital
Corporation at the time of Benefit Payment, benefit payments will be in the form of shares.

SECTION 5.6 Designation of Beneficiary. A Participant may, on such form as may be provided by
the Administrator, designate one or more primary and contingent Beneficiaries to receive the Plan
Benefit which may be payable hereunder following the Participant’s death, and may designate the
proportions in which such Beneficiaries are to receive such payments. A Participant may change such
designations from time to time, and the last written designation filed with the Administrator prior
to the Participant’s death shall control. If a Participant fails to specifically designate a
Beneficiary or, if no designated Beneficiary survives the Participant, payment shall be made to the
Participant’s estate, notwithstanding any other provision of this Plan.

SECTION 5.7 Termination of the Plan. Distributions upon termination of the Plan may occur
under the following circumstances:

	 	(a)	 	Within 12 months of a taxable corporate dissolution or with the approval of a
bankruptcy court, provided that all amounts deferred under the Plan are includible in
gross income of the Participants in the later of the calendar year in which the Plan
termination occurs or the first calendar year in which the payment is administratively
practicable.

	 	(b)	 	Within the 30 days preceding or the 12 months following a Change in Control, as
defined in Section 8.2, provided all substantially similar arrangements sponsored by the
Company are also terminated and that all participants in such arrangements receive all
amounts of deferred compensation under all of the terminated plans within 12 months of the
date of termination of the Plan.

	 	(c)	 	At the Company’s discretion, provided that

	 	1.	 	All plans that would be aggregated with the Plan under Proposed
Treasury Regulation §1.409A-1(c) (or any successor provisions of the Regulations)
if the same employee or other service provider participated in all such
arrangements are also terminated,

	 	2.	 	No payments other than payments that would be payable under the terms
of the terminated plans if the termination had not occurred are made within 12
months of the termination of the arrangements,

	 	3.	 	All payments are made within 24 months of the termination of the
plans, and

	 	4.	 	The Company does not adopt a new arrangement that would be aggregated
with any of the terminated plans if the same employee or other service provider
participated in both such arrangements, at any time within 5 years following the
date of termination of the Plan.

ARTICLE VI

ADMINISTRATION

SECTION 6.1 General. Except as otherwise specifically provided in the Plan, the Administrator
shall be responsible for administration of the Plan. The Administrator shall be the “named
fiduciary” within the meaning of Section 402(c)(2) of ERISA. The Administrator, in the exercise of
its discretion, may delegate to any employee or employees of the Company the authority to act as
the Administrator’s agent with respect to any matter within the control of the Administrator,
provided that such delegation of authority shall be subject to revocation by the Administrator. Any
act that the Administrator is required or authorized to perform under the terms of this Plan,
including any communication to be made or received by the Administrator, may be performed by an
agent of the Administrator, provided such person is acting within the scope of that person’s
delegation of authority from the Administrator.

SECTION 6.2 Administrative Rules. The Administrator may adopt such rules of procedure as it
deems desirable for the conduct of its affairs, except to the extent that such rules conflict with
the provisions of the Plan.

SECTION 6.3 Duties. The Administrator shall have the following rights, powers and duties:

(a) The decision of the Administrator in matters within its jurisdiction shall be final,
binding and conclusive upon the Employer and upon any other person affected by such decision,
subject to the claims procedure hereinafter set forth.

(b) The Administrator shall have the duty and authority to interpret and construe the
provisions of the Plan, to decide any question which may arise regarding the rights of Executives,
Participants, and Beneficiaries and the amount of their respective interests, to adopt such rules
and to exercise such powers as the Administrator may deem necessary for the administration of the
Plan, and to exercise any other rights, powers or privileges granted to the Administrator by the
terms of the Plan.

(c) The Administrator shall maintain full and complete records of its decisions. Its records
shall contain all relevant data pertaining to the Participant and his rights and duties under the
Plan. The Administrator shall have the duty to maintain Account records of all Participants. The
Administrator shall also have the duty to report pertinent information regarding Participant
Accounts to Participants at least annually.

(d) The Administrator shall cause the principal provisions of the Plan to be communicated to
the Participants, and a copy of the Plan and other documents shall be available at the principal
office of the Employer for inspection by the Participants at reasonable times determined by the
Administrator.

(e) The Administrator shall periodically report to the Board with respect to the status of the
Plan.

SECTION 6.4 Fees. No fee or compensation shall be paid to any person for services as the
Administrator.

ARTICLE VII

CLAIMS PROCEDURE

SECTION 7.1 General. Any claim for Plan Benefits under the Plan shall be filed by the claimant
on the form prescribed for such purpose with the Administrator.

SECTION 7.2 Denials. If a claim for Plan Benefits under the Plan is wholly or partially
denied, notice of the decision shall be furnished to the claimant by the Administrator within sixty
days after receipt of the claim by the Administrator, unless special circumstances require an
extension of time of sixty days (for a total of 120 days).

SECTION 7.3 Notice. Any claimant who is denied a claim for Plan Benefits shall be furnished
written notice setting forth:

(a) the specific reason or reasons for the denial;

(b) specific reference to the pertinent provision of the Plan upon which the denial is based;

(c) a description of any additional material or information necessary for the claimant to
perfect the claim; and

(d) an explanation of the claim review procedure under Section 7.5.

SECTION 7.4 Appeals Procedure. In order that a claimant may appeal a denial of a claim, the
claimant or the claimant’s duly authorized representative may:

(a) request a review by written application to the Administrator, or its designate, no later
than sixty days after receipt by the claimant of written notification of denial of a claim;

(b) review pertinent documents; and

(c) submit issues and comments in writing.

SECTION 7.5 Review. A decision on review of a denied claim shall be made by the Administrator
not later than sixty days after receipt of a request for review, unless special circumstances
require an extension of time for processing, in which case a decision shall be rendered within a
reasonable period of time, but not later than 120 days after receipt of a request for review. The
decision on review shall be in writing and shall include the specific reason(s) for the decision
and the specific reference(s) to the pertinent provisions of the Plan on which the decision is
based.

ARTICLE VIII

CHANGE IN CONTROL

SECTION 8.1. In General. In the event of a “Change in Control” as defined in Section 8.2 of
the Plan, all amounts in all Participant Accounts will be distributed to the Participants in
accordance with Article V.

SECTION 8.2. Definition of “Change in Control”. A “Change in Control” means (i) the sale or
other disposition of at least forty percent (40%) of the Company’s assets; or (ii) the acquisition,
whether directly, indirectly, beneficially (within the meaning of Rule 13d-3 of the 1934 Act), or
of record, as a result of a merger, consolidation or otherwise, of securities of the Company
representing fifty percent (50%) or more of the aggregate voting power of the Company’s then
outstanding common stock by any person (within the meaning of Section 13(d) and 14(d) of the 1934
Act), including, but not limited to, any corporation or group of persons acting in concert, other
than (A) the Company or its subsidiaries and/or (B) any employee pension benefit plan (within the
meaning of Section 3(2) of the Employee Retirement Income Security Act of 1974) of the Company or
its subsidiaries, including a trust established pursuant to any such plan; or (iii) the individuals
who were members of the Board of Directors as of the Effective Date (the “Incumbent Board”) cease
to constitute at least two-thirds (2/3) of the Board of Directors; provided, however, that any
director appointed by at least two-thirds (2/3) of the then Incumbent Board or nominated by at
least two-thirds (2/3) of the Corporate Governance/ Nominating Committee of the Board (if a
majority of the members of the Corporate Governance/ Nominating Committee are members of the then
Incumbent Board or appointees thereof), other than any director appointed or nominated in
connection with, or as a result of, a threatened or actual proxy or control contest, shall be
deemed to constitute a member of the Incumbent Board.

ARTICLE IX

TRUST

SECTION 9.1 Trust. A trust to be known as the Allied Capital Corporation Non-Qualified
Deferred Compensation Plan II Trust (the “Trust”) has been established by the execution of a Trust
agreement with one or more Trustees and is intended to be maintained as a “grantor trust” under
Code Section 677. The assets of the Trust will be held, invested and disposed of by the Trustee, in
accordance with the terms of the Plan and the terms of the Trust, for the purpose of providing Plan
Benefits for the Participants. Notwithstanding any provision of the Plan or the Trust to the
contrary, the assets of the Trust shall at all times be subject to the claims of the Employer’s
general creditors in the event of insolvency or bankruptcy.

SECTION 9.2 Contributions and Expenses. The Employer, in its sole discretion, and from time
to time, may make contributions to the Trust. All Plan Benefits under the Plan and expenses
chargeable to the Plan, to the extent not paid directly by the Employer, shall be paid from the
Trust.

SECTION 9.3 Trustee Duties. The powers, duties and responsibilities of the Trustee shall be
as set forth in the Trust agreement and nothing contained in the Plan, either expressly or by
implication, shall impose any additional powers, duties or responsibilities upon the Trustee.

SECTION 9.4 Reversion to the Employer. With the exception of amounts forfeited to the Company
in accordance with Section 5.4 and subject to Sections 1.3 and 9.1, the Employer shall have no
beneficial interest in the Trust and no part of the Trust shall ever revert or be repaid to the
Employer, directly or indirectly.

ARTICLE X

MISCELLANEOUS PROVISIONS

SECTION 10.1 Modification, Amendment, Discontinuance, and Termination. The Board retains the
right to modify or amend the Plan at any time and from time to time and the right to discontinue or
terminate the Plan at any time and from time to time; provided, however, that no modification,
amendment, discontinuance or termination shall adversely affect the rights of Participants and
Beneficiaries to receive amounts credited to the Accounts maintained on their behalf before such
modification, amendment, discontinuance or termination. No amendment will be effective unless
approved by the shareholders of the Company if shareholder approval of such amendment is required
to comply with applicable law, regulation, or stock exchange rule. Notice of every such
modification, amendment, discontinuance or termination shall be given in writing to each
Participant and to each Beneficiary then entitled to Plan Benefits. In the case of termination of
the Plan, any amounts credited to the Account of a Participant shall be distributed in accordance
with the provisions of Article V of the Plan.

SECTION 10.2 No Assignment. The Participant shall not have the power to pledge, transfer,
assign, anticipate, mortgage or otherwise encumber or dispose of in advance any interest in amounts
payable hereunder or any of the payments provided for herein, nor shall any interest in amounts
payable hereunder or in any payments be subject to seizure for payments of any debts, judgments,
alimony or separate maintenance, or be reached or transferred by operation of law in the event of
bankruptcy, insolvency or otherwise, other than by will or the laws of intestacy.

SECTION 10.3 Successors and Assigns. The provisions of the Plan are binding upon and inure to
the benefit of the Employer, its successors and assigns, and the Participant, his Beneficiaries,
heirs, legal representatives and assigns.

SECTION 10.4 Governing Law. The Plan shall be subject to and construed in accordance with the
laws of the State of Maryland to the extent not preempted by the provisions of ERISA.

SECTION 10.5 No Guarantee of Employment. Nothing contained in the Plan shall be construed as
a contract of employment or deemed to give any Participant the right to be retained in the employ
of an Employer or any equity or other interest in the assets, business or affairs of the Employer.

SECTION 10.6 Severability. If any provision of the Plan shall be held illegal or invalid for
any reason, such illegality or invalidity shall not affect the remaining provisions of the Plan,
but the Plan shall be construed and enforced as if such illegal or invalid provision had never been
included herein.

SECTION 10.7 Notification of Addresses. Each Participant and each Beneficiary shall file with
the Administrator, from time to time, in writing, the post office address of the Participant, the
post office address of each Beneficiary, and each change of post office address. Any communication,
statement or notice addressed to the last post office address filed with the Administrator (or if
no such address was filed with the Administrator, then to the last post office address of the
Participant or Beneficiary as shown on the Employer’s records) shall be binding on the Participant
and each Beneficiary for all purposes of the Plan and neither the Administrator nor the Employer
shall be obligated to search for or ascertain the whereabouts of any Participant or Beneficiary.

SECTION 10.8 Bonding. The Administrator and all agents and advisors employed by it shall not
be required to be bonded, except as otherwise required by ERISA.

The undersigned, pursuant to the approval of the Board, does hereby execute the 2005 Allied
Capital Corporation Non-Qualified Deferred Compensation Plan II on this 9th day of December, 2005.

Allied Capital Corporation

	 	 	 	 	 	 	 
	Attest:	 	/s/ Suzanne V. Sparrow	 	By:	 	/s/ Kelly A. Anderson
	 	 	(Signature)	 	 	 	(Signature)
	
 
	 	Suzanne V. Sparrow
	 	 	 	Kelly A. Anderson
	
 
	 	 
	 	 	 	 
	
 
	 	(Print Name)
	 	 	 	(Print Name)
	 
	 	 	 	 	 	 

3

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