Document:

exv10w3

 

Exhibit 10.3

Stock Option Agreement

THIS STOCK OPTION AGREEMENT (this “Agreement”) is made as of the Option Grant Date set forth
on the initial Notice of Grant attached hereto by and between (i) WEBMETHODS, INC., a Delaware
corporation (the “Corporation”), and (ii) Participant, an employee of the Corporation or any
Subsidiary or Parent, named on each Notice of Grant attached hereto.

The Corporation has adopted a 2006 Omnibus Stock Incentive Plan (with all amendments thereto, the
“Plan”), a copy of which has been provided or made available to Participant; and

In consideration of the foregoing, of the mutual promises set forth in this Agreement and of other
good and valuable consideration, the receipt and sufficiency of which are acknowledged, the
parties, intending to be legally bound, agree as follows:

1. Grant of Option. Subject to the terms and conditions set forth in this
Agreement and the respective Notice of Grant, the Corporation hereby grants to Participant the
right to purchase, during the period specified in Section 2, the number of shares of Common Stock
(those shares of Common Stock are referred to as the “Shares”) set forth on the respective Notice
of Grant at an exercise price of per Share set forth on that Notice of Grant, in accordance with
the terms of this Agreement, that Notice of Grant and the Plan (that right is referred to as the
“Option”).

2. Duration of Option. The Option shall be effective during the period
commencing as of the Option Grant Date and ending on the earliest to occur of: (a) failure of
Participant to promptly return a signed copy of the Notice of Grant (and, if the initial Notice of
Grant, a signed copy of this Agreement) to the Corporation; (b) the date all of the Shares are
purchased pursuant to the terms of this Agreement or are surrendered to the Corporation; (c) ninety
(90) days after the date Participant ceases to be employed by the Corporation or any Subsidiary or
Parent (except for termination due to the death of Participant); (d) the expiration of the one
(1)-year period prescribed under Section 3.B; (e) at 5:00 P.M. local time at the headquarters of
the Corporation on the termination date specified on the respective Notice of Grant; and (f) at
5:00 P.M. local time at the headquarters of the Corporation on the day immediately preceding the
seventh (7th) anniversary of the Option Grant Date. Upon the expiration of the Option, the Option
shall have no further force or effect, and Participant shall have no further rights in or under the
Option or to the Shares which shall not have been purchased by that time pursuant to the Option.

3. Exercise of Option.

A. Subject to the provisions of Section 2 regarding the duration of the Option, and
except as provided below, the Option shall vest in periodic increments commencing on the Vesting
Start Date as provided in the respective Notice of Grant. Notwithstanding the foregoing, vesting
of the Option shall terminate immediately upon the Participant ceasing to be employed with the
Corporation or a Subsidiary or Parent. The Option may be exercised only to the extent the Option
is vested.

The Option may be exercised only if Participant is in compliance with all covenants in, and
provisions of, this Agreement and if compliance with all applicable securities laws can be
effected, including without limitation the existence of an effective registration statement under
the Securities Act of 1933 with respect to the exercise of the Option, and only by (i)
Participant’s completion, execution and delivery (by written or electronic means) to the
Corporation of a Notice and Request of Exercise in the form specified by the Corporation, (ii) the
payment to the Corporation, as provided in Section 3.C, of an amount equal to the amount obtained
by multiplying the Exercise Price by the number of Shares being purchased pursuant to such
exercise, as shall be specified by Participant in such notice of exercise and (iii) if tax
withholding applies to such exercise, the payment to the Corporation, as provided in Section 3.C,
of an amount calculated by the Corporation to be sufficient to satisfy applicable Federal, state,
foreign or local tax withholding requirements. Except in the event of the death of a Participant,
in which event Participant’s estate, executors or administrators, or personal or legal
representatives may exercise the Option in accordance with the terms of Section 3.B, the Option or
any of the rights thereunder may be exercised by Participant only, and may not, on an absolute or
contingent basis, be transferred or assigned, in whole or in part, whether voluntarily,
involuntarily or by operation of law (including, without limitation, the laws of bankruptcy,
intestacy, descent and distribution and succession).

 

 

B. In the event of the death of Participant at such time that Participant shall possess
an Option pursuant to the terms of this Agreement, Participant’s estate, executors or
administrators, or personal or legal representatives shall be entitled, for a period of one (1)
year following the date of Participant’s death, to exercise the Option, but only to the extent that
Participant was entitled to exercise the Option on the date of such death. Any person so desiring
to exercise Participant’s Option shall be required, as a condition to the exercise of the Option,
to furnish to the Corporation such documentation as the Corporation shall deem satisfactory to
evidence the exclusive authority of such person to exercise the Option on behalf of Participant.
In the event of the exercise of the Option by Participant’s estate, executors or administrators, or
personal or legal representatives, all references herein to Participant shall, to the extent
applicable, be deemed to refer to and include such estate, executors or administrators, or personal
or legal representatives, as the case may be.

C. Payment of the amount determined pursuant to Section 3.A shall be made (i) by cash,
(ii) by good check, (iii) by delivery of shares of Common Stock owned by Participant valued at
their fair market value as determined by the Board of Directors in good faith (which shares of
Common Stock shall have been owned by Participant at least six (6) months prior to such delivery),
(iv) by the assignment of the proceeds of a sale or loan with respect to some or all of the Shares
being acquired upon exercise of the Option (including without limitation, through an exercise
complying with Regulation T or rules promulgated by the Board of Governors of the Federal Reserve
System) in accordance with such rules and procedures as the Corporation shall determine or (v) in
such other manner as shall then be acceptable to, and permitted by, the Board of Directors. In
addition, the Participant may satisfy applicable tax withholding requirements by electing to have
the Corporation withhold from the Shares issuable upon exercise of an Option a number of whole
shares having a fair market value (determined on the date that the amount of tax to be withheld is
fixed) not in excess of the aggregate minimum withholding amount required by statute.

D. Upon the exercise of the Option by Participant, or as soon thereafter as is
practicable, the Corporation shall issue and deliver to Participant a certificate or certificates
evidencing such number of Shares as Participant has so elected to receive. Such certificate or
certificates shall be registered in the name of Participant and, if applicable, shall bear an
appropriate investment warranty legend, any legends required by any applicable securities law, rule
or regulation, any legend referring to the restrictions provided hereunder and under the Plan and
any legend required by the law of the jurisdiction of incorporation of the Corporation. Upon the
exercise of the Option and the issuance and delivery of such certificate or certificates,
Participant shall have all the rights of a stockholder with respect to such Shares and to receive
all dividends or other distributions paid or made with respect thereto; provided, however, that
such Shares shall be subject to the restrictions hereunder and in the Plan (if any).

E. The Board of Directors of the Corporation may, upon such terms and conditions as it
deems appropriate, accept the surrender by Participant of Participant’s right to exercise the
Option, in whole or in part, and authorize a payment in consideration therefor of an amount equal
to the difference obtained by subtracting the sum of (i) the Exercise Price of the Shares which are
the subject of such surrendered Option and (ii) an amount calculated by the Corporation to be
sufficient to satisfy applicable Federal, state, foreign or local tax withholding requirements from
the fair market value of the Shares which are the subject of such surrendered Option on the date of
such surrender (such amount not to be less than zero), such payment to be in cash.

F. Notwithstanding any other provision of this Agreement, any unvested portion of the
Option shall thereupon vest and the entire Option shall thereupon become immediately exercisable
upon consummation of a Change of Control of the Corporation; provided, however that
Participant shall agree not to terminate Participant’s employment with the Corporation or its
successor for a period of up to six months following consummation of such Change of Control for any
reason other than Good Reason, as defined in Section 1(b)(i) in Participant’s Executive Agreement
of even date herewith. For purposes of this Agreement, a “Change of Control” shall be deemed to
have occurred if (A) any person (as such term is used in Sections 13(d) and 14(d) of the Securities
Exchange Act of 1934, as amended (the “Exchange Act”), is or becomes the “beneficial owner” (as
defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the
Corporation representing fifty percent (50%) or more of the combined voting power of the
Corporation’s then outstanding securities, (B) during any period of two (2) consecutive years
during the term of this Agreement, individuals who at the beginning of such period constitute the
Board cease for any reason to constitute at least a majority thereof, unless the election of each
director who was not a director at the beginning of such period has been approved in advance by
directors representing at least two-thirds of the directors then in office who were directors at
the beginning of the period, (C) the shareholders of the Corporation approve a merger or

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consolidation involving the Corporation that would result in a change of ownership of a majority of
the outstanding shares of capital stock of the Corporation or its successor, or (D) the
shareholders of the Corporation approve a plan of liquidation or dissolution of the Corporation or
the sale or disposition by the Corporation of all or substantially all the Corporation’s assets.

4. Changes in Capital Structure of the Corporation. Subject to any required
action by the stockholders of the Corporation and the provisions of the applicable law of the
jurisdiction of incorporation of the Corporation, the number of Shares subject to this Agreement as
well as the Exercise Price of any Shares not yet purchased by Participant shall be proportionately
adjusted for (a) a division or combination of the shares of capital stock of the Corporation, (b) a
dividend payable in shares of capital stock of the Corporation or (c) a reclassification of any
shares of capital stock of the Corporation.

5. Rights Prior to Exercise. Participant shall have no equity interest in the
Corporation or any voting, dividend, liquidation or dissolution rights with respect to any capital
stock of the Corporation solely by reason of having an Option or having executed this Agreement or
any Notice of Grant hereto. Furthermore, prior to the exercise of all or a portion of the Option,
as set forth in Section 3.A, and the issuance and delivery of a certificate or certificates
evidencing the Shares purchased pursuant to the exercise of all or a portion of such Option,
Participant shall have no interest in, or any voting, dividend, liquidation or dissolution rights
with respect to, the Shares.

6. Treatment of Information.

A. Participant covenants and agrees that Participant shall not, except with the prior
written consent of the Corporation, or except if Participant is acting as an employee of the
Corporation solely for the benefit of the Corporation in connection with the Corporation’s business
and in accordance with the Corporation’s business practices and employee policies, at any time
during or within ten (10) years following termination of Participant’s employment by the
Corporation, directly or indirectly, disclose, divulge, reveal, report, publish, transfer or use,
for any purpose whatsoever, any Confidential Information in any form or format which has been
obtained by or disclosed to Participant as a result of Participant’s employment with the
Corporation. “Confidential Information” shall include, without limitation: the terms and conditions
of this Agreement; trade secrets; systems; technology; computer programs, related object and source
code or documentation; databases and data residing therein or derived therefrom; procedures;
manuals or confidential reports or analysis; the agreements with or terms of any relationship or
agreement with any distributor, reseller, customer, systems integrator, business partner or
strategic partner; financial, marketing or sales information and strategy; pricing or accounting
data or methods; licenses, business arrangements or related documentation; the identity of and
lists and/or electronic mail addresses relating to customers, prospective customers, systems
integrators, business partners or strategic partners; personal information and electronic mail
addresses or telephone numbers for employees of or contractors to the Corporation or any
subsidiary; information, concepts, discoveries or ideas relating to the Corporation’s past, present
and future technology, software, services and techniques; information concerning competitive
analysis or strategy; inventions, improvements, techniques, designs or other technical data; or
other information, data or materials concerning any of the Corporation’s business methods,
personnel, practices or strategies. Participant acknowledges that Participant’s obligations not to
use or disclose the Corporation’s trade secrets after the term of Participant’s employment by the
Corporation continue indefinitely and are not subject to the ten (10)-year limitation upon use or
disclosure of Confidential Information. Participant further acknowledges that any information and
materials received by the Corporation from third parties in confidence (or subject to nondisclosure
or similar covenants) shall be deemed to be and shall be Confidential Information within the
meaning of this Section 6. The absence of any marking or statement that particular information is
confidential, proprietary or Confidential Information shall not affect its status as Confidential
Information.

B. Disclosure of any Confidential Information shall not be prohibited if such disclosure
is required by a valid and existing order of a court or other governmental body or agency within
the United States; provided, however, that (i) Participant shall first have given prompt notice to
the Corporation of any possible or prospective order (or proceeding pursuant to which any such
order may result) and (ii) the Corporation shall have been afforded a reasonable opportunity to
prevent or limit any such disclosure. It shall not be a violation of this Agreement for
Participant to disclose to Participant’s legal counsel the provisions of this Agreement, provided
that the purpose of such disclosure is to aid in Participant’s compliance with those provisions,
and that Participant’s legal counsel

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agrees in writing to maintain the provisions of this Agreement in strictest confidence. Also, it
shall not be a violation of this Agreement for Participant to disclose the provisions of this
Agreement to Participant’s tax advisors, provided that such tax advisors agree in writing to
maintain the provisions of this Agreement in strictest confidence.

C. For purposes of this Agreement, Participant may disclose Confidential Information
which (i) has been provided to Participant by a third party that is not obligated to maintain
confidentiality or to whom the Corporation owes no duty of confidentiality, (ii) is or becomes
publicly available without breach of any other agreement or instrument to which the Corporation is
a party or a beneficiary or (iii) is or becomes publicly available without breach of any duty owed
to the Corporation by Participant or any third party. Participant acknowledges and agrees that, if
Participant shall seek to disclose, divulge, reveal, report, publish, transfer or use, for any
purpose whatsoever, any Confidential Information within the scope of this Section 6.C, Participant
shall bear the burden of proving that any such Confidential Information shall have become publicly
available without a breach of an agreement or instrument to which the Corporation is a party or
beneficiary or the breach of a duty to the Corporation.

7. Covenant Not to Compete. Participant covenants and agrees that during the
Restricted Period (as defined below) and in the Restricted Area (as defined below), Participant
shall not directly, indirectly or in concert with any other person or entity, provide services that
are the same as, or substantially similar to, the services Participant performed for the
Corporation at any time during Participant’s employment by the Corporation (the “Restricted
Services”), to or on behalf of a Competing Entity (as defined below).

A. “Competing Entity” shall mean any person (including Participant acting on his/her own
behalf) or entity engaged in actual competition for customers with the Corporation, in the business
of designing, developing, producing, marketing, distributing, licensing, selling, implementing,
modifying, deploying, servicing or supporting any software or technology being designed, developed,
produced, marketed, demonstrated, distributed, licensed, sold, implemented, modified, deployed,
serviced or supported by the Corporation (the “Competing Products”) (i) during the period the
Restricted Services were performed for the Corporation or (ii) as of the date of termination of
Participant’s employment with the Corporation.

B. The “Restricted Period” shall mean the period commencing with the Option Grant Date
set forth on the initial Notice of Grant and ending on the later of (i) nine (9) months after
Participant’s employment with the Corporation ends for any reason whatsoever, including, but not
limited to, involuntary termination by the Corporation, voluntary termination by Participant, a
mutual decision by the Corporation and Participant, or any other reason; or (ii) nine (9) months
after a court of competent jurisdiction enters an order enforcing the terms of this Section 7.

C. The “Restricted Area” shall mean any state, province or similar political subdivision
where the Corporation has employees and/or has designed, developed, produced, marketed,
demonstrated, distributed, licensed, sold, implemented, modified, deployed, serviced or supported
software, technology or services or has a written proposal pending to do the same. In addition to
the foregoing, given the ability of Participant to work remotely for a Competing Entity via the
internet or other technology, the Restricted Area shall include any other state, province or
similar political subdivision where Participant is physically located while performing Restricted
Services for a Competing Entity that directly or indirectly uses Participant’s services to design,
develop, demonstrate, produce, market, demonstrate, distribute, license, sell, implement, modify,
deploy, service or support any Competing Product within the Restricted Area or has a written
proposal pending to do the same.

D. Notwithstanding the foregoing, Participant shall not be in violation of this Section 7
if Participant is acting as an employee of the Corporation solely for the benefit of the
Corporation in connection with the Corporation’s business and in accordance with the Corporation’s
business practices and employee policies. Also, Participant shall not be in violation of this
Section 7 if, after the termination of Participant’s employment with the Corporation, Participant
provides services to a Competing Entity in a line of business which the Corporation has abandoned.

8. Customer Nonsolicitation Covenant. Participant covenants and agrees that for
the Nonsolicitation Period (as defined below), Participant will not, directly, indirectly, or in
concert with any other person or entity, solicit any Customer (as defined below) where the products
or services at issue are the same as, substantially similar to or substantially derived from those
then available from the Corporation.

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A. “Customer” shall mean any person or entity that had purchased or utilized products or
services from the Corporation during the twelve (12) month period immediately preceding the earlier
of (i) the prohibited solicitation; or (ii) the date of termination of Participant’s employment
with the Corporation. “Customer” shall also include any person or entity who Participant is, or
reasonably should be, aware that the Corporation was actively soliciting (other than by means of a
general advertising campaign) to purchase the Corporation’s products or services during the twelve
(12) month period immediately preceding the earlier of (i) the prohibited solicitation; or (ii) the
date of termination of Participant’s employment by the Corporation.

B. The “Nonsolicitation Period” shall mean the period commencing with the Option Grant
Date set forth on the initial Notice of Grant and ending on the later of (i) nine (9) months after
Participant’s employment with the Corporation ends for any reason whatsoever, including, but not
limited to, involuntary termination by the Corporation, voluntary termination by Participant, a
mutual decision by the Corporation and Participant, or any other reason; or (ii) nine (9) months
after a court of competent jurisdiction enters an order enforcing the terms of this Section 8.

C. Notwithstanding the foregoing, Participant shall not be in violation of this Section 8
if Participant is acting as an employee of the Corporation solely for the benefit of the
Corporation in connection with the Corporation’s business and in accordance with the Corporation’s
business practices and employee policies.

9. Employee/Consultant Nonsolicitation Covenant. Participant covenants and
agrees that for the period commencing with the Option Grant Date set forth on the initial Notice of
Grant and ending on the later of (a) two (2) years after Participant’s employment with the
Corporation ends for any reason whatsoever, including, but not limited to, involuntary termination
by the Corporation, voluntary termination by Participant, a mutual decision by Corporation and
Participant, or any other reason whatsoever, or (b) two (2) years after a court of competent
jurisdiction enters an order enforcing the terms of this Section 8, Participant shall not,
directly or indirectly, Solicit (as defined below) any person or entity who was an employee,
independent contractor or consultant of the Corporation during the one (1)-year period prior to the
date of termination of Participant’s employment by the Corporation (any such person or entity is a
“Covered Person”), in any manner that causes any Covered Person to terminate or otherwise diminish
any Covered Person’s relationship with the Corporation.

A. “Solicit” shall mean the direct or indirect solicitation for hire or engagement by
Participant of a Covered Person, whether for or on behalf of Participant or for any entity in which
Participant shall have a direct or indirect interest (or any subsidiary or affiliate of any such
entity), whether as a proprietor, partner, co-venturer, financier, investor or stockholder (other
than de minimis stock holdings), director, officer, employer, employee, servant, agent,
representative or otherwise. “Solicit” shall also mean Participant’s direct or indirect hiring or
engagement of a Covered Individual, whether for or on behalf of Participant or for any entity in
which Participant shall have a direct or indirect interest (or any subsidiary or affiliate of any
such entity), whether as a proprietor, partner, co-venturer, financier, investor or stockholder,
director, officer, employer, employee, servant, agent, representative or otherwise.

10. Materials. All notes, data, tapes, reference items, sketches, drawings,
memoranda, records and other materials in any way relating to the Corporation’s business shall
belong exclusively to the Corporation and Participant agrees to turn over to the Corporation all
copies of such materials in Participant’s possession or under Participant’s control at the request
of the Corporation or, in the absence of such a request, upon the termination of Participant’s
employment with the Corporation.

11. Reasonableness of Restrictions. PARTICIPANT HAS CAREFULLY READ AND
CONSIDERED THE PROVISIONS OF SECTIONS 6 THROUGH 10 HEREOF INCLUSIVE AND SECTION 15 HEREOF AND,
HAVING DONE SO, AGREES THAT THE RESTRICTIONS SET FORTH IN SUCH SECTIONS ARE FAIR AND REASONABLE AND
ARE REASONABLY REQUIRED TO PROTECT THE INTERESTS OF THE CORPORATION, AND ITS OFFICERS, DIRECTORS,
STOCKHOLDERS AND EMPLOYEES, INCLUDING BUT NOT LIMITED TO, THE GOODWILL THE CORPORATION HAS
DEVELOPED WITH ITS CUSTOMERS AND THE PROTECTION OF THE CORPORATION’S CONFIDENTIAL INFORMATION AND
TRADE SECRETS.

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12. Employment of Participant. Nothing in this Agreement shall be construed as
constituting a commitment, guarantee, agreement or understanding of any kind or nature that the
Corporation shall continue to employ Participant, nor shall this Agreement affect in any way the
right of the Corporation to terminate the employment of Participant, at any time and for any reason
if Participant is employed in the United States. By Participant’s execution of this Agreement,
Participant acknowledges and agrees that Participant’s employment, if that employment is within the
United States, is “at will.” No change of Participant’s duties as an employee of the Corporation
shall result in, or be deemed to be, a modification of any of the terms of this Agreement.

13. No Prior Agreements. Participant represents that Participant’s performance
of all the terms of this Agreement and any services to be rendered as an employee of the
Corporation do not and shall not breach any fiduciary or other duty or any covenant, agreement or
understanding (including, without limitation, any agreement relating to any proprietary
information, knowledge or data acquired by Participant in confidence, trust or otherwise prior to
Participant’s employment by the Corporation) to which Participant is a party or by the terms of
which Participant may be bound.

14. Burden and Benefit; Corporation. This Agreement shall be binding upon, and
shall inure to the benefit of, the Corporation and Participant, and their respective heirs,
personal and legal representatives, successors and assigns. As used in Sections 6 through 13
inclusive, this Section 14 and Sections 15 and 21, the term the “Corporation” shall also include
any corporation or other entity which is the parent or a subsidiary of the Corporation or any
corporation or entity which is an affiliate of the Corporation by virtue of common (although not
identical) ownership, and for which Participant is providing services in any form during
Participant’s employment with the Corporation or any such other corporation or entity. Participant
hereby consents to the enforcement of any and all of the provisions of this Agreement by or for the
benefit of the Corporation and any such other corporation or entity.

15. Accounting for Profits; Indemnification. Participant covenants and agrees
that, if Participant shall violate any of Participant’s covenants or agreements contained in this
Agreement, the Corporation shall be entitled to an accounting and repayment of all profits, gains,
compensation, royalties, commissions, remunerations or benefits which Participant directly or
indirectly shall have realized or may realize relating to, growing out of or in connection with (i)
any such violation; and (ii) any grant of Options under this Agreement; such remedy shall be in
addition to and not in limitation of any injunctive relief or other rights or remedies to which the
Corporation is or may be entitled at law or in equity or otherwise under this Agreement.
Participant agrees that the Corporation may obtain injunctive or equitable relief without posting a
bond. Participant hereby agrees to defend, indemnify and hold harmless the Corporation against and
in respect of: (i) any and all losses and damages resulting from, relating or incident to, or
arising out of any misrepresentation or breach by Participant of any warranty, covenant or
agreement made or contained in this Agreement; and (ii) any and all actions, suits, proceedings,
claims, demands, judgments, costs and expenses (including reasonable attorneys’ fees) incident to
the foregoing.

16. Forum Choice. Participant consents to the personal and subject matter
jurisdiction and venue of the Circuit Court for Fairfax County, Virginia, USA and the U.S. District
Court for the Eastern District of Virginia, USA, with respect to any and all causes of action
pertaining to this Agreement, and agrees to accept service of process made in accordance with the
statutes of Virginia and the United States. Participant and the Corporation agree that the
exclusive forum for any and all causes of action pertaining to this Agreement shall be the Circuit
Court for Fairfax County, Virginia, USA and the U.S. District Court for the Eastern District of
Virginia, USA.

17. Genders. The use of any gender herein shall be deemed to be or include the
other genders and the use of the singular herein shall be deemed to be or include the plural (and
vice versa), wherever appropriate.

18. Headings. The headings and other captions contained in this Agreement are
for convenience of reference only and shall not be used in interpreting, construing or enforcing
any of the provisions of this Agreement.

19. Entire Agreement. This Agreement, the Notice(s) of Grant, and the Plan set
forth all of the promises, agreements, conditions, understandings, warranties and representations
between the parties hereto with respect to the subject matter of this Agreement, and there are no
promises, agreements, conditions, understandings, warranties or representations, oral or written,
express or implied, between them with respect to the Option or the Shares other than as set forth
herein. This Agreement, the Notice of Grant, and the Plan are, and are intended by the parties to
be, an

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integration of any and all prior agreements or understandings, oral or written, with respect to the
Option and the Shares. The terms and conditions of this Agreement shall apply to any future grants
of Common Stock to Participant pursuant to the Plan and the term “Option Grant Date” shall refer to
such subsequent grant date as appropriate. Any such future grants and acceptance thereof shall be
evidenced by the completion, execution and attachment to this Agreement of an additional Notice of
Grant, in substantially the form of the initial Notice of Grant, or as otherwise provided by the
Corporation, which shall be incorporated herein by reference.

20. Notices. Any and all notices provided for herein shall be sufficient if in
writing, and sent by hand delivery or by certified or registered mail (return receipt requested and
first- class postage prepaid), in the case of the Corporation, to its principal office and to the
attention of its General Counsel, and, in the case of Participant, to Participant’s address as
shown on the Corporation’s records.

21. Invalid or Unenforceable Provisions. The provisions of this Agreement shall
be deemed severable, and the invalidity or unenforceability of any one or more of the provisions
hereof shall not affect the validity and enforceability of the other provisions hereof.
Participant agrees that the breach or alleged breach by the Corporation of (a) any covenant
contained in another agreement (if any) between the Corporation and Participant or (b) any
obligation owed to Participant by the Corporation, shall not affect the validity or enforceability
of the covenants and agreements of Participant set forth herein.

22. Governing Law. This Agreement shall be construed and enforced in accordance
with the substantive laws of the jurisdiction of incorporation of the Corporation excluding
conflicts-of-law principles.

23. Modifications. The Corporation may waive, amend, cancel, extend, renew,
accept the surrender of, modify or accelerate the vesting of or lapse of restrictions on all or any
portion of the Option hereunder without the consent of Participant. The Corporation may waive,
change, or modify any portion of this Agreement from time to time without the consent of
Participant, except to the extent that such waiver, change or modification adversely affects the
rights of Participant, in which case such waiver, change or modification of this Agreement shall,
to such extent, be in writing and signed by the parties hereto. In furtherance and not in
limitation of the foregoing, Participant and the Corporation agree that any waiver, change or
modification that may cause an Incentive Stock Option to become a Nonqualified Stock Option shall
not be treated as adversely affecting the rights of the Participant. Participant hereby covenants
and agrees to execute any amendment to this Agreement which shall be required or desirable (in the
opinion of the Corporation or its counsel) in order to comply with any applicable securities law or
rule or any rule or regulation promulgated or proposed under the Code by the Internal Revenue
Service.

24. Terms and Conditions of Plan. The terms and conditions included in the Plan
are incorporated by reference herein, and to the extent that any conflict may exist between any
term or provision of this Agreement and any term or provision of the Plan, such term or provision
of the Plan shall control.

[Signatures Next Page]

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     IN WITNESS WHEREOF, the Corporation and Participant have executed this Agreement as of the
Option Grant Date.

	 	 	 	 	 
	CORPORATION:	 	 
	 
	 	 	 	 
	WEBMETHODS, INC., a Delaware corporation	 	 
	 
	 	 	 	 
	By:

	 	      David Mitchell
 

     Authorized Person
	 	 
	 
	 	 	 	 

	 	 	 	 	 
	PARTICIPANT:	 	 
	 
	 	 	 	 
	/s/ Kenneth A. Sexton	 	 
	 	 	 
	Kenneth A. Sexton	 	 
	 
	 	 	 	 
	Address:
	 	 	 	 
	 

	 	 	 	 
	 
	 	 	 	 
	 

	 	 	 	 
	 
	 	 	 	 
	 

	 	 	 	 

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Exhibit 10.4

WEBMETHODS, INC.

2006 OMNIBUS STOCK INCENTIVE PLAN

RESTRICTED STOCK AWARD AGREEMENT

     This Restricted Stock Award Agreement (this “Agreement”) is between Kenneth A. Sexton (the
“Employee”) and webMethods, Inc., a Delaware corporation (the “Corporation”). This Agreement
governs an award made to Employee pursuant to the Corporation’s 2006 Omnibus Stock Incentive Plan
(the “Plan”). The Corporation and Employee agree as follows:

     1. Grant. Effective as of January 2, 2007 (the “Grant Date”), the Compensation
Committee of the Board of Directors of the Corporation awarded the Employee 50,000 shares of the
Corporation’s Common Stock subject to the vesting and other restrictions provided in this Agreement
(the “Restricted Stock”). Except as may otherwise be required by law, no payment by the Employee
is required for the Restricted Stock. Shares of Restricted Stock may not be sold, pledged,
assigned, transferred, or otherwise encumbered or disposed of for any reason until vesting
restrictions on such shares are removed in accordance with this Agreement. Any attempt to dispose
of unvested shares of Restricted Stock or any interest in such shares in a manner contrary to the
restrictions set forth in this Agreement shall be void and of no effect.

     2. Vesting Generally. The award will vest in four (4) equal annual installments of
twenty-five percent (25%) of the shares covered by the award beginning on the first annual
anniversary of the Grant Date and subsequently on the second, third and fourth annual anniversary
of the Grant Date. Each installment shall vest and thereby all vesting restrictions shall be
removed on the installment so long as the Employee has remained employed by the Corporation or a
Subsidiary (as defined in the Plan) through the day on which the installment is scheduled to vest.
If the Employee’s employment terminates other than in connection with a Change of Control (as
defined below), shares of Restricted Stock which have not vested as of such date of termination
shall be forfeited and returned to the Corporation upon such termination.

     3. Vesting Following Change of Control. For purposes of this Agreement, a “Change of
Control” shall be deemed to have occurred if (A) any person (as such term is used in Sections 13(d)
and 14(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is or becomes
the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly,
of securities of the Corporation representing fifty percent (50%) or more of the combined voting
power of the Corporation’s then outstanding securities, (B) during any period of two (2)
consecutive years during the term of this Agreement, individuals who at the beginning of such
period constitute the Board of Directors of the Corporation cease for any reason to constitute at
least a majority thereof, unless the election of each director who was not a director at the
beginning of such period has been approved in advance by directors representing at least two-thirds
of the directors then in office who were directors at the beginning of the period, (C) the
shareholders of the Corporation approve a merger or consolidation involving the Corporation that
would result in a change of ownership of a majority of the outstanding shares of capital stock of
the Corporation or its successor, or (D) the shareholders of the Corporation approve a plan of
liquidation or dissolution of the Corporation or the sale or disposition by the Corporation of all
or substantially all the Corporation’s assets. In the event of a Change of Control of the
Corporation, any shares of Restricted Stock which are unvested as of the date of consummation of
such Change of Control shall immediately vest on the date of consummation of such Change of
Control; provided, however that Employee shall agree not to terminate Employee’s
employment with the Corporation or its successor for a period of up to six months following
consummation of such Change of Control for any reason other than Good Reason, as defined in Section
1(b)(i) in Employee’s Executive Agreement of even date herewith.

 

 

     4. Stock Certificates and Restrictions. Subject to the provisions of this Section 4,
the full number of shares of Restricted Stock have been or shall promptly be deposited in an
account for the Employee at the Corporation’s transfer agent. The Corporation reserves the right
at its sole discretion to change the financial institution or agent in which the shares are
deposited or the certificates for shares are held. These shares are nontransferable and are
otherwise subject to the Plan and this Agreement until the vesting restrictions are removed or the
shares are returned to the Corporation. The Corporation may place such legends on any certificates
for Restricted Stock as it deems appropriate, including a legend (“Restrictive Legend”) in
substantially the following form:

The ownership and transferability of this certificate and the shares of stock
represented hereby are subject to the terms and conditions (including forfeiture) of
the webMethods, Inc. 2006 Omnibus Stock Incentive Plan (the “Plan”) and a Restricted
Stock Award Agreement (the “Agreement”) entered into between the registered owner
and webMethods, Inc. Copies of such Plan and Agreement are on file in the executive
offices of webMethods, Inc.

In addition, the stock certificate or certificates for the Restricted Stock shall be subject to
such stop-transfer orders and other restrictions as the Corporation may deem advisable under the
rules, regulations, and other requirements of the Securities and Exchange Commission, any stock
exchange or securities association upon which the Common Stock of the Corporation is then listed,
and any applicable federal or state securities law. The Employee has the right to vote the full
number of shares and to receive any declared dividends or other distributions associated with the
shares. On or before the issuance of the certificate or certificates representing the Restricted
Stock, the Employee shall deliver to the Corporation stock powers endorsed in blank relating to the
Restricted Stock, in a form provided by the Corporation. Employee hereby irrevocably appoints the
Corporation and each of its officers, employees and agents as his true and lawful attorneys with
power (i) to sign in Employee’s name and on Employee’s behalf stock certificates and stock powers
covering the Restricted Stock and such other documents and instruments as the Corporation deems
necessary or desirable to carry out the terms of this Agreement and (ii) to take such other action
as the Corporation deems necessary or desirable to effectuate the terms of this Agreement. This
power, being coupled with an interest, is irrevocable. As soon as administratively practicable
following the applicable vesting date of the Restricted Stock, and upon the satisfaction of all
other applicable conditions as to such vested percentage of Restricted Stock, including, but not
limited to, the payment by the Employee of all applicable withholding taxes, the Corporation shall
deliver or cause to be delivered to the Employee a certificate or certificates for the applicable
shares of Restricted Stock which shall not bear the Restrictive Legend.

     5. Corporate Event. In the event of the declaration of a stock dividend, the
declaration of an extraordinary dividend payable in a form other than stock, a spin-off, a stock
split, a recapitalization, a merger or a similar transaction affecting the Corporation’s
outstanding securities without receipt of consideration, any new, substituted or additional
securities or other property (including money paid other than as an ordinary cash dividend) which
are distributed to the Employee with respect to shares of Restricted Stock which have not already
vested shall immediately be subject to the vesting and other restrictions of this Agreement to the
same extent as the shares of Restricted Stock to which such distributed property relates.

     6. Taxation. Employee acknowledges that Section 83(a) of the Internal Revenue Code of
1986, as amended (the “Code”), taxes as ordinary compensation income the fair market value of
shares of Restricted Stock on the date as of which Employee’s rights to retain each such share of
Restricted Stock vests. Thus, shares of Restricted Stock will vest and be taxable in increments on
the four annual anniversary dates of such transfer. Accelerated vesting of the Restricted Stock
will also accelerate the date of taxation. Employee acknowledges that Employee may elect to be
taxed on the fair market value

- 2 -

 

of some or all of the Restricted Stock at the time such shares are transferred to Employee,
rather than at those times when Employee’s right to retain the Restricted Stock vest, by filing an
election under Section 83(b) of the Code (a “Section 83(b) Election”) with the Internal
Revenue Service within 30 days from the date of the transfer of the Restricted Stock to Employee.
Employee acknowledges that failure to file such an election in a timely manner results in the
inability to file such election. Employee further acknowledges that an additional copy of such
election form should be filed with Employee’s federal income tax return for the calendar year to
which such election applies. Employee acknowledges and agrees that the foregoing is only a summary
of the effects of United States federal income taxation with respect to the Restricted Stock and
does not purport to be complete. Employee further acknowledges and agrees that the Corporation has
directed Employee to seek independent professional advice regarding the tax consequences of receipt
of the Restricted Stock under federal, state and local law. Employee acknowledges and agrees that
if the Employee decides to file a Section 83(b) Election it is Employee’s sole responsibility, and
not the Corporation’s or its affiliate’s, to file a timely election, even if Employee requests the
Corporation, its affiliate or its representatives to make the filing on Employee’s behalf.

     7. Withholding Taxes. Employee acknowledges that upon occurrence of the taxable event
with respect to the Restricted Stock, Employee will be responsible for payment of taxes due. The
Corporation shall have the power and the right to deduct or withhold, or require the Employee to
remit to the Corporation, an amount sufficient to satisfy federal, state, and local taxes
(including the Employee’s FICA obligation), domestic or foreign, required by law to be withheld
with respect to any exercise of the Employee’s rights under this Agreement as well as upon the
vesting of the Restricted Stock. Unless the Employee has made alternative arrangements acceptable
to the Corporation, the Employee may, in the Corporation’s sole discretion, pay applicable minimum
required withholding taxes due by having the Corporation withhold shares that would otherwise be
released from vesting restrictions, in which case such withheld shares shall be transferred back to
the Corporation. The Corporation shall be authorized, in its sole discretion, to establish such
rules and procedures relating to the use of shares of Common Stock of the Corporation to satisfy
tax withholding obligations as it deems necessary or appropriate to facilitate and promote the
conformity of the Employee’s transactions under the Plan and this Agreement with Rule 16b-3 under
the Securities Exchange Act of 1934, as amended, if such Rule is applicable to a transaction by the
Employee.

     8. Construction of “Employee”. Wherever the word “Employee” is used in any provision
of this Agreement under circumstances where the provision should logically be construed to apply to
the executors, the administrators, or the person or persons to whom the Restricted Stock may be
transferred by will or the laws of descent and distribution, the word “Employee” shall be deemed to
include such person or persons.

     9. Entire Agreement; Amendment. This Agreement represents the full and complete
understanding between Employee and the Corporation with respect to the subject matter hereof. The
Corporation may waive, amend, cancel, extend, renew, accept the surrender of, modify or accelerate
the vesting of or lapse of restrictions on all or any portion of the Restricted Stock hereunder
without the consent of Employee. The Corporation may waive, change, or modify any portion of this
Agreement from time to time without the consent of Employee, including, without limitation, as the
Corporation shall deem necessary or advisable in order to comply with Section 409A of the Code;
provided, however, that to the extent that any such waiver, change or modification
adversely affects the rights of Employee, such waiver, change or modification of this Agreement
shall, to such extent, be in writing and executed by the parties hereto.

     10. Terms and Conditions of Plan. The terms and conditions included in the Plan are
incorporated by reference herein, and to the extent that any conflict may exist between any term or

- 3 -

 

provision of this Agreement and any term or provision of the Plan, such term or provision of
the Plan shall control.

     11. Choice of Law. This Agreement shall be construed, interpreted and enforced in
accordance with the laws of the State of Delaware without regard to its conflict of law principles.

     12. Successors and Assigns. This Agreement shall be binding upon and inure to the
benefit of both parties and their respective successors and assigns, including any entity with
which or into which the Corporation may be merged or which may succeed to its assets or business or
any entity to which the Corporation may assign its rights and obligations under this Agreement.

     13. Employment of Employee. Nothing in this Agreement shall be construed as
constituting a commitment, guarantee, agreement or understanding of any kind or nature that the
Corporation shall continue to employ Employee, nor shall this Agreement affect in any way the right
of the Corporation to terminate the employment of Employee, at any time and for any reason. By
Employee’s execution of this Agreement, Employee acknowledges and agrees that Employee’s employment
is “at will.” No change of Employee’s duties as an employee of the Corporation shall result in, or
be deemed to be, a modification of any of the terms of this Agreement.

     14. Invalid or Unenforceable Provisions. The provisions of this Agreement shall be
deemed severable, and the invalidity or unenforceability of any one or more of the provisions
hereof shall not affect the validity and enforceability of the other provisions hereof. Employee
agrees that the breach or alleged breach by the Corporation of (a) any covenant contained in
another agreement (if any) between the Corporation and Employee or (b) any obligation owed to
Employee by the Corporation, shall not affect the validity or enforceability of the covenants and
agreements of Employee set forth herein.

     15. Notices. Any and all notices provided for herein shall be sufficient if in
writing, and sent by hand delivery or by certified or registered mail (return receipt requested and
first- class postage prepaid) or by reputable overnight courier service, in the case of the
Corporation, to its principal office and to the attention of its General Counsel, and, in the case
of Employee, to Employee’s address as shown on the Corporation’s records.

     16. Further Assurances. Employee agrees, upon demand of the Corporation, to do all
acts and execute, deliver and perform all additional documents, instruments and agreements
(including, without limitation, stock powers with respect to shares of common stock of the
Corporation issued as a dividend or distribution on Restricted Stock) which may be reasonably
required by the Corporation, to implement the provisions and purposes of this Agreement and the
Plan.

     17. Headings. The headings and other captions contained in this Agreement are for
convenience of reference only and shall not be used in interpreting, construing or enforcing any of
the provisions of this Agreement.

-o0o-

- 4 -

 

     IN WITNESS WHEREOF, the parties hereto have executed this Agreement to be effective as of the
Grant Date.

	 	 	 	 	 
	 	 	WEBMETHODS, INC.
	 
	 	 	 	 
	 

	 	By:
	 	/s/ David Mitchell
	 

	 	 	 	 
	 

	 	Name:
	 	David Mitchell
	 

	 	 	 	 
	 

	 	Title:
	 	President & CEO
	 

	 	 	 	 
	 
	 	 	 	 
	 	 	EMPLOYEE
	 
	 	 	 	 
	 	 	/s/ Kenneth A. Sexton
	 	 	 

- 5 -

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