Document:

Exhibit 10.1

 

ROSETTA STONE INC.

2006 STOCK INCENTIVE PLAN

 

 

TABLE OF CONTENTS

 

	
   

  	
   

  	
  Page

  
	
   

  	
   

  	
   

  
	
  1.
  

  	
  PURPOSE

  	
  1

  
	
  2.
  

  	
  DEFINITIONS

  	
  1

  
	
  3.
  

  	
  ADMINISTRATION
  OF THE PLAN

  	
  5

  
	
   

  	
  3.1 

  	
  Board

  	
  5

  
	
   

  	
  3.2 

  	
  Committee

  	
  6

  
	
   

  	
  3.3 

  	
  Grants

  	
  6

  
	
   

  	
  3.4 

  	
  No Liability

  	
  7

  
	
  4.
  

  	
  STOCK
  SUBJECT TO THE PLAN 

  	
  7

  
	
  5.
  

  	
  GRANT
  ELIGIBILITY

  	
  8

  
	
  6.
  

  	
  AWARD
  AGREEMENT

  	
  8

  
	
  7.
  

  	
  TERMS
  AND CONDITIONS OF OPTIONS 

  	
  8

  
	
   

  	
  7.1 

  	
  Option Price 

  	
  8

  
	
   

  	
  7.2 

  	
  Vesting 

  	
  9

  
	
   

  	
  7.3 

  	
  Term 

  	
  9

  
	
   

  	
  7.4 

  	
  Exercise of Options on Termination of Service 

  	
  9

  
	
   

  	
  7.5 

  	
  Limitations on Exercise of Option

  	
  10

  
	
   

  	
  7.6 

  	
  Exercise Procedure

  	
  10

  
	
   

  	
  7.7 

  	
  Right of Holders of Options

  	
  10

  
	
   

  	
  7.8 

  	
  Delivery of Stock Certificates

  	
   11

  
	
   

  	
  7.9 

  	
  Transferability of Options

  	
  11

  
	
  8.  

  	
  FORM OF
  PAYMENT 

  	
  11

  
	
  9.
  

  	
  WITHHOLDING
  TAXES 

  	
  11

  
	
  10.
  

  	
  RESTRICTIONS
  ON TRANSFER OF SHARES OF STOCK

  	
  12

  
	
   

  	
  10.1
  

  	
  Restrictions
  on Transfer

  	
  12

  
	
   

  	
  10.2
  

  	
  Repurchase
  and Other Rights

  	
  13

  
	
   

  	
  10.3
  

  	
  Installment
  Payments 

  	
  13

  
	
   

  	
   

  	
  10.3.1
  General Rule

  	
   13

  
	
   

  	
   

  	
  10.3.2
  Exception in the Case of Stock Repurchase Right

  	
  13

  
	
   

  	
  10.4
  

  	
  Publicly
  Traded Stock

  	
  13

  
	
   

  	
  10.5
  

  	
  Legend

  	
  14

  
	
  11.

  	
  PARACHUTE
  LIMITATIONS

  	
  14

  
	
  I2.
  

  	
  REQUIREMENTS
  OF LAW

  	
  15

  
	
   

  	
  12.1
  

  	
  General

  	
  15

  
	
   

  	
  12.2
  

  	
  Rule 16b-3

  	
  16

  

 

i

 

	
  13.

  	
  EFFECT OF CHANGES IN CAPITALIZATION

  	
  16

  
	
   

  	
  13.1

  	
  Changes in Stock

  	
  16

  
	
   

  	
  13.2

  	
  Reorganization in Which the Company Is the
  Surviving Entity and in Which No Change of Control Occurs

  	
  17

  
	
   

  	
  13.3

  	
  Change of Control.

  	
  17

  
	
   

  	
  13.4

  	
  Adjustments

  	
  18

  
	
   

  	
  13.5

  	
  No Limitations on Company.

  	
  19

  
	
  14. 

  	
  DURATION AND AMENDMENTS

  	
  19

  
	
   

  	
  14.1

  	
  Term of the Plan.

  	
  19

  
	
   

  	
  14.2 

  	
  Amendment and Termination of the Plan

  	
  19

  
	
  15. 

  	
  GENERAL PROVISIONS

  	
  20

  
	
   

  	
  15.1

  	
  Disclaimer of Rights

  	
  20

  
	
   

  	
  15.2

  	
  Nonexclusivity of the Plan

  	
  20

  
	
   

  	
  15.3

  	
  Captions

  	
  20

  
	
   

  	
  15.4

  	
  Other Award Agreement Provisions

  	
  20

  
	
   

  	
  15.5

  	
  Number and Gender

  	
  21

  
	
   

  	
  15.6

  	
  Severability

  	
  21

  
	
   

  	
  15.7

  	
  Governing Law

  	
  21

  
	
   

  	
  15.8

  	
  Code Section 409A

  	
  21

  
	
  16. 

  	
  EXECUTION

  	
  22

  

 

ii

 

ROSETTA STONE INC.

 

2006 STOCK INCENTIVE PLAN

 

Rosetta Stone Inc., a Delaware corporation
(the “Company”), sets forth herein the terms of its 2006 Stock Incentive Plan
(the “Plan”) as follows:

 

1. PURPOSE

 

The Plan is intended to enhance the Company’s
and its Affiliates’ (as defined herein) ability to attract and retain highly
qualified officers, directors, key employees, and other persons, and to
motivate such persons to serve the Company and its Affiliates and to expend
maximum effort to improve the business results and earnings of the Company, by
providing to such persons an opportunity to acquire or increase a direct
proprietary interest in the operations and future success of the Company.

 

2. DEFINITIONS

 

For purposes
of interpreting the Plan and related documents (including Award Agreements),
the following definitions shall apply:

 

2.1  “Affiliate” means, with respect to the Company, any
company or other trade or business that controls, is controlled by or is under
common control with the Company within the meaning of Rule 405 of
Regulation C under the Securities Act, including, without limitation, any
Subsidiary.

 

2.2  “Award Agreement” means the stock option
agreement between the Company and a Grantee that evidences and sets out the
terms and conditions of a Grant.

 

2.3  “Board” means the Board of
Directors of the Company.

 

2.4  “Cause” means termination for any of the following: (A) commission of a
felony or a crime involving moral turpitude or the commission of any other act
or omission involving dishonesty in the performance of his duties to the
Company or fraud; (B) substantial and repeated failure to perform duties of the office held by the

 

1

 

Grantee as reasonably directed by the
Company; (C) gross negligence or willful misconduct with respect to the
Company or any of its Subsidiaries; (D) material breach of any employment
agreement between the Grantee and the Company that is not cured within ten (10) days
after receipt of written notice thereof from the Company; (E) failure,
within ten (10) days after receipt by the Grantee of written notice
thereof from the Company, to
correct, cease or otherwise alter any failure to comply with instructions or
other action or omission which the Board
reasonably believes does or may materially or adversely affect its business or
operations; (F) misconduct which is of such a serious or substantial
nature that a reasonable likelihood exists that such misconduct will materially
injure the reputation of the Company or its Subsidiaries if the Grantee were to
remain employed by the Company; (G) harassing or discriminating against
the Company’s employees, customers or vendors in violation of the Company’s policies with respect to such
matters; (H) misappropriation of funds or assets of the Company for personal use or willful
violation of Company policies or standards of business conduct as determined in
good faith by the Board; and/or (I) failure due to some action or inaction
on the part of the Grantee to have immigration status that permits the Eligible
Employee to maintain full-time employment with the Company in the United States in compliance
with all applicable immigration laws.

 

2.5  “Change of
Control” means (i) the liquidation, dissolution or winding-up of the Company,
(ii) the sale, license or lease of all or substantially all
of the assets of the Company, or (iii) a share exchange, reorganization,
recapitalization, or merger or consolidation of the Company with or into any
other corporation or corporations (or other form of business entity) or of any other
corporation or corporations (or other form of business entity) with or into the Company, but excluding any merger effected
exclusively for the purpose of changing the domicile of the Company; Provided, however, that a Change
of Control shall not include any of the aforementioned transactions listed in
clauses (i), (ii) and (iii) involving the Company or a Subsidiary in which the holders of shares of
the Company voting stock outstanding immediately prior to such transaction or
any Affiliate of such holders continue to hold at least a majority, by voting power, of the capital stock or, by a majority, based on fair
market value as determined in good faith by the Board of Directors, of the
assets, in each case in substantially the same proportion, of (1) the surviving or resulting
corporation (or other form of
business entity), (2) if the surviving or resulting corporation (or other
form of business entity) is a wholly
owned subsidiary of another corporation (or other form of business entity)
immediately following such transaction, the parent corporation (or other form of business entity) of

 

2

 

such surviving or resulting corporation (or
other form of business entity) or (3) a successor entity holding a
majority of the assets of the Company.

 

2.6  “Charter” means the Amended and
Restated Certificate of Incorporation of the
Company as the same may be
amended, modified or restated hereafter.

 

2.7  “Code” means the Internal
Revenue Code of 1986, as now in effect or as hereafter amended.

 

2.8  “Committee” means a committee of, and designated from
time to time by resolution of, the Board, which shall consist of one or more
members of the Board.

 

2.9  “Company” means Rosetta Stone Inc.

 

2.10  “Disability” means an incapacity due
to physical or mental illness such that the Grantee is unable to perform the essential
functions of Grantee’s previously assigned duties where (1) such
incapacity has been determined to exist by either (x) the Company’s
disability insurance carrier or (y) by the concurring opinions of two
licensed physicians (one selected by the Company and one by Grantee), and (2) the Board has
determined, based on competent medical advice, that such incapacity will likely
last for a continuous period of at least six (6) months. Any termination
for disability shall be only as expressly permitted by the Americans with
Disabilities Act.

 

2.11  “Effective Date” means May    ,
2006, the date the Plan is approved by the Board.

 

2.12  “Exchange
Act” means the Securities Exchange Act of 1934, as now in effect or as
hereafter amended.

 

2.13  “Fair
Market Value” means the value of a share of Stock,
determined as follows: if on the Grant Date or other determination date the
Stock is listed on an established national or regional stock exchange, is
admitted to quotation on The Nasdaq Stock Market, Inc., or is publicly
traded on an established securities market, the Fair Market Value of a share of
Stock shall be the closing price of the Stock on such exchange or in such
market (if there is more than one such exchange or market the Board shall
determine the appropriate exchange or market) on the Grant Date or such other
determination date (or if there is no such reported closing

 

3

 

Price, the Fair Market Value shall be the mean
between the highest bid and lowest asked prices or between the high and low
sale prices on such trading day) or, if no sale of Stock is reported for such
trading day, on the next preceding day on which any sale shall have been
reported. If the Stock is not listed on such an exchange, quoted on such system
or traded on such a market, Fair Market Value shall be the value of the Stock
as determined by the Board in good faith, and shall be determined by the
reasonable application of a reasonable valuation method within the meaning of Section 409A
of the Code and the regulations promulgated thereunder.

 

2.14  “Grant” means an award of an Option under the Plan.

 

2.15  “Grant Date” means, as determined by the Board, the latest to occur of (i) the date as
of which the Board approves a Grant, (ii) the date on which the recipient
of a Grant first becomes eligible to receive a Grant under Section 5
hereof, or (iii) such other date as may be specified by the Board.

 

2.16  “Grantee” means a person who receives or holds a Grant under the Plan.

 

2.17  “Nonqualified Stock
Option” means a stock option that is not an Incentive Stock
Option.

 

2.18  “Option” means an option to
purchase one or more shares of Stock pursuant to the Plan.

 

2.19  “Option
Price” means the purchase price for each share of Stock subject to an Option.

 

2.20  “Other Agreement” shall have the meaning set forth in Section 11 hereof.

 

2.21  “Plan” means this Rosetta
Stone Inc. 2006 Stock Incentive Plan

 

2.22  “Reporting
Person” means a person who is required to file reports under Section 16(a) of
the Exchange Act.

 

2.23  “Securities
Act” means the
Securities Act of 1933, as now in effect or as hereafter amended.

 

4

 

2.24  “Service” means service as Service Provider of the Company or an Affiliate. Unless
otherwise stated in the applicable Award Agreement, a Grantee’s change in
position or duties shall not result in interrupted or terminated Service, so
long as such Grantee continues to be a Service Provider of the Company or an
Affiliate. Subject to the preceding sentence, whether a termination of Service shall have occurred for
purposes of the Plan shall be determined by the Board, which determination
shall be final, binding and conclusive

 

2.25  “Service Provider” means an employee,
officer or director of the Company or an Affiliate, or a consultant or adviser
providing services to the Company or an Affiliate

 

2.26  “Stock” means the Common Stock, $0.001 par value per
share, of the Company.

 

2.27  “Subsidiary” means any “subsidiary corporation” of the Company within the meaning of Section 424(f)
of the Code.

 

2.28  “Ten-Percent
Stockholder” means an individual who owns more than ten
percent (10%) of the total combined voting power of all classes of outstanding
stock of the Company, its parent or any of its Subsidiaries. In determining
stock ownership, the attribution rules of Section 424(d) of the
Code shall be applied.

 

3.  ADMINISTRATION
OF THE PLAN

 

3.1  Board.

 

The Board shall have such powers and
authorities related to the administration of the Plan as are consistent with
the Company’s Charter and bylaws and applicable law. The Board shall have full
power and authority to take all actions and to make all determinations required
or provided for under the Plan, any Grant or any Award Agreement, and shall
have full power and authority to take all such other actions and make all such
other determinations not inconsistent with the specific terms and provisions of
the Plan that the Board deems to be necessary or appropriate to the
administration of the Plan, any Grant or any Award Agreement. All such actions
and determinations shall be by the affirmative vote of a majority of the members
of the Board present at a meeting or by unanimous consent of the Board executed
in writing in accordance with the Company’s Charter

 

5

 

and bylaws and applicable law. The
interpretation and construction by the Board of any provision of the Plan, any
Grant or any Award Agreement shall be final, binding and conclusive. To the
extent permitted by law, the Board may delegate its authority under the Plan to
a member of the Board or
an executive officer of the Company who is a member of the Board.

 

3.2  Committee.

 

The Board from time to time may delegate
to one or more Committees such
powers and authorities related to the administration and implementation of the Plan, as set forth in Section 3.1
above and in other applicable provisions, as the Board shall determine, consistent with the
Charter and bylaws of the
Company and applicable law. In the event that the Plan, any Grant or any Award Agreement entered into
hereunder provides for any
action to be taken by or determination to be made by the Board, such action may be taken by or such determination may be made by the applicable Committee if
the power and authority to do so has been delegated to the Committee by the Board as provided for in Section 3.1. Unless otherwise expressly
determined by the Board, any such action or determination by the Committee shall be final, binding and
conclusive. To the extent permitted by law, the Committee may delegate its
authority under the Plan to a member of the Board or an executive officer of
the Company who is a member of the Board.

 

3.3  Grants.

 

Subject to the other terms and conditions of
the Plan, the Board shall have full and final authority to:

 

(i)            designate
Grantees,

 

(ii)           determine the number of shares of Stock to be subject to a Grant,

 

(iii)          establish the terms and conditions of each Grant (including, but not
limited to, the Option Price of any Option, the nature and duration of any
restriction or condition (or provision for lapse there of) relating to the
vesting, exercise, transfer, or forfeiture
of a Grant
or the shares of Stock subject thereto),

 

(iv)          prescribe
the form of each Award Agreement evidencing a Grant, and

 

6

 

(v)                                 amend, modify, or supplement the terms of any
outstanding Grant. Notwithstanding the foregoing, no amendment, modification or
supplement of any Grant shall, without the consent of the Grantee, impair the
Grantee’s rights under such Grant.

 

Such authority specifically includes the
authority, in order to effectuate the purposes of the Plan but without amending
the Plan, to modify Grants to eligible individuals who are foreign nationals or
are individuals who are employed outside the United States to recognize
differences in local law, tax policy, or custom. As a condition to any Grant,
the Board shall have the right, at its sole discretion, to require Grantees to
return to the Company Grants previously awarded under the Plan. Subject to the
terms and conditions of the Plan, any such subsequent Grant shall be upon such
terms and conditions as are specified by the Board at the time the new Grant is made. The
Board shall have the right, in its sole discretion, to make Grants in
substitution or exchange for any other grant under another plan of the Company,
any Affiliate, or any business entity to be acquired by the Company or an
Affiliate. The Company may retain the right in an Award Agreement to cause a
forfeiture of the gain realized by a Grantee on account of actions taken by the
Grantee in violation or breach of or in conflict with any non-competition
agreement, any agreement prohibiting solicitation of employees or clients of
the Company or any Affiliate thereof or any confidentiality obligation with
respect to the Company or any Affiliate thereof or otherwise in competition
with the Company or any Affiliate thereof, to the extent specified in such
Award Agreement applicable to the Grantee. Furthermore, the Company may annul a Grant if the Grantee is an employee of the Company or an Affiliate thereof and is terminated for
Cause as defined in the applicable Award Agreement or the Plan, as applicable.

 

3.4  No
Liability.

 

No member of the Board or of the Committee
shall be liable for any action or determination made in good faith with respect
to the Plan or any Grant or Award Agreement.

 

4. STOCK SUBJECT TO THE PLAN

 

Subject to adjustment as
provided in Section 13
hereof, the number of shares of Stock available for issuance under the Plan shall be one million four hundred and ninety four thousand
(1,494,000) shares. Stock issued
or to be issued

 

7

 

under the Plan shall be authorized but
unissued shares or, to the extent permitted by applicable law, issued shares
that have been reacquired by the Company. If any shares covered by a Grant are
not purchased or are forfeited, or if a Grant otherwise terminates without
delivery of any Stock subject thereto, then the number of shares of Stock
counted against the aggregate number of shares available under the Plan with
respect to such Grant shall, to the extent of any such forfeiture or
termination, again be available for making Grants under the Plan. If the
exercise price of any Option granted under the Plan is satisfied by tendering
shares of Stock to the Company (by either actual delivery or by attestation),
only the number of shares of Stock issued net of the shares of Stock tendered
shall be deemed delivered for purposes of determining the maximum number of
shares of Stock available for delivery under the Plan.

 

5. GRANT ELIGIBILITY

 

Grants may be made under the Plan to any
Service Provider to the Company or any Affiliate. To the extent required by
applicable state law, Grants within certain states may be limited to employees
and officers or employees, officers and directors. An eligible person may
receive more than one Grant, subject to such restrictions as are provided
herein.

 

6. AWARD AGREEMENT

 

Each Grant pursuant to the Plan shall be
evidenced by an Award Agreement, in such form or forms as the Board shall from
time to time determine, which specifies the number of shares subject to the
Grant (subject to adjustment in accordance with Section 13). Award Agreements granted from time to time or at
the same time need not contain similar provisions but shall be consistent with
the terms of the Plan.

 

7. TERMS AND CONDITIONS OF OPTIONS

 

7.1  Option
Price.

 

The Option Price of each Option shall be
fixed by the Board and stated in the Award Agreement evidencing such Option.
The Option Price shall not be less than the Fair Market Value on the Grant
Date of a share of Stock. To the extent required by applicable law, in the case
of a Nonqualified Stock Option, the Option

 

8

 

Price shall be not less than 110 percent of
the Fair Market Value of a share of Stock on the Grant Date. In no case shall
the Option Price of any Option be less than the par value of a share of Stock.

 

7.2  Vesting.

 

Subject to Sections 7.3 and 13.3 hereof, each
Option granted under the Plan shall become exercisable at such times and under
such conditions as shall be determined by the Board and stated in the Award
Agreement. Except as otherwise provided in the Award Agreement, each Option
granted under the Plan shall become exercisable for twenty-five percent (25%)
of the shares subject to the Option on the first anniversary of the Grant Date
and thereafter shall become exercisable as to an additional 1/16th
of the shares subject to the Option at the end of each three month period
thereafter. For purposes of this Section 7.2, fractional numbers of shares
of Stock subject to an Option shall be rounded down to the next nearest whole
number. To the extent required by applicable law, each Option shall become
exercisable no less rapidly than the rate of twenty percent (20%) per year for
each of the first five (5) years from the Grant Date based on continued
Service. Subject to the preceding sentence, the Board may provide, for example,
in the Award Agreement for (i) accelerated exercisability of the Option in
the event the Grantee’s Service terminates on account of death, Disability or
another event, (ii) expiration of the Option prior to its term in the
event of the termination of the Grantee’s Service, (iii) immediate forfeiture
of the Option in the event the Grantee’s Service is terminated for Cause or (iv) unvested
Options to be exercised subject to the Company’s right of repurchase with respect to unvested shares of Stock.

 

7.3  Term.

 

Each Option granted under the Plan shall
terminate, and all rights to purchase shares of Stock thereunder shall cease,
upon the expiration of ten years from the Grant Date, or under such
circumstances and on such date prior thereto as is set forth in the Plan or as
may be fixed by the Board and stated in the Award Agreement relating to such Option.

 

7.4  Exercise
of Options on Termination of Service.

 

Each Award Agreement shall set forth the
extent to which the Grantee shall have the right to exercise the Option following termination of
the Grantee’s
Service. Such provisions shall
be determined in the sole discretion of the Board, need not be

 

9

 

uniform among all Options issued pursuant to
the Plan, and may reflect distinctions based on the reasons for termination of
Service. Notwithstanding the foregoing, to the extent required by applicable
law, each Option shall provide that the Grantee shall have the right to
exercise the vested portion of any Option held at termination for at least
thirty (30) days following termination of Service with the Company for any
reason (other than for Cause), and that the Grantee shall have the right to
exercise the Option for at least six (6) months if the Grantee’s Service
terminates due to death or Disability.

 

7.5  Limitations
on Exercise of Option.

 

Notwithstanding any other
provision of the Plan, in no event may any Option be exercised, in whole or in
part, prior to the date the Plan is approved by the shareholders of the Company, or after ten years following
the Grant Date, or after the occurrence of an event referred to in Section 18
hereof which results in termination of the Option.

 

7.6  Exercise
Procedure.

 

An Option that is exercisable may
be exercised by the Grantee’s delivery to the Company of written notice of
exercise on any business day, at the Company’s principal office, on the form specified
by the Company. Such notice shall specify the number of shares of Stock with
respect to which the Option is being exercised and shall be accompanied by
payment in full of the Option Price of the shares for which the Option is being
exercised. The minimum number of shares of Stock with respect to which an
Option may be exercised, in whole or in part, at any time shall be the lesser
of (i) 100 shares or such lesser number set forth in the applicable Award Agreement
and (ii) the maximum number of shares available for purchase under the
Option at the time of exercise. The Option Price shall be payable in a form
described in Section 8.

 

7.7  Right
of Holders of Options.

 

Unless otherwise stated in the
applicable Award Agreement, an individual holding or exercising an Option shall
have none of the rights of a shareholder (for example, the right to cash or
dividend payments or distributions attributable to the subject shares of Stock
or to direct the voting of shares of Stock) until the shares of Stock covered
thereby are fully paid and issued to such individual.

 

10

 

7.8  Delivery
of Stock Certificates.

 

Promptly after the exercise of an
Option by a Grantee and the payment in full of the Option Price, such Grantee
shall be entitled to the issuance of a stock certificate or certificates
evidencing such Grantee’s ownership of the shares of Stock purchased upon such exercise of the
Option. Notwithstanding any other provision of this Plan to the contrary, the
Company may elect to satisfy any requirement under this Plan for the delivery
of stock certificates through the use of book-entry.

 

7.9  Transferability
of Options.

 

During the lifetime of a Grantee,
only the Grantee (or, in the event of legal incapacity or incompetency, the
Grantee’s guardian or legal representative) may exercise an Option. No Option
shall be assignable or transferable by the Grantee to whom it is granted, other than by
will or the laws of descent and
distribution.

 

8. FORM OF PAYMENT

 

Payment of the Option Price for
the shares purchased pursuant to the exercise of an Option shall be made in
cash or in cash equivalents acceptable to the Company. Subject to the prior
approval of the Company or the Affiliate, which may be withheld by the Company or the
Affiliate, as the case may be, in its sole discretion, the Grantee may elect to satisfy
such obligations, in whole or in part, (i) by causing the Company or the
Affiliate to withhold shares of Stock otherwise issuable to the Grantee or (ii) by delivering to the Company or the Affiliate
shares of Stock already owned by the Grantee. The shares of Stock so delivered
or withheld shall have an aggregate Fair Market Value equal to such Option
Price. In addition, to the extent the Award Agreement so provides, payment of the Option Price for shares purchased pursuant to
exercise of an Option may be made in any other form that is consistent with applicable
laws, regulations and rules.

 

9. WITHHOLDING TAXES

 

The Company or any Affiliate, as the case may be, shall have the right to deduct from payments of any kind otherwise due to a Grantee
any Federal, state, or local
taxes of any kind required by law to be
withheld upon the issuance of any shares of Stock or payment of any kind upon the exercise of
any Grant.
At the time of such exercise, the Grantee shall pay to the Company or Affiliate, as the case may

 

11

 

be, any amount that the Company or Affiliate may
reasonably determine to be necessary to satisfy such withholding obligation.
Subject to the prior approval of the Company or the Affiliate, which may be
withheld by the Company or the Affiliate, as the case may be, in its sole
discretion, the Grantee may elect to satisfy such obligations, in whole or in
part, (i) by causing the Company or the Affiliate to withhold shares of
Stock otherwise issuable to the Grantee or (ii) by delivering to the
Company or the Affiliate shares of Stock already owned by the Grantee. The
shares of Stock so delivered or withheld shall have an aggregate Fair Market
Value equal to such withholding obligations. The Fair Market Value of the
shares of Stock used to satisfy such withholding obligation shall be determined
by the Company or the Affiliate as of the date that the amount of tax to be
withheld is to be determined. A Grantee who has made an election pursuant to
this Section 9 may satisfy his or her withholding obligation only with
shares of Stock that are not subject to any repurchase, forfeiture, unfulfilled
vesting, or other similar requirements.

 

10. RESTRICTIONS ON TRANSFER OF SHARES OF
STOCK

 

10.1  Restrictions
on Transfer.

 

Subject to Section 10.4 below, a Grantee
(or such other individual who is entitled to exercise an Option or otherwise
acquire shares pursuant to a Grant under the terms of this Plan) shall not
sell, pledge, assign, gift, transfer, or otherwise dispose of any shares of
Stock acquired pursuant to a Grant to any person or entity without the consent
of the Company other than to immediate family members or a trust established
for the benefit of Grantee or his immediate family members. The
restrictions of this Section 10.1 apply to any person to whom Stock that
was originally acquired pursuant to a Grant is bequeathed, gifted, transferred
or otherwise disposed of, without regard to the number of such subsequent
transferees or the manner in which they acquire the Stock, but the restrictions
of this Section 10.1 do not apply to a transfer of Stock that occurs as a
result of the death of the Grantee or of any subsequent transferee (but shall
apply to the executor, the administrator or personal representative, the
estate, and the legatees, beneficiaries and assigns thereof).

 

12

 

10.2  Repurchase
and Other Rights.

 

Stock issued upon exercise of a
Grant may be subject to such right of repurchase or other transfer restrictions
as the Board may determine, consistent with applicable law. Any such additional
restriction shall be set forth in the Award Agreement.

 

10.3  Installment
Payments.

 

10.3.1 
General Rule.

 

In the case of
any purchase of Stock or an Option under this Section 10, the Company or
its permitted assignee may pay the Grantee, transferee of the Option or other
registered owner of the Stock the purchase
price in three or fewer annual installments. Interest shall be credited on the
installments at the applicable federal rate (as determined for purposes of Section 1274
of the Code) in effect on the date on which the purchase is made. The Company
or its permitted assignee shall pay at least one-third of the total purchase
price each year, plus interest on the unpaid balance, with the first payment
being made on or before the 60th day after the purchase.

 

10.3.2 
Exception in the Case of Stock Repurchase Right.

 

If an Award Agreement authorizes,
upon the Grantee’s termination of Service, the repurchase of shares of Stock
acquired by the Grantee pursuant to the exercise of an Option , to the extent
required by applicable law, payment shall be made in cash or by cancellation of
indebtedness within the later of 90 days from the date of termination of Service or 90 days from the
date of exercise or purchase, as the case may be.

 

10.4  Publicly
Traded Stock.

 

If the Stock is listed on an established national or regional stock exchange
or is admitted to quotation on The Nasdaq Stock Market, Inc., or is
publicly traded in an established securities market, the foregoing transfer
restrictions of Sections 10.1 and 10.2 shall terminate as of the first date
that the Stock is so listed, quoted or publicly traded.

 

13

 

10.5  Legend.

 

In order to enforce the restrictions imposed
upon shares of Stock under this Plan or as provided in an Award Agreement, the
Board may cause a legend or legends to be placed on any certificate
representing shares issued pursuant to this Plan that complies with the
applicable securities laws and regulations and makes appropriate reference to the
restrictions imposed under it.

 

11. PARACHUTE LIMITATIONS

 

Notwithstanding
any other provision of this Plan or of any other agreement, contract, or understanding
heretofore or hereafter entered into by a Grantee with the Company or any
Affiliate, except an agreement, contract, or understanding hereafter entered
into that expressly modifies or excludes application of this paragraph (an “Other
Agreement”), and notwithstanding any formal or informal plan or other
arrangement for the direct or indirect provision of compensation to the Grantee
(including groups or classes of participants or beneficiaries of which the
Grantee is a member), whether or not such compensation is deferred, is in cash,
or is in the form of a benefit to or for the Grantee (a “Benefit Arrangement”),
if the Grantee is a “disqualified individual,” as defined in Section 280G(c) of
the Code, any Grants held by that Grantee and any right to receive any
payment or other benefit under
this Plan shall not become exercisable or vested (i) to the extent that
such right to exercise, vesting, payment, or benefit, taking into account all
other rights, payments, or
benefits to or for the Grantee under this Plan, all Other Agreements, and all Benefit Arrangements, would cause any payment or benefit to the Grantee
under this Plan to be considered a “parachute payment” within the meaning of Section 280G(b)(2) of the Code as then in effect
(a “Parachute Payment”) and (ii) if,
as a result of receiving a Parachute Payment, the
aggregate after-tax amounts received by the Grantee from the Company under
this Plan, all Other Agreements, and all Benefit Arrangements would be less than the maximum after-tax amount that could be received by the Grantee without causing any such
payment or benefit to be
considered a Parachute Payment. In the event that the receipt of any such right
to exercise, vesting,
payment, or benefit under this
Plan, in conjunction with all
other rights, payments, or benefits to or for the Grantee under any Other
Agreement or any Benefit Arrangement would cause the Grantee to be considered
to have received a Parachute Payment under this Plan that would have the effect
of decreasing the after-tax amount received by the Grantee as described in clause (ii) of the preceding sentence, then the
Grantee shall have the right, in the Grantee’s sole discretion, to designate
those rights, payments, or benefits under this Plan, any

 

14

 

Other Agreements, and any Benefit
Arrangements that should be reduced or eliminated so as to avoid having the
payment or benefit to the Grantee under this Plan be deemed to be a Parachute
Payment.

 

12. REQUIREMENTS OF LAW

 

12.1  General.

 

The Company shall not be required to sell or issue any shares of Stock
under any Grant if the sale or issuance of such shares would constitute a
violation by the Grantee, any other individual exercising a right emanating
from such Grant, or the Company of any provision of any law or regulation of
any governmental authority, including without limitation any federal or state
securities laws or regulations. If at any time the Company shall determine, in
its sole discretion, that the
listing, registration or qualification of any shares subject to a Grant upon
any securities exchange or under any governmental regulatory body is necessary
or desirable as a condition of, or in connection with, the issuance or purchase
of shares hereunder, no shares of Stock may be issued or sold to the Grantee or
any other individual exercising an Option pursuant to such Grant unless such listing, registration, qualification,
consent or approval shall have been effected or obtained free of any conditions
not acceptable to the Company, and any delay caused thereby shall in no way
affect the date of termination of the Grant. Specifically, in connection with
the Securities Act, upon the exercise of any right emanating from such Grant,
unless a registration statement under the Securities Act is in effect with
respect to the shares of Stock covered by such Grant, the Company shall not be
required to sell or issue such shares unless
the Board has received evidence satisfactory to it that the Grantee or any other
individual exercising an Option may acquire such shares pursuant to an
exemption from registration under the Securities Act. Any determination in this
connection by the Board shall be final, binding, and conclusive. The Company
may, but shall in no event be obligated to, register any securities covered
hereby pursuant to the Securities Act. The
Company shall not be obligated to take any affirmative action in order to cause
the exercise of an Option or the issuance of shares of Stock pursuant to the
Plan to comply with any law or regulation of any governmental authority. As to
any jurisdiction that expressly imposes the requirement that an Option shall
not be exercisable until the shares of Stock covered by such Option are
registered or are exempt from registration, the exercise of such Option (under
circumstances in which the laws of such jurisdiction

 

15

 

apply) shall be deemed conditioned upon the
effectiveness of such registration or the availability of such an exemption.

 

12.2  Rule 16b-3.

 

During any time when the Company has a class of
equity security registered under Section 12 of the Exchange Act, it is the
intent of the Company that Grants pursuant to the Plan and the exercise of
Options granted hereunder will qualify for the exemption provided by Rule 16b-3
under the Exchange Act. To the extent that any provision of the Plan or action
by the Board does not comply with the requirements of Rule 16b-3, it shall
be deemed inoperative to the extent permitted by law and deemed advisable by
the Board, and shall not affect the validity of the Plan. In the event that Rule 16b-3
is revised or replaced, the Board may exercise its sole discretion to modify
this Plan in any respect necessary to satisfy the requirements of, or to take
advantage of any features of, the revised exemption or its replacement.

 

13. EFFECT OF CHANGES IN CAPITALIZATION

 

13.1  Changes
in Stock.

 

The number of shares for which Grants may be made
under the Plan shall be proportionately increased or decreased for any increase
or decrease in the number of shares of Stock on account of any
recapitalization, reclassification, stock split, reverse split, combination of
shares, exchange of shares, stock dividend or other distribution payable in
capital stock, or for any other increase or decrease in such shares effected
without receipt of consideration by the Company occurring after the Effective
Date (any such event hereafter referred to as a “Corporate Event”). In
addition, subject to the exception set forth in the last sentence of Section 13.4,
the number of shares for which Grants are outstanding shall be proportionately
increased or decreased for any increase or decrease in the number of Shares of
Stock on account of any Corporate Event. Any such adjustment in outstanding
Options shall not change the aggregate Option Price payable with respect to
shares that are subject to the unexercised portion of an Option outstanding but
shall include a corresponding proportionate adjustment in the Option Price per
share. The conversion of any convertible securities of the Company shall not be
treated as an increase in shares effected
without receipt of consideration. In the event of any distribution to
the Company’s stockholders of an extraordinary cash dividend or securities of
any other entity or other assets (other than ordinary dividends payable

 

16

 

in cash or stock of the Company) without
receipt of consideration by the Company, the Company may, in such manner as the
Company deems appropriate, adjust (i) the number and kind of shares subject
to outstanding Grants and/or (ii) the exercise price of outstanding
Options to reflect such distribution.

 

13.2  Reorganization in Which the Company Is the
Surviving Entity and in Which No Change of Control Occurs.

 

Subject to
the exception set forth in the last sentence of Section 13.4, if the
Company shall be the surviving entity in any reorganization, merger, or
consolidation of the Company with one or more other entities and in which no Change
of Control occurs, any Grant theretofore made pursuant to the Plan shall
pertain to and apply solely to the shares to which a holder of the number of
shares of Stock subject to such Grant would have been entitled immediately
following such reorganization, merger, or consolidation, and in the case of
Options, with a corresponding proportionate adjustment of the Option Price per
share so that the aggregate Option Price thereafter shall be the same as the
aggregate Option Price of the shares remaining subject to the Option
immediately prior to such reorganization, merger, or consolidation.

 

13.3  Change of Control.

 

Subject to
the last sentence of Section 13.4 upon the occurrence of a Change of
Control the Board, may, in its sole discretion, take any of, or any combination
of, the following actions:

 

(i) Provide
that all Options outstanding hereunder shall become immediately exercisable and
shall remain exercisable for a reasonable period of time determined by the
Board in its sole discretion. With respect to the Company’s establishment of an
exercise window, (i) any exercise of an Option during such period shall be
conditioned upon the consummation of the event end shall be effective only
immediately before the consummation of the event, and (ii) upon consummation of
any Change of Control, the Plan, and all outstanding but unexercised Options
shall terminate. The Board shall send written notice of an event that will
result in such a termination to all individuals who hold Options not later than
the time at which the Company gives notice thereof to its shareholders.

 

(ii) Cancel
any outstanding Grants (whether vested or unvested) and pay or deliver, or cause to be paid or
delivered, to the holder thereof an amount in

 

17

 

cash or securities having a value (as determined by
the Board acting in good faith) equal to the product of the number of shares of
Stock subject to the Grant (the “Grant Shares”) multiplied by the amount, if
any by which (I) the formula or fixed price per share paid to holders of
shares of Stock pursuant to such transaction exceeds (II) the Option Price
applicable to such Grant Shares. Notwithstanding the foregoing, the Board may,
in its sole discretion and without the consent of the holder of any Option
affected thereby, make payment of the consideration contemplated by this Section 13.3(ii)
in the same form and manner and to the same degree as consideration to be
received by holders of Stock in connection with the Change of Control. By way
of example but not by way of limitation, if a portion of the cash consideration
otherwise payable to holders of Stock in connection with the Change of Control
is required to be placed into an escrow or similar holdback fund, the Board may
require that a portion of the cash otherwise payable to optionees be similarly
placed into such escrow or holdback fund to the same extent and in the same
degree as holders of Stock.

 

(iii) Provide in
writing in connection with a Change of Control for the assumption or continuation
of
the
Options theretofore granted, or for the substitution for such Grants for new
common stock options relating to the stock of a successor entity, or a parent
or subsidiary thereof, with appropriate adjustments as to the number of shares
(disregarding any consideration that is not common stock) end option prices, in
which event the Grants theretofore granted shall continue in the manner and
under the terms so provided.

 

If none of the forgoing
actions are taken, any Options that are not vested and any Options that are
vested but are not exercised will terminate at the time of the closing a Change
of Control transaction.

 

13.4  Adjustments.

 

Adjustments under Section 13 related to shares
of Stock or securities of the Company shall be made by the Board, whose
determination in that respect shall be final, binding and conclusive. No
fractional shares or other securities shall be issued pursuant to any such
adjustment, and any fractions resulting from any such adjustment shall be
eliminated in each case by rounding downward to the nearest whole share. The
Board may provide in the Award Agreements at the time of Grant, or any time
thereafter with the consent of the Grantee, for different

 

18

 

provisions to apply to a Grant in place of those
described in Sections 13.1, 13.2 and 13.3.

 

13.5  No
Limitations on Company.

 

The making of Grants pursuant to the Plan shall not affect
or limit in any way the right or power of the Company to make adjustments,
reclassifications, reorganizations, or changes of its capital or business
structure or to merge, consolidate, dissolve, or liquidate, or to sell or
transfer all or any part of its business or assets.

 

14. DURATION AND AMENDMENTS

 

14.1  Term
of the Plan.

 

The Effective Date of this Plan is the date of its
adoption by the Board, subject to the approval of the Plan by the Company’s
stockholders. In the event that the stockholders fail to approve the Plan
within twelve (12) months after its adoption by the Board, any Grants already
made shall be null and void, and no additional Grants shall be made after such
date. The Plan shall terminate automatically ten (10) years after its
adoption by the Board and may be terminated on any earlier date as next
provided.

 

14.2  Amendment
and Termination of the Plan.

 

The Board may, at any time and from time to time,
amend, suspend, or terminate the Plan as to any shares or Stock as to which Grants have not been made. An
amendment to the Plan shall be contingent on approval of the Company’s stockholders only
to the extent required by applicable law, regulations or rules. No Grants shall be
made after the termination of the Plan. No amendment, suspension, or termination of
the Plan shall, without the consent of the Grantee, alter or impair rights or obligations
under any Grant theretofore awarded under the Plan.

 

19

 

15. GENERAL PROVISIONS

 

15.1  Disclaimer
of Rights

 

No provision
in the Plan or in any Grant or Award Agreement shall be construed to confer
upon any individual the right to remain in the employ or service of the Company
or any Affiliate, or to interfere
in any way with any contractual or other right or authority of the Company
either to increase or decrease the compensation or other payments to any
individual at any time, or to terminate any employment or other relationship
between any individual and the Company or any Affiliate. The obligation of the
Company to pay any benefits pursuant to this Plan shall be interpreted as a contractual
obligation to pay only those amounts described herein, in the manner and under
the conditions prescribed herein. The Plan shall in no way be interpreted to
require the Company to transfer any amounts to a third party trustee or
otherwise hold any amounts in trust or escrow for payment to any participant or
beneficiary under the terms of the Plan.

 

15.2  Nonexclusivity
of the Plan

 

Neither the
adoption of the Plan nor the submission of the Plan to the shareholders of the
Company for approval shall be construed as creating any limitations upon the
right and authority of the Board to adopt such other incentive compensation
arrangements (which arrangements may be applicable either generally to a class
or classes of individuals or specifically to a particular individual or particular individuals) as
the Board in its sole discretion determines desirable, including, without
limitation, the granting of stock options otherwise then under the Plan.

 

15.3  Captions

 

The use of
captions in this Plan or any Award Agreement is for the convenience of
reference only and shall not affect the meaning of any provision of the Plan or such Award Agreement.

 

15.4  Other
Award Agreement Provisions

 

Each Grant
awarded under the Plan may contain
such other terms and conditions not inconsistent with the Plan as may be
determined by the Board, in its sole discretion.

 

20

 

15.5  Number
and Gender

 

With respect to words used in this Plan, the
singular form shall include the plural form, the masculine gender shall include
the feminine gender, etc., as the context requires.

 

15.6  Severability

 

If any provision of the Plan or any Award Agreement shall be
determined to be illegal or unenforceable by any court of law in any
jurisdiction, the remaining provisions hereof and thereof shall be severable
and enforceable in accordance with their terms, and all provisions shall remain
enforceable in any other jurisdiction.

 

15.7  Governing
Law

 

The validity and construction of this Plan
and the instruments evidencing the Grants awarded hereunder shall be governed
by the laws of the State of Delaware other than any conflicts or choice of law rule or principle
that might otherwise refer construction or interpretation of this Plan and the
instruments evidencing the Grants awarded hereunder to the substantive laws of
any other jurisdiction.

 

15.8  Code
Section 409A

 

The Board intends to comply with Section 409A
of the Code, or an exemption to Section 409A of the Code, with regard to
Grants hereunder that constitute nonqualified deferred compensation within the
meaning of Section 409A of the Code. To the extent that the Board determines that a Grantee would be
subject to the additional 20% tax imposed on certain nonqualified deferred
compensation plans pursuant to Section 409A of the Code as a result or any provision of any Grant granted under this
Plan, such provision shall be deemed amended to the minimum extent necessary to
avoid application of such additional tax. The nature of any such amendment
shall be determined by the Board.

 

21

 

16. EXECUTION

 

To record adoption of the Plan by the Board as of May 8,
2006, and approval of the Plan by the stockholders on May 8, 2006, the Company
has caused its authorized officer to execute the Plan.

 

 

	
   

  	
  ROSETTA
  STONE INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Tom
  Adams

  
	
   

  	
  Title:

  	
  CEO

  

 

22Exhibit 10.3

 

Exhibit D

Director Form of Option Agreement

 

 

Exhibit D

 

Non-Employee Director—Accelerated Vesting on
a Change in Control

 

Option No.:               

 

ROSETTA STONE INC.

2006 STOCK INCENTIVE PLAN

 

NONQUALIFIED STOCK OPTION AWARD AGREEMENT

 

Rosetta Stone Inc., a Delaware corporation (the “Company”),
hereby grants an option to purchase shares of its Common Stock, $.001 par
value, (the “Stock”) to the optionee
named below. The terms and conditions of the option are set forth in this cover
sheet, in the attachment and in the Company’s 2006 Stock Incentive Plan (the “Plan”).

 

	
  Grant
  Date:

  	
   

  	
  ,  200 

  	
   

  

 

	
  Name of Optionee:

  	
   

  	
   

  

 

	
  Number of Shares Covered by Option:

  	
   

  	
   

  

 

	
  Option Price per Share: $

  	
   

  	
   .

  	
   

  	
   

  

 

	
  Vesting Start Date:

  	
   

  	
   , 20  

  	
   

  

 

By signing this cover sheet, you
agree to all of the terms and conditions described in the attached Agreement
and in the Plan, a copy of which is also attached. You acknowledge that you
have carefully reviewed the Plan, and agree that the Plan will control in the
event any provision of this Agreement should appear to be inconsistent.

 

	
  Optionee: 

  	
   

  	
   

  
	
   

  	
  (Signature)

  	
   

  
	
   

  	
   

  
	
  Company:

  	
   

  	
   

  
	
   

  	
  (Signature)

  	
   

  
	
   

  	
   

  
	
   

  	
  Title:

  	
   

  	
   

  
				

 

Attachment

 

This is not a stock
certificate or a negotiable
instrument

 

 

ROSETTA STONE INC.

2006 STOCK INCENTIVE PLAN

 

NONQUALIFIED STOCK OPTION AGREEMENT

 

Nonqualified Stock Option

 

This
option is not intended to be an incentive stock option under Section 422
of the Internal Revenue Code and will be interpreted accordingly.

 

Vesting

 

This
option is only exercisable before it expires and then only with respect to the
vested portion of the option. Subject to the preceding sentence, you may
exercise this option, in whole or in part, to purchase a whole number of vested shares
not less than 100 shares, unless the number of shares purchased is the total
number available for purchase under the option, by following the procedures set
forth in the Plan and below in this Agreement.

 

Your
right to purchase shares of Stock under this option vests as to one-fourth
(1/4) of the total number of shares covered by this option, as shown on the
cover sheet (the “Option Shares”), on the one-year anniversary of the Vesting
Start Date (“Anniversary Date”), provided you then continue in Service.
Thereafter, for each such vesting date that you remain in Service, the number
of shares of Stock which you may purchase under this option shall vest at the
rate of one-sixteenth (1/16th) of the Option Shares per three month period
following the Anniversary Date. The
resulting aggregate number of vested shares will be rounded to the
nearest whole number, and you cannot vest in more than the number of shares covered
by this option.

 

Notwithstanding
the vesting schedule set forth above, if you have been a member of the Board of
Directors for two (2) years, your Option Shares will become 100% vested
upon the occurrence of a Change of Control as defined in the Plan provided,
however, that a Change of Control shall not include a bona fide, firm
commitment underwritten public offering of the common stock of the Corporation
pursuant to a registration statement declared effective under the Securities
Act of 1933, as amended.

 

No
additional shares of Stock will vest after your Service has terminated for any
reason.

 

2

 

Term

 

Your option will expire in any event at
the close of business at Company headquarters on the day before the 10th
anniversary of the Grant Date, as shown on the cover sheet. Your option will
expire earlier (but never later) if your Service terminates, as described below.

 

Termination
Other Than Cause

 

If
your Service terminates for any reason, other than Cause, then the unvested
portion of your option will expire at the close of business at Company
headquarters on your termination date.

 

Termination
for Cause

 

If
your Service is terminated for Cause, then you shall immediately forfeit all
rights to your option and the option shall immediately expire.

 

Notice
of Exercise

 

When
you wish to exercise this option, you must notify the Company by filing the proper
“Notice of Exercise” form at the address given
on the form. Your notice must specify how many shares you wish to purchase (in
a parcel of at least 100 shares generally). Your notice must also specify how
your shares of Stock should be registered (in your name only or in your and
your spouse’s names as joint tenants with right of survivorship). The notice
will be effective when it is received by the Company.

 

If someone else wants to exercise this option after
your death, that person must prove to the Company’s satisfaction that he or she
is entitled to do so.

 

Form of Payment

 

When you submit your notice of exercise, you must
include payment of the option price for the shares you are purchasing. Payment
may be made in one (or a combination) of the following forms:

 

	
  ·

  	
   

  	
  Cash, your personal check, a cashier’s check, a
  money order or another cash equivalent acceptable to the Company.

  
	
   

  	
   

  	
   

  
	
  ·

  	
   

  	
  By causing the Company or the Affiliate to
  withhold shares of Stock otherwise issuable to you with a fair market value,
  determined as of the effective date of

  

 

3

 

	
   

  	
   

  	
  the
  option exercise, equal to the option price

  
	
   

  	
   

  	
   

  
	
  ·

  	
   

  	
  Shares
  of Stock which have already been owned by you. The value of the shares,
  determined as of the effective date of the option exercise, will be applied
  to the option price.

  
	
   

  	
   

  	
   

  
	
  ·

  	
   

  	
  To
  the extent a public market for the Stock exists as determined by the Company,
  by delivery (on a form prescribed by the Company) of an irrevocable direction
  to a licensed securities broker acceptable to the Company to sell Stock and
  to deliver all or part of the sale proceeds to the Company in payment of the
  aggregate option price and any withholding taxes.

  
	
   

  	
   

  	
   

  

Transfer
of Option

 

During
your lifetime, only you (or, in the event of your legal incapacity or
incompetency, your guardian or legal representative) may exercise the option.
You cannot transfer or assign this option. For instance, you may not sell this
option or use it as security for a loan. If you attempt to do any of these things, this option will immediately become invalid.
You may, however, dispose of this option in your will or it may be transferred
upon your death by the laws of descent and distribution.

 

Regardless
of any marital property settlement agreement, the Company is not obligated to
honor a notice of exercise from your spouse, nor is the Company obligated to
recognize your spouse’s interest in your option in any other way.

 

Market Stand-off Agreement

 

In
connection with any underwritten public offering by the Company of its equity
securities pursuant to an effective
registration statement filed under the Securities Act, including the Company’s
initial public offering, you agree not to sell, make any short sale of, loan,
hypothecate, pledge, grant any option for the purchase of, or otherwise dispose
or transfer for value or agree to engage
in any of the foregoing transactions with respect to any shares of Stock
without the prior written consent of the Company or its underwriters, for such
period of time after the effective date of such registration statement as may
be requested by the Company or the underwriters (not to exceed 180 

 

4

 

days in length).

 

Investment Representation

 

If the sale of Stock under the Plan is not
registered under the Securities Act, but an exemption is available which
requires an investment or other representation, you shall represent and agree
at the time of exercise that the Stock being acquired upon exercise of this
option is being acquired for investment, and not with a view to the sale or
distribution thereof, and shall make such other representations as are deemed
necessary or appropriate by the Company and its counsel.

 

No Transfer

 

You cannot sell, transfer or assign any shares of Stock
acquired on exercise of this option without the Company’s consent other than to
immediate family members or a trust established for your benefit or your
immediate family members. You may,
however, dispose of the shares acquired on exercise of this option in your will
or they may be transferred upon your death by the laws of descent and
distribution. These restrictions apply to any person to whom Stock that was
originally acquired pursuant to this option is bequeathed, gifted, transferred
or otherwise disposed of, without regard to the number of such subsequent
transferees or the manner in which they acquire the Stock.

 

This restriction on transfer shall terminate in the
event that the Stock is listed on an established national or regional stock
exchange, is admitted for quotation on The Nasdaq Stock Market, Inc., or
is publicly traded in an established securities market.

 

Right to Repurchase

 

Following termination of your Service for any
reason, the Company shall have the right to purchase all of those shares of Stock
that you have or will acquire under this option. If the Company exercises its
right to purchase the shares, the Company will notify you of its intention to
purchase such shares, and will consummate the purchase within one year (or 90
days to the extent required by applicable law) of your termination of Service
or, in the case of Stock acquired after your termination of Service, within one
year (or 90 days to the extent required by applicable law) of the date of
exercise. The purchase price shall be the Fair Market Value of the shares on
the date of your termination of Service if the Company exercises its

 

5

 

right to purchase such shares within 90 days of your
termination of Service or exercises its right within 90 days of the date of
your exercise of the option following termination of Service; otherwise the
purchase price shall be the Fair Market Value of the shares on the date the
Company gives you notice of its intent to exercise its right to purchase the
shares. The Company’s rights of repurchase shall terminate in the event that
the Stock is listed on an established national or regional stock exchange, is
admitted for quotation on The Nasdaq Stock Market, Inc., or is publicly
traded in an established securities market.

 

Retention Rights

 

Neither your option nor this Agreement give you the
right  to be retained by the Company (or any Parent,  Subsidiaries or Affiliates) in any capacity. The
Company (and any Parent, Subsidiaries
or Affiliates) reserve the right to terminate your Service at any time and for
any reason.

 

Shareholder Rights

 

You, or your estate or heirs, have no rights as a
shareholder of the Company until a certificate for your option’s shares has
been issued (or an appropriate book entry has been made). No adjustments are
made for dividends or other rights if the applicable record date occurs before
your stock certificate is issued (or an
appropriate book entry has been made), except as
described in the Plan.

 

Adjustments

 

In the event of a stock split, a stock dividend or a similar change in the Stock, the
number of shares covered by this  option
and the option price per share may be adjusted (and rounded down to the nearest
whole number) pursuant to the Plan. Your option shall
be subject to the terms of the agreement of
merger, liquidation or  reorganization in the event the Company
is subject to such corporate activity.

 

Legends

 

All certificates representing the Stock issued upon
exercise of this option shall, where applicable, have endorsed thereon the
following legends:

 

“THE SHARES REPRESENTED BY THIS  CERTIFICATE ARE SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFER AND OPTIONS
TO

 

6

 

PURCHASE SUCH SHARES SET FORTH IN AN AGREEMENT
BETWEEN THE COMPANY AND THE REGISTERED HOLDER, OR HIS OR HER PREDECESSOR IN
INTEREST. A COPY OF SUCH AGREEMENT IS ON FILE AT THE PRINCIPAL OFFICE OF THE
COMPANY AND WILL BE FURNISHED UPON WRITTEN REQUEST TO THE SECRETARY OF THE
COMPANY BY THE HOLDER OF RECORD OF THE SHARES REPRESENTED BY THIS CERTIFICATE.”

 

“THE SHARES REPRESENTED HEREBY HAVE NOT BEEN
REGISTERED OR QUALIFIED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY
SECURITIES LAWS OF ANY STATE OR OTHER JURISDICTION, AND MAY NOT BE SOLD,
PLEDGED, OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION OR
QUALIFICATION THEREOF UNDER SUCH ACT AND SUCH APPLICABLE STATE OR OTHER JURISDICTION’S SECURITIES LAWS OR AN OPINION OF
COUNSEL, SATISFACTORY TO THE COMPANY AND ITS COUNSEL, THAT SUCH REGISTRATION
AND QUALIFICATION IS NOT REQUIRED.”

 

Applicable Law

 

This Agreement will be interpreted and enforced
under the laws of the State of
Delaware, other than any conflicts or choice of law rule or principle that
might otherwise refer construction or interpretation of this Agreement to the
substantive law of another jurisdiction.

 

The Plan

 

The text of the Plan is incorporated in this
Agreement by reference. Certain capitalized terms used in this Agreement
are defined in the Plan, and have the
meaning set forth in the Plan.

 

This Agreement and the Plan constitute the entire
understanding between you and the Company regarding this option. Any prior
agreements, commitments or negotiations concerning this option are superseded.

 

Other Agreements

 

You agree, as a condition of the grant of this
option, that  in
connection with the exercise of the option, you will
execute such document(s) as necessary to become a party to any shareholder
agreement or
voting trust as the

 

7

 

Company may require.

 

By signing the cover sheet of this
Agreement, you agree to all of the terms and conditions described above and in
the Plan.

 

8

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