Stock Option Plan Plus Exhibits and Q&A

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QUESTIONS AND ANSWERS ABOUT STOCK OPTIONS

UNDER THE

[COMPANY]

STOCK OPTION PLAN

1. What is a stock option?

A stock option gives you the right, for a fixed period of time, to purchase a specified number of shares of the

Company's Common Stock at the price (the "option price") that was in effect on the day the option was

granted. When you purchase the stock, you "exercise" your option.

2. What is the Plan?

The [Date] Stock Option/Stock Issuance Plan (the "Plan") is the document that sets forth the general terms and

conditions that apply to the stock options granted by the Company. It is important to read your copy of the

Plan and understand the terms of your Stock Option Agreement. If you have questions, please consult with

the Company.

3. How are Options granted?

Only the Board of Directors, or a committee composed of members of the Board of Directors, can grant stock

options. Shortly after the Board approves a grant, a Notice of Grant of Stock Option ("Notice of Grant")

will be prepared and forwarded, together with a copy of the Plan and a Stock Option Agreement, to an

employee to whom such grant was made.

4. Are there different types of Stock Options?

The Company's stock option plans offer two different types of options: nonstatutory stock options (NSOs)

and incentive stock options (ISOs). ISOs are "qualified," which means they conform to certain regulations of

the Internal Revenue Service that provide for special tax treatment. NSOs are "not qualified" and are subject

only to the terms and conditions of the Plan. Specific differences between the two types of options will be

discussed below.

5. How do I know how many Options I have?

Shortly after the Board grants your option, you will receive the Notice of Grant and Stock Option Agreement

referred to above, which will describe the kind of option you are to receive and its exact terms, including

(i) the number of shares available to you, (ii) the price per share (typically, the "fair market value" of the stock

on the day you are granted the option), and (iii) your vesting schedule. You should sign all copies of the

Notice of Grant and return them to the Company. The Stock Purchase Agreement attached to your Option

Agreement is an exhibit for your information; you will not sign this form of document until you actually

decide to exercise your option and purchase shares of Common Stock. An execution copy of this document

will be prepared for you at the time you elect to make such purchase.

After an officer of the Company signs the Notice of Grant, a copy will be returned to you for your files

together with the exhibits thereto. Please be aware that this package of documents is valuable and should be

kept in a safe place with your other important papers. If you should lose your copy of any of these documents,

however, notify the Company and request a duplicate.

Disclaimer: This template is provided with the understanding that the publisher is not in the business of rendering legal or professional advice. Consult with a reputable professional before signing an agreement, sending one to another party, or using this material.

6. How is the Option Price determined?

Because of legal and tax restrictions, the option price of an ISO issued may not be less than the "fair market

value" of the shares on the day the option is granted. You will be told what the "option price" is for your

options at the time the option is granted. This will be fixed for the life of the option even if the Company's

stock can be sold for a higher amount.

7. What is the Fair Market Value?

The "fair market value" of the Company's Common Stock is the price that a reasonable person could be

expected to pay for the stock. Currently, because the Company does not have an established public market for

its securities (e.g., a listing on NASDAQ with brokers acting as market makers), the fair market value is

determined by the Board of Directors.

8. What does "exercise" mean?

When you "exercise" an option, you purchase from the Company all or a portion of the stock subject to your

option.

9. When may I exercise the Option and purchase the shares?

If you are granted an installment option, you may purchase the shares as they become vested in accordance

with the vesting schedule set out in your Notice of Grant.

If you are granted an immediately exercisable option, you may purchase your shares at any time before the

expiration date of your option, but if you purchase your shares before they have vested, the shares will be

subject to repurchase by the Company at the option price paid per share, should you leave the Company

(whether as an employee, consultant or director) before the shares vest.

10. What is vesting?

The shares purchasable under your Options are subject to vesting provisions. This means you have to remain

in the Company's employ or service for a certain period of time before you may purchase the shares covered

by the option, or in the case of immediately exercisable options, before you fully own the shares purchased

under your option. The shares subject to your option will vest periodically over a period of several years.

If you have an immediately exercisable option, remember that while you may at any time exercise your option

for unvested shares, those shares will be subject to repurchase by the Company if you leave before you vest in

those shares; or you may wait until your shares vest before you exercise your option for those shares. The

choice is yours.

11. An example illustrating vesting:

Jane Doe is granted an option on June 1, [Date] to purchase 4,800 shares of the Company's stock at $1.00 per

share (the fair market value on that date). Her Option Agreement states the option is immediately exercisable

for all 4,800 shares, but that the shares purchasable under the option are to vest as follows: 25% of the shares

will vest one year after the grant date and the balance will vest in equal annual installments over the 3 years

thereafter during which she remains with the Company. Accordingly, the vesting schedule would be as

follows:

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# of Shares Vested On or After

1,200 June 1, [Date]

1,200 June 1, 2000

1,200 June 1, 2001

1,200 June 1, 2002

If Jane purchases all 4,800 shares on September 1, [Date] and then leaves the Company on October 15, 2001,

the Company would have the right to repurchase the 1,200 unvested shares held by Jane at that time at a price

of $1.00 per share, the amount she previously paid for those shares. The 3,600 vested shares would not be

subject to such repurchase.

12. How do I exercise an Option?

If you want to exercise an option, provide the Company with a letter stating your intent to exercise. Since

some employees may have been granted more than one Option, please specify:

* the date of the option grant notice

* the option price

* the number of shares you want to buy

* where to send shares (if other than the Company)

The Company will send you an execution copy of the Stock Purchase Agreement for you to sign. Return the

signed Stock Purchase Agreement to the Company with a check made out to the Company for the purchase

price. (The Company will inform you if it ever becomes registered as a public company subject to the

reporting requirements of the Securities Exchange Act of 1934, which is not presently the case, but in which

case you might be able to exercise your option without the payment of cash). If your option is immediately

exercisable and you are purchasing unvested shares, the Stock Purchase Agreement contains the Company's

repurchase right for any such shares.

13. What is the effective date of exercise?

The effective date will be the date you deliver to the Company your check for the purchase price of your

option shares and your signed Stock Purchase Agreement.

14. When will I receive the certificate?

Within a few weeks after the date of exercise, a stock certificate for any vested shares you purchase will be

prepared by our attorneys in their capacity as our stock transfer agent and sent to you.

If you purchase any unvested shares, the Company will hold the certificates for those shares until your

vesting date.

15. When can I sell stock?

Until the Company goes public, and there is no assurance that it ever will, there is no public market for the

stock. Further, sales of stock are governed by a complex body of securities laws. After the Company goes

public, you may be able to sell your stock shortly after you exercise the option. For your reference, attached

to this document is a brief introduction to certain securities laws, SEC regulations and rules governing resale

of the Company's stock.

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16. What taxes do I pay when I exercise an ISO?

An ISO is not taxable at the time of grant. Currently, on exercise of an ISO you do not pay any tax (unless

you are subject to the "alternative minimum tax" described below). Tax would be due on the gain you make

when you sell your stock.

17. What taxes do I pay when I sell stock purchased pursuant to an ISO?

Under the current tax rules, the difference between your exercise price ("cost") and the selling price is taxed at

the time of sale. Depending on the timing of the sale, the income recognized may be eligible for long-term

capital gains treatment.

18. An example of tax liability for an ISO:

On October 1, [Date], Jane Doe purchases 1,200 fully-vested shares under the June 1, [Date] option at $1.00

per share. At the time of such purchase, the stock has a fair market value of $3.00 per share. Because she had

to pay $1,200 for shares with a fair market value of $3,600, Jane has theoretically made a $2,400 profit by

exercising her option.

Since this is an ISO, Jane would be entitled to postpone payment of taxes on the $2,400 "profit" until she sells

the shares (unless she owed alternative minimum tax as explained below).

If we assume she sells the shares for $4.00 per share in early 2000, she would owe taxes for 2000 on $3,600

(the difference between the $1,200 she paid and the $4,800 she received from the sale).

It is important to remember that the values used in these calculations are only hypothetical examples, and the

Company cannot determine whether its stock will increase in price in the future.

19. What taxes do I pay when I exercise an NSO?

Non-statutory options generally are not taxable at the time of grant. Upon exercise, you will recognize

ordinary income with respect to any shares for which the Company's repurchase right has lapsed or any other

shares in which the recipient is at the time fully vested. Such income will be in an amount equal to the excess

of the value of the vested shares on the exercise date over the exercise price paid for such shares. Taxable

income will be recognized on the balance of the shares as the repurchase right (if any) lapses with respect to

those shares, and the income will be equal to the spread which exists between the value of those shares on the

lapse date and the exercise price paid for the shares.

You may elect under Section 83(b) of the Internal Revenue Code to be taxed at the time the option is

exercised for unvested shares subject to the Company's repurchase right. The election must be filed with the

IRS within thirty (30) days after exercise. If the election is made, no additional income will be recognized as

the repurchase right lapses. However, should you incur any loss upon the repurchase of your unvested shares

following termination of service (the difference between the amount of taxable income recognized at the time

of the Section 83(b) election and the amount received upon the Corporation's repurchase of the unvested

shares), such loss will not be deductible for tax purposes.

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20. What taxes do I pay when I sell stock purchased pursuant to an NSO?

You will recognize either short or long term capital gain (or loss) when you sell your shares. The amount of

the gain (or loss) equals the spread between the selling price and your basis in the shares. Your basis is

generally the exercise price plus any income recognized on the shares at the tie of exercise. If you have held

your shares for more than eighteen months, you will recognize long term capital gain (or loss). If you have

held your shares for less than eighteen months, you will recognize short term capital gain or loss. In general,

long term capital gains are taxed at preferential rates but short term capital losses are more beneficial than

long term capital losses.

For any vested shares, and for any unvested shares if you have made a Section 83(b) election as described

above, the holding period for capital gains begins at the time of exercise. The capital gains holding period for

unvested shares for which you have not made the Section 83(b) election will begin at the time those shares

become vested.

The Company strongly encourages you to consult with your own tax advisor for a more in depth and personal

analysis of the tax implications of the exercise of your option and later sale of your shares.

21. An example of tax liability for an NSO:

On July 1, [Date] assume Jane Doe purchases 1,200 fully-vested shares under the June 1, [Date] option at

$1.00 per share. At the time of such purchase, the stock has a fair market value of $3.00 per share. Because

she paid $1,200 for shares with a fair market value of $3,600, Jane will recognize ordinary income of $2,400.

Section 83(b) is not an issue since she only exercised for vested shares.

If we assume she sells the shares for $4.00 per share in March 2001, she would owe tax on capital gain for

2001 of $1,200 (the difference between her exercise price ($1,200) plus the amount of income she recognized

when she exercised ($2,400) and her sale proceeds ($4,800). The capital gain is long term since Jane held her

shares for more than eighteen months after exercise.

It is important to remember that the values used in these calculations are only hypothetical examples, and the

Company cannot determine whether its stock will increase in price in the future.

22. What is Alternative Minimum Tax?

Alternative Minimum Tax is a special tax computation that certain taxpayers may have to do. For many of

you, the alternative minimum tax will not be relevant. You should consult your tax advisor to see if it may

apply to you.

In general, when you exercise an ISO, in computing alternative minimum taxable income, you must include

the difference between your exercise price and the fair market value of the purchased shares on the exercise

date. When you do your tax return, you may have to calculate your taxes two different ways. Under the

regular calculation, this spread on your option is not added to your income at all; it is not taxed until the shares

are sold or otherwise transferred. But you may also have to do a separate, alternative calculation which

includes as part of your taxable income the ISO spread, as well as other "tax preference" items. You may end

up paying higher taxes as a result of this alternative calculation. If alternative minimum tax does apply to you,

you may be able to plan your option exercises to minimize any possible alternative minimum tax liability. If you use this template, please make a donation so that we can continue to add to the templates library and assist other startups. Pay it forward! https://www.paypal.com/cgi-bin/webscr?cmd=_s-xclick&hosted_button_id=6978591

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23. What if I leave the Company?

If you leave the Company, you will have 3 months to exercise your option for any vested shares not otherwise

purchased before your termination date.

24. What should I say if someone asks me about the value of any stock option or the

Company's financial status?

All inquiries about the Company's financial condition or prospects, and any questions from anyone who is

interested in the Company from the perspective of an investor (rather than a customer or prospective

employee), should be directed to the Chief Financial Officer or the President. This includes all inquiries from

the financial community and the financial press.

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ADDITIONAL INFORMATION ABOUT

SECURITIES LAWS AND RESALE OF

RESTRICTED SECURITIES

Your option by its terms will not be transferable other than upon your death and, during your lifetime, will be exercisable only by you. In addition to this restriction, your option and the shares purchased upon exercise of that option may be subject to restrictions on transfer under state and federal securities laws.

The Plan, the options and the shares have not been registered under the Securities Act of 1933, as amended (the “Act”), which is a federal law regulating the issuance of and transactions in securities. Rather, such options and shares will be issued in reliance on an exemption under the Act available for employee stock plans. A

restrictive legend will be placed on the stock certificate stating that no sale or other disposition of the stock may be made without meeting certain conditions, which include registration of the stock by the Company or an opinion to the Company by an attorney that an exemption is available under the Act for a resale of the stock.

You are advised that because the Company‟s securities have not been registered under the Act, any shares purchased

upon exercise of an option are “restricted securities” and must be held indefinitely unless they are subsequently registered for sale under the Act or an exemption from such registration is available. Moreover, the Company is under no obligation to register the shares issued under the Plan, and there is no current public market for any of the Company‟s securities and it is uncertain that such a market will develop in the future.

In the future, Rule 144 of the United States Securities and Exchange Commission (“SEC”) may be

available as an exemption for resales of any unregistered shares of the Common Stock you may have purchased upon the exercise of your option. SEC Rule 144 will allow the resale of such unregistered shares if all of the conditions of

the Rule are satisfied. The applicable requirements are as follows:

(1) The Company must at the time of such sale be subject to the periodic

reporting requirements of the federal securities laws. In general, the Company

would become subject to such requirements immediately following the initial

public offering of its securities;

(2) The shares must have been held for at least one year, although this

holding period requirement will automatically lapse ninety days after the initial

public offering;

(3) The number of shares which may be sold pursuant to the Rule 144

exemption in any three-month period is limited to the greater of 1% of the total

outstanding shares of the Company‟s Common Stock at that time or the average

trading volume in such shares for the four weeks immediately preceding the date

of sale;

(4) The sale must be effected in a broker transaction or through a

market-maker in the shares; and

(5) Notice of the sale must be given contemporaneously to the SEC.

Under the provisions of subparagraph (k) of Rule 144, a seller does not need to comply with the

above requirements if the seller: (i) is not an affiliate of the issuer (i.e. officer, director or significant stockholder) and has not been an affiliate during the three months prior to sale, and (ii) has held the shares for at least two years. It is

important to realize that the Rule 144 holding period for your shares will not begin until the shares are purchased and will not include the period of time for which your option was outstanding.

Please be aware that this summary only briefly describes certain basic federal securities law restrictions that apply to the transfer of any shares you have purchased and does not purport to be an exhaustive guide to securities law or the ability of a stockholder to transfer such stockholder‟s stock. This summary does not discuss the contractual restrictions that may apply to your shares regardless of compliance with federal securities law and is intended only as a If you use this template, please make a donation so that we can continue to add to the templates library and assist other startups. Pay it forward! https://www.paypal.com/cgi-bin/webscr?cmd=_s-xclick&hosted_button_id=6978591

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general informational introduction to certain federal securities law provisions.

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[COMPANY]

NOTICE OF GRANT OF STOCK OPTION

Notice is hereby given of the following option grant (the “Option”) made to purchase shares of [Company], Inc. (the “Company”) common stock (the “Common Stock”):

Optionee:

Grant Date:

Vesting Commencement Date:

Class of Common Stock: Not Applicable

Option Price Per Share: $

Number of Option Shares:

Expiration Date:

Type of Option: Incentive/Non-Statutory [circle one]

Exercise Schedule: Provided Optionee remains in Service (as defined in the Stock Option

Agreement attached as Exhibit B hereto), the Option will become exercisable with respect to (i)

twenty-five percent (25%) of the Option Shares one (1) year after the Vesting Commencement Date

and (ii) the balance of the Option Shares in a series of equal successive quarterly installments over

the three (3) year period thereafter. Once exercisable, the option may not be exercised on more than

two separate occasions in each calendar year during the term of the Option (other than the calendar

year in which this Option is to expire or terminate).

Repurchase Right: Not applicable.

Optionee understands and agrees that the Option is granted subject to and in accordance with the express terms and conditions of the [Company], Inc. [Date] Stock Option/Stock Issuance Plan (the “Plan”). Optionee further agrees to be bound by the terms and conditions of the Option as set forth in the Stock Option Agreement attached hereto as Exhibit B. Optionee understands that certain terms and conditions governing Option Shares purchased pursuant to the Option are set forth in the Stock Purchase Agreement attached hereto as Exhibit C.

Optionee hereby acknowledges receipt of a copy of the Plan in the form attached hereto as Exhibit A.

RIGHTS OF FIRST REFUSAL. THE OPTIONEE HEREBY AGREES THAT ALL

OPTION SHARES ACQUIRED UPON THE EXERCISE OF THE OPTION SHALL BE SUBJECT TO

CERTAIN TRANSFER RESTRICTIONS AND RIGHTS OF FIRST REFUSAL EXERCISABLE BY THE

COMPANY AND CERTAIN OTHER SHAREHOLDERS OF THE COMPANY UPON ANY PROPOSED

SALE, ASSIGNMENT, TRANSFER, ENCUMBRANCE OR OTHER DISPOSITION OF THE COMPANY’S

SHARES. THE TERMS AND CONDITIONS OF SUCH RIGHTS ARE SPECIFIED IN THE STOCK

PURCHASE AGREEMENT ATTACHED HERETO AS EXHIBIT C.

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No Employment or Service Contract. Nothing in this Agreement or in the Plan shall confer upon the Optionee any right to continue in the Service of the Company for any period of specific duration or interfere with or otherwise restrict in any way the rights of the Company or the Optionee, which rights are hereby expressly reserved by each, to terminate Optionee‟s Service at any time for any reason whatsoever, with or without cause.

Date

[COMPANY], INC.

By:

Its:

Optionee

Address:

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DOCSFORD

Stock Option Plan Plus Exhibits and Q&A