EXHIBIT 99.4
IMMEDIATELY EXERCISABLE
RHYTHMS NETCONNECTIONS INC.
STOCK PURCHASE AGREEMENT
AGREEMENT made as of this _____ day of ____________, 19___, by and among
Rhythms NetConnections Inc., (the "Corporation"), ________________________,
the holder of a stock option (the "Optionee") under the Corporation's 1997
Stock Option/Stock Issuance Plan and ________________________, the Optionee's
spouse.
I. EXERCISE OF OPTION
1.1 EXERCISE. Optionee hereby purchases ____________ shares
("Purchased Shares") of the Corporation's common stock ("Common Stock")
pursuant to that certain option ("Option") granted Optionee on _____________,
19___ ("Grant Date") to purchase up to ____________ shares of the Common
Stock ("Total Purchasable Shares") under the Corporation's 1997 Stock
Option/Stock Issuance Plan (the "Plan") at an option price of $__________ per
share ("Option Price").
1.2 PAYMENT. Concurrently with the delivery of this Agreement
to the Corporate Secretary of the Corporation, Optionee shall pay the Option
Price for the Purchased Shares in accordance with the provisions of the
agreement between the Corporation and Optionee evidencing the Option (the
"Option Agreement") and shall deliver whatever additional documents may be
required by the Option Agreement as a condition for exercise, together with a
duly-executed blank Assignment Separate from Certificate (in the form
attached hereto as Exhibit I) with respect to the Purchased Shares.
1.3 DELIVERY OF CERTIFICATES. The certificates representing the
Purchased Shares hereunder shall be held in escrow by the Corporate Secretary
of the Corporation in accordance with the provisions of Article VII.
1.4 SHAREHOLDER RIGHTS. Until such time as the Corporation
actually exercises its repurchase right, rights of first refusal or special
purchase right under this Agreement, Optionee (or any successor in interest)
shall have all the rights of a shareholder (including voting and dividend
rights) with respect to the Purchased Shares, including the Purchased Shares
held in escrow under Article VII, subject, however, to the transfer
restrictions of Article IV.
II. SECURITIES LAW COMPLIANCE
2.1 EXEMPTION FROM REGISTRATION. The Purchased Shares have not
been registered under the Securities Act of 1933, as amended (the "1933
Act"), and are accordingly being issued to Optionee in reliance upon the
exemption from such registration provided by Rule 701 of the Securities and
Exchange Commission for stock issuances under compensatory benefit plans such
as the Plan. Optionee hereby acknowledges previous receipt of a copy of the
documentation for such Plan in the form of Exhibit C to the Notice of Grant
of Stock Option (the "Grant Notice") accompanying the Option Agreement.
2.2 RESTRICTED SECURITIES.
A. Optionee hereby confirms that Optionee has been informed
that the Purchased Shares are restricted securities under the 1933 Act and
may not be resold or transferred unless the Purchased Shares are first
registered under the Federal securities laws or unless an exemption from such
registration is available. Accordingly, Optionee hereby acknowledges that
Optionee is prepared to hold the Purchased Shares for an indefinite period
and that Optionee is aware that Rule 144 of the Securities and Exchange
Commission issued under the 1933 Act is not presently available to exempt the
sale of the Purchased Shares from the registration requirements of the 1933
Act.
B. Upon the expiration of the ninety (90)-day period
immediately following the date on which the Corporation first becomes subject
to the reporting requirements of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), the Purchased Shares, to the extent vested
under Article V, may be sold (without registration) pursuant to the
applicable requirements of Rule 144. If Optionee is at the time of such sale
an affiliate of the Corporation for purposes of Rule 144 or was such an
affiliate during the preceding three (3) months, then the sale must comply
with all the requirements of Rule 144 (including the volume limitation on the
number of shares sold, the broker/market-maker sale requirement and the
requisite notice to the Securities and Exchange Commission); however, the two
(2)-year holding period requirement of the Rule will not be applicable. If
Optionee is not at the time of the sale an affiliate of the Corporation nor
was such an affiliate during the preceding three (3) months, then none of the
requirements of Rule 144 (other than the broker/market-maker sale requirement
for Purchased Shares held for less than three (3) years following payment in
cash of the Option Price therefor) will be applicable to the sale.
C. Should the Corporation not become subject to the
reporting requirements of the Exchange Act, then Optionee may, provided
he/she is not at the time an affiliate of the Corporation (nor was such an
affiliate during the preceding three (3) months), sell the Purchased Shares
(without registration) pursuant to paragraph (k) of Rule 144 after the
Purchased Shares have been held for a period of three (3) years following the
payment in cash of the Option Price for such shares.
2.3 DISPOSITION OF SHARES. Optionee hereby agrees that Optionee
shall make no disposition of the Purchased Shares (other than a permitted
transfer under paragraph 4.1) unless and until there is compliance with all
of the following requirements:
(a) Optionee shall have notified the Corporation of the
proposed disposition and provided a written summary of the terms and
conditions of the proposed disposition.
(b) Optionee shall have complied with all requirements of
this Agreement applicable to the disposition of the Purchased Shares.
(c) Optionee shall have provided the Corporation with
written assurances, in form and substance satisfactory to the Corporation,
that (i) the proposed disposition does not require registration of the
Purchased Shares under the 1933 Act or (ii) all appropriate action
necessary for compliance with the registration requirements of
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the 1933 Act or of any exemption from registration available under the
1933 Act (including Rule 144) has been taken.
(d) Optionee shall have provided the Corporation with
written assurances, in form and substance satisfactory to the Corporation,
that the proposed disposition will not result in the contravention of any
transfer restrictions applicable to the Purchased Shares pursuant to the
provisions of the Commissioner Rules identified in paragraph 2.5.
The Corporation shall NOT be required (i) to transfer on its books
any Purchased Shares which have been sold or transferred in violation of the
provisions of this Article II NOR (ii) to treat as the owner of the Purchased
Shares, or otherwise to accord voting or dividend rights to, any transferee
to whom the Purchased Shares have been transferred in contravention of this
Agreement.
2.4 RESTRICTIVE LEGENDS. In order to reflect the restrictions
on disposition of the Purchased Shares, the stock certificates for the
Purchased Shares will be endorsed with restrictive legends, including one or
more of the following legends:
(i) "The shares represented by this certificate have
not been registered under the Securities Act of 1933. The shares may not be
sold or offered for sale in the absence of (a) an effective registration
statement for the shares under such Act, (b) a `no action' letter of the
Securities and Exchange Commission with respect to such sale or offer, or (c)
satisfactory assurances to the Corporation that registration under such Act
is not required with respect to such sale or offer."
(ii) "The shares represented by this certificate are
unvested and accordingly may not be sold, assigned, transferred, encumbered,
or in any manner disposed of except in conformity with the terms of a written
agreement dated ____________, 19__ between the Corporation and the registered
holder of the shares (or the predecessor in interest to the shares). Such
agreement grants certain repurchase rights and rights of first refusal to the
Corporation (or its assignees) upon the sale, assignment, transfer, encumbrance
or other disposition of the Corporation's shares or upon termination of service
with the Corporation. The Corporation will upon written request furnish a copy
of such agreement to the holder hereof without charge."
III. SPECIAL TAX ELECTION
3.1 SECTION 83(b) ELECTION APPLICABLE TO THE EXERCISE OF A
NON-STATUTORY STOCK OPTION. If the Purchased Shares are acquired hereunder
pursuant to the exercise of a NON-STATUTORY STOCK OPTION, as specified in the
Grant Notice, then the Optionee understands that under Section 83 of the
Internal Revenue Code of 1986, as amended (the "Code"), the excess of the
fair market value of the Purchased Shares on the date any forfeiture
restrictions applicable to such shares lapse over the Option Price paid for
such shares will be reportable as ordinary income on such lapse date. For
this purpose, the term "forfeiture restrictions" includes the right of the
Corporation to repurchase the Purchased Shares pursuant to the Repurchase
Right provided under Article V of this Agreement. Optionee understands that
he/she may elect under Section 83(b) of the Code to be taxed at the time the
Purchased Shares are acquired hereunder, rather
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than when and as such Purchased Shares cease to be subject to such forfeiture
restrictions. Such election must be filed with the Internal Revenue Service
within thirty (30) days after the date of this Agreement. Even if the fair
market value of the Purchased Shares at the date of this Agreement equals the
Option Price paid (and thus no tax is payable), the election must be made to
avoid adverse tax consequences in the future. THE FORM FOR MAKING THIS
ELECTION IS ATTACHED AS EXHIBIT II HERETO. OPTIONEE UNDERSTANDS THAT FAILURE
TO MAKE THIS FILING WITHIN THE THIRTY (30)-DAY PERIOD WILL RESULT IN THE
RECOGNITION OF ORDINARY INCOME BY THE OPTIONEE AS THE FORFEITURE RESTRICTIONS
LAPSE.
3.2 CONDITIONAL SECTION 83(b) ELECTION APPLICABLE TO THE
EXERCISE OF AN INCENTIVE STOCK OPTION. If the Purchased Shares are acquired
hereunder pursuant to the exercise of an INCENTIVE STOCK OPTION under the
Federal tax laws, as specified in the Grant Notice, then the following tax
principles shall be applicable to the Purchased Shares:
A. For regular tax purposes, no taxable income will be
recognized at the time the Option is exercised.
B. The excess of (i) the fair market value of the Purchased
Shares on the date the Option is exercised or (if later) on the date any
forfeiture restrictions applicable to the Purchased Shares lapse over (ii)
the Option Price paid for the Purchased Shares will be includible in the
Optionee's taxable income for alternative minimum tax purposes.
C. If the Optionee makes a disqualifying disposition of the
Purchased Shares, then the Optionee will recognize ordinary income in the
year of such disposition equal in amount to the excess of (i) the fair market
value of the Purchased Shares on the date the Option is exercised or (if
later) on the date any forfeiture restrictions applicable to the Purchased
Shares lapse over (ii) the Option Price paid for the Purchased Shares. Any
additional gain recognized upon the disqualifying disposition will be either
short-term or long-term capital gain depending upon the period for which the
Purchased Shares are held prior to the disposition.
D. For purposes of the foregoing, the term "forfeiture
restrictions" will include the right of the Corporation to repurchase the
Purchased Shares pursuant to the Repurchase Right provided under Article V of
this Agreement. The term "disqualifying disposition" means any sale or other
disposition(1) of the Purchased Shares within two (2) years after the Grant
Date or within one (1) year after the execution date of this Agreement.
E. In the absence of final Treasury Regulations relating
to incentive stock options, it is not certain whether the Optionee may, in
connection with the exercise of the Option for any Purchased Shares at the time
subject to forfeiture restrictions, file a protective
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(1) Generally, a disposition of shares purchased under an incentive stock
option includes any transfer of legal title, including a transfer by
sale, exchange or gift, but does not include a transfer to the
Optionee's spouse, a transfer into joint ownership with right of
survivorship if Optionee remains one of the joint owners, a pledge, a
transfer by bequest or inheritance or certain tax free exchanges
permitted under the Code.
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election under Section 83(b) of the Code which would limit (I) the Optionee's
alternative minimum taxable income upon exercise and (II) the Optionee's
ordinary income upon a disqualifying disposition, to the excess of (i) the
fair market value of the Purchased Shares on the date the Option is exercised
over (ii) the Option Price paid for the Purchased Shares. THE APPROPRIATE
FORM FOR MAKING SUCH A PROTECTIVE ELECTION IS ATTACHED AS EXHIBIT II TO THIS
AGREEMENT AND MUST BE FILED WITH THE INTERNAL REVENUE SERVICE WITHIN THIRTY
(30) DAYS AFTER THE DATE OF THIS AGREEMENT. HOWEVER, SUCH ELECTION IF
PROPERLY FILED WILL ONLY BE ALLOWED TO THE EXTENT THE FINAL TREASURY
REGULATIONS PERMIT SUCH A PROTECTIVE ELECTION.
3.3 OPTIONEE ACKNOWLEDGES THAT IT IS OPTIONEE'S SOLE
RESPONSIBILITY, AND NOT THE CORPORATION'S, TO FILE A TIMELY ELECTION UNDER
SECTION 83(b), EVEN IF OPTIONEE REQUESTS THE CORPORATION OR ITS
REPRESENTATIVES TO MAKE THIS FILING ON HIS/HER BEHALF. This filing should be
made by registered or certified mail, return receipt requested, and Optionee
must retain two (2) copies of the completed form for filing with his or her
State and Federal tax returns for the current tax year and an additional copy
for his or her records.
IV. TRANSFER RESTRICTIONS
4.1 RESTRICTION ON TRANSFER. Optionee shall not transfer,
assign, encumber or otherwise dispose of any of the Purchased Shares which
are subject to the Corporation's Repurchase Right under Article V. In
addition, Purchased Shares which are released from the Repurchase Right shall
not be transferred, assigned, encumbered or otherwise made the subject of
disposition in contravention of the Corporation's First Refusal Right under
Article VI. Such restrictions on transfer, however, shall NOT be applicable
to (i) a gratuitous transfer of the Purchased Shares made to the Optionee's
spouse or issue, including adopted children, or to a trust for the exclusive
benefit of the Optionee or the Optionee's spouse or issue, PROVIDED AND ONLY
IF the Optionee obtains the Corporation's prior written consent to such
transfer, (ii) a transfer of title to the Purchased Shares effected pursuant
to the Optionee's will or the laws of intestate succession or (iii) a
transfer to the Corporation in pledge as security for any purchase-money
indebtedness incurred by the Optionee in connection with the acquisition of
the Purchased Shares.
4.2 TRANSFEREE OBLIGATIONS. Each person (other than the
Corporation) to whom the Purchased Shares are transferred by means of one of
the permitted transfers specified in paragraph 4.1 must, as a condition
precedent to the validity of such transfer, acknowledge in writing to the
Corporation that such person is bound by the provisions of this Agreement and
that the transferred shares are subject to (i) both the Corporation's
Repurchase Right and the Corporation's First Refusal Right granted hereunder
and (ii) the market stand-off provisions of paragraph 4.4, to the same extent
such shares would be so subject if retained by the Optionee.
4.3 DEFINITION OF OWNER. For purposes of Articles IV, V, VI and
VII and Section 9.4 of this Agreement, the term "Owner" shall include the
Optionee and all subsequent holders of the Purchased Shares who derive their
chain of ownership through a permitted transfer from the Optionee in
accordance with paragraph 4.1.
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4.4 MARKET STAND-OFF PROVISIONS.
A. In connection with any underwritten public offering
by the Corporation of its equity securities pursuant to an effective
registration statement filed under the 1933 Act, including the Corporation's
initial public offering, Owner shall not sell, make any short sale of, loan,
hypothecate, pledge, grant any option for the purchase of, or otherwise dispose
or transfer for value or otherwise agree to engage in any of the foregoing
transactions with respect to, any Purchased Shares without the prior written
consent of the Corporation or its underwriters. Such limitations shall be in
effect for such period of time from and after the effective date of such
registration statement as may be requested by the Corporation or such
underwriters; PROVIDED, however, that in no event shall such period exceed one
hundred-eighty (180) days. The limitations of this paragraph 4.4 shall remain
in effect for the two-year period immediately following the effective date of
the Corporation's initial public offering and shall thereafter terminate and
cease to have any force or effect.
B. Owner shall be subject to the market stand-off
provisions of this paragraph 4.4 PROVIDED AND ONLY IF the officers and directors
of the Corporation are also subject to similar arrangements.
C. In the event of any stock dividend, stock split,
recapitalization or other change affecting the Corporation's outstanding Common
Stock effected as a class without receipt of consideration, then any new,
substituted or additional securities distributed with respect to the Purchased
Shares shall be immediately subject to the provisions of this paragraph 4.4, to
the same extent the Purchased Shares are at such time covered by such
provisions.
D. In order to enforce the limitations of this paragraph
4.4, the Corporation may impose stop-transfer instructions with respect to the
Purchased Shares until the end of the applicable stand-off period.
V. REPURCHASE RIGHT
5.1 GRANT. The Corporation is hereby granted the right (the
"Repurchase Right"), exercisable at any time during the sixty (60)-day period
following the date the Optionee ceases for any reason to remain in Service or
(if later) during the sixty (60)-day period following the execution date of this
Agreement, to repurchase at the Option Price all or (at the discretion of the
Corporation and with the consent of the Optionee) any portion of the Purchased
Shares in which the Optionee has not acquired a vested interest in accordance
with the vesting provisions of paragraph 5.3 (such shares to be hereinafter
called the "Unvested Shares"). For purposes of this Agreement, the Optionee
shall be deemed to remain in Service for so long as the Optionee continues to
render periodic services to the Corporation or any parent or subsidiary
corporation, whether as an employee, a non-employee member of the board of
directors, or an independent contractor or consultant.
5.2 EXERCISE OF THE REPURCHASE RIGHT. The Repurchase Right shall
be exercisable by written notice delivered to the Owner of the Unvested Shares
prior to the expiration of the applicable sixty (60)-day period specified in
paragraph 5.1. The notice shall indicate the number of Unvested Shares to be
repurchased and the date on which the repurchase is to be effected, such date to
be not more than thirty (30) days after the date of notice. To the
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extent one or more certificates representing Unvested Shares may have been
previously delivered out of escrow to the Owner, then Owner shall, prior to
the close of business on the date specified for the repurchase, deliver to
the Secretary of the Corporation the certificates representing the Unvested
Shares to be repurchased, each certificate to be properly endorsed for
transfer. The Corporation shall, concurrently with the receipt of such stock
certificates (either from escrow in accordance with paragraph 7.3 or from
Owner as herein provided), pay to Owner in cash or cash equivalents
(including the cancellation of any purchase-money indebtedness), an amount
equal to the Option Price previously paid for the Unvested Shares which are
to be repurchased.
5.3 TERMINATION OF THE REPURCHASE RIGHT. The Repurchase Right
shall terminate with respect to any Unvested Shares for which it is not timely
exercised under paragraph 5.2. In addition, the Repurchase Right shall
terminate, and cease to be exercisable, with respect to any and all Purchased
Shares in which the Optionee vests in accordance with the vesting schedule
specified in the Grant Notice. All Purchased Shares as to which the Repurchase
Right lapses shall, however, continue to be subject to (i) the First Refusal
Right of the Corporation and its assignees under Article VI, (ii) the market
stand-off provisions of paragraph 4.4 and (iii) the Special Purchase Right under
Article VIII.
5.4 AGGREGATE VESTING LIMITATION. If the Option is exercised in
more than one increment so that the Optionee is a party to one or more other
Stock Purchase Agreements ("Prior Purchase Agreements") which are executed prior
to the date of this Agreement, then the total number of Purchased Shares as to
which the Optionee shall be deemed to have a fully-vested interest under this
Agreement and all Prior Purchase Agreements shall not exceed in the aggregate
the number of Purchased Shares in which the Optionee would otherwise at the time
be vested, in accordance with the vesting provisions of paragraph 5.3, had all
the Purchased Shares been acquired exclusively under this Agreement.
5.5 FRACTIONAL SHARES. No fractional shares shall be repurchased
by the Corporation. Accordingly, should the Repurchase Right extend to a
fractional share (in accordance with the vesting provisions of paragraph 5.3) at
the time the Optionee ceases Service, then such fractional share shall be added
to any fractional share in which the Optionee is at such time vested in order to
make one whole vested share no longer subject to the Repurchase Right.
5.6 ADDITIONAL SHARES OR SUBSTITUTED SECURITIES. In the event of
any stock dividend, stock split, recapitalization or other change affecting the
Corporation's outstanding Common Stock as a class effected without receipt of
consideration, then any new, substituted or additional securities or other
property (including money paid other than as a regular cash dividend) which is
by reason of any such transaction distributed with respect to the Purchased
Shares shall be immediately subject to the Repurchase Right, but only to the
extent the Purchased Shares are at the time covered by such right. Appropriate
adjustments to reflect the distribution of such securities or property shall be
made to the number of Purchased Shares and Total Purchasable Shares hereunder
and to the price per share to be paid upon the exercise of the Repurchase Right
in order to reflect the effect of any such transaction upon the Corporation's
capital structure; PROVIDED, however, that the aggregate purchase price shall
remain the same.
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5.7 CORPORATE TRANSACTION.
A. The Repurchase Rights shall automatically terminate
and cease to be exercisable with respect to a portion of the Purchased Shares
upon the consummation of any Corporate Transaction, provided that such
repurchase right shall not terminate if and to the extent the repurchase rights
are assigned to the successor corporation (or parent thereof) in connection with
such Corporate Transaction. The portion of the Purchased Shares with respect to
which the repurchase rights will terminate shall be a number of Purchased Shares
equal to the total number of Unvested Shares immediately prior to the Corporate
Transaction multiplied by a fraction, the NUMERATOR of which is the number of
complete months which elapsed after the Vesting Commencement Date set forth in
the Grant Notice and the date of the Corporate Transaction, and the DENOMINATOR
of which is the number of months required under the Grant Notice for all of the
Purchased Shares to become fully vested. Any and all repurchase rights which
will not be either assigned or terminated at the time of the Corporate
Transaction may be exercised by the Company immediately prior to the Corporate
Transaction.
B. Repurchase rights which are assigned in connection
with a Corporate Transaction shall be exercisable with respect to the property
issued to the Optionee upon consummation of such Corporate Transaction in
exchange for the Common Stock held by the Optionee subject to the repurchase
rights immediately prior to the Corporate Transaction.
C. Any Repurchase Rights which are assigned in a
Corporate Transaction and do not otherwise become vested at that time, shall
automatically terminate and cease to be exercisable in the event the Optionee's
Service should subsequently terminate by reason of an Involuntary Termination
within twenty-four (24) months following the effective date of such Corporate
Transaction.
D. This Agreement shall not in any way affect the right
of the Corporation to adjust, reclassify, reorganize or otherwise make changes
in its capital or business structure or to merge, consolidate, dissolve,
liquidate or sell or transfer all or any part of its business or assets.
VI. RIGHT OF FIRST REFUSAL
6.1 GRANT. The Corporation is hereby granted rights of first
refusal (the "First Refusal Right"), exercisable in connection with any proposed
transfer of the Purchased Shares in which the Optionee has vested in accordance
with the vesting provisions of Article V. For purposes of this Article VI, the
term "transfer" shall include any sale, assignment, pledge, encumbrance or other
disposition for value of the Purchased Shares intended to be made by the Owner,
but shall not include any of the permitted transfers under paragraph 4.1.
6.2 NOTICE OF INTENDED DISPOSITION. In the event the Owner
desires to accept a bona fide third-party offer for the transfer of any or all
of the Purchased Shares (the shares subject to such offer to be hereinafter
called the "Target Shares"), Owner shall promptly (i) deliver to the Corporate
Secretary of the Corporation written notice (the "Disposition Notice") of the
terms and conditions of the offer, including the purchase price and the identity
of the third-party offeror, and (ii) provide satisfactory proof that the
disposition of the Target Shares to such
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third-party offeror would not be in contravention of the provisions set forth
in Articles II and IV of this Agreement.
6.3 EXERCISE OF RIGHT. The Corporation shall, for a period of
forty-five (45) days following receipt of the Disposition Notice, have the right
to repurchase any or all of the Target Shares specified in the Disposition
Notice upon the same terms and conditions specified therein or upon terms and
conditions which do not materially vary from those specified therein. Such
right shall be exercisable by delivery of written notice (the "Exercise Notice")
to Owner prior to the expiration of the forty-five (45)-day exercise period. If
such right is exercised with respect to all the Target Shares specified in the
Disposition Notice, then the Corporation (or its assignees) shall effect the
repurchase of the Target Shares, including payment of the purchase price, not
more than ten (10) business days after delivery of the Exercise Notice; and at
such time Owner shall deliver to the Corporation the certificates representing
the Target Shares to be repurchased, each certificate to be properly endorsed
for transfer. To the extent any of the Target Shares are at the time held in
escrow under Article VII, the certificates for such shares shall automatically
be released from escrow and delivered to the Corporation for purchase. Should
the purchase price specified in the Disposition Notice be payable in property
other than cash or evidences of indebtedness, the Corporation (or its assignees)
shall have the right to pay the purchase price in the form of cash equal in
amount to the value of such property. If the Owner and the Corporation (or its
assignees) cannot agree on such cash value within ten (10) days after the
Corporation's receipt of the Disposition Notice, the valuation shall be made by
an appraiser of recognized standing selected by the Owner and the Corporation
(or its assignees) or, if they cannot agree on an appraiser within twenty (20)
days after the Corporation's receipt of the Disposition Notice, each shall
select an appraiser of recognized standing and the two appraisers shall
designate a third appraiser of recognized standing, whose appraisal shall be
determinative of such value. The cost of such appraisal shall be shared equally
by the Owner and the Corporation. The closing shall then be held on the LATER
of (i) the tenth business day following delivery of the Exercise Notice or (ii)
the tenth business day after such cash valuation shall have been made.
6.4 NON-EXERCISE OF RIGHT. In the event the Exercise Notice is
not given to Owner within forty-five (45) days following the date of the
Corporation's receipt of the Disposition Notice, Owner shall have a period of
thirty (30) days thereafter in which to sell or otherwise dispose of the Target
Shares to the third-party offeror identified in the Disposition Notice upon
terms and conditions (including the purchase price) no more favorable to such
third-party offeror than those specified in the Disposition Notice; PROVIDED,
however, that any such sale or disposition must not be effected in contravention
of the provisions of Article II of this Agreement. To the extent any of the
Target Shares are at the time held in escrow under Article VII, the certificates
for such shares shall automatically be released from escrow and surrendered to
the Owner. The third-party offeror shall acquire the Target Shares free and
clear of the Corporation's Repurchase Right under Article V and the
Corporation's First Refusal Right hereunder, but the acquired shares shall
remain subject to (i) the securities law restrictions of paragraph 2.2(a) and
(ii) the market stand-off provisions of paragraph 4.4. In the event Owner does
not effect such sale or disposition of the Target Shares within the specified
thirty (30)-day period, the Corporation's First Refusal Right shall continue to
be applicable to any subsequent disposition of the Target Shares by Owner until
such right lapses in accordance with paragraph 6.7.
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6.5 PARTIAL EXERCISE OF RIGHT. In the event the Corporation (or
its assignees) makes a timely exercise of the First Refusal Right with respect
to a portion, but not all, of the Target Shares specified in the Disposition
Notice, Owner shall have the option, exercisable by written notice to the
Corporation delivered within thirty (30) days after the date of the Disposition
Notice, to effect the sale of the Target Shares pursuant to one of the following
alternatives:
(i) sale or other disposition of all the Target Shares to
the third-party offeror identified in the Disposition Notice, but in full
compliance with the requirements of paragraph 6.4, as if the Corporation
did not exercise the First Refusal Right hereunder; or
(ii) sale to the Corporation (or its assignees) of the
portion of the Target Shares which the Corporation (or its assignees) has
elected to purchase, such sale to be effected in substantial conformity
with the provisions of paragraph 6.3.
Failure of Owner to deliver timely notification to the Corporation
under this paragraph 6.5 shall be deemed to be an election by Owner to sell the
Target Shares pursuant to alternative (i) above.
6.6 RECAPITALIZATION/MERGER.
(a) In the event of any stock dividend, stock split,
recapitalization or other transaction affecting the Corporation's
outstanding Common Stock as a class effected without receipt of
consideration, then any new, substituted or additional securities or other
property which is by reason of such transaction distributed with respect to
the Purchased Shares shall be immediately subject to the Corporation's
First Refusal Right hereunder, but only to the extent the Purchased Shares
are at the time covered by such right.
(b) In the event of any of the following transactions:
(i) a merger or consolidation in which the
Corporation is not the surviving entity,
(ii) a sale, transfer or other disposition of all
or substantially all of the Corporation's assets,
(iii) a reverse merger in which the Corporation is
the surviving entity but in which the Corporation's outstanding voting
securities are transferred in whole or in part to person or persons other
than those who held such securities immediately prior to the merger, or
(iv) any transaction effected primarily to change
the State in which the Corporation is incorporated, or to create a holding
company structure,
the Corporation's First Refusal Right shall remain in full
force and effect and shall apply to the new capital stock or other property
received in exchange for the
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Purchased Shares in consummation of the transaction but only to the extent
the Purchased Shares are at the time covered by such right.
6.7 LAPSE. The First Refusal Right under this Article VI shall
lapse and cease to have effect upon the EARLIEST to occur of (i) the first date
on which shares of the Corporation's Common Stock are held of record by more
than five hundred (500) persons, (ii) a determination is made by the
Corporation's Board of Directors that a public market exists for the outstanding
shares of the Corporation's Common Stock, or (iii) a firm commitment
underwritten public offering pursuant to an effective registration statement
under the 1933 Act, covering the offer and sale of the Corporation's Common
Stock in the aggregate amount of at least $20,000,000. However, the market
stand-off provisions of paragraph 4.4 shall continue to remain in full force and
effect following the lapse of the First Refusal Right hereunder.
VII. ESCROW
7.1 DEPOSIT. Upon issuance, the certificates for any Unvested
Shares purchased hereunder shall be deposited in escrow with the Corporate
Secretary of the Corporation to be held in accordance with the provisions of
this Article VII. Each deposited certificate shall be accompanied by a
duly-executed Assignment Separate from Certificate in the form of Exhibit I.
The deposited certificates, together with any other assets or securities from
time to time deposited with the Corporate Secretary pursuant to the
requirements of this Agreement, shall remain in escrow until such time or
times as the certificates (or other assets and securities) are to be released
or otherwise surrendered for cancellation in accordance with paragraph 7.3.
Upon delivery of the certificates (or other assets and securities) to the
Corporate Secretary of the Corporation, the Owner shall be issued an
instrument of deposit acknowledging the number of Unvested Shares (or other
assets and securities) delivered in escrow.
7.2 RECAPITALIZATION. All regular cash dividends on the Unvested
Shares (or other securities at the time held in escrow) shall be paid directly
to the Owner and shall not be held in escrow. However, in the event of any
stock dividend, stock split, recapitalization or other change affecting the
Corporation's outstanding Common Stock as a class effected without receipt of
consideration or in the event of a Corporate Transaction, any new, substituted
or additional securities or other property which is by reason of such
transaction distributed with respect to the Unvested Shares shall be immediately
delivered to the Corporate Secretary to be held in escrow under this Article
VII, but only to the extent the Unvested Shares are at the time subject to the
escrow requirements of paragraph 7.1.
7.3 RELEASE/SURRENDER. The Unvested Shares, together with any
other assets or securities held in escrow hereunder, shall be subject to the
following terms and conditions relating to their release from escrow or their
surrender to the Corporation for repurchase and cancellation:
(i) Should the Corporation (or its assignees) elect to
exercise the Repurchase Right under Article V with respect to any Unvested
Shares, then the escrowed certificates for such Unvested Shares (together
with any other assets or securities issued with respect thereto) shall be
delivered to the Corporation concurrently with the payment to the Owner, in
cash or cash equivalent (including the cancellation of any purchase-money
indebtedness), of an amount equal to the aggregate Option Price for
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such Unvested Shares, and the Owner shall cease to have any further rights
or claims with respect to such Unvested Shares (or other assets or
securities attributable to such Unvested Shares).
(ii) Should the Corporation (or its assignees) elect to
exercise its First Refusal Right under Article VI with respect to any
vested Target Shares held at the time in escrow hereunder, then the
escrowed certificates for such Target Shares (together with any other
assets or securities attributable thereto) shall, concurrently with the
payment of the paragraph 6.3 purchase price for such Target Shares to the
Owner, be surrendered to the Corporation, and the Owner shall cease to have
any further rights or claims with respect to such Target Shares (or other
assets or securities).
(iii) Should the Corporation (or its assignees) elect NOT
to exercise its First Refusal Right under Article VI with respect to any
Target Shares held at the time in escrow hereunder, then the escrowed
certificates for such Target Shares (together with any other assets or
securities attributable thereto) shall be surrendered to the Owner for
disposition in accordance with provisions of paragraph 6.4.
(iv) As the interest of the Optionee in the Unvested
Shares (or any other assets or securities attributable thereto) vests in
accordance with the provisions of Article V, the certificates for such
vested shares (as well as all other vested assets and securities) shall be
released from escrow and delivered to the Owner in accordance with the
following schedule:
a. The initial release of vested shares (or other
vested assets and securities) from escrow shall be effected within
thirty (30) days following the expiration of the initial twelve
(12)-month period measured from the Grant Date.
b. Subsequent releases of vested shares (or other
vested assets and securities) from escrow shall be effected at
semi-annual intervals thereafter, with the first such semi-annual
release to occur eighteen (18) months after the Grant Date.
c. Upon the Optionee's cessation of Service, any
escrowed Purchased Shares (or other assets or securities) in which the
Optionee is at the time vested shall be promptly released from escrow.
d. Upon any earlier termination of the Corporation's
Repurchase Right in accordance with the applicable provisions of
Article V, any Purchased Shares (or other assets or securities) at the
time held in escrow hereunder shall promptly be released to the Owner
as fully-vested shares or other property.
(v) All Purchased Shares (or other assets or securities)
released from escrow in accordance with the provisions of subparagraph (iv)
above shall nevertheless remain subject to (I) the Corporation's First
Refusal Right under Article VI until such right lapses pursuant to
paragraph 6.7, (II) the market stand-off provisions of
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paragraph 4.4 until such provisions terminate in accordance therewith and
(III) the Special Purchase Right under Article VIII.
VIII. MARITAL DISSOLUTION OR LEGAL SEPARATION
8.1 GRANT. In connection with the dissolution of the Optionee's
marriage or the legal separation of the Optionee and the Optionee's spouse, the
Corporation shall have the right (the "Special Purchase Right"), exercisable at
any time during the thirty (30)-day period following the Corporation's receipt
of the required Dissolution Notice under paragraph 8.2, to purchase from the
Optionee's spouse, in accordance with the provisions of paragraph 8.3, all or
any portion of the Purchased Shares which would otherwise be awarded to such
spouse in settlement of any community property or other marital property rights
such spouse may have in such shares.
8.2 NOTICE OF DECREE OR AGREEMENT. The Optionee shall promptly
provide the Secretary of the Corporation with written notice (the "Dissolution
Notice") of (i) the entry of any judicial decree or order resolving the property
rights of the Optionee and the Optionee's spouse in connection with their
marital dissolution or legal separation or (ii) the execution of any contract or
agreement relating to the distribution or division of such property rights. The
Dissolution Notice shall be accompanied by a copy of the actual decree of
dissolution or settlement agreement between the Optionee and the Optionee's
spouse which provides for the award to the spouse of one or more Purchased
Shares in settlement of any community property or other marital property rights
such spouse may have in such shares.
8.3 EXERCISE OF SPECIAL PURCHASE RIGHT. The Special Purchase
Right shall be exercisable by delivery of written notice (the "Purchase Notice")
to the Optionee and the Optionee's spouse within thirty (30) days after the
Corporation's receipt of the Dissolution Notice. The Purchase Notice shall
indicate the number of shares to be purchased by the Corporation, the date such
purchase is to be effected (such date to be not less than five (5) business
days, nor more than ten (10) business days, after the date of the Purchase
Notice), and the fair market value to be paid for such Purchased Shares. The
Optionee (or the Optionee's spouse, to the extent such spouse has physical
possession of the Purchased Shares) shall, prior to the close of business on the
date specified for the purchase, deliver to the Corporate Secretary of the
Corporation the certificates representing the shares to be purchased, each
certificate to be properly endorsed for transfer. To the extent any of the
shares to be purchased by the Corporation are at the time held in escrow under
Article VII, the certificates for such shares shall be promptly delivered out of
escrow to the Corporation. The Corporation shall, concurrently with the receipt
of the stock certificates, pay to the Optionee's spouse (in cash or cash
equivalents) an amount equal to the fair market value specified for such shares
in the Purchase Notice.
If the Optionee's spouse does not agree with the fair market
value specified for the shares in the Purchase Notice, then the spouse shall
promptly notify the Corporation in writing of such disagreement and the fair
market value of such shares shall thereupon be determined by an appraiser of
recognized standing selected by the Corporation and the spouse. If they cannot
agree on an appraiser within twenty (20) days after the date of the Purchase
Notice, each shall select an appraiser of recognized standing, and the two
appraisers shall designate a third appraiser of recognized standing whose
appraisal shall be determinative of
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such value. The cost of the appraisal shall be shared equally by the
Corporation and the Optionee's spouse. The closing shall then be held on the
fifth business day following the completion of such appraisal; PROVIDED,
however, that if the appraised value is more than fifteen percent (15%)
greater than the fair market value specified for the shares in the Purchase
Notice, the Corporation shall have the right, exercisable prior to the
expiration of such five (5)-business-day period, to rescind the exercise of
the Special Purchase Right and thereby revoke its election to purchase the
shares awarded to the spouse.
8.4 LAPSE. The Special Purchase Right under this Article VIII
shall lapse and cease to have effect upon the EARLIER to occur of (i) the first
date on which the First Refusal Right under Article VI lapses or (ii) the
expiration of the thirty (30)-day exercise period specified in paragraph 8.3, to
the extent the Special Purchase Right is not timely exercised in accordance with
such paragraph.
IX. GENERAL PROVISIONS
9.1 ASSIGNMENT. The Corporation may assign its Repurchase Right
under Article V, its First Refusal Right under Article VI and/or its Special
Purchase Right under Article VIII to any person or entity selected by the
Corporation's Board of Directors, including (without limitation) one or more
shareholders of the Corporation.
If the assignee of the Repurchase Right is other than a one
hundred percent (100%) owned subsidiary corporation of the Corporation or the
parent corporation owning one hundred percent (100%) of the Corporation, then
such assignee must make a cash payment to the Corporation, upon the assignment
of the Repurchase Right, in an amount equal to the excess (if any) of (i) the
fair market value of the Unvested Shares at the time subject to the assigned
Repurchase Right over (ii) the aggregate repurchase price payable for the
Unvested Shares thereunder.
9.2 DEFINITIONS. For purposes of this Agreement, the following
provisions shall be applicable in determining the parent and subsidiary
corporations of the Corporation:
(i) Any corporation (other than the Corporation) in an
unbroken chain of corporations ending with the Corporation shall be
considered to be a parent corporation of the Corporation, provided each
such corporation in the unbroken chain (other than the Corporation) owns,
at the time of the determination, stock possessing fifty percent (50%) or
more of the total combined voting power of all classes of stock in one of
the other corporations in such chain.
(ii) Each corporation (other than the Corporation) in an
unbroken chain of corporations beginning with the Corporation shall be
considered to be a subsidiary of the Corporation, provided each such
corporation (other than the last corporation) in the unbroken chain owns,
at the time of the determination, stock possessing fifty percent (50%) or
more of the total combined voting power of all classes of stock in one of
the other corporations in such chain.
9.3 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 Corporation
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(or any parent or subsidiary corporation of the Corporation employing or
retaining Optionee) for any period of specific duration or interfere with or
otherwise restrict in any way the rights of the Corporation (or any parent or
subsidiary corporation of the Corporation employing or retaining Optionee) or
the Optionee, which rights are hereby expressly reserved by each, to
terminate the Optionee's Service at any time for any reason whatsoever, with
or without cause.
9.4 CERTAIN POOLING TRANSACTIONS. In the event that the Board of
Directors of the Corporation and holders of a majority of the Common Stock
issuable or issued upon conversion of the Series A Preferred Stock of the
Corporation vote in favor of a Pooling Corporate Transaction (as defined below),
each Optionee and Owner hereby agrees not to take any action inconsistent with
the pooling-of-interest accounting treatment to the extent applicable to such
Pooling Corporate Transaction, as reasonably deemed necessary by the
Corporation's Board of Directors. For purposes of this Section 9.4, Pooling
Corporate Transaction shall mean the acquisition of the Corporation by another
entity by means of any transaction or series of related transactions (including,
without limitation, any reorganization, merger or consolidation) that results in
the transfer of fifty percent (50%) or more of the outstanding voting power of
the Corporation.
9.5 NOTICES. Any notice required in connection with (i) the
Repurchase Right, the Special Purchase Right or the First Refusal Right or (ii)
the disposition of any Purchased Shares covered thereby shall be given in
writing and shall be deemed effective upon personal delivery or upon deposit in
the United States mail, registered or certified, postage prepaid and addressed
to the party entitled to such notice at the address indicated below such party's
signature line on this Agreement or at such other address as such party may
designate by ten (10) days advance written notice under this paragraph 9.4 to
all other parties to this Agreement.
9.6 NO WAIVER. The failure of the Corporation (or its assignees)
in any instance to exercise the Repurchase Right granted under Article V, or the
failure of the Corporation (or its assignees) in any instance to exercise the
First Refusal Right granted under Article VI, or the failure of the Corporation
(or its assignees) in any instance to exercise the Special Purchase Right
granted under Article VIII shall not constitute a waiver of any other repurchase
rights and/or rights of first refusal that may subsequently arise under the
provisions of this Agreement or any other agreement between the Corporation and
the Optionee or the Optionee's spouse. No waiver of any breach or condition of
this Agreement shall be deemed to be a waiver of any other or subsequent breach
or condition, whether of like or different nature.
9.7 CANCELLATION OF SHARES. If the Corporation (or its assignees)
shall make available, at the time and place and in the amount and form provided
in this Agreement, the consideration for the Purchased Shares to be repurchased
in accordance with the provisions of this Agreement, then from and after such
time, the person from whom such shares are to be repurchased shall no longer
have any rights as a holder of such shares (other than the right to receive
payment of such consideration in accordance with this Agreement), and such
shares shall be deemed purchased in accordance with the applicable provisions
hereof and the Corporation (or its assignees) shall be deemed the owner and
holder of such shares, whether or not the certificates therefor have been
delivered as required by this Agreement.
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X. MISCELLANEOUS PROVISIONS
10.1 OPTIONEE UNDERTAKING. Optionee hereby agrees to take whatever
additional action and execute whatever additional documents the Corporation may
in its judgment deem necessary or advisable in order to carry out or effect one
or more of the obligations or restrictions imposed on either the Optionee or the
Purchased Shares pursuant to the express provisions of this Agreement.
10.2 AGREEMENT IS ENTIRE CONTRACT. This Agreement constitutes the
entire contract between the parties hereto with regard to the subject matter
hereof. This Agreement is made pursuant to the provisions of the Plan and shall
in all respects be construed in conformity with the express terms and provisions
of the Plan.
10.3 GOVERNING LAW. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of California, as such laws
are applied to contracts entered into and performed in such State without resort
to that State's conflict-of-laws rules.
10.4 COUNTERPARTS. This Agreement may be executed in counterparts,
each of which shall be deemed to be an original, but all of which together shall
constitute one and the same instrument.
10.5 SUCCESSORS AND ASSIGNS. The provisions of this Agreement
shall inure to the benefit of, and be binding upon, the Corporation and its
successors and assigns and the Optionee and the Optionee's legal
representatives, heirs, legatees, distributees, assigns and transferees by
operation of law, whether or not any such person shall have become a party to
this Agreement and have agreed in writing to join herein and be bound by the
terms and conditions hereof.
10.6 POWER OF ATTORNEY. Optionee's spouse hereby appoints Optionee
his or her true and lawful attorney in fact, for him or her and in his or her
name, place and stead, and for his or her use and benefit, to agree to any
amendment or modification of this Agreement and to execute such further
instruments and take such further actions as may reasonably be necessary to
carry out the intent of this Agreement. Optionee's spouse further gives and
grants unto Optionee as his or her attorney in fact full power and authority to
do and perform every act necessary and proper to be done in the exercise of any
of the foregoing powers as fully as he or she might or could do if personally
present, with full power of substitution and revocation, hereby ratifying and
confirming all that Optionee shall lawfully do and cause to be done by virtue of
this power of attorney.
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IN WITNESS WHEREOF, the parties have executed this Agreement on the
day and year first indicated above.
RHYTHMS NETCONNECTIONS INC.
By:
Title:
------------------------------------------
Address: -------------------------------------------------
-------------------------------------------------
-------------------------------------------------
Optionee*
Address: -------------------------------------------------
-------------------------------------------------
The undersigned spouse of Optionee has read and hereby approves the
foregoing Stock Purchase Agreement. In consideration of the Corporation's
granting the Optionee the right to acquire the Purchased Shares in accordance
with the terms of such Agreement, the undersigned hereby agrees to be
irrevocably bound by all the terms and provisions of such Agreement, including
(specifically) the right of the Corporation (or its assignees) to purchase any
and all interest or right the undersigned may otherwise have in such shares
pursuant to community property laws or other marital property rights.
-------------------------------------------------
Optionee's Spouse
Address: -------------------------------------------------
-------------------------------------------------
--------------------
* I have executed the Section 83(b) election that was attached hereto as
an Exhibit. As set forth in Article III, I understand that I, and NOT
the Corporation, will be responsible for comleting the form and filing
the election with the appropriate office of the Federal and State tax
authorities and that if such filing is not completed within thirty
(30) days after the date of this Agreement, I will not be entitled to
the tax benefits provided by Section 83(b).
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EXHIBIT I
ASSIGNMENT SEPARATE FROM CERTIFICATE
FOR VALUE RECEIVED _____________________ hereby sell(s), assign(s) and
transfer(s) unto Rhythms NetConnections Inc. (the "Corporation"),
_____________________ (____________) shares of the Common Stock of the
Corporation standing in his\her name on the books of the Corporation represented
by Certificate No. _________________ and do hereby irrevocably constitute and
appoint ________________________ as Attorney to transfer the said stock on the
books of the Corporation with full power of substitution in the premises.
Dated:
-------------------
Signature
------------------------------
INSTRUCTION: Please do not fill in any blanks other than the signature line.
The purpose of this assignment is to enable the Corporation to exercise its
Repurchase Right set forth in the Agreement without requiring additional
signatures on the part of the Optionee.
REPURCHASE RIGHTS
EXHIBIT II
SECTION 83(b) TAX ELECTION
This statement is being made under Section 83(b) of the Internal Revenue Code,
pursuant to Treas. Reg. Section 1.83-2.
(1) The taxpayer who performed the services is:
Name:
Address:
Taxpayer Ident. No.:
(2) The property with respect to which the election is being made is
____________ shares of the common stock of Rhythms NetConnections Inc.
(3) The property was issued on ____________, 19___.
(4) The taxable year in which the election is being made is the calendar year
19__.
(5) The property is subject to a repurchase right pursuant to which the issuer
has the right to acquire the property at the original purchase price if for
any reason taxpayer's employment with the issuer is terminated. The
issuer's repurchase right lapses in a series of annual and monthly
installments over a four year period ending on ____________, 19___.
(6) The fair market value at the time of transfer (determined without regard to
any restriction other than a restriction which by its terms will never
lapse) is $____________ per share.
(7) The amount paid for such property is $____________ per share.
(8) A copy of this statement was furnished to Rhythms NetConnections Inc. for
whom taxpayer rendered the services underlying the transfer of property.
(9) This statement is executed as of: ________________________.
--------------------------------- -----------------------------
Spouse (if any) Taxpayer
This form must be filed with the Internal Revenue Service Center with which
taxpayer files his/her Federal income tax returns. The filing must be made
within 30 days after the execution date of the Stock Purchase Agreement.
SPECIAL PROTECTIVE ELECTION PURSUANT TO SECTION 83(b) OF THE
INTERNAL REVENUE CODE WITH RESPECT TO PROPERTY ACQUIRED UPON
EXERCISE OF AN INCENTIVE STOCK OPTION
The property described in the above Section 83(b) election is comprised of
shares of common stock acquired pursuant to the exercise of an incentive stock
option under Section 422 of the Code. Accordingly, it is the intent of the
Taxpayer to utilize this election to achieve the following tax results:
1. The purpose of this election is to have the alternative
minimum taxable income attributable to the purchased shares measured by the
amount by which the fair market value of such shares at the time of their
transfer to the Taxpayer exceeds the purchase price paid for the shares. In the
absence of this election, such alternative minimum taxable income would be
measured by the spread between the fair market value of the purchased shares and
the purchase price which exists on the various lapse dates in effect for the
forfeiture restrictions applicable to such shares. The election is to be
effective to the full extent permitted under the Internal Revenue Code.
2. Section 421(a)(1) of the Code expressly excludes from income
any excess of the fair market value of the purchased shares over the amount paid
for such shares. Accordingly, this election is also intended to be effective in
the event there is a "disqualifying disposition" of the shares, within the
meaning of Section 421(b) of the Code, which would otherwise render the
provisions of Section 83(a) of the Code applicable at that time. Consequently,
the Taxpayer hereby elects to have the amount of disqualifying disposition
income measured by the excess of the fair market value of the purchased shares
on the date of transfer to the Taxpayer over the amount paid for such shares.
Since Section 421(a) presently applies to the shares which are the subject of
this Section 83(b) election, no taxable income is actually recognized for
regular tax purposes at this time, and no income taxes are payable, by the
Taxpayer as a result of this election.
This form should be filed with the Internal Revenue Service Center with which
taxpayer files his/her Federal income tax returns. The filing must be made
within 30 days after the execution date of the Stock Purchase Agreement.
NOTE: PAGE 2 SHOULD BE ATTACHED ONLY IF YOU ARE EXERCISING
AN INCENTIVE STOCK OPTION.
