Key Employee Agreement

IRORI
KEY EMPLOYEE AGREEMENT


THIS EMPLOYMENT AGREEMENT ("Agreement") is entered into as of the 17th day of April, 1998 by and between Riccardo Pigliucci ("Executive") and IRORI, a California corporation (the "Company").


WHEREAS, the Company desires to employ Executive to provide personal services to the Company, and wishes to provide Executive with certain compensation and benefits in return for his services; and


WHEREAS, Executive wishes to be employed by the Company and provide personal services to the Company in return for certain compensation and benefits;


NOW THEREFORE, in consideration of the mutual promises and covenants contained herein; it is hereby agreed by and between the parties hereto as follows:


1. EMPLOYMENT BY THE COMPANY.


1.1 Subject to terms set forth herein, the Company agrees to employ Executive in the position of President and Chief Executive Officer ("CEO") of the Company and Executive hereby accepts such employment effective as of April 17, 1998. During the term of his employment with the Company, Executive will devote his best efforts and substantially all of his business time and attention (except for vacation periods as set forth herein and reasonable periods of illness or other incapacities permitted by the Company's general employment policies) to the business of the Company. Executive will use his best efforts to relocate to a temporary residence in the San Diego, California area (pending relocation of his permanent residence to the San Diego, California area) on a full-time basis by no later than August 31, 1998, and shall spend approximately 1 day per week on site at the Company prior to the completion of this relocation.


1.2 Executive shall serve in an executive capacity and shall perform such duties as are customarily associated with his then current title, consistent with the Bylaws of the Company and as required by the Company's Board of Directors (the "Board").


1.3 The employment relationship between the parties shall also be governed by the general employment policies and practices of the Company, including those relating to protection of confidential information and assignment of inventions, except that when the terms of this Agreement differ from or are in conflict with the Company's general employment policies or practices, this Agreement shall control. In addition, as an executive officer of the Company, Executive will be covered by the Company's directors and officers liability insurance coverage, as in effect from time to time, as well as the Company's bylaw indemnification and indemnity agreement for executive officers and directors. 2


2. BOARD OF DIRECTORS.


The Company shall use its best efforts to elect Executive to the Board for so long as Executive holds the position of President and Chief Executive Officer of the Company. Executive agrees to serve as a director if elected by the shareholders and the Board, as the case may be. Upon Executive's request (no earlier than six (6) months following the Effective Date), the Board will consider electing Executive as Chairman.


3. COMPENSATION.


3.1 Salary. Executive shall receive for services to be rendered hereunder an annualized base salary of $350,000 payable according to the Company's regular payroll schedule.


3.2 Bonus Plan; Bonus. No later than March 1 of each calendar year during the term hereof, commencing with calendar year 1998 (with the exception that the Bonus Plan, as hereinafter defined, for 1998 is to be completed and approved by the June 1, 1998), Executive will be responsible for creating and presenting to the Board of Directors of the Company (the "Board"), a performance-based bonus plan (a "Bonus Plan") for such calendar year for such employees of the Company, including Executive, as Executive believes to be appropriate and in the best interests of the Company's business. The Board and Executive will in good faith attempt to agree upon the Bonus Plan for 1998 no later than June 1, 1998. If Executive has timely submitted such Bonus Plan in the relevant calendar year, and if by April 15 of the relevant calendar year (by June 1, 1998 for the Bonus Plan for 1998), the Board has not approved such Bonus Plan as submitted by Executive and as discussed by the Board and Executive after or before such submission, then the Board will approve and deliver to Executive no later than May 15 of such year (no later than June 15 for 1998) a performance-based Bonus Plan created by the Board, which will be the Bonus Plan against which Executive's performance for such year will be measured as to any bonus to which he may become entitled, provided that such Board-created Bonus Plan will in each case be created in good faith with the goal of maintaining and increasing shareholder value in the Company. If Executive remains an active employee throughout the applicable calendar year and Executive and/or the Company, as applicable, meet the performance goals set forth in the Bonus Plan then in effect, Executive will be entitled to receive a bonus equal to at least 50% of base salary under such Bonus Plan, prorated for partial performance, if and to the extent set forth in such Bonus Plan, in each case, as such Bonus Plan is approved by the Board.


3.3 Standard Company Benefits. Executive shall be entitled to all rights and benefits for which he is eligible under the terms and conditions of the standard Company benefits and compensation practices which may be in effect from time to time and provided by the Company to its employees generally.


3.4 Relocation Expenses. The Company will advance, or reimburse, upon submission of invoices and reasonably detailed supporting documentation an amount not to exceed $175,000 (not including the amount of the "gross up" set forth in Section 3.4(e) below) in the aggregate in respect of:


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(a) Executive's reasonable moving expenses, including packing and unpacking and any necessary in-transit or other temporary storage, in relocating Executive's household goods from the Weston, Connecticut area to the San Diego, California area;


(b) Executive's reasonable temporary housing expenses, for the period from the Effective Date through the earlier of December 31, 1998 or the date upon which Executive's household has been relocated to the San Diego, California area;


(c) One round-trip coach airfare ticket per week for Executive between the Connecticut/New York area and San Diego, California during the period commencing on the Effective Date and ending upon the earlier of the date of final relocation of Executive's household to the San Diego, California area or August 31, 1998, and for (ii) round-trip coach airfare between the Connecticut/New York area and San Diego, California for Executive's spouse for up to three (3) trips in connection with the relocation of Executive's household to the San Diego, California area; and


(d) All commercially reasonable closing costs (including without limitation reasonable and customary real estate commissions to the extent applicable) in connection with both any sale by Executive of his house in Connecticut and any purchase by Executive of a house in the San Diego, California area which occur, in each case, within one (1) year after the Effective Date.


(e) The reimbursements set forth in this Section 3.4 shall, to the extent appropriate, be "grossed up". For purposes of this Section 3.4 and Section 3.5 below, "grossed up" means that in the case of a reimbursed expense or payment that is taxable to Executive and is not deductible for Federal income tax purposes, Executive will be paid an amount which, after taxes on such amount, will equal the amount of the non-deductible reimbursable expenses or payments.


3.5 Mortgage Differential Assistance. Executive will be paid an amount equal to the difference in interest incurred on the principal amount of the mortgage unpaid on his current residence in Weston, Connecticut area as of the Effective Date ("Old Mortgage") and the interest incurred on any mortgage taken out by him in connection with his new residence in the San Diego, California area ("New Mortgage"), limited to the excess interest payable on an amount of up to $1,000,000 more of principal amount of mortgage (the "Excess Mortgage Amount"). The interest differential on the Excess Mortgage Amount shall be paid for a period ending on the earlier of (i) three (3) years from the commencement date of the New Mortgage or (ii) the date upon which the Company first sells securities pursuant to a registration statement filed by the Company under the Securities Act of 1933, as amended, in connection with a firm commitment underwritten offering of the Company's securities. The interest differential on the Excess Mortgage Amount shall be determined without regard to the effects of any adjustment in the interest rate that takes place following the date the New Mortgage is funded and by calculating the interest that would have been due on the Excess Mortgage Amount assuming the New Mortgage is amortized over thirty (30) years. The payments to be made to Executive with respect to the interest differential on the Excess Mortgage Amount shall be "grossed up".


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3.6 Compensation Review. The Board will annually review Executive's salary, performance bonus, and incentive stock options to ensure that they are commensurate with work performed. In addition, the Company will annually review and mutually establish with Executive the goals to be used in evaluating Executive's performance bonus.


4. STOCK OWNERSHIP. Executive will be entitled to obtain stock ownership in the Company as follows:


4.1 Initial Stock Purchase. Within fifteen (15) days after the Effective Date, the Company will, by action of its Board, provide to Executive the opportunity to purchase up to 600,000 shares of the Company's Common Stock (the "Initial Shares"), pursuant to the standard Restricted Stock Purchase Agreement (the "Restricted Stock Purchase Agreement") approved as part of the Company's Equity Incentive Plan (the "Plan"), as follows:


(a) Such Initial Shares will be sold to Executive for the fair market value per share of the Common Stock as determined in good faith by the Board as of the date of sale.


(b) The Company will provide Executive an opportunity to acquire the Initial Shares by issuing to the Company a Note in the amount of the purchase price for the Initial Shares bearing interest at the minimum applicable Federal interest rate, secured by the Initial Shares.


(c) The Company shall have the right to repurchase, at the purchase price per share paid by Executive, shares from Executive upon his termination as will be specified in the Restricted Stock Purchase Agreement, which repurchase right will lapse with respect to one hundred and twenty thousand (120,000) shares on the first anniversary of the Effective Date and ten thousand (10,000) shares for each month thereafter, at the end of which Executive still is employed by the Company, as specified in the Restricted Stock Purchase Agreement.


4.2 Percentage Maintenance Right. During the term of his employment, Executive will have the right to purchase further securities of the Company as follows:


(a) For purposes of this Section 4.2, the following terms will have the following meanings:


(i) "Equity Financing" means the issuance and sale by the Company, at a closing which occurs after the Effective Date but during the term of this Agreement, of the Company's Common Stock and/or Preferred Stock and/or other securities, such as warrants or convertible debt securities, convertible into its Common Stock or Preferred Stock ("Equity Securities"), other than the following: (i) Common Stock (or options therefor) issued to employees, consultants, directors or officers of the Company pursuant to plans approved by the Board, (ii) Equity Securities issued in, or following the consummation of, a bona fide, firmly underwritten public offering of shares of Common Stock, registered under the Securities Act of 1933, as amended, pursuant to a registration statement on Form S-1, (iii) Equity Securities issued pursuant to the conversion or exercise of convertible or exercisable securities,


4 5 (iv) Equity Securities issued in connection with a bona fide business acquisition of or by the Company, whether by merger, consolidation, sale of assets, sale or exchange of stock or otherwise or (v) stock, warrants or other securities or rights issued to persons or entities with which the Company has or is establishing business relationships provided such issuances are for other than primarily equity financing purposes and involve other strategic elements which may include without limitation, a joint marketing agreement, a license agreement, or a technology development agreement.


(ii) "Executive's Minimum Proportion" means a proportion equal to the number of shares of Common Stock issued and held, or issuable upon conversion or exercise of any convertible or exercisable security then held by Executive divided by the total number of shares of Common Stock of the Company then outstanding (assuming full conversion and exercise of all convertible or exercisable securities).


(b) Executiv ...