1
EXHIBIT 10.5
December 3, 1999
Patrick Lo
19831 Lanark Lane
Saratoga, Ca. 95070
Re: EMPLOYMENT AGREEMENT
Dear Patrick:
Conditioned on Netgear, Inc. (the "Company") closing a private offering of
its outstanding common stock ("Private Offering") and on your resignation from
Nortel Networks NA Inc. or its successor corporation, Netgear, Inc.'s Board of
Directors extends you the following offer of employment as further set forth in
the following.
1. Position and Duties. You will be employed by Netgear, Inc. ("Company")
as its Chief Executive Officer and President, reporting to the Company's Board
of Directors (the "Board"). You accept employment with the Company on the terms
and conditions set forth in this Agreement, and you agree to devote your full
business time, energy and skill to your duties at the Company. Your duties will
include, but not be limited to, those duties normally performed by a chief
executive officer, as well as any other reasonable duties that may be assigned
to you from time to time by the Board.
2. Term of Employment. Your employment with the Company will start on the
later to occur of the day that the Company completes its Private Offering or the
day your resignation from Nortel Networks NA Inc. ("NNNA") becomes effective.
Thereafter your employment with the Company will be for no specified term, and
may be terminated by you or the Company at any time, with or without cause,
subject to the provisions of Paragraphs 4 and 5 below.
3. Compensation. You will be compensated by the Company for your services
as follows:
(a) Salary: You will be paid an annual salary of $180,000.00 (one
hundred eighty thousand dollars), less applicable withholding and taxes, in
accordance with the Company's normal payroll procedures. Your salary will be
reviewed by the Board from time to time (but no more frequently than annually),
and may be subject to adjustment based upon various factors including, but not
limited to, your performance and the Company's profitability. Any adjustment to
your salary shall be in the sole discretion of the Board.
2
Patrick Lo
December 3, 1999
Page 2
(b) MBO Bonus: You will be eligible to receive annual target bonus
of $66,500.00 (sixty six thousand five hundred dollars) per year based upon the
Company's achievement of various financial and/or other goals established by the
Board. The objectives that govern your bonus eligibility for this year will be
communicated to you in writing by the Board within 60 days following the start
of your employment. During this initial year of your employment, you will have
quarterly MBO goals. To the extent earned (which requires that you be employed
by the Company on the last day of the applicable quarter), bonuses will be paid
to you on the later of 30 days after (i) the end of the applicable quarter (or
year), or (ii) the date on which the financial or other data necessary to
determine your entitlement to the bonus becomes available. Please note that your
MBO bonus payments will be prorated based on the number of days that you were
employed by the Company during any relevant quarter in which you were not
employed during the entire quarter. For the bonus payment due for the quarter
ending on December 31, 1999 your MBO bonus payment will be prorated based on the
number of days that you were employed by the Company only if you received a
partial MBO payment from Nortel upon your resignation from Nortel. All MBO
bonuses will be subject to applicable withholding and taxes. The Board of
Directors will have the discretion to change the schedule and number of MBO
payments at any time and for any reason.
(c) Benefits: You will have the right, on the same basis as other
employees of the Company, to participate in and to receive benefits under any
Company medical, disability or other group insurance plans, as well as under the
Company's business expense reimbursement and other policies. You will accrue
paid vacation in accordance with the Company's vacation policy at the rate of 4
weeks per year. You will be allowed to start your employment with a credit of
vacation hours equal to your unused vacation hours at the time of your
termination from NNNA, net of any amount of vacation pay-out that you elect at
the time of your termination from NNNA.
(d) Netgear, Inc. Stock Options: Following your written acceptance
of these terms and subject to the completion of the Private Offering, you will
be granted by the Board an option to purchase 3.30% of the fully diluted post
private placement outstanding shares of Netgear, Inc. common stock under the
Company's stock option plan at an exercise price per share calculated using the
lower of: the valuation of the company agreed to in writing between the Company
and the private investors participating in the Private Offering or
$175,000,000.00 (one hundred seventy-five million dollars). Provided you remain
employed by the Company, and contingent on the Company's Private Offering being
completed, the vesting of these options will be as follows: these options will
vest over a four year period with 25% of the shares vesting on the first
anniversary of the date you commence employment with the Company, and 1/48th of
the shares vesting monthly for three years thereafter. In the event that the
Company conducts an Initial Public Offering ("IPO") of stock before the first
anniversary of your employment, then 10% of the shares would vest on the day of
the IPO; 15% of the shares would vest on the first anniversary of the
commencement of your employment; and 1/48th of the shares would vest monthly for
three years thereafter. Your option will be governed by and subject to the terms
and conditions of the Company's standard form of stock option agreement
3
Patrick Lo
December 3, 1999
Page 3
(which you will be required to sign in connection with the issuance of your
option). In the event that the Private Offering is not completed, the Company
may not offer you employment, and, in such case, the option grant shall not have
occurred and your rights to such options will not accrue.
(i) If you are terminated without Cause (as defined below), you will
be entitled to continue to have stock options vest during the one year period
immediately following such termination.
(ii) If within one year following any Change of Control (as defined
below), and (A) your employment is terminated without Cause, or (B) you resign
from your employment for Good Reason (as defined below), you will receive full
acceleration of any unvested portion of this Netgear, Inc. stock option.
(e) Nortel Networks Corporation Stock Options: Your Nortel Networks
Corporation stock options will continue to vest as long as Netgear, Inc. remains
an affiliate or subsidiary, as defined by IRS Code 424(f) of Nortel Networks
Corporation subject to the terms and conditions of the 1986 Nortel Networks
Corporation Stock Option Plan as amended and restated, and/or the 1994 Bay
Networks, Inc. Stock Option Plan and as long as you remain an employee of
Netgear, Inc.
4. Voluntary Termination. In the event that you voluntarily resign from
your employment with the Company other than for Good Reason, or in the event
that your employment terminates as a result of your death or disability (meaning
that you are unable to perform your duties for any 90 days in any one year
period as a result of a physical and/or mental impairment), you will be entitled
to no compensation or benefits from the Company other than those earned under
Paragraph 3 through the date of your termination. You agree that if you
voluntarily terminate your employment with the Company for any reason, you will
provide the Company with thirty days' written notice of your resignation. The
Company may, in its sole discretion, elect to waive all or any part of such
notice period and accept your resignation at an earlier date.
5. Other Termination. Your employment may be terminated under the
circumstances set forth below.
(a) Termination for Cause: If your employment is terminated by the
Company for Cause as defined below, you shall be entitled to no compensation or
benefits from the Company other than those earned under Paragraph 3 through the
date of your termination for Cause.
For purposes of this Agreement, a termination "for Cause" occurs if you
are terminated for any of the following reasons: (i) theft, dishonesty, material
misconduct, or any material violation of the Company's personnel policies and
procedures, or falsification of any employment or Company records; (ii)
disclosure of the Company's confidential or proprietary
4
Patrick Lo
December 3, 1999
Page 4
information in violation of the Company's Invention and Proprietary Information
Agreement; (iii) any intentional action by you which has a material detrimental
effect on the Company's reputation or business; (iv) your failure or inability
to perform any assigned duties after written notice from the Company to you of,
and a reasonable opportunity to cure, such failure or inability, which is not
less than 90 days; or (v) your conviction (including any plea of guilty or no
contest) for any criminal act that impairs your ability to perform your duties
under this Agreement.
(b) Termination Without Cause: If your employment is terminated by
the Company without Cause (and not as a result of your death or disability), you
will receive severance payments at your final base salary rate, less applicable
withholding, until one year after the date of your termination without cause.
Severance payments will be made in accordance with the Company's normal payroll
procedures. During the period in which you are receiving severance payments, you
will have the option of continuing to participate in the Company's medical,
dental and vision group health insurance coverage if you elect to have the
premiums for this coverage deducted from your severance pay.
(c) Resignation for Good Reason: If, within one year following any
Change of Control, you resign from your employment with the Company for Good
Reason, you shall be entitled to receive the severance payments and health
insurance premium payments described in subparagraph 5(b) and the accelerated
vesting described in subparagraph 3(d).
6. Change of Control/Good Reason.
(a) For purposes of this Agreement, a "Change of Control" of the
Company shall be deemed to have occurred if at any time after the Private
Offering has occurred:
(i) any "person" (as such term is used in Sections 13(d) and
14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")),
other than a trustee or other fiduciary holding securities of the Company under
an employee benefit plan of the Company, becomes the "beneficial owner" (as
defined in Rule 13d-3 promulgated under the Exchange Act), directly or
indirectly, of securities of the Company representing 50% or more of (A) the
outstanding shares of common stock of the Company or (B) the combined voting
power of the Company's then-outstanding securities entitled to vote generally in
the election of directors; or
(ii) the Company (A) is party to a merger, consolidation or
exchange of securities which results in the holders of voting securities of the
Company outstanding immediately prior thereto failing to continue to hold at
least 50% of the combined voting power of the voting securities of the Company,
the surviving entity or a parent of the surviving entity outstanding immediately
after such merger, consolidation or exchange, or (B) sells or disposes of all or
substantially all of the Company's assets (or any transaction having similar
effect is consummated), or (C) the individuals constituting the Board
immediately prior to such merger,
5
Patrick Lo
December 3, 1999
Page 5
consolidation, exchange, sale or disposition shall cease to constitute at least
50% of the Board, unless the election of each director who was not a director
prior to such merger, consolidation, exchange, sale or disposition was approved
by a vote of at least two-thirds of the directors then in office who were
directors prior to such merger, consolidation, exchange, sale or disposition.
(iii) Notwithstanding the foregoing, for the purposes of this
Agreement no Change of Control will have occurred due solely to the decrease or
increase of any ownership of the Company by NNNA, its parent corporations,
subsidiaries, or affiliates.
(b) For purposes of this Agreement, "Good Reason" means any of the
following conditions, which condition(s) remain(s) in effect 10 days after
written notice to the Board from you of such condition(s):
(i) a decrease in your target annual compensation; or
(ii) a material, adverse change in your authority,
responsibilities or duties, as measured against your authority, responsibilities
or duties immediately prior to such change.
(iii) Notwithstanding the foregoing, for the purposes of this
Agreement in no event will you have Good Reason to resign due merely to a change
of title or a change in your reporting caused by a change of control or
discontinuance of any duties and responsibilities solely related to the
operation of a public company.
7. Condition Precedent to Severance Benefits. As a condition of receiving
severance benefits including, but not limited to, severance payments, continued
stock vesting, acceleration of stock vesting or other benefits described in
paragraphs 3(d) and 5, you will be required to sign a full release of all claims
against the Company (except for any claims for workers' compensation benefits or
claims for indemnity based upon acts or omissions committed by you in good faith
during the course and scope of your employment with the Company) and an
agreement not to compete against the Company for a period of one year, and not
to solicit Company employees to seek employment outside the Company for a period
of two years after your employment with the Company terminates.
6
Patrick Lo
December 3, 1999
Page 6
8. Confidential and Proprietary Information. As a condition of your
employment, you agree to sign the Company's standard form of employee invention
and proprietary information agreement.
9. Co-Employment: You acknowledge and agree that for the purposes of the
provision of human resource services including employee relations, payroll and
the provision of certain employee benefits that the Company will be in a
co-employment relationship with TriNet Employer Group, Inc. ("TriNet"), and to
that extent you will be in an employment relationship with the Company and
TriNet. Nothing about this paragraph creates any new rights in your favor, nor
any new obligations on the part of either TriNet or the Company not already
contained in, nor otherwise modifies the terms and conditions of, the Service
Agreement between the Company and TriNet.
10. Dispute Resolution. In the event of any dispute or claim relating to
or arising out of your employment relationship with the Company, this Agreement,
or the termination of your employment with the Company for any reason
(including, but not limited to, any claims of breach of contract, wrongful
termination or age, disability or other discrimination), you and the Company
agree that all such disputes shall be fully, finally and exclusively resolved by
binding arbitration conducted by the American Arbitration Association of San
Francisco, California. You and the Company hereby knowingly and willingly waive
your respective rights to have any such disputes or claims tried to a judge or
jury. Provided, however, that this arbitration provision shall not apply to any
claims for injunctive relief by you or the Company.
11. Assignment. In view of the personal nature of the services to be
performed under this Agreement by you, you cannot assign or transfer any of your
obligations under this Agreement.
12. Entire Agreement. This Agreement and the agreements referred to above
constitute the entire agreement between you and the Company regarding the terms
and conditions of your employment, and they supersede all prior negotiations,
representations or agreements between you and the Company regarding your
employment, whether written or oral.
13. Modification. This Agreement may only be modified or amended by a
supplemental written agreement signed by you and an authorized representative of
the Company.
7
Patrick Lo
December 3, 1999
Page 7
Patrick, we look forward to working with you at Netgear, Inc. Please sign
and date this letter on the spaces provided below to acknowledge your acceptance
of the terms of this Agreement.
Sincerely,
Board of Directors of Netgear, Inc.
By: [SIGNATURE ILLEGIBLE]
-----------------------------------
Member of Board of Director,
Netgear, Inc.
I agree to and accept employment with Netgear, Inc. on the terms and
conditions set forth in this Agreement.
Date: 12/3, 1999 /s/ PATRICK LO
---- ---------------------------------------