CAPELLA EDUCATION COMPANY 2005 STOCK INCENTIVE PLAN Market Stock Unit Award Agreement Terms and Conditions

(a)    Number of Shares. Subject to Sections 3, 4 and 5 of this Agreement, the number of Units subject to this Agreement that will vest on the Scheduled Vesting Date (as defined below) shall be a function of the Ending Value (as defined below) of the Company's common stock as of the end of the applicable Performance Period (as defined below) as set forth in the following schedule, provided the Recipient's employment with the Company does not terminate on or before the Scheduled Vesting Date. Any Units that do not vest on the Scheduled Vesting Date shall be forfeited.

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(1) If the Ending Value is between two of the values shown in the table, then the number of Units that vest will be determined by straight line interpolation between the applicable Unit values shown in the table.

(b)    Payment. Subject to Section 9, each vested Unit shall be paid and settled in one share of the Company's common stock. Issuance and delivery of Shares in payment of vested Units will occur within ten (10) days after vesting of the Units, and Recipient shall have no power to affect the timing of such delivery. Such issuance shall be evidenced by a stock certificate or appropriate entry on the books of the Company or a duly authorized transfer agent of the Company, and shall be in complete satisfaction of such vested Units. If the Units that vest and become payable include a fractional Unit, the Company shall round the number of vested Units to the nearest whole Unit prior to delivery of Shares as provided herein. If the ownership of or issuance of Shares to Recipient as provided herein is not feasible due to applicable exchange controls, securities or tax laws or other provisions of applicable law, as determined by the Committee in its sole discretion, Recipient or his or her Successor shall

receive cash proceeds in an amount equal to the Fair Market Value (as of the date vesting occurs) of the Shares otherwise issuable to Recipient in payment of vested Units, net of any amount required to satisfy withholding tax obligations as provided in Section 11.

(c)    Effect. Whenever the Company shall become obligated to make payment in respect of a Unit subject to this Agreement, all rights of Recipient with respect to such Unit, other than the right to such payment, shall terminate and be of no further force or effect and such Unit shall be cancelled.

(d)    Payments on Death. Any payment due under this Agreement following the death of Recipient shall be paid to the Successor of Recipient.

(e)    Clawback. Notwithstanding anything apparently to the contrary herein, if the Board determines that Participant has engaged in business conduct inconsistent with the Company's ethical standards, including those ethical standards that apply to the Company's regulatory matters, then (i) if the Units have not yet been settled in shares of Common Stock, the Units shall be immediately and irrevocably forfeited without any payment therefor; and (ii) if the Units have vested and been settled in shares of Common Stock, Participant shall be required, upon demand, to repay or otherwise reimburse the Company an amount having a value equal to the aggregate Fair Market Value of the shares of Common Stock underlying such Units on the date the Units became vested.

Scheduled Vesting Date, the following provisions apply:

(a)Termination for Cause. If Recipient's employment is terminated for Cause (as defined in the Plan), Recipient shall immediately forfeit the Units.

(b)Voluntary Termination, including Retirement. If Recipient resigns or otherwise voluntarily terminates his/her employment, including for retirement at any age, Recipient shall immediately forfeit the Units.

(c)Death, Disability or Termination without Cause. If Recipient's employment is terminated as a result of Recipient's death or Disability (as defined in the Plan) or is terminated without Cause, then the Units shall immediately vest and be paid in Shares as provided in Section 3; provided, however, in such instance the date of death, Disability or termination without Cause shall be deemed the Scheduled Vesting Date.

For purposes of this Agreement, a “Change in Control” of the Company shall be deemed to occur if any of the following occur:

(a)     Any “person” (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) acquires or becomes a “beneficial owner” (as defined in Rule 13d-3 or any successor rule under the Exchange Act), directly or indirectly, of securities of the Company representing the 65% or more of the combined voting power of the Company's then outstanding securities entitled to vote generally in the election of directors (“Voting Securities”). Provided, however, that the following shall not constitute a Change in Control pursuant to this Section 6(a):

(1)     any acquisition or beneficial ownership by the Company or a subsidiary;

(2)     any acquisition or beneficial ownership by any employee benefit plan (or related trust) sponsored or maintained by the Company or one or more of its subsidiaries;

(3)     any acquisition or beneficial ownership by any corporation with respect to which, immediately following such acquisition, more than 65% of both the combined voting power of the Company's then outstanding Voting Securities and the Shares of the Company is then beneficially owned, directly or indirectly, by all or substantially all of the persons who beneficially owned Voting Securities and Shares of the Company immediately prior to such acquisition in substantially the same proportions as their

ownership of such Voting Securities and Shares, as the case may be, immediately prior to such acquisition;

(b)     A majority of the members of the Board of Directors of the Company shall not be Continuing Directors. “Continuing Directors” shall mean: (1) individuals who, on the date hereof, are directors of the Company, (2) individuals elected as directors of the Company subsequent to the date hereof for whose election proxies shall have been solicited by the Board of Directors of the Company or (3) any individual elected or appointed by the Board of Directors of the Company to fill vacancies on the Board of Directors of the Company caused by death or resignation (but not by removal) or to fill newly-created directorships;

(c)     Consummation by the Company of a reorganization, merger or consolidation of the Company or a statutory exchange of outstanding Voting Securities of the Company, unless, immediately following such reorganization, merger, consolidation or exchange, all or substantially all of the persons who were the beneficial owners, respectively, of Voting Securities and Shares of the Company immediately prior to such reorganization, merger, consolidation or exchange beneficially own, directly or indirectly, more than 65% of, respectively, the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors and the then outstanding shares of common stock, as the case may be, of the corporation resulting from such reorganization, merger, consolidation or exchange in substantially the same proportions as their ownership, immediately prior to such reorganization, merger, consolidation or exchange, of the Voting Securities and Shares of the Company, as the case may be;

 

(d)     Consummation by the Company of the sale or other disposition of all or substantially all of the assets of the Company (in one or a series of transactions), other than to a corporation with respect to which, immediately following such sale or other disposition, more than 65% of, respectively, the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors and the then outstanding shares of common stock of such corporation is then beneficially owned, directly or indirectly, by all or substantially all of the persons who were the beneficial owners, respectively, of the Voting Securities and Shares of the Company immediately prior to such sale or other disposition in substantially the same proportions as their ownership, immediately prior to such sale or other disposition, of the Voting Securities and Shares of the Company, as the case may be; or

(e)     Approval by the shareholders of the Company of a complete liquidation or dissolution of the Company.

    

For purposes of this Agreement, “Good Reason” is defined as a material demotion or material reduction of the job responsibilities of Recipient or the reassignment, without Recipient's consent, of Recipient's place of work to a location more than 50 miles from the Recipient's place of work immediately prior to the Change in Control, provided that none of these conditions shall constitute Good Reason unless Recipient first gives written notice to the Company within 90 days of the first occurrence of the condition, delineating the claimed breach and setting forth Recipient's intention to terminate Recipient's employment if such breach is not duly remedied within 30 business days, and the Company fails to cure the condition within such 30-day period.

(a)     The Recipient, by accepting this award, agrees and covenants that during the period during which Recipient is employed by the Company and for twelve months following the date of termination of Recipient's employment by the Company (the “Restricted Period”) for any reason whatsoever, Recipient will not, directly or indirectly:

    

(b)     If the Company determines that Recipient violated any provisions of Section 9(a) above during the Restricted Period, Recipient agrees and covenants that:

        

(c)     The foregoing remedies set forth in Section 9(b) shall not be the Company's exclusive remedies. The Company reserves all other rights and remedies available to it at law or in equity.

        

(d)     The Company may exercise its right to provide notice of its determination and forfeiture of Units within ninety days after discovery of such an occurrence but in no event later than fifteen months after Recipient's termination of employment with the Company.

    

(e)     For purposes of this Section 9, the following terms shall have the meanings set forth below:

    

“Competitor” means any person, corporation, not-for-profit organization or other entity that is engaged in any business that competes with: (a) any of the businesses or programs conducted by the Company during the term of Recipient's service with the Company, or (2) any of the potential businesses or programs Recipient knew or had reason to know were in development by the Company in the education industry during the period of Recipient's service with the Company.

    

“Confidential Information” means information proprietary to the Company and not generally known (including trade secret information) about the Company's customers, products, services, personnel, pricing, sales strategy, technology, methods, processes, research, development, finances, systems, techniques, accounting, purchasing, and business strategies. All information disclosed to Recipient or to which Recipient obtains access, whether originated by Recipient or by others, during the period of Recipient's employment, shall be presumed to be Confidential Information if it is treated by the Company as being Confidential Information or if Recipient has a reasonable basis to believe it to be Confidential Information.