EMPLOYMENT AGREEMENT

Exhibit 10.1

EMPLOYMENT AGREEMENT

THIS EMPLOYMENT AGREEMENT (this “ Agreement ”) is entered into by and between Basin Water, Inc., a Delaware corporation (the “ Company ”), and Michael Stark (“ Executive ”) on October 27, 2006, and is effective as of the 22 ^nd day of October, 2006 (the “ Effective Date ”).

WHEREAS, the Company desires to employ Executive, and Executive desires to be employed by the Company, on the terms and subject to the conditions set forth herein.

NOW, THEREFORE, in consideration of the mutual promises herein contained, the parties agree as follows:

1. Definitions . As used in this Agreement, the following terms shall have the following meanings:

(a) Board . “ Board ” means the Board of Directors of the Company.

(b) Bonus . “ Bonus ” means an amount equal to the greater of (i) Executive’s target annual bonus for the fiscal year in which the date of termination occurs, or (ii) the bonus awarded to Executive for the fiscal year prior to the date of termination. If any portion of the bonuses awarded to Executive consisted of securities or other property, the fair market value thereof shall be determined in good faith by the Board.

(c) Cause . “ Cause ” means any of the following:

(i) the commission of an act of fraud or embezzlement by Executive involving the Company or any successor or affiliate thereof or Executive’s commission of any other act of dishonesty that has a material adverse impact on the Company or any successor or affiliate thereof;

(ii) a conviction of, or plea of “guilty” or “no contest” to, a felony by Executive or any other crime involving moral turpitude (it being understood that violation of the motor vehicle code does not constitute such a crime);

(iii) any unauthorized use or disclosure by Executive of confidential information or trade secrets of the Company or any successor or affiliate thereof;

(iv) Executive’s gross negligence, insubordination or material violation of any duty of loyalty to the Company or any successor or affiliate thereof or any other material misconduct on the part of Executive;

(v) Executive’s ongoing and repeated failure or refusal to perform or neglect of Executive’s duties as required by this Agreement, which failure, refusal or neglect continues for fifteen (15) days following Executive’s receipt of written notice from the CEO or the Board stating with specificity the nature of such failure, refusal or neglect; or

(vi) Executive’s breach of any material provision of this Agreement;

provided , however , that prior to the determination that “Cause” under clause (i), (iv), (v) or (vi) of this Section 1(c) has occurred, the Company shall (w) provide to Executive in writing, in reasonable detail, the reasons for the determination that such “Cause” exists, (x) other than with respect to clause (v) above which specifies the applicable period of time for Executive to remedy his breach, afford Executive a reasonable opportunity to remedy any such breach, if such breach is capable of being remedied, and (y) provide Executive an opportunity to be heard prior to the final decision to terminate the Executive’s employment hereunder for such “Cause.” The Company shall make any decision that “Cause” exists in good faith.

The foregoing definition shall not in any way preclude or restrict the right of the Company or any successor or affiliate thereof to discharge or dismiss Executive for any other acts or omissions, but such other acts or omissions shall not be deemed, for purposes of this Agreement, to constitute grounds for termination for Cause.

(d) Change in Control . “ Change in Control ” means and includes each of the following:

(i) the acquisition, directly or indirectly, by any “person” or “group” (as those terms are defined in Sections 3(a)(9), 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the “ Exchange Act ”), and the rules thereunder) of “beneficial ownership” (as determined pursuant to Rule 13d-3 under the Exchange Act) of securities entitled to vote generally in the election of directors (“ voting securities ”) of the Company that represent fifty percent (50%) or more of the combined voting power of the Company’s then outstanding voting securities, other than:

(A) an acquisition by a trustee or other fiduciary holding securities under any employee benefit plan (or related trust) sponsored or maintained by the Company or any person controlled by the Company or by any employee benefit plan (or related trust) sponsored or maintained by the Company or any person controlled by the Company;

(B) an acquisition of voting securities by the Company or a corporation owned, directly or indirectly by the stockholders of the Company in substantially the same proportions as their ownership of the stock of the Company; or

(C) an acquisition of voting securities pursuant to a transaction described in subsection (iii) below that would not be a Change in Control under subsection (iii);

Notwithstanding the foregoing, the following event shall not constitute an “acquisition” by any person or group for purposes of this Section 1(d): an acquisition of the Company’s securities by the Company which causes the Company’s voting securities beneficially owned by a person or group to represent fifty percent (50%) or more of the combined voting power of the Company’s then outstanding voting securities; or

(ii) during any period of two (2) consecutive years, individuals who, at the beginning of such period, constitute the Board together with any new director(s) (other than a director designated by a person who shall have entered into an agreement with the Company to

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effect a transaction described in clauses (i) or (iii) of this Section 1(d)) whose election by the Board or nomination for election by the Company’s stockholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the two (2) year period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority thereof; or

(iii) the consummation by the Company (whether directly involving the Company or indirectly involving the Company through one or more intermediaries) of (x) a merger, consolidation, reorganization, or business combination or (y) a sale or other disposition of all or substantially all of the Company’s assets or (z) the acquisition of assets or stock of another entity, in each case other than a transaction:

(A) which results in the Company’s voting securities outstanding immediately before the transaction continuing to represent (either by remaining outstanding or by being converted into voting securities of the Company or the person that, as a result of the transaction, controls, directly or indirectly, the Company or owns, directly or indirectly, all or substantially all of the Company’s assets or otherwise succeeds to the business of the Company (the Company or such person, the “ Successor Entity ”)), directly or indirectly, at least a majority of the combined voting power of the Successor Entity’s outstanding voting securities immediately after the transaction; and

(B) after which no person or group beneficially owns voting securities representing fifty percent (50%) or more of the combined voting power of the Successor Entity; provided , however , that no person or group shall be treated for purposes of this clause (B) as beneficially owning fifty percent (50%) or more of combined voting power of the Successor Entity solely as a result of the voting power held in the Company prior to the consummation of the transaction; or

(iv) the Company’s stockholders approve a liquidation or dissolution of the Company.

(e) Code . “ Code ” means the Internal Revenue Code of 1986, as amended from time to time, and the Treasury Regulations and other interpretive guidance issued thereunder.

(f) Excise Tax . “ Excise Tax ” means the excise tax imposed by Section 4999 of the Code, together with any interest or penalties imposed with respect to such excise tax.

(g) Good Reason . “ Good Reason ” means Executive’s voluntary resignation following any one or more of the following that is effected without Executive’s written consent:

(i) the relocation of the office of Executive more than fifty (50) miles from the Primary Work Locations;

(ii) a material reduction in the nature or scope of Executive’s responsibilities, or the assignment to Executive of duties that are materially inconsistent with Executive’s position (in each case as compared to Executive’s responsibilities, duties or position on the Effective Date) (provided that the fact that the Company becomes a subsidiary of an

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acquirer or a division of an acquirer shall not in and of itself by considered a material reduction or change to Executive’s responsibilities, duties or position);

(iii) a reduction in Executive’s base salary or target bonus as an employee of the Company, other than pursuant to a Company-wide reduction of base salaries and target bonuses for employees of the Company generally;

(iv) the Company’s failure to continue in effect compensation and benefit plans which provide Executive with benefits which are no less favorable on an aggregate basis, both in terms of the amount of benefits provided and the level of Executive’s participation relative to other participants, to the benefits provided to Executive under the Company’s compensation and benefit plans and practices on the Effective Date;

(v) any failure by the Company to obtain the assumption of this Agreement by any successor or assign of the Company as contemplated by Section 9(b);

(vi) any change in Executive’s reporting relationship such that Executive no longer reports directly to the CEO; or

(vii) the Company’s breach of any material provision of this Agreement; provided , that Executive shall (w) provide to the Company in writing, in reasonable detail, notice of such breach and (x) afford the Company a reasonable opportunity to remedy any such breach, if such breach is capable of being remedied.

(h) Payment . “ Payment ” means any payment or distribution in the nature of compensation (within the meaning of Section 280G(b)(2) of the Code) to or for the benefit of the Executive, whether paid or payable pursuant to this Agreement or otherwise.

(i) Permanent Disability . Executive’s “ Permanent Disability ” shall be deemed to have occurred if Executive shall become physically or mentally incapacitated or disabled or otherwise unable fully to discharge his duties hereunder for a period of ninety (90) consecutive calendar days or for one hundred twenty (120) calendar days in any one hundred eighty (180) calendar-day period. The existence of Executive’s Permanent Disability shall be determined by the Company on the advice of a physician chosen by the Company and the Company reserves the right to have the Executive examined by a physician chosen by the Company at the Company’s expense.

(j) Stock Awards . “ Stock Awards ” means all stock options, restricted stock and such other awards granted pursuant to the Company’s stock option and equity incentive award plans or agreements and any shares of stock issued upon exercise thereof.

2. Term of Agreement . Executive’s employment under this Agreement shall be for a term of three (3) years from the Effective Date (the “ Employment Term ”).

3. Services to Be Rendered.

(a) Duties and Responsibilities . Executive shall serve as President and Chief Operating Officer of the Company and in such capacity shall have such duties as are normally

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associated with such position, including but not limited to responsibility for the overall operation of the Company including marketing, sales, and profit and loss responsibilities. In the performance of such duties, Executive shall report to the Chief Executive Officer (“ CEO ”) and shall be subject to the direction of the CEO and to such limits upon Executive’s authority as the CEO may from time to time impose. Executive hereby consents to serve as an officer and/or director of the Company or any subsidiary or affiliate thereof without any additional salary or compensation, if so requested by the CEO or the Board. Executive shall be employed by the Company on a full time basis. Executive’s primary place of work shall be the Company’s facility in Rancho Cucamonga, California, or such other location as may be designated by the CEO and the Board from time to time (Rancho Cucamonga, California or such other location as designated by the CEO and the Board are referred to herein as the “ Primary Work Locations ”). The Company acknowledges that the Executive will not be expected to relocate his residence to California as part of his job responsibilities. Executive understands and agrees that he may be required to travel and perform services for the Company at such other places within or outside the United States as the CEO may direct from time to time, however, Executive’s primary place of work shall remain the Primary Work Locations. Executive shall be subject to and comply with the policies and procedures generally applicable to senior executives of the Company to the extent the same are not inconsistent with any term of this Agreement.

(b) Exclusive Services . Executive shall at all times faithfully, industriously and to the best of his ability, experience and talent perform to the satisfaction of the CEO and the Board all of the duties that may be assigned to Executive hereunder and shall devote substantially all of his productive time and efforts to the performance of such duties. Subject to the terms of Section 6, this shall not preclude Executive from devoting time to personal and family investments or serving on community and civic boards, or participating in industry associations, provided such activities do not interfere with his duties to the Company, as determined in good faith by the CEO and the Board. Executive agrees that he will not join any boards, other than community and civic boards (which do not interfere with his duties to the Company), without the prior approval of the CEO and the Board.

4. Compensation and Benefits . The Company shall pay or provide, as the case may be, to the Executive the compensation and other benefits and rights set forth in this Section 4, commencing as of the Effective Date unless otherwise indicated.

(a) Base Salary . The Company shall pay to Executive a base salary of $325,000 per year, payable in accordance with the Company’s usual pay practices (and in any event no less frequently than monthly). Executive’s base salary shall be subject to review annually by and at the sole discretion of the Compensation Committee of the Board based on the Company’s performance (such as profitability of the Company and growth in the Company’s market capitalization).

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(b) Bonus . Executive shall be eligible to receive a bonus based on achievement of annual targeted revenue and net income, as established by the Compensation Committee of the Board each fiscal year. If actual performance is less than 80% of target no bonus will be earned or paid. If actual performance is 80% or more of target, then Executive shall earn and be paid a bonus as a percentage of base salary as follows:

All interim percentages will be calculated on straight-line, pro rata basis. For this purpose, revenue and net income shall be defined to exclude contribution from any future acquisitions, initiatives or other joint ventures of the Company, unless specifically included by the Compensation Committee of the Board, in advance and in writing.

In the event that the performance targets are not achieved, the Compensation Committee of the Board in its sole discretion may elect to pay a discretionary bonus of up to 25% of base salary based on other factors not related to achievement of the performance targets.

(c) Benefits . Executive shall be entitled to participate in benefits under the Company’s benefit plans and arrangements, including, without limitation, any employee benefit plan or arrangement made available in the future by the Company to its senior executives, subject to and on a basis consistent with the terms, conditions and overall administration of such plans and arrangements. The Company shall have the right to amend or delete any such benefit plan or arrangement made available by the Company to its senior executives and not otherwise specifically provided for herein. The Company shall provide executive with the following employee benefits:

(i) The Company shall provide Executive long-term disability insurance at its cost to the Executive in an amount equal to 75% of base annual salary up to a maximum benefit of $30,000 per month (total benefit to be provided through a combination of “group” program offered to all employees and supplemental individual disability policy for the Executive);

(ii) The Company shall provide Executive life insurance at its cost in an amount equal to 3 times Executive’s annual base salary (total benefit to be provided through Company’s basic group term life insurance plan, should one be established, and an individual term life insurance policy for the Executive);

(iii) The Company agrees to reimburse the Executive for out-of-pocket expenses relating to a biennial physical examination up to a maximum of $3,000.

(d) Expenses . The Company shall reimburse Executive for reasonable out-of-pocket expenses incurred in connection with the performance of his duties hereunder, subject to (i) such policies as the Company may from time to time establish, and (ii) Executive furnishing the Company with evidence in the form of receipts satisfactory to the Company substantiating the claimed expenditures.

(e) Paid Time Off . Executive shall be entitled to such periods of paid time off (“ PTO ”) each year as provided under the Company’s PTO policy and as otherwise provided for

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senior executive officers. Under such policy, Executive shall accrue 20 days in the first two years of employment, 25 days after two years.

(f) Equity Plans .

(i) Executive shall be entitled to participate in any equity or other employee benefit plan that is generally available to senior executive officers, as distinguished from general management, of the Company. Except as otherwise provided in this Agreement, Executive’s participation in and benefits under any such plan shall be on the terms and subject to the conditions specified in the governing document of the particular plan.

(ii) On the date of this Agreement, Executive shall be granted a restricted stock award of 200,000 shares of the Company’s common stock (the “ Restricted Stock ”) under the Company’s 2006 Equity Incentive Award Plan (the “ 2006 Plan ”). The shares of Restricted Stock will be subject to forfeiture in the event Executive’s employment with or service to the Company terminates prior to the vesting of the shares in accordance with the terms of this Agreement. The restrictions on such Restricted Stock shall lapse in three (3) equal annual installments commencing on the first anniversary of the Effective Date, subject to Executive’s continued employment or service with the Company on each such date. Subject to Sections 4(g) and 5, such Restricted Stock shall be subject to the terms and conditions of the 2006 Plan and the restricted stock award agreement pursuant to which such Restricted Stock is granted to the extent such provisions are not less favorable to Executive than the applicable provisions of this Agreement.

(iii) On the date of this Agreement, Executive shall be granted options to purchase 300,000 shares of the Company’s common stock at an exercise price equal to the fair market value of the Company’s common stock on such date, as determined under the 2006 Plan. Such options shall vest and become exercisable as follows: (A) 100,000 shares subject to such option shall be vested and exercisable on the date that the closing price of the Company’s common stock on Nasdaq (or such other stock exchange or national market system on which the Company’s common stock is then traded) equals or exceeds $15.25 per share for a period of at least 45 continuous days within the three year period from the date of grant; (B) 100,000 shares subject to such option shall be vested and exercisable on the date that the closing price of the Company’s common stock on Nasdaq (or such other stock exchange or national market system on which the Company’s common stock is then traded) equals or exceeds $19 per share for a period of at least 45 continuous days within the three year period from the date of grant; and (C) 100,000 shares subject to such option shall be vested and exercisable on the date that the closing price of the Company’s common stock on Nasdaq (or such other stock exchange or national market system on which the Company’s common stock is then traded) equals or exceeds $23.50 per share for a period of at least 45 continuous days within the four year period from the date of grant.

(g) Accelerated Vesting of Stock Awards .

(i) In the event of a Change in Control, the vesting and/or exercisability of one hundred percent (100%) of Executive’s outstanding Stock Awards shall be automatically accelerated immediately prior to the Change in Control.

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(ii) If Executive’s employment is terminated by the Company without Cause or by Executive for Good Reason, in each case within twenty-four (24) months following a Change in Control, the vesting and/or exercisability of one hundred percent (100%) of Executive’s outstanding Stock Awards shall be automatically accelerated as of the date of termination.

(iii) The vesting pursuant to clauses (i) and (ii) of this Section 4(g) shall be cumulative. The foregoing provisions are hereby deemed to be a part of each Stock Award and to supersede any less favorable provision in any agreement or plan regarding such Stock Award.

5. Termination and Severance . Executive shall be entitled to receive benefits upon termination of employment only as set forth in this Section 5:

(a) At-Will Employment; Termination . The Company and Executive acknowledge that Executive’s employment is and shall continue to be at-will, as defined under applicable law, and that Executive’s employment with the Company may be terminated by either party at any time for any or no reason, with or without notice. If Executive’s employment terminates for any reason, Executive shall not be entitled to any payments, benefits, damages, award or compensation other than as provided in this Agreement. Executive’s employment under this Agreement shall be terminated immediately on the death of Executive.

(b) Termination without Cause or for Good Reason .

(i) Termination Apart From Change in Control . If Executive’s employment is terminated by the Company without Cause or by Executive for Good Reason prior to a Change in Control or more than twenty-four (24) months following a Change in Control, Executive shall be entitled to receive, in lieu of any severance benefits to which Executive may otherwise be entitled under any severance plan or program of the Company, the benefits provided below:

(A) the Company shall pay to Executive his fully earned but unpaid base salary, when due, through the date of termination at the rate then in effect, plus all other amounts to which Executive is entitled under any compensation plan or practice of the Company at the time of termination;

(B) subject to Executive’s continued compliance with the provisions of Section 6, Executive shall be entitled to receive severance pay in an amount equal to Executive’s base salary as in effect immediately prior to the date of termination for the six (6) month period following the date of termination, payable in a lump sum as soon as administratively practicable but in any event no later than two and one-half (2  ¹ / 2 ) months following the date of termination; plus

(C) subject to Executive’s continued compliance with the provisions of Section 6, for the period beginning on the date of termination and ending on the date which is six (6) full months following the date of termination (or, if earlier, the date on which Executive accepts employment with another employer that provides comparable benefits in terms of cost and scope of coverage), the Company shall pay for

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and provide Executive and his dependents with healthcare benefits which are substantially the same as the benefits provided to Executive immediately prior to the date of termination, including, if necessary, paying the costs associated with continuation coverage pursuant to the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended (“ COBRA ”); and

(D) subject to Executive’s continued compliance with the provisions of Section 6, Executive shall be entitled to executive-level outplacement services at the Company’s expense, not to exceed $15,000. Such services shall be provided by a firm selected by Executive from a list compiled by the Company.

(ii) Termination In Connection With Change in Control . If Executive’s employment is terminated by the Company without Cause or by Executive for Good Reason within twenty-four (24) months following a Change in Control, Executive shall be entitled to receive, in lieu of any severance benefits to which Executive may otherwise be entitled under any severance plan or program of the Company, the benefits provided below:

(A) the Company shall pay to Executive his fully earned but unpaid base salary, when due, through the date of termination at the rate then in effect, plus all other amounts to which Executive is entitled under any compensation plan or practice of the Company at the time of termination;

(B) subject to Executive’s continued compliance with the provisions of Section 6, Executive shall be entitled to receive severance pay in an amount equal to the sum of:

(1) Executive’s base salary as in effect immediately prior to date of termination for a period equal to six (6) months, payable in a lump sum as soon as administratively practicable but in any event no later than two and one-half (2  ¹ / 2 ) months following the date of termination; plus

(2) an amount equal to Executive’s Bonus for the year in