Employment Agreement

EXHIBIT 10.1

[Cepheid letterhead]

January 24, 2007

John L. Bishop

Employment Agreement

Dear John:

          In recognition of your importance to Cepheid’s continued growth and success, we are pleased to offer you this Employment Agreement effective January 24, 2007 (the “Effective Date”) on the terms set forth below (this “Employment Agreement”).

          This Employment Agreement amends, restates and supercedes in its entirety the letter agreement you entered into with Cepheid on March 27, 2002 (the “Prior Agreement”), except as otherwise provided in this Employment Agreement. In this Employment Agreement, “Cepheid” means Cepheid, a California corporation, and any successor or assign to substantially all the business and/or assets of Cepheid.

	1.		Position . You will remain employed by Cepheid as its Chief Executive Officer until termination pursuant to Section 6. You will continue to be nominated to serve on Cepheid’s Board of Directors for so long as you are Cepheid’s Chief Executive Officer. You will continue to have overall responsibility for the management of Cepheid and report directly to its Board of Directors. During your employment, you will be expected to devote your full working time and attention to the business of Cepheid, and you will not render services to any other business without the prior approval of the Board of Directors (not to be unreasonably withheld) or, directly or indirectly, engage or participate in any business that is competitive in any manner with the business of Cepheid. The foregoing, however, will not preclude you from engaging in reasonable community, school or charitable activities or acting as a director of any private company that does not compete with Cepheid with the permission of the Board of Directors (not to be unreasonably withheld). You will be expected to comply with and be bound by Cepheid’s operating policies, procedures and practices that are from time to time in effect during the term of your employment.
	2.		Base Salary . Your base annual salary will be $450,000, payable in accordance with Cepheid’s normal payroll practices with such payroll deductions and withholdings as are required by law (your “Base Salary”). The Compensation Committee of Cepheid’s Board of Directors (the “Compensation Committee”) will review your base annual salary on an annual basis.
	3.		Annual Performance Bonus . Your annual performance bonus in 2007 will be determined pursuant to Cepheid’s 2007 Executive Incentive Plan (the “Incentive Plan”).

Your 2007 bonus, if any, will be payable upon Cepheid’s attainment of certain financial goals in accordance with the Incentive Plan. Your target bonus will be 40% of your Base Salary. You have no minimum annual bonus commitment. Your maximum annual bonus in 2007 will be $225,000. The Compensation Committee will review your performance bonus on an annual basis and may, in its sole discretion, make adjustments to the target or maximum bonus amounts, bonus objectives and other terms.

	4.		Equity Compensation . Your existing equity awards shall continue to be governed by the terms of such awards, as modified by this Employment Agreement. The Compensation Committee may, in its sole discretion, award you other equity-based awards in the future.
	5.		Other Benefits . You will be entitled to the following additional benefits:

	a.		You will continue to be eligible for the normal health insurance, 401(k), employee stock purchase plan and other benefits offered to all Cepheid senior executives.
	b.		Your paid personal time off (“PTO”) will continue to accrue at a rate of 25 days per year of employment. Your PTO accrual rate will increase by an additional 5 days per year after the completion of your tenth year with Cepheid. Your PTO, including maximum accrual, will otherwise be governed by current Cepheid policy.
	c.		Cepheid will rent for you a one-bedroom corporate apartment in the Sunnyvale, California area, and pay your expenses incurred for weekly travel between Chicago, Illinois and the Bay Area. The Compensation Committee may review this housing and travel coverage on an annual basis and may, in its discretion, modify these arrangements.
	d.		During the term of your employment, you will be authorized to incur necessary and reasonable travel expenses, including entertainment and other business expenses, in connection with your duties to Cepheid. Cepheid will reimburse you for such expenses upon presentation of an itemized account and appropriate supporting documentation, all in accordance with Cepheid’s generally applicable policies.

6.

Employment and Termination . Your employment with Cepheid will be at-will and may be terminated by you or by Cepheid at any time for any reason as follows:

a.

You may terminate your employment upon written notice to the Board of Directors at any time for “Good Reason,” as defined below (an “Involuntary Termination”);

	b.		You may terminate your employment upon written notice to the Board of Directors at any time in your discretion without Good Reason (“Voluntary Termination”);
	c.		Cepheid may terminate your employment upon written notice to you at any time following a determination by the Board of Directors that there is “Cause,” as defined below, for such termination (“Termination for Cause”);
	d.		Cepheid may terminate your employment upon written notice to you at any time in the sole discretion of the Board of Directors without a determination that there is Cause for such termination (“Termination without Cause”);
	e.		Your employment will automatically terminate upon your death or upon your disability as determined by the Board of Directors.

	7.		Term . Unless your employment with Cepheid is earlier terminated, the provisions of this letter agreement shall govern for 4 years from the Effective Date (such 4-year period, the “Term”). Assuming you remain employed by Cepheid, the parties will enter into negotiations for a new arrangement prior to expiration of the Term to cover future periods. You agree to resign immediately upon request of Cepheid from your directorship upon termination of your employment for any reason.
	8.		Definitions . As used in this Employment Agreement, the following terms have the following meanings:

	a.		“Good Reason” means the occurrence of any of the following conditions, without your written consent: (i) a significant diminution in the nature or scope of your authority, title, function or duties; (ii) a 10% reduction in your Base Salary or a 25% reduction in your target bonus opportunity (in either case, unless either such reduction is part of an officer-wide program to reduce expenses); (iii) any material breach of the terms of this Employment Agreement by Cepheid; (iv) Cepheid’s requiring you to be based at any office or location more than 50 miles from Cepheid’s current headquarters in Sunnyvale, California; or (v) failure of any successor or assignee to Cepheid to assume this agreement.
	b.		“Cause” means your (a) failure to perform any reasonable and lawful duty of your position or failure to follow the lawful written directions of the Board of Directors after being given written notice of such failure by the Board of Directors and fifteen days in which to cure your performance, provided that such notice will be

required only with respect to the first failure; (b) commission of an act that constitutes misconduct and is injurious to Cepheid or any subsidiary; (c) conviction of, or pleading “guilty” or “no contest” to, a felony under the laws of the United States or any state thereof; (d) committing an act of fraud against, or the misappropriation of property belonging to, Cepheid or any subsidiary; (e) commission of an act of dishonesty in connection with your responsibilities as an employee and affecting the business or affairs of Cepheid; (f) breach of any confidentiality, proprietary information or other agreement between you and Cepheid or any subsidiary; or (g) failure or refusal to carry out the reasonable directives of Cepheid, if such failure continues for fifteen days or more after Cepheid has given written notice describing such failure, provided that such notice shall be required only with respect to the first failure.

	c.		“Change of Control” means (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 Cepheid under an employee benefit plan of Cepheid, becomes the “beneficial owner” (as defined in Rule 13d-3 promulgated under the Exchange Act), directly or indirectly, of securities of Cepheid representing 50% or more of (A) the outstanding shares of common stock of Cepheid or (B) the combined voting power of Cepheid’s then outstanding securities; (ii) Cepheid is party to a merger or consolidation which results in the voting securities of Cepheid outstanding immediately prior thereto failing to continue to represent (either by remaining outstanding or by being converted into voting securities of the surviving or another entity) at least 50% percent of the combined voting power of the voting securities of Cepheid or such surviving or other entity outstanding immediately after such merger or consolidation; (iii) the sale or disposition of all or substantially all of Cepheid’s assets (or consummation of any transaction having similar effect); (iv) the dissolution or liquidation of Cepheid; or (v) individuals who, as of the Effective Date, constitute the Board of Directors (the “Incumbent Board”) cease for any reason to constitute at least a majority of such Board; provided that any individual who becomes a director of Cepheid subsequent to the Effective Date, whose election, or nomination for election by Cepheid shareholders, was approved by the vote of at least a majority of the directors then in office shall be deemed a member of the Incumbent Board.
	d.		“Termination Upon Change of Control” means (i) any Termination without Cause within twelve months following a Change of Control; or (ii) any Involuntary Termination where (A) any condition constituting Good Reason occurs within twelve months following the Change of Control, and (B) such Involuntary Termination occurs within ninety days following the occurrence of such condition constituting Good Reason.

9.

Separation Benefits . Upon termination of your employment with Cepheid for any reason, you will receive payment for all unpaid salary, reimbursements and PTO accrued to the date of your termination of employment; and your benefits will be continued under Cepheid’s then existing benefit plans and policies for so long as provided under the terms of such plans and policies and as required by applicable law. Under certain circumstances, you will also be entitled to receive severance benefits as set forth below provided you sign a valid and binding release agreement. No severance benefit shall be paid until six months and one day following the date of termination of your employment except as may be permitted under Section 409A of the Internal Revenue Code (the “Code”). You agree that, except as set forth below, you will not be entitled to any other compensation, award or damages with respect to your employment or termination.

	a.		In the event of your Voluntary Termination or Termination for Cause, you will not be entitled to any cash severance benefits or additional vesting of any outstanding stock options granted or restricted stock issued to you by Cepheid.
	b.		In the event of your Involuntary Termination or Termination without Cause, provided that you comply with Section 9(e) below, (i) you shall receive a single lump sum severance payment equal to twelve months of your then current annual base salary (less applicable deductions and withholdings) payable within ten business days of the effective date of your termination, subject to any deferral of payment under Section 409A of the Code; (ii) you shall receive a single lump sum payment equal to your prorated target bonus for the then current year without regard to satisfaction of any target performance objectives (less applicable deductions and withholdings) payable within ten business days of the effective date of your termination, subject to any deferral of payment under Section&nbs