2004 OPTION PLAN Adopted September 3, 2004

Exhibit 10.31

TJ CHEMICAL HOLDINGS LLC

2004 OPTION PLAN

Adopted September 3, 2004

The purpose of the TJ Chemical Holdings LLC (the “ Company ”) 2004 Option Plan (the “ Plan ”) is to promote the interests of the Company and the Holders of Membership Units in the Company by providing key employees, consultants, members and service providers of the Company and its affiliates with an appropriate incentive to encourage them to continue in the employ of or to perform services for, and to improve the growth and profitability of, the Company and its affiliates.

Capitalized terms not otherwise defined herein shall have the meaning assigned to such terms in the LLC Agreement. As used in the Plan, the following capitalized terms shall have the following meanings:

“Board” shall mean the Board of Directors of the Company.

“Business Day ” shall mean any day other than a Saturday, a Sunday or a holiday on which national banking associations in Delaware or New York are closed.

“Cause” shall mean, unless otherwise specified in a Participant’s Option Grant Agreement, employment agreement or other written agreement with respect to the termination of a Participant’s Services, (A) such Participant’s continued failure substantially to perform his or her duties (other than as a result of Disability), whether as an employee, independent contractor or otherwise, (B) dishonesty in the performance of such Participant’s duties, (C) any act or acts of such Participant that constitutes (x) a felony or (y) a misdemeanor involving moral turpitude, (D) such Participant’s willful malfeasance or willful misconduct in connection with his or her duties or any act or omission which is injurious to the financial condition or business reputation of KRATON or any of its subsidiaries or affiliates, or (E) such Participant’s breach of confidentiality, non-competition, assignment of inventions or similar agreements. If, subsequent to Participant’s termination of Services for other than Cause, it is determined in good faith by the Company that Participant’s Services could have been terminated for Cause, Participant’s Services shall, at the election of the Company, be deemed to have been terminated for Cause retroactively to the date the events giving rise to Cause occurred.

“Change in Control” shall mean the occurrence of any of the following events: (i) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all of the assets of the Company to any Person or group of related persons for purposes of Section 13(d) of the Exchange Act (a “ Group ”), together with any affiliates thereof other than to TPG III Polymer Holdings LLC, TPG IV Polymer Holdings LLC or J.P. Morgan Partners L.P. or any of their affiliates (hereinafter the “ Sponsors ” ) ; (ii) the complete liquidation or dissolution of the Company; (iii) (A) any Person or Group (other than the Sponsors) shall

become the beneficial owner (within the meaning of Section 13(d) of the Exchange Act), directly or indirectly, of Units representing more than 40% of the aggregate outstanding Voting Units of the Company and such Person or Group actually has the power to vote such Units in any such election and (B) the Sponsors beneficially own (within the meaning of Section 13(d) of the Exchange Act), directly or indirectly, in the aggregate a lesser percentage of the Voting Units of the Company than such other Person or Group; (iv) the replacement of a majority of the Board over a two-year period from the directors who constituted the Board at the beginning of such period, and such replacement shall not have been approved by a vote of at least a majority of the Board then still in office who either were members of such Board at the beginning of such period or whose election as a member of such Board was previously so approved or who were nominated by, or designees of, the Sponsors; or (v) a merger or consolidation of the Company with another entity in which holders of the Membership Units of the Company immediately prior to the consummation of the transaction hold, directly or indirectly, immediately following the consummation of the transaction, less than 50% of the common equity interest in the surviving corporation in such transaction and the Sponsors do not hold a sufficient amount of Voting Units (or similar securities) to elect a majority of the surviving entity’s board of directors.

“Code” shall mean the Internal Revenue Code of 1986 and any successor statute, as amended, from time to time.

“Committee” shall mean the Committee appointed by the Board pursuant to Section 3 of the Plan or, in the absence of any such Committee, the Board.

“Company” shall mean TJ Chemical Holdings LLC, a Delaware limited liability company or any successor thereto.

“ Disability” shall mean, unless otherwise specified in a Participant’s Option Grant Agreement, employment agreement or other written agreement with respect to the termination of a Participant’s Services, a permanent disability as defined in the disability plan of the Company or such affiliate of the Company to which the Participant provides Services.

“Eligible Service Provider” shall mean those employees, consultants, members or service providers who, in the judgment of the Committee, should be eligible to participate in the Plan due to the services they perform on behalf of the Company or an affiliate of the Company.

“Exchange Act” shall mean the Securities Exchange Act of 1934, as amended.

“Exercise Date” shall have the meaning set forth in Section 4.10 herein.

“Exercise Notice” shall have the meaning set forth in Section 4.10 herein.

“Exercise Price” shall mean the price that the Participant must pay under the Option per Membership Unit, as determined by the Committee for each Grant and specified in each Option Grant Agreement.

“Fair Market Value” shall mean, solely for purposes of the Plan and the Options Granted thereunder, as of any date, the value per Membership Unit as determined by the

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Committee in good faith; provided , in making such determination, the Committee may rely on the reports or appraisals of the Company’s auditors or other third party appraisers.

“Good Reason” shall mean, unless otherwise specified in a Participant’s Option Grant Agreement, employment agreement or other written agreement with respect to the termination of a Participant’s Services, (i) a material diminution in a Participant’s duties and responsibilities other than a change in such Participant’s duties and responsibilities that results from becoming part of a larger organization following a Change in Control, (ii) a decrease in a Participant’s base salary, bonus opportunity or benefits other than a decrease in bonus opportunity or benefits that applies to all employees of the Company or its affiliates otherwise eligible to participate in the affected plan, or (iii) a relocation of a Participant’s primary work location more than 50 miles from the work location immediately prior to the Change in Control, without written consent; provided that, within sixty days following the occurrence of any of the events set forth herein, the Participant shall have delivered written notice to the Company of his intention to terminate his Services for Good Reason, which notice specifies in reasonable detail the circumstances claimed to give rise to the Participant’s right to terminate his Services for Good Reason, and the Company shall not have cured such circumstances within thirty days following the Company’s receipt of such notice.

“Grant” shall mean a grant of an Option under the Plan evidenced by an Option Grant Agreement.

“Grant Date” shall have the meaning set forth in Section 4.3 herein.

“Holder” shall mean any Person admitted to the Company as a holder of a Membership Unit in the Company and shall exclude any Person who ceases to be admitted as a holder of a Membership Unit in the Company.

“ LLC Agreement” shall mean the Second Amended and Restated Limited Liability Company Operating Agreement of the Company, dated as of March 31, 2004, a copy of which is attached hereto as Exhibit B.

“ Option” shall mean an option to purchase a Membership Unit or a fraction thereof granted to any Participant under the Plan. Each Option granted hereunder shall be a non-qualified Option and shall be identified as such in the Option Grant Agreement by which it is evidenced.

“Option Grant Agreement” shall mean an agreement entered into by each Participant and the Company evidencing the Grant of each Option issued pursuant to the Plan (a sample of which is attached hereto as Exhibit A).

“ Option Spread” shall mean, as of any date of determination, with respect to an Option, the excess, if any, of the Fair Market Value of a Membership Unit as of such date over the Exercise Price with respect to such Option.

“Participant” shall mean an Eligible Service Provider to whom a Grant of an Option under the Plan has been made, and, where applicable, shall include Permitted Transferees.

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“Permitted Transferee” shall have the meaning set forth in Section 4.6 hereof.

“Person” shall mean an individual, partnership, corporation, limited liability company, unincorporated organization, trust or joint venture, or a governmental agency or political subdivision thereof.

“Securities Act” shall mean the Securities Act of 1933, as amended.

“Services” shall mean employment with the Company or any affiliate of the Company or the provision of services as a consultant or service provider for the Company or any affiliate thereof.

“Transfer” shall mean any transfer, sale, assignment, gift, testamentary transfer, pledge, hypothecation or other disposition of any interest. “Transferee” and “Transferor” shall have correlative meanings.

“Vesting Date” shall mean the date an Option becomes exercisable as defined in Section 4.4 herein.

The Committee shall be appointed by the Board to administer the Plan. In the absence of a Committee, the Board shall function as the Committee for all purposes under the Plan, and to the extent that the Board so acts, references in this Plan to the Committee shall refer to the Board as applicable. In addition, the Committee, in its discretion, may delegate its authority to make Grants to a director or an officer or committee of officers of the Company or one of its affiliates, subject to reasonable limits and guidelines established by the Committee at the time of such delegation. No member of the Committee shall participate in any decision that specifically affects such member’s interest in the Plan, other than decisions that affect all Participants generally.

3.1 Powers of the Committee. In addition to the other powers granted to the Committee under the Plan, the Committee shall have the power: (a) to determine to which of the Eligible Service Providers Grants shall be made; (b) to determine the time or times when Grants shall be made and to determine the number of Membership Units or fraction thereof subject to each such Grant; (c) to prescribe the form of an Option Grant Agreement; (d) to adopt, amend and rescind such rules and regulations as, in its opinion, may be advisable for the administration of the Plan; (e) to construe and interpret the Plan, such rules and regulations and all Option Grant Agreements; (f) to make any necessary or reasonable adjustments to the Plan, Membership Units or Option Grant Agreements; and (g) to make all other determinations necessary or advisable for the administration of the Plan.

3.2 Determinations of the Committee. Any Grant, determination, prescription or other act of the Committee made in good faith shall be final and conclusively binding upon all Persons; provided that, absent evidence to the contrary, it shall be conclusively presumed that the Committee has acted in good faith in making such Grant, determination, prescription or other act.

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3.3 Indemnification of the Committee. No member of the Committee or the Board shall be liable for any action or determination made in good faith with respect to the Plan or any Grant. To the fullest extent permitted by law, the Company shall indemnify and hold harmless each person made or threatened to be made a party to any civil or criminal action or proceeding by reason of the fact that such person, or such person’s testator or intestate, is or was a member of the Committee.

3.4 Compliance with the LLC Agreement and Option Grant Agreement and Applicable Law. Notwithstanding anything herein to the contrary, Membership Units will not be certificated upon exercise of any Option, unless otherwise determined by the Committee. Each of the Company and the Participant shall comply with any such law, regulation or requirement, including without limitation requirements imposed by the LLC Agreement and Option Grant Agreement. In addition to the terms and conditions provided herein, the Committee may require that a Participant make such reasonable covenants, agreements and representations as the Committee, in its sole discretion, deems advisable in order to comply with any such laws, regulations or requirements (including without limitation any requirements imposed by the LLC Agreement).

3.5 Inconsistent Terms. Except as expressly provided in the Plan, in the event of a conflict between the terms of the Plan and the terms of any Option Grant Agreement, the terms of the Option Grant Agreement shall govern.

Subject to adjustment as provided in Section 4.13 hereof, the Committee may grant to Participants Options to purchase Membership Units or fractions thereof in the Company which, when combined with profits units that have been granted, in the aggregate, do not exceed 21,740,802 Membership Units, which represents approximately 8% of the Membership Units and Profits Units outstanding on March 31, 2004 on a fully diluted basis. To the extent that any Option granted under the Plan terminates, expires or is canceled without having been exercised, the Membership Unit covered by such Option shall again be available for Grant under the Plan.

4.1 Non-Qualified Options. The Options granted under the Plan shall be non-qualified Options to purchase a Membership Unit.

4.2 Exercise Price. The Exercise Price shall be the price the Participant must pay under the Option for each Membership Unit as determined by the Committee (which may be equal to, less than or greater than the Fair Market Value of a Membership Unit on the Grant Date for such Option) and shall be specified in the Option Grant Agreement.

4.3 Grant Date. The Grant Date of each Option shall be the date designated by the Committee and specified in the Option Grant Agreement as the date on which such Option is Granted.

4.4 Vesting Date of Options. Each Option Grant Agreement shall indicate the date or conditions under which such Option shall become exercisable; provided that, unless otherwise provided in a Participant’s Option Grant Agreement, if within the two-year period

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following a Change in Control the Participant’s Services are terminated by the Company or its affiliate without Cause or by the Participant for Good Reason, all outstanding Options held by such Participant shall become immediately vested as of the effective date of the termination of such Participant’s Services.

4.5 Expiration of Options.

(a) With respect to each Participant, any of such Participant’s Option(s) or portion thereof which have not yet become exercisable shall expire on the date such Participant’s Services are terminated for any reason.

(b) With respect to each Participant, each Participant’s Option(s) or any portion thereof which have become exercisable on or before the date such Participant’s Services are terminated shall expire on the earlier of (i) the commencement of business on the date the Participant’s Services are terminated for Cause ; (ii) 90 calendar days after the date the Participant’s Services are terminated for any reason other than Cause, death or Disability; (iii) one year after the date the Participant’s Services are terminated by reason of death or Disability; or (iv) the 10th anniversary of the Grant Date for such Option(s).

(c) Notwithstanding the foregoing clauses (a) and (b), the Committee may specify in any Option Grant Agreement a different expiration date or period for any Option granted hereunder, and such expiration date or period shall supersede the foregoing expiration period.

4.6 Limitation on Transfer. Each Option shall be exercisable only by such Participant unless the Participant obtains the prior written consent of the Committee to Transfer such Option to a specified transferee (a “ Permitted Transferee ”) or the Participant’s Option Grant Agreement provides otherwise.

4.7 Condition Precedent to Transfer of Any Option. It shall be a condition precedent to any Transfer of any Option that the Permitted Transferee, if not already a Participant in the Plan, shall agree in writing prior to the Transfer with the Company to be bound by the terms of the Plan and the Option Grant Agreement as if he had been an original signatory thereto (including without limitation acknowledging that the Options Transferred to such Permitted Transferee shall expire in the event that the events or dates set forth in Section 4.5 of the Plan occur with respect to the Transferor); provided that, upon such Transfer in accordance with Sections 4.6 and 4.7 hereof, all references in the Plan and Option Grant Agreement except for Section 4.5 of the Plan shall be deemed to be replaced by a reference to such Permitted Transferee.

4.8 Effect of Void Transfers. In the event of any purported Transfer of any Option in violation of the provisions of the Plan, such purported Transfer shall be void ab initio and of no effect.

4.9 Exercise of Options. A Participant may exercise any or all of his vested Options by serving an Exercise Notice on the Company as provided in Section 4.10 hereto.

4.10 Method of Exercise. An Option shall be exercised by delivery of written notice to the Company at the address set forth in Section 6.6 hereof (the “ Exercise Notice ”) no

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less than ten (10) Business Days in advance of the effective date of the proposed exercise (the “ Exercise Date ”). Such notice shall (a) specify the number of Membership Units or fraction thereof with respect to which the Option is being exercised, the Grant Date of such Option and the desired Exercise Date; provided that such Exercise Date shall not be later than the date on which such Option has expired pursuant to Section 4.5 hereof, (b) be signed by the Participant, and (c) indicate in writing that the Participant agrees to be bound by the LLC Agreement. The Exercise Notice shall include payment in U.S. currency or immediately available funds for an amount equal to the Exercise Price multiplied by the number or fraction of Membership Units specified in such Exercise Notice or any method otherwise approved by the Committee. In addition, the Participant shall be responsible for the payment of applicable withholding and other taxes in cash, or in Membership Units if approved by the Committee, that may become due as a result of the exercise of such Option. A Participant’s partial exercise of the Option, without more, shall not cause the expiration, termination or cancellation of such Participant’s remaining portion of the Option. The Committee may prohibit the exercise of fractions of Membership Units.

4.11 Issuance of Membership Units. Upon the exercise of any Option in accordance with Section 4.10, the Company shall issue the appropriate number of Membership Units and record such issuance on its books and in its records in the name of the Participant as soon as practicable following the Exercise Date, and such Participant shall be entitled to the profits and losses of the Company attributable to such Membership Units as determined under the LLC Agreement. Notwithstanding the foregoing, no Membership Unit shall be issued to any Participant until such Participant agrees to be bound by and executes the LLC Agreement.

4.12 Administration of Options.

(a) Termination of the Options . The Committee may, at any time, in its absolute discretion, without amendment to the Plan or any relevant Option Grant Agreement, terminate all, but not less than all, Options then outstanding, whether or not exercisable provided, however, that the Company, in full consideration of such termination, shall pay with respect to any Option, or portion thereof, then outstanding, an amount equal to the Option Spread determined as of the date of such termination. Such payment shall be made as soon as practicable after the payment amounts are determined, provided, however, that the Company shall have the option to make payments to the Participants by issuing a note to the Participant bearing a reasonable rate of interest as determined by the Committee in its absolute discretion.

(b) (i) Notwithstanding any other provision of this Plan or any Option Grant Agreement to the contrary, the Company shall not be obligated or permitted to pay the Option Spread for any Option if (A) the payment of such Option Spread would result in a violation of the terms or provisions of, or result in a default or an event of default under, any guarantee, financing or security agreement or document entered into by the Company or any of its affiliates, in each case as the same may be amended, modified or supplemented from time to time (such agreements and documents, the “ Financing Agreements ”), (B) the payment of such Option Spread would violate any term or provision of the Certificate of Formation of the Company or (C) the Company has no funds legally available therefor under the laws of the State of Delaware.

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(ii) In the event that the payment of the Option Spread by the Company is prevented solely by the terms of this Section 4.12(b), (A) the payment of such Option Spread will be postponed and will be made without the application of further conditions or impediments (other than as set forth in this Section 4.12(b)) at the first opportunity thereafter when the Company has funds legally available therefor and when the payment of such Option Spread will not result in any default or event of default by the Company or any of its affiliates or violation under any Financing Agreement or in a violation of any term or provision of the Certificate of Formation of the Company and (B) the Participant’s right to receive payment of such Option Spread shall rank against other similar rights with respect to Options in respect thereof according to priority in time of the effective date of the event giving rise to any such right; provided that any such right as to which a common date determines priority shall be of equal priority and shall share pro rata in any purchase payments made pursuant to Section 4.12(b)(ii)(A).

(iii) In the event that the payment of the Option Spread for any Options is delayed pursuant to this Section 4.12(b), the Option Spread for such Options when the Option Spread is eventually paid as contemplated by this Section shall be the sum of (A) the Option Spread of such Options at the time that the Option Spread would have been paid but for the operation of this Section 4.12(b), plus (B) an amount equal to the interest on such Option Spread for the period from the date on which the Option Spread would have been paid but for the operation of this Section 4.12(b) to the date on which such Option Spread is actually paid (the “ Delay Period ”), at an annual rate of interest equal to the average annual cost to the Company and its affiliates of their bank indebtedness obligations outstanding during the Delay Period or, if there are no such obligations outstanding, the average annual prime rate charged during the Delay Period by JP Morgan Chase Bank or such other nationally recognized bank designated by the Committee.

(c) Amendment of Terms of Options. The Committee may, in its absolute discretion, amend the Plan or terms of any Option; provided that any such amendment (other than a termination as provided in subparagraph (a) above) shall not impair or adversely affect any Participant’s rights under the Plan or such Option without such Participant’s written consent.

(d) Termination of this Plan. The Committee may at any time, in its absolute discretion, suspend or terminate this Plan. No awards may be granted during any suspension of the Plan or after the Plan has been terminated. The termination of the Plan shall not affect any previous Grants. After the plan terminates, the function of the Committee will be limited to supervising the administration of previous Grants.

4.13 Adjustment Upon Changes in Company Membership Units.

(a) Increase or Decrease in Issued Membership Units Without Consideration. Subject to any required action by the Holders, in the event of any increase or decrease in the number of issued and outstanding Membership Units resulting from a subdivision or consolidation of Membership Units or any other increase or decrease in the number of such Membership Units effected without receipt of consideration by the Company, the Committee may make such adjustments with respect to the number of Membership Units subject to the

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Options and/or the Exercise Price per Membership Unit, as the Committee may consider appropriate to prevent the enlargement or dilution of rights of Participants.

(b) Certain Mergers. Subject to any required action by Holders, in the event that the Company shall be the surviving corporation in any merger or consolidation (except a merger or consolidation as a result of which the Holders receive securities of another corporation or entity), the Options outstanding on the date of such merger or consolidation shall pertain to and apply to the securities that a Holder of the number of shares of Membership Units subject to any such Option would have received in such merger or consolidation (it being understood that if, in connection with such transaction, the Holders retain their Membership Units and are not entitled to any additional or other consideration, the Options shall not be affected by such transaction).

(c) Certain Other Transactions. In the event of (i) a dissolution or liquidation of the Company, (ii) a sale of all or substantially all of the Company’s assets, (iii) a merger or consolidation involving the Company in which the Company is not the surviving corporation or (iv) a merger or consolidation involving the Company in which the Company is the surviving corporation but the Holders receive securities of another corporation and/or other property, including cash, the Committee shall, in its absolute discretion, have the power to:

(A) provide for the exchange of any Option outstanding immediately prior to such event (whether or not then exercisable) for an option with respect to, as appropriate, some or all of the property for which the Membership Units underlying such Option is exchanged and, incident thereto, make an equitable adjustment, as determined by the Committee, in the exercise price of the Options, if applicable, or the number or kind of securities or amount of property subject to the Option or, if appropriate, provide for a cash payment to the Participants in partial consideration for the exchange of the Options as the Committee may consider appropriate to prevent dilution or enlargement of rights;

(B) cancel, effective immediately prior to the occurrence of such event, any Option outstanding immediately prior to such event (whether or not then exercisable or vested), and in full consideration of such cancellation, pay to the Participant to whom such Option was granted an amount in cash, for each Membership Unit subject to such Option, equal to the excess of (1) the value, as determined by the Committee in its absolute discretion, of securities and property (including cash) received by the Holder of a Membership Unit as a result of such event over (2) the Exercise Price of such Option; or

(C) provide for any combination of (A) or (B).

(d) Other Changes. In the event of any change in the capitalization of the Company or a corporate change other than those specifically referred to in Sections 4.13 (a), (b) or (c) hereof, the Committee shall, in its absolute discretion, make such adjustments in the number and class of shares subject to Options outstanding on the date on which such change occurs and, if applicable, in the Exercise Price of each such Option, as the Committee may, in its absolute discretion, consider appropriate to prevent dilution or enlargement of rights.

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(e) No Other Rights. Except as expressly provided in the Plan or the Option Grant Agreements evidencing the Options, no Participant shall have any rights by reason of (i) any subdivision or consolidation of Membership Units, (ii) any dissolution or liquidation of the Company or (iii) the payment of any dividend or any increase or decrease in the number of Membership Units. Except as expressly provided in the Plan or the Option Grant Agreements evidencing the Options, no issuance by the Company of any Membership Units shall affect, and no adjustment by reason thereof shall be made with respect to, the number of Membership Units subject to the Options or the Exercise Price of such Options.

5.1 Registration . The Company shall be under no obligation to effect the registration pursuant to the Securities Act of any Membership Units to be issued hereunder or to effect similar compliance under any state laws. Notwithstanding anything hereof to the contrary, the Company shall not be obligated to cause to be issued or deliver any Membership Units pursuant to this Plan unless and until the Company is advised by its counsel that the issuance and delivery of such Membership Units is in compliance with all applicable laws, regulations of governmental authority and the requirements of any securities exchange on which such Membership Units are traded. The Committee may require, as a condition to the issuance or delivery of any Membership Units pursuant to the terms hereof, that the recipient of such Membership Units make such covenants, agreements and representations, as the Committee deems necessary or advisable.

5.2 Effectiveness of Option Exercise or Grant. The Company may, in its sole discretion, defer the effectiveness of an exercise of an Option hereunder or the issuance or transfer of Membership Units pursuant to any Grant pending or to ensure compliance under federal or state securities laws. The Company shall inform the Participant in writing of its decision to defer the effectiveness of the exercise of an Option or the issuance or transfer of Membership Units pursuant to any Grant. During the period that the effectiveness of the exercise of an Option has been deferred, the Participant may, by written notice, withdraw such exercise and obtain the refund of any amount paid with respect thereto.

6.1 Effective Date. The effective date of this Plan shall be August 23, 2004.

6.2 Rights as Holders. No Participant shall have any rights as a Holder with respect to any Membership Unit covered by or relating to the Options granted pursuant to the Plan until the date such Participant exercises such Option and is admitted as a Holder of Membership Units in the Company. Except as otherwise expressly provided in Sections 4.12 and 4.13 hereof, no adjustment to the Options shall be made for any rights for which the record date occurs prior to the date such Participant becomes the Holder of a Membership Unit.

6.3 No Special Services Rights. Nothing contained in the Plan shall confer upon any Participant any right with respect to the continuation of his Services or interfere in any way with the right of the Company or an affiliate, subject to the terms of any separate Services agreement to the contrary, at any time to terminate such Participant’s Services or to increase or

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decrease such Participant’s compensation from the rate in existence at the time of the grant of any Option.

6.4 No Obligation to Exercise. No Grant to any Participant of any Option shall impose any obligation upon such Participant to exercise such Option.

6.5 Restrictions on Membership Units. The rights and obligations of the Participants with respect to Membership Units obtained through the exercise of any Option provided in the Plan shall be governed by the terms and conditions of the LLC Agreement.

6.6 Notices. All notices and other communications hereunder shall be in writing and shall be given and shall be deemed to have been duly given if delivered in person, by cable, telegram, telex or facsimile transmission, to the parties as follows:

If to the Company:

TJ Chemical Holdings LLC

c/o Texas Pacific Group

301 Commerce Street, Suite 3300

Fort Worth, Texas 76102

If to the Participant:

At the address contained in the records of the Company or its affiliates for such Participant

or to such other address as any party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall only be effective upon receipt.

6.7 Descriptive Headings. The headings in the Plan are for convenience of reference only and shall not limit or otherwise affect the meaning of the terms contained herein.

6.8 Severability. In the event that any one or more of the provisions, subdivisions, words, clauses, phrases or sentences contained herein, or the application thereof in any circumstances, is held invalid, illegal or unenforceable in any respect for any reason, the validity, legality and enforceability of any such provision, subdivision, word, clause, phrase or sentence in every other respect and of the remaining provisions, subdivisions, words, clauses, phrases or sentences hereof shall not in any way be impaired, it being intended that all rights, powers and privileges of the Company and Participants shall be enforceable to the fullest extent permitted by law.

6.9 Governing Law. The Plan shall be governed by, and construed and enforced in accordance with the laws of the State of Delaware without regard to the provisions thereof governing conflict of laws.

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EXHIBIT A

OPTION GRANT AGREEMENT

THIS OPTION GRANT AGREEMENT, made as of the              day of              , 2004 between TJ Chemical Holdings LLC (the “ Company ”) and                      (the “ Participant ”).

WHEREAS, the Company has adopted and maintains the TJ Chemical Holdings LLC 2004 Option Plan (the “ Plan ”) to promote the interests of the Company and the Holders of Membership Units in the Company by providing key employees, consultants, members and service providers of the Company and its affiliates with an appropriate incentive to encourage them to continue in the employ or service and to improve the growth and profitability of the Company and its affiliates;

WHEREAS, the Plan provides for the Grant to Participants of non-qualified Options to purchase Membership Unit(s) in the Company;

NOW, THEREFORE, in consideration of the premises and the mutual covenants hereinafter set forth, the parties hereto hereby agree as follows:

1. Grant of Options . Pursuant to, and subject to, the terms and conditions set forth herein and in the Plan, the Company hereby grants to the Participant a non-qualified option (the “ Option ”) with respect to              Membership Unit(s) in the Company.

2. Grant Date . The Grant Date of the Option hereby granted is              , 2004.

3. Vesting Commencement Date . The Vesting Commencement Date of the Option hereby granted is              , 2004.

4. Incorporation of Plan . All terms, conditions and restrictions of the Plan and the LLC Agreement are incorporated herein and made part hereof as if stated herein. If there is any conflict between the terms and conditions of the Plan or the LLC Agreement and this Option Grant Agreement, the terms and conditions of this Option Grant Agreement, as interpreted by the Committee in its sole discretion, shall govern, unless explicitly provided to the contrary in the Plan or this Option Grant Agreement. All capitalized terms used herein shall have the meaning given to such terms in the Plan.

5. Exercise Price . The exercise price per Membership Unit underlying the Option granted hereby is $              .

6. Vesting Date . The Option shall become exercisable as follows: twenty percent (20%) of the Membership Unit(s) (rounded down to the nearest Membership Unit) underlying the Option shall become exercisable on each of the first five anniversaries of the Vesting Commencement Date; provided that the Participant remains employed with the Company or any of its affiliates on each such anniversary; and provided further that notwithstanding the foregoing, if within the

two-year period following a Change in Control the Participant’s Services are terminated by the Company or its affiliate without Cause or by the Participant for Good Reason, the unvested portion of the Option shall become immediately vested as of the effective date of the termination of such Participant’s Services. For purposes of this Option Grant Agreement, the definition of Good Reason contained in the Plan shall govern the Participant’s rights during the two-year period following a Change in Control, without regard to that definition’s reference to the Participant’s employment agreement.

7. Expiration Date . The Option or such portion thereof that has not yet become exercisable on the date the Participant’s Services are terminated for any reason shall expire on such date. The Option or such portion thereof that has become exercisable on or before the date the Participant’s Services are terminated shall expire on the earlier of (a) the commencement of business on the date the Participant’s Services are terminated for Cause; (b) 90 calendar days after the date the Participant’s Services are terminated for any reason other than Cause, death or Disability; (c) one year after the date the Participant’s Services are terminated by reason of death or Disability; or (d) the 10th anniversary of the Grant Date.

8. Limitations on Transfer of Membership Units; Termination of Employment. The Participant acknowledges that upon becoming a member of the Company, the Participant will be subject to all the terms and conditions provided in the LLC Agreement. Notwithstanding anything herein or the LLC Agreement to the contrary, the Participant shall not sell or transfer any Membership Unit acquired pursuant to the exercise of an Option, except (i) to the Participant’s beneficiaries or estate upon the Participant’s death, (ii) upon consent of the Committee, (iii) pursuant to Sections 6.03, 6.04, 6.06 of the LLC Agreement, or (iv) if such sale or transfer occurs following the date set forth in Section 6.07 of the LLC Agreement.

In the event of a termination of a Participant’s Services, the Company shall have the right to purchase the Participant’s Membership Units acquired pursuant to the Options in accordance with Section 6.06 of the LLC Agreement. Any Membership Units acquired pursuant to the exercise of the Options shall be subject to certain Tag-Along and Drag-Along rights in accordance with Article VI of the LLC Agreement.

9. Delays or Omissions . No delay or omission to exercise any right, power or remedy accruing to any party hereto upon any breach or default of any party under this Option Grant Agreement, shall impair any such right, power or remedy of such party nor shall it be construed to be a waiver of any such breach or default, or an acquiescence therein, or of or in any similar breach or default thereafter occurring nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default theretofore or thereafter occurring. Any waiver, permit, consent or approval of any kind or character on the part of any party of any breach or default under this Option Grant Agreement, or any waiver on the part of any party or any provisions or conditions of this Option Grant Agreement, shall be in writing and shall be effective only to the extent specifically set forth in such writing.

10. Limitation on Transfer of Options . Except as set forth in this Section 10, the Option shall be exercisable only by the Participant. The Option shall not be assignable or transferable other than by will or by the laws of descent and distribution. Notwithstanding the foregoing, the Participant may request authorization from the Committee to assign the Option granted herein to

a trust or custodianship, the beneficiaries of which may include only the Participant, the Participant’s spouse or the Participant’s lineal descendants (by blood or adoption), and, if the Committee grants such authorization, the Participant may assign his rights accordingly. In the event of any such assignment, such trust or custodianship shall be subject to all the restrictions, obligations, and responsibilities as apply to the Participant under the Plan and this Option Grant Agreement and shall be entitled to all the rights of the Participant under the Plan and this Option Grant Agreement; provided that notwithstanding such assignment, if the events or dates set forth in Sections 6 and 7 of the Option Grant Agreement occur with respect to the Participant, the Option shall not vest or expire at the times set forth in Sections 6 and 7 hereof; provided further that upon such assignment in accordance with this Section 10, all references in the Plan and Option Grant Agreement except for Sections 6 and 7 of the Option Grant Agreement (and any other provision of Services with the Company or its affiliates (or the termination thereof)) shall be deemed to be replaced by a reference to the Transferee of the Option.

11. Indemnification . The Participant agrees, to the fullest extent permitted by law, to indemnify and hold harmless the Company and any director, officer, or employee thereof against any and all losses, liabilities, claims, damages, and expenses of any nature whatsoever (including attorneys’ fees and disbursements, judgments, fines and amounts paid in settlement) (collectively, “ Losses ”) arising out of or based upon any breach or failure by the Participant to comply with his obligations made herein. This Section 11 shall survive any termination or execution of this Option Grant Agreement.

12.1 Participant Representations. In addition to any representations made by the Participant in the LLC Agreement, the Participant hereby represents and warrants to the Company that: (a) the Participant is an “accredited investor” as defined in Rule 501(a) under the Securities Act; provided that the Company may, in its discretion and subject to compliance with all applicable securities laws, waive the foregoing representation with respect to a limited number of Participants; (b) the Participant, alone or together with his representatives, possesses such expertise, knowledge, and sophistication in financial and business matters generally, and in the type of transactions in which the Company proposes to engage in particular; (c) the Participant is aware that the LLC Agreement provides significant restrictions on the ability of a Participant to sell, transfer, assign, mortgage, hypothecate, or otherwise encumber the Membership Units; (d) the Participant has duly executed and delivered this Option Grant Agreement; and (e) the Participant’s authorization, execution, delivery, and performance of this Option Grant Agreement do not conflict with any other agreement or arrangement to which the Participant is a party or by which it is bound.

12.2 Truth of Representations and Warranties. The Participant represents and warrants that all of his representations set forth in Section 12.1 of this Option Grant Agreement are true and correct as of the date hereof and will be true and correct on any Exercise Date.

13. Integration . This Option Grant Agreement, and the other documents referred to herein or delivered pursuant hereto (including, without limitation, the LLC Agreement) which form a part hereof contain the entire understanding of the parties with respect to its subject matter and there are no restrictions, agreements, promises, representations, warranties, covenants or

undertakings with respect to the subject matter hereof other than those expressly set forth in such documents. This Option Grant Agreement, the Plan and the LLC Agreement supersede all prior agreements and understandings between the parties with respect to its subject matter.

14. Counterparts . This Option Grant Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same instrument.

15. Governing Law . This Option Grant Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Delaware without regard to the provisions thereof governing conflict of laws.

16. Participant Acknowledgment . The Participant hereby acknowledges receipt of a copy of the Plan and the LLC Agreement. The Participant hereby acknowledges that all decisions, determinations and interpretations of the Committee in respect of the Plan, this Option Grant Agreement and the Option shall be final and conclusive.

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IN WITNESS WHEREOF, the Company has caused this Option Grant Agreement to be duly executed by its duly authorized officer and said Participant has hereunto signed this Option Grant Agreement on his own behalf, thereby representing that he has carefully read and understands this Option Grant Agreement, the Plan, and the LLC Agreement as of the day and year first written above.

EXHIBIT B

SECOND AMENDED AND RESTATED LIMITED LIABILITY COMPANY

OPERATING AGREEMENT OF THE COMPANY

EXECUTION VERSION

SECOND AMENDED AND RESTATED

LIMITED LIABILITY COMPANY

OPERATING AGREEMENT

OF

TJ CHEMICAL HOLDINGS LLC

Dated as of March 31, 2004

TABLE OF CONTENTS

i

TABLE OF CONTENTS

(continued)

ii

TABLE OF CONTENTS

(continued)

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SECOND AMENDED AND RESTATED LIMITED LIABILITY COMPANY

OPERATING AGREEMENT

OF TJ CHEMICAL HOLDINGS LLC

This SECOND AMENDED AND RESTATED LIMITED LIABILITY COMPANY OPERATING AGREEMENT (this “ Agreement ”) of TJ Chemical Holdings LLC, a Delaware limited liability company (the “ Company ”), dated as of March 31, 2004 (the “ Second Agreement Date ”), is entered into by and among the Persons listed on Schedule A as members of the Company (each, a “ Member ” and collectively, the “ Members ”).

W I T N E S S E T H :

WHEREAS, TPG Partners III, L.P., as the initial member of the Company, formed the Company by filing the Certificate of Formation (as defined below) with the office of the Secretary of State of Delaware on November 24, 2003 (the “ Formation Date ”) pursuant to the Delaware Limited Liability Company Act (as amended, the “ Act ”);

WHEREAS, Polymer Holdings, LLC (formerly, TPG Polymer Holdings, LLC), a limited liability company and a wholly owned subsidiary of the Company (“ Holdings ”). Ripplewood Chemical Holding LLC, a Delaware limited liability company, KRATON Polymers LLC, a Delaware limited liability company (“ Kraton ”) and Polymer Acquisition LLC (formerly TPG Polymer Acquisition LLC), a Delaware limited liability company and a wholly-owned subsidiary of Holdings, entered into an Agreement and Plan of Merger, dated as of November 5, 2003, and amended and restated as of December 23,2003, pursuant to which Polymer Acquisition LLC merged with and into Kraton, with Kraton as the surviving company;

WHEREAS, as a result of the merger described above, the Company holds all of the interests of Holdings, which in turn holds all of the interests of Kraton;

WHEREAS, the Company will file or cause to be filed a timely election pursuant to Treasury Regulations Section 301.7701-3 to treat Holdings as an association taxable as a corporation for U.S. federal income tax purposes; and

WHEREAS, the Members desire to amend and restate in their entirety the terms of the Amended and Restated Limited Liability Company Operating Agreement of the Company dated as of December 23, 2003 (the “ Existing Agreement ”) in order to, among other things, (i) provide for the management of the Company, (ii) set forth their respective rights and obligations as Members of the Company generally and (iii) increase the number of Membership Units (as defined below) of the Members.

NOW, THEREFORE, in consideration of the mutual promises of the parties hereto, and of other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, agree that the Existing Agreement is hereby amended and restated in its entirety as follows:

ARTICLE I

DEFINITIONS

Section 1.01. Certain Definitions . As used herein, (a) the terms defined in the introductory paragraph and the recitals hereof have the meanings specified therein and (b) the following terms shall have the following meanings:

“ Act ” has the meaning set forth in the recitals to this Agreement.

“ Adverse Person ” has the meaning set forth in Section 6.01(b).

“ Affiliate ” means, with respect to any Person, any other Person that directly or indirectly controls, is controlled by, or is under common control with, such Person. For these purposes, “control” shall mean the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities, by contract or otherwise. For the avoidance of doubt, (i) no Person shall be considered an Affiliate as a result of any employment or management arrangement with Kraton or any its subsidiaries and (ii) Management LLC shall not be considered an Affiliate of any other Member. Notwithstanding the foregoing, for purposes of Section 6.08 only, “ Affiliate ” also has any meaning ascribed to it in any Law.

“ Agreement ” has the meaning set forth in the preamble to this Agreement.

“ Banking Regulations ” means all federal, state and foreign Laws applicable to banks, bank holding companies and their Affiliates, including without limitation, the Bank Holding Company Act and the Federal Reserve Act.

“ Board of Directors ” has the meaning set forth in Section 4.01(a).

“ Breaching Drag-Along Member ” has the meaning set forth in Section 6.04(d).

“ Business Day ” means any day other than a Saturday, a Sunday or a day on which banks in New York City are authorized or obligated by law or executive order to close.

“ Buy-In Price ” has the meaning set forth in Section 6.06(c).

“ Capital Contribution ” means, with respect to any Member, the total amount of money and the net fair market value of property other than money contributed to the capital of the Company.

“ Certificate of Formation ” means the certificate of formation of the Company as filed with the Secretary of State of Delaware on the Formation Date, as amended from time to time.

“ Closing Date ” means December 23, 2003.

“ Closing Date Working Capital Adjustment ” has the meaning set forth in the Financing Agreements.

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“ Code ” means the U.S. Internal Revenue Code of 1986, as amended. Any reference to a section of the Code shall include a reference to any successor provision thereto.

“ Company ” has the meaning set forth in the preamble to this Agreement.

“ Company Assets ” means all assets, whether tangible or intangible and whether real, personal or mixed, at any time owned by the Company.

“ Corresponding Management LLC Membership Unit ” means, with respect to a Membership Unit held by Management LLC, a corresponding membership unit in Management LLC held by a Kraton Employee.

“ Corresponding Management LLC Profits Unit ” means, with respect to a Profits Unit held by Management LLC, a corresponding profits unit in Management LLC held by a Kraton Employee.

“ Delay Period ” has the meaning set forth in Section 6.06(f).

“ Drag-Along Buyer ” has the meaning set forth in Section 6.04(a).

“ Drag-Along Member ” has the meaning set forth in Section 6.04(a).

“ Drag-Along Notice ” has the meaning set forth in Section 6.04(a).

“ Drag-Along Proxy Holder ” has the meaning set forth in Section 6.04(d).

“ ERISA ” means the Employee Retirement Income Security Act of 1974, as amended from time to time.

“ Escrow Agent ” has the meaning set forth in Section 6.04(e).

“ Existing Agreement ” has the meaning set forth in the recitals to this Agreement.

“ Financing Agreements ” means (x) the indenture dated as of December 23, 2003, governing the 8.125% Senior Subordinated Notes due 2014, issued by Kraton and (y) the Credit and Guaranty Agreement, dated as of December 23, 2003, among Kraton, Holdings, certain subsidiaries of Holdings, certain lenders and certain other parties thereto.

“ Financing Document ” has the meaning set forth in Section 6.06(f).

“ Formation Date ” has the meaning set forth in the recitals to this Agreement.

“ GAAP ” means generally accepted accounting principles in the United States.

“ Holdings ” has the meaning set forth in the recitals to this Agreement.

“ Indemnified Person ” has the meaning set forth in Section 8.01(a).

“ Initial Holding Period ” has the meaning set forth in Section 6.01(a).

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“ Initial Membership Units ” means, for any Member, the number of Membership Units held by such Member as of the Second Agreement Date, adjusted as follows: (i) reduced by the number of Membership Units of such Member redeemed by the Company in any redemption in which the Membership Units of the Voting Members are redeemed pro rata ; and (ii) increased by any Membership Units issued to such Member in respect of Capital Contributions by such Member in any transaction (or series of related transactions) in which the Voting Members make pro rata Capital Contributions.

“ IPO ” means an initial registered offering of equity securities or equity interests of the Company or any of its subsidiaries to the public.

“ JPMP ” means, collectively, JPMP BHCA Fund, JPMP Main Fund, J.P. Morgan Global Investors (Cayman), L.P., a Cayman Islands limited partnership, JPMP Global Fund/Kraton, L.P., a Delaware limited partnership, JPMP Global Fund/Kraton A, L.P., a Delaware limited partnership and J.P. Morgan Global Investors (Cayman) II, L.P., a Cayman Islands limited partnership.

“ JPMP BHCA Fund ” means J.P. Morgan Partners (BHCA), L.P., a Delaware limited partnership.

“ JPMP Main Fund ” means J.P. Morgan Partners Global Investors, L.P., a Delaware limited partnership.

“ Kraton ” has the meaning set forth in the recitals to this Agreement.

“ Kraton Agreement ” means the Second Amended and Restated Limited Liability Company Agreement of Kraton dated as of March 31, 2004.

“ Kraton Employee ” means an employee, or services provider to, of the Kraton Group.

“ Kraton Group ” means Holdings and its subsidiaries.

“ Law ” means, with respect to any Person, (i) all provisions of all laws, statutes, ordinances, rules, regulations, permits, certificates or orders of any governmental authority applicable to such Person or any of its assets or property or to which such Person or any of its assets or property is subject, including, without limitation, Banking Regulations, and (ii) all judgments, injunctions, orders and decrees of all courts and arbitrators in proceedings or actions in which such Person is a party or by which it or any of its assets or properties is or may be bound or subject.

“ Loss ” has the meaning set forth in Section 8.02.

“ Management LLC ” means Kraton Management LLC, a Delaware limited liability company.

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“ Management Services Agreement ” means the management services agreement among Kraton and TPG and the JPMP BHCA Fund, dated as of December 23, 2003, as such agreement may be amended from time to time.

“ Member ” has the meaning set forth in the preamble to this Agreement.

“ Membership Unit ” has the meaning set forth in Section 3.01(a).

“ Option ” means the right to acquire a Membership Unit, pursuant to such terms and conditions as determined by the Board of Directors.

“ Permitted Transferee ” means (a) an Affiliate of a Member and (b) in the case of any Member that is a partnership or limited liability company, any general or limited partner or member of such Member; provided , however , that a general partner, limited partner or member of a Member shall not be a Permitted Transferee under clause (b) unless the Transfer to such Person is required under the applicable partnership agreement or limited liability company agreement, as the case may be, and is made pro rata to all partners or members thereunder.

“ Person ” means an individual, corporation, association, limited liability company, partnership, estate, trust, unincorporated organization or a government or any agency or political subdivision thereof.

“ Profits Unit ” has the meaning set forth in Section 3.01(c)(ii).

“ Proposed Transfer ” has the meaning set forth in Section 6.03(a).

“ Proposed Transferee ” has the meaning set forth in Section 6.03(a).

“ Registration Rights Agreement ” means the registration rights agreement among the Voting Members and the Company, dated as of December 23, 2003, as such agreement may be amended from time to time.

“ Regulatory Problem ” means any set of facts or circumstances in which JPMP’s ownership of securities issued by the Company (i) gives rise to a material violation of Law by JPMP or any of its Affiliates, or gives rise to a reasonable belief by JPMP that such a violation is likely to occur or (ii) gives rise to a limitation in Law that will materially impair the ability of JPMP or any Affiliate to conduct its business or gives rise to a reasonable belief by JPMP that such a limitation is likely to arise.

“ Rollover Letter Agreement ” means the letter agreement between various Kraton Employees, the Company, Ripplewood Chemical Management LLC and Ripplewood Holdings LLC relating to the acquisition of Membership Units by Management LLC.

“ Second Agreement Date ” has the meaning set forth in the preamble to this Agreement.

“ Securities Act ” means the Securities Act of 1933, as amended.

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