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                                                                     EXHIBIT 4.2

 

                     THIRD AMENDED AND RESTATED CO-SALE AND

                         BOARD REPRESENTATION AGREEMENT

 

      This THIRD AMENDED AND RESTATED CO-SALE AND BOARD REPRESENTATION AGREEMENT

("Agreement") dated as of January 22, 2003, by and among Capella Education

Company (the "Company"), Stephen Shank ("Shank"), Cherry Tree Ventures IV, a

Minnesota limited partnership ("Cherry Tree"), NCS Pearson, Inc. as successor to

National Computer Systems, Inc. ("Pearson"), Forstmann Little & Co. Equity

Partnership-VI, L.P. ("Equity-VI"), Forstmann Little & Co. Equity

Partnership-VII, L.P. ("Equity-VII"), Forstmann Little & Co. Subordinated Debt

and Equity Management Buyout Partnership-VIII, L.P. ("MBO-VIII" and, together

with Equity-VI and Equity-VII, the "Forstmann Little Entities"), SmartForce plc

("SmartForce"), Putnam OTC and Emerging Growth Fund ("Putnam OTC"), TH LEE,

Putnam Investment Trust - TH LEE, Putnam Emerging Opportunities Portfolio

("Putnam TH LEE" and, together with Putnam OTC, "Putnam"), DRW Venture Partners

LP ("Dain"), ThinkEquity Investment Partners LLC ("Think Equity"), the

Management Investors (the "Management Investors") listed on Schedule 1 attached

hereto for the benefit of each of them, Maveron Equity Partners 2000, L.P.,

Maveron Equity Partners 2000-B, L.P. and MEP 2000 Associates LLC (collectively

the "Maveron Entities"), Judy Shank ("Judy"), Susan Shank ("Susan"), Mary

Retzlaff ("Retzlaff"), (collectively, the "Shareholders") and Joseph Gaylord

("Gaylord"), a resident of Minnesota, shall supersede and replace that certain

Second Amended and Restated Co-Sale and Board Representation Agreement dated

February 21, 2002 by and among Shank, Cherry Tree, Pearson, the Forstmann Little

Entities, SmartForce, Putnam, Dain, Think Equity, the Management Investors,

Gaylord and the Company (the "Prior Agreement") and be effective as of the date

of this Agreement. The Prior Agreement is hereby cancelled and terminated in its

entirety and shall be of no further force and effect.

 

      WHEREAS, the Maveron Entities and David Smith ("Smith") (collectively, the

"Purchasers") have executed the Maveron Class G Convertible Preferred Stock

Purchase Agreement dated as of January 15, 2003 with the Company (the "Purchase

Agreement"), pursuant to which the Purchasers will acquire shares of Class G

Convertible Preferred Stock ("Class G Preferred Stock") which will become part

of the outstanding shares of capital stock of the Company ("Capital Stock")

(hereinafter the term "Capital Stock" shall be deemed to include any shares of

Capital Stock subsequently acquired by a Shareholder and any rights by a

Shareholder to acquire any additional shares of Capital Stock and shall exclude

any shares acquired from Harold Abel ("Abel") pursuant to Shareholder Agreement

No. 2 (as defined in Section 2));

 

      WHEREAS, Equity-VII, MBO-VIII, Putnam, Think Equity, Dain, Gaylord and the

Management Investors (other than Smith) (collectively referred to as the "Class

F Investors") have entered into an exchange agreement (the "Exchange

Agreement"), pursuant to which the Class F Investors agree to exchange (the

"Exchange") each of the outstanding shares of Class F Convertible Preferred

Stock of the Company (the "Class F Preferred Stock") held by such investor for

shares of Class G Preferred Stock;

 

      WHEREAS, certain of the parties hereto own shares of Capital Stock as set

forth in Schedule 2.4 to the Purchase Agreement;

 

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      WHEREAS, the execution and delivery of this Agreement by each Shareholder

is a condition to the purchase of the Class G Preferred Stock by the Purchasers

and the exchange of the Class F Preferred Stock for Class G Preferred Stock by

the Class F Investors; and

 

      WHEREAS, the parties hereto desire that the Purchasers consummate the

purchase of Class G Preferred Stock contemplated by the Purchase Agreement and

are willing to enter into this Agreement as an inducement to the Purchasers to

complete the purchase of the Class G Preferred Stock.

 

      NOW, THEREFORE, for good and valuable consideration, the receipt and

adequacy of which are hereby acknowledged, the parties hereto agree as follows:

 

      1. RESTRICTION ON TRANSFER. (a) Each of Shank, Judy, Cherry Tree, the

Forstmann Little Entities, Pearson, SmartForce, the Maveron Entities and Putnam

(collectively, the "Co-Sale Shareholders") agrees, on behalf of such Co-Sale

Shareholder and any transferee of any shares of Capital Stock owned by such

Co-Sale Shareholder, not to sell, transfer or otherwise dispose of (or enter

into a binding agreement to sell, transfer or otherwise dispose of) all or any

of such Co-Sale Shareholder's shares of Capital Stock now or hereafter owned by

such Co-Sale Shareholder, unless the right of co-sale set forth in Section 2 of

this Agreement has been fully complied with to the extent applicable.

 

      (b) Each Shareholder agrees, on behalf of such Shareholder and any

transferee of any shares of Capital Stock owned by such Shareholder, not to

sell, transfer or otherwise dispose of (or enter into a binding agreement to

sell, transfer or otherwise dispose of) all or any of such Shareholder's shares

of Capital Stock now or hereafter owned by such Shareholder, unless such

transferee shall become a signatory to this Agreement, and upon execution and

delivery of this Agreement, such transferee shall be deemed a Shareholder for

purposes of this Agreement. The obligations of this Section 1(b) shall terminate

upon an IPO (as defined in Section 2).

 

       2. RIGHT OF CO-SALE. Except as hereinafter provided, each Co-Sale

Shareholder agrees that such Co-Sale Shareholder will not sell, transfer or

otherwise dispose of any shares of Capital Stock (or any rights to acquire

shares of Capital Stock) without permitting each of the other Co-Sale

Shareholders (the "Benefiting Shareholders") to participate as a seller in such

transaction on a pro rata basis according to common share holdings (with

preferred shares of the Company being counted on an as-if-converted basis) as of

the date of receipt of the notice described below in this Section 2.

 

      The following sale, transfer or other disposal of shares of Capital Stock

shall not be covered by this right of co-sale:

 

            (a) sale of shares of Capital Stock by any of the Co-Sale

      Shareholders in a bona fide underwritten public offering pursuant to a

      registration statement filed by the Company pursuant to the Securities Act

      of 1933, as now or hereafter amended (the "1933 Act");

 

             (b) sale of shares of Capital Stock in a market transaction in a

      bona fide public market, either pursuant to such a registration statement

      or Rule 144 (or any successor rule) promulgated under the 1933 Act;

 

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            (c) transfer of shares of Capital Stock (i) during the lifetime of a

      Co-Sale Shareholder to the spouse of such Co-Sale Shareholder or to the

      children, spouses of children or grandchildren of such Co-Sale Shareholder

       or to a trust or trusts for benefit of any of the foregoing, or (ii) by

      gift or testamentary disposition to any person, so long as the transferee,

      donee or distributee assumes in writing the obligations of such Co-Sale

      Shareholder under this Agreement and agrees to be treated as a

      "Shareholder" and a "Co-Sale Shareholder" for all purposes of this

      Agreement; or

 

            (d) transfers by Cherry Tree, Putnam, any Maveron Entity or any

      Forstmann Little Entity to any of their respective partners, members,

      investors, or other affiliates (including without limitation affiliated

      investment funds), so long as the transferee assumes in writing the

      obligations of such Shareholder under this Agreement and agrees to be

      treated as a "Shareholder" and a "Co-Sale Shareholder" for all purposes of

      this Agreement.

 

      Any Co-Sale Shareholder that intends to sell, transfer or otherwise

dispose of shares of Capital Stock in a transaction subject to these rights of

co-sale (the "Selling Shareholder") shall give prompt written notice of such

intent to each Benefiting Shareholders, and each Benefiting Shareholder shall

notify the Selling Shareholder within 20 days of receipt of such notice whether

such Benefiting Shareholder wishes to participate in such transaction and bear a

pro rata portion of the expenses incident thereto. Failure of a Benefiting

Shareholder to respond within such 20-day period shall be deemed a declination

of any right to participate in such transaction provided that: (i) such

transaction is fully closed and consummated within 90 days of the expiration of

such 20-day period; (ii) the terms of the actual transaction include no fewer or

greater number of shares of Capital Stock than those set forth in the notice

hereunder; and (iii) no purchasers or ultimate legal or beneficial holders of

such shares of Capital Stock are involved in the transaction in addition to

those disclosed in any such notice. Failure to meet any of the foregoing

conditions shall require a new notification and right of co-sale with regard to

such transaction under this Section 2. Each Co-Sale Shareholder acknowledges the

obligations of Shank and Cherry Tree under that certain Shareholder Agreement

dated May 24, 1993 by and between Abel, Shank, and Cherry Tree ("Shareholder

Agreement No. 2") and agrees that any exercise of rights by a Benefiting

Shareholder hereunder shall be conducted in a manner which facilitates

compliance by the Selling Shareholder of such obligations.

 

      The provisions of Section 1(a) and this Section 2 shall terminate at such

time as the Company consummates a sale of shares of Capital Stock pursuant to an

effective registration statement under the 1933 Act in which the aggregate gross

proceeds to the Company and/or selling shareholders, if any, equal or exceed

$20,000,000 at an average price per share of at least $5.40 (an "IPO") (subject

to adjustment for stock splits, stock dividends, combinations, recapitalizations

and the like) or, if earlier, as to any Co-Sale Shareholder at such time as such

Co-Sale Shareholder is the beneficial owner of fewer than 140,000 shares of

Capital Stock (subject to adjustment for stock splits, stock dividends,

combinations, recapitalizations and the like).

 

      3. REPRESENTATION ON BOARD OF DIRECTORS.

 

            (a) From and after the Closing, the Company shall take all necessary

      or desirable action within its control to, and the Shareholders shall take

      all necessary or

 

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      desirable action within its control (including, without limitation, voting

      its shares) to, cause the following persons to be elected as directors in

      connection with each annual or special meeting held for the election of

      directors of the Company following the date hereof:

 

            (i)     Pearson shall have the right to designate one person for

                   appointment as a director (the "Pearson Director"), who shall

                   initially be Jeff Taylor;

 

            (ii)    Cherry Tree shall have the right to designate one person for

                   appointment as a director (the "Cherry Tree Director"), who

                   shall initially be Tony Christianson;

 

            (iii)   Equity-VI shall have the right to designate one person for

                   appointment as a director (the "Equity-VI Director"), who

                   shall initially be Gordon Holmes;

 

            (iv)    So long as Shank (i) is chief executive officer of the

                    Company or (ii) owns not less than the Minimum Equity Amount

                   (as defined below), Shank shall have the right to designate

                   one person (which may be Shank) for appointment as a director

                   (the "Shank Director"), who shall initially be Stephen Shank;

 

            (v)     The holders of 66 2/3% of the then outstanding shares of

                   Class G Preferred Stock shall have the right to designate one

                   person for appointment as a director, who shall initially be

                   Russell Gullotti (the "Class G Director");

 

            (vi)    The Forstmann Little Entities holding shares of Capital Stock

                   of the Company and Shank (or if Shank is not the chief

                   executive officer of the Company, the chief executive officer

                   of the Company) shall have the right to jointly designate one

                   person for appointment as a director (the "Forstmann-Shank

                    Director"), provided however, that Shank hereby agrees that

                   he shall approve the appointment of Thomas H. Lister or T.

                   Geoffrey McKay if the Forstmann Little Entities desire to

                   appoint either Mr. Lister or Mr. McKay to such directorship;

 

            (vii)   The directors designated pursuant to (i) - (v) above (by

                   majority vote) shall have the right to jointly designate one

                   person for appointment as a director (the "Preferred

                   Director"; together with the Pearson Director, the Cherry

                   Tree Director, the Equity-VI Director, the Shank Director,

                   the Forstmann-Shank Director and the Class G Director, the

                    "Designated Directors"), who shall initially by Joshua Lewis;

                   and

 

            (viii) The Board of Directors shall include two independent

                   directors, who shall initially be James Mitchell and David

                    Smith;

 

      "Independent" director shall mean a person who is not an affiliate (as

      defined in the 1933 Act) of the Company or any Shareholder.

 

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            (b) In connection with any annual or special meeting of shareholders

      at which the term of any Designated Director is to expire, the Company

      shall (to the extent within its control), and the Shareholders shall, take

      all necessary action to cause a Designated Director to be nominated. At

      any time at which the Shareholders have the right to, or will vote for, or

      consent to, electing the members of the Board of Directors, the

      Shareholders shall vote all shares of Capital Stock then owned by them

      (including shares of Capital Stock hereafter acquired by them) in favor of

      the election of the Designated Directors to the Board of Directors.

 

            (c) As soon as practicable following Closing, the Company shall (to

      the extent within its control), and the Shareholders shall (to the extent

      within their control), cause the appointment of (i) a person designated by

      the Forstmann Little Entities holding shares of Capital Stock of the

      Company to serve on the Audit Committee of the Board of Directors (which

      shall consist of no more than five persons or such greater number as the

      Board of Directors shall unanimously approve) and (ii) a person designated

      by the Forstmann Little Entities holding shares of Capital Stock of the

      Company to serve on the Compensation Committee of the Board of Directors

      (which shall consist of no more than six persons or such greater number as

      the Board of Directors shall unanimously approve).

 

            (d) If at any time a Shareholder (or Shareholders, in the case of a

      director designated by more than one Shareholder) desires to remove, with

      or without cause, a designee which such Shareholder (or Shareholders) has

      the right to designate (whether directly or through their Designated

      Director), upon notice of such determination, each Shareholder shall vote

      all of its shares of Capital Stock to remove such designee or designees.

      In the event of any vacancy arising by reason of the resignation, death,

      removal or inability to serve of any Designated Director, each Shareholder

      shall vote all of its shares of Capital Stock for the election of the

      successor selected by the Shareholder (or Shareholders, in the