Governance Agreement

Convertible Preferred Stock Purchase Agreement

This Convertible Preferred Stock Purchase Agreement (this "Agreement"), dated as of January 11, 2000, among Sheldahl, Inc., a Minnesota corporation (the "Company"), and the parties executing an Acceptance page hereto (individually, a "Purchaser" and collectively the "Purchasers").

WHEREAS, subject to the terms and conditions set forth in this Agreement, the Company desires to issue and sell to the Purchasers and the Purchasers desire to acquire shares of the Company's Series F Convertible Preferred Stock, par value $1.00 per share (the "Series F Preferred").

NOW, THEREFORE, IN CONSIDERATION of the mutual covenants contained in this Agreement, the Company and the Purchasers agree as follows:

PURCHASE AND SALE OF PREFERRED SHARES

1.1 Purchase and Sale.

(a) Subject to the terms and conditions set forth herein, at the Closing (as defined below), the Company shall issue and sell to the Purchasers and the Purchasers shall purchase shares of Series F Preferred (the "Shares").

(b) The Shares shall have the respective rights, preferences and privileges set forth in the Certificate of Designation attached hereto as Exhibit A (the "Certificate of Designation"), which shall be filed on or prior to the Closing Date (as defined below) by the Company with the Secretary of State of Minnesota. The Shares, the Warrants (as defined in Section 3.2) and the Underlying Shares (as defined in Section 2.1(d)) are sometimes collectively referred to herein as the "Securities."

1.2 Purchase Price.

The purchase price per Share shall be .

1.3 The Closing.

(a) The Closing of the purchase and sale of the Shares (the "Closing") shall take place at the offices of Lindquist & Vennum P.L.L.P., 4200 IDS Center, 80 South 8th Street, Minneapolis, Minnesota on . The date of the Closing is hereinafter referred to as the "Closing Date."

(b) At the Closing, the Company shall deliver to each Purchaser a stock certificate registered in the name of such Purchaser for the number of Series F Preferred set forth opposite such Purchaser's name on Schedule A hereto; a Warrant to purchase thirty one (31) shares of Common Stock of the Company for each $1000 of purchase price; and all other documents required to have been delivered at or prior to the Closing. At the Closing, each Purchaser shall deliver to the Company the purchase price set forth on Schedule A hereto by wire transfer of same day funds.

REPRESENTATIONS AND WARRANTIES

2.1 Representations, Warranties and Agreements of the Company.

The Company hereby makes the following representations and warranties to each of the Purchasers individually:

(a) Organization. The Company is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Minnesota, with the requisite corporate power and authority to own and use its properties and assets and to carry on its business as currently conducted.

(b) Authorization; Enforcement. The Company has the requisite corporate power and authority to enter into and to consummate the transactions contemplated by this Agreement, the Certificate of Designation, the Registration Rights Agreement and the Warrants and otherwise to carry out its obligations hereunder and thereunder.

(c) Capitalization. The authorized, issued and outstanding capital stock of the Company is set forth in Schedule 2.1(c). Except as specifically disclosed in Schedule 2.1(c), no shares of Common Stock of the Company are entitled to preemptive or similar rights.

(d) Issuance of Shares and Warrants. The Shares and the Warrants are duly authorized and, when issued in accordance with the terms hereof, shall be validly issued, fully paid and non-assessable.

(e) No Conflicts. The execution, delivery and performance of the Transaction Documents by the Company do not and will not conflict with or violate provisions of its governing documents or applicable laws, except as noted in the Agreement.

(f) Consents and Approvals. Except as specifically set forth in Schedule 2.1(f), the Company is not required to obtain any consent, waiver, authorization or order, or make any filing or registration, except for the Required Approvals.

(g) Litigation; Proceedings. Except as disclosed in Item 3 of the Company's most recent Form 10-K, there is no pending or threatened action, suit, proceeding or investigation which could reasonably be expected to have a Material Adverse Effect.

(h) No Default or Violation. Neither the Company nor any subsidiary is in default under or in violation of any indenture, loan or credit agreement or any other agreement, except as could not reasonably be expected to have a Material Adverse Effect.

(i) SEC Documents. The Company has filed all reports required under the Exchange Act for the three years preceding the date hereof on a timely basis.

2.2 Representations and Warranties of the Purchasers.

Each Purchaser hereby represents and warrants to the Company with respect to itself or himself as follows:

(a) Organization; Authority. The Purchaser has the requisite power and authority to enter into and consummate the transactions contemplated by the Transaction Documents.

(b) Investment Intent. The Purchaser is acquiring the Securities for its own account for investment purposes only and not with a view to distribution or resale.

(c) Purchaser Status. At the time the Purchaser was offered the Shares and Warrants, it was and is an "accredited investor" as defined in Rule 501(a).

(d) Experience of Purchaser. The Purchaser has knowledge, sophistication and experience in business and financial matters sufficient to evaluate the merits and risks of the investment.

(e) Ability of Purchaser to Bear Risk of Investment. The Purchaser is able to bear the economic risk of an investment in the Securities.

(f) Access to Information. The Purchaser has had the opportunity to ask questions and receive information about the Company and the Securities.

(g) Reliance. The Purchaser understands the Securities are being offered without registration under the Securities Act in a private placement exempt under Section 4(2) or Regulation D.

(h) No Affiliation. No Purchaser is an Affiliate or Associate of any other Purchaser or acting in concert with any other Purchaser.

(i) No Conflicts. The execution and delivery of the Transaction Documents by the Purchaser do not conflict with its governing documents or applicable law.

(j) Consents and Approvals. Except for Schedule 13D and Form 4 filings by Molex Incorporated, such Purchaser is not required to obtain any consent, waiver, authorization or order, or make any filing or registration.

(k) Litigation; Proceedings. There is no pending or threatened action, suit, proceeding or investigation which would adversely affect the legality or enforceability of the Transaction Documents.

(l) Beneficial Ownership of Sheldahl Stock.

At and after the Closing, no Purchaser shall be a Beneficial Owner of fifteen percent (15%) or more of outstanding shares of the Company's Common Stock.

For purposes of this Section 2.2(l), "Beneficial Owner" shall have the meaning set forth in the Rights Agreement.

Notwithstanding the foregoing, for purposes of Molex Incorporated, such references above to fifteen percent (15%) shall be deemed to refer to twenty-two percent (22%).

(m) Residency. The Purchaser is a resident of or domiciled in the state set forth on Schedule A.

OTHER AGREEMENTS OF THE PARTIES

3.1 Transfer Restrictions.

(a) If the Purchaser should decide to dispose of any of the Securities held by it, the Purchaser understands and agrees that it may do so only pursuant to an effective registration statement under the Securities Act, to the Company or pursuant to an available exemption from the registration requirements of the Securities Act.

(b) The Purchaser agrees to the imprinting, so long as is required by this Section 3.1(b), of the following legend on the Securities:

The Underlying Shares issuable upon conversion of Shares and exercise of the Warrants shall not contain the legend set forth above if the conversion or exercise occurs while the Underlying Securities Registration Statement is effective, or if the Underlying Shares have been sold pursuant to Rule 144, or if in the written opinion of counsel the legend is not required.

The Company makes no representation, warranty or agreement as to the availability of any exemption from registration under the Securities Act with respect to any resale of any Securities.

3.2 The Warrants.

At the Closing, the Company shall issue and deliver Common Stock purchase warrants (the "Warrants") entitling the Purchasers to purchase, on the terms and conditions set forth in Exhibit B, an aggregate of 31 shares of Common Stock for each share of Series F Preferred Stock at a price per share equal to the initial Conversion Price (the "Warrant Exercise Price").

3.3 Use Of Proceeds.

The Company shall use the Net Proceeds from the placement of the Shares and Warrants for working capital purposes.

ARTICLE IV

CONDITIONS

4.1 Conditions Precedent to the Obligation of the Purchasers to Purchase the Series F Shares.

The obligation of each Purchaser hereunder to acquire and pay for the Shares and the Warrants is subject to the satisfaction or waiver by each Purchaser, at or before the Closing, of each of the following conditions:

(a) Accuracy of the Company's Representations and Warranties. The representations and warranties of the Company contained herein shall be true and correct in all material respects as of the date when made and as of the Closing Date.

(b) Performance by the Company. The Company shall have performed, satisfied and complied in all material respects with all covenants, agreements and conditions required by the Transaction Documents at or prior to the Closing Date.

(c) No Injunction. No statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated or endorsed which prohibits the consummation of the transactions contemplated by this Agreement.

(d) No Suspensions of Trading in Common Stock. The trading in the Common Stock shall not have been suspended by the Commission or on the Nasdaq National Market.

(e) Legal Opinion. The Company shall have delivered to the Purchasers an opinion of outside legal counsel to the Company as to the matters attached hereto as Exhibit C and dated the Closing Date.

(f) Required Approvals. All Required Approvals shall have been obtained.

(g) Delivery of Stock Certificates and Warrants. The Company shall have delivered to the Purchasers or the Purchasers' designee the stock certificate(s) representing the Shares being purchased at the Closing and the Warrants to be received by the Purchasers, registered in the name of the Purchasers, in form satisfactory to the Purchasers.

(h) Registration Rights Agreement. The Company and the Purchasers shall have entered into the Registration Rights Agreement in the form of Exhibit D.

4.2 Conditions Precedent to the Company's Obligations.

The obligations of the Company hereunder are subject to the following conditions:

(a) Accuracy of the Representations and Warranties of Purchasers. The representations and warranties of the Purchasers contained herein shall be true and correct in all material respects as of the date when made and as of the Closing Date.

(b) Performance by the Purchasers. The Purchasers shall have performed, satisfied and complied in all material respects with all covenants, agreements and conditions required by the Transaction Documents at or prior to the Closing Date.

(c) No Injunction. No statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated or endorsed which prohibits the consummation of the transactions contemplated by this Agreement.

(d) Required Approvals. All Required Approvals shall have been obtained.

(e) Payment of Purchase Price. The Purchasers shall have paid the purchase price set forth on Schedule A.

MISCELLANEOUS

5.1 Fees and Expenses.

Each party shall pay the fees and expenses of its advisers, counsel, accountants and other experts, if any, and all other expenses incurred by such party incident to the negotiation, preparation, execution, delivery and performance of this Agreement, except as set forth in the Registration Rights Agreement.

Each Purchaser, severally, shall be responsible for its or his own tax liability that may arise as a result of the investment hereunder or the transactions contemplated by this Agreement.

5.2 Entire Agreement; Amendments.

This Agreement, together with the Exhibits and Schedules hereto, the Registration Rights Agreement, the Certificate of Designation (when filed) and the Warrants referenced in Section 3.2, contains the entire understanding of the parties with respect to the subject matter hereof and supersedes all prior agreements and understandings, oral or written, with respect to such matters.

5.3 Notices.

Any notice or other communication required or permitted to be given hereunder shall be in writing and shall be deemed to have been received as specified in this Agreement.

or such other address as may be designated in writing hereafter, in the same manner, by such person.

5.4 Amendment; Waivers.

No provision of this Agreement may be waived or amended except in a written instrument signed by the Company and each Purchaser. No waiver of any default shall be deemed to be a continuing waiver in the future or a waiver of any other provision.

5.5 Headings.

The headings herein are for convenience only and do not constitute a part of this Agreement.

5.6 Successors and Assigns.

This Agreement shall be binding upon and inure to the benefit of the parties and their successors and permitted assigns.

5.7 No Third-Party Beneficiaries.

This Agreement is intended for the benefit of the parties hereto and their respective permitted successors and assigns and is not for the benefit of any other person.

5.8 Governing Law.

This Agreement shall be governed by and construed and enforced in accordance with the internal laws of the State of Minnesota.

5.9 Execution.

This Agreement may be executed in two or more counterparts and may be signed by facsimile transmission.

5.10 Severability.

If any provision is invalid or unenforceable, the remaining terms and provisions shall remain in effect.

5.11 Covenants.

The foregoing covenants shall not be applicable to the extent and for so long as the Board of Directors of the Company has determined in its judgment, after consultation with counsel, that fulfilling such covenants could result in violation of applicable securities laws or breach of fiduciary duties.

(a) The Company agrees during the fiscal year ended August 25, 2000 to provide to Purchasers such business and financial information as Purchasers reasonably request.

(b) The Company agrees that if by February 28, 2000 it has not engaged in a transaction relating to its Micro Products business, then the Company will meet with Purchasers to discuss strategic options regarding this activity.

IN WITNESS WHEREOF

The Company has caused this Agreement to be duly executed by its authorized representative and the Purchasers have caused this Agreement to be executed by signing in counterpart the acceptance form attached to this Agreement.

Additional Purchaser Information