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Offer Letter - Capella University and Reed A. Watson

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                            (CAPELLA UNIVERSITY LOGO)

June 6, 2006

Reed A. Watson
4465 Vinewood Lane North
Plymouth, MN 55442

Dear Reed,

We are pleased to formally extend you this offer of employment for the position
of Senior Vice President of Marketing for Capella University. The position
reports to Ken Sobaski, President and Chief Operating Officer. Your start date
is to be determined pending further discussion. Please note that this offer of
employment is contingent upon successful completion of a background check and
the signing of a confidentiality / non-compete agreement on or prior to your
first day of employment.

You will be paid on a bi-weekly basis at a rate of $9,423.07, which equals
$245,000.00 when annualized. This position is classified as exempt. You will be
eligible for a prorated performance and salary review in March 2007. Capella is
an "at-will employer;" this means that either you or Capella may terminate
employment at any time for any reason, without advance notice.

On your first day, please report to the 9th floor lobby at the 225 S. 6th St.
building by 8:15 a.m. and check in with the receptionist as a new employee
attending orientation. If you have questions in regards to your first day,
scheduling, or other concerns, please contact me directly at (612) 977-5309.

Signing Bonus--In addition, you will receive a signing bonus equal to $50,000.00
(pretax) payable on your first pay date. By accepting this offer of employment,
you authorize Capella to reclaim a pro-rated portion of this signing bonus
should you voluntarily leave the company within your first year of employment.
As used in this paragraph "prorate" means that the amount of the signing bonus
to be returned is reduced by 1/12 for each month that you do not work (due to
you leaving the organization voluntarily) prior to your one year anniversary
date with the Capella.

Annual incentive compensation potential - In addition to your salary, you will
be eligible to earn an annual incentive compensation award with a target of 40%
of your annual base salary earnings. Payout for this award typically takes place
in March of each year. The details of the incentive compensation program will be
specified in an annual award plan. As discussed, you will be eligible to
participate in the 2006 plan on a pro-rated basis based on your date of hire.
Capella will guarantee a minimum of target payout for the 2006 plan. (Target is
40%, and the pro-ration factor will be determined by your date of hire.) If
company performance should yield a payout higher than target, your payout will
be based on company performance. You will receive this guaranteed 2006 incentive
compensation award if you remain employed as of December 31, 2006. The target
percentage is subject to modification after fiscal year 2006.

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2


Stock Option Grant - You will be granted options to purchase 75,000 shares of
Capella University common stock at the exercise price then in effect on the date
of the award. This option grant is subject to approval by the Board of
Director's Compensation Committee. The terms and conditions of the stock option
grant will be outlined in a Capella Education Stock Option Agreement that you
will receive within a week following confirmation of the stock option award. The
stock option shares will vest pro rata over a four-year period of time after the
grant and the options can be exercised during a ten-year period from the date of
the award, providing you are still employed by the company.

BENEFIT PLANS: The following will summarize the current benefit plans, for which
you would be eligible as a full time employee:

Medical/Dental- Beginning the first day of the month following your hire date,
you will be eligible to participate in the company's medical and dental plans.
The medical plan is administered through Medica. As a Senior Vice President,
Capella will pay 100% of the premium for medical coverage for you, your spouse
and dependent children. (For specific options and plan details, please refer to
your benefits handout.) You will also be eligible to participate in the
company's dental plan, administered by Delta Dental. Both plans offer you a
choice of networks and/or benefit levels.

Life Insurance - The company provides paid life insurance in the amount of lx
salary. You may also elect to purchase additional coverage for yourself, spouse
and/or dependents. You will be eligible to participate in the company's life
insurance plan on the first day of the month following employment.

Disability Benefits - The company offers short and long-term disability
benefits. The short-term disability coverage provides salary replacement for up
to 26 weeks of disability. The amount and length of coverage is based upon
length of service with the company. This benefit is paid for by the company. You
may elect to purchase long-term disability coverage. The Plan replaces up to 60%
of your salary as long as you are eligible for disability benefits under the
Plan. The company pays 50% of the cost of this plan.

Cafeteria Plan - This plan allows you to pay for medical premiums, unreimbursed
medical and child care expenses from pre-tax dollars. You would be eligible for
this plan at the same time you are eligible for the medical insurance.

401k Retirement Plan - Under this plan, you may contribute up to 100% of your
eligible compensation, up to the IRS annual limit on deferrals. The company will
match 50% of employee contributions, up to 4% of compensation - or, put another
way, the company contributes a 2% match. There is a 5-year vesting schedule on
the employer match, with 20% of the employer contribution vesting annually. You
can begin to participate in this plan after approximately one month of service.
More specific information and details about the plan and the investment funds
will be provided in your orientation.

ESOP - The Company may also make an annual discretionary contribution to the
ESOP up to 3% of eligible compensation in the form of company stock once you are
eligible to participate. Employer contributions made in your first three years
with Capella will vest at the end of your third year of service as defined in
the Plan document. Employer contributions made after the end of your third year
of service will vest immediately. The form and amount of employer contributions
is currently under review and, while it is our desire to offer a competitive
retiree benefit program, there should be no expectation that future ESOP
contributions will continue in the same manner as in the past.

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3


Time Off - You will be entitled to Capella's paid time off (PTO) benefit which
is accrued and earned on a pro-rated bi-weekly basis equal to a maximum 27
days/year, as well as 10 paid holidays/year.

Executive Severance Plan - Capella Education Company has established the Capella
Education Company Executive Severance Plan (the "Severance Plan") to provide
severance pay and other benefits to eligible employees. Notwithstanding any
contrary provisions of the Severance Plan, you will receive severance of 12
months total compensation (defined as base salary). You will be able to receive
the above listed severance compensation if you are terminated without cause or
quit for good reason, as both are defined and limited in this letter. You will
be entitled to receive the full 12 months compensation regardless whether you
find other employment during that time and no amount of replacement income will
be set off. Capella will require any successor to assume its obligations in this
letter or will remain obligated after any sale. You are eligible for up to 12
months of outplacement assistance through the outplacement agency then used by
Capella. Any outplacement assistance provided under the Plan will be paid
directly to the outplacement agency.

Continuation Coverage - Federal and state laws require Capella Education Company
to offer certain departing employees (and where applicable, their dependents)
the right to continue coverage, at their own expense, under our group health,
dental and life insurance programs. For health and dental benefits, this
continuation coverage is called COBRA. Upon termination of employment, you will
receive information further describing how this continuation coverage works, its
limitations, and your rights and duties to maintain coverage. Capella Education
Company will pay the regular employer portion towards continued coverage for
you, your spouse and dependent children under Capella Education Company's group
health, dental and basic life insurance plans for the number of months upon
which your severance pay is based. After that time, you must pay the entire cost
of continuation coverage if you wish to continue coverage.

Change in Control - If you voluntarily terminate for Good Reason, as limited in
this letter, following a Change in Control, or if you are involuntarily
terminated other than for Cause, within 24 months after a qualified Change in
Control, you will be entitled to severance pay equal to twelve months of your
base salary. You will also be entitled to 80% of the amount of any targeted
bonus for the year in which you terminate, prorated to the date of termination,
without regard to performance.

Please refer to the Severance Plan document you have already received for
information on the additional provisions and conditions of the Severance Plan.
You are entitled all other Level 2 benefits in the Plan and any enhancements
provided at that level in the future. Your rights to severance as provided in
this letter continue even if the Severance Plan is changed after you sign this
letter. Your entitlement begins on your first day of employment.

Parking - Capella will also provide monthly-contract parking for you at our
expense. More information will be provided to you about parking once you start.

Definition of Cause - For purposes of this letter and in interpreting your
rights to severance under the Severance Plan, Incentive Compensation Plan and
Stock Incentive Plan, as well as under any Change of Control, "Cause" for
termination shall be defined and limited as follows: 1) your conviction of a
crime or commission of other acts either of which could materially damage the
reputation of Capella; 2) your theft, misappropriation, or embezzlement of
Capella property, 3) your falsification of records maintained by Capella; 4)
your failure substantially to comply with the written policies and procedures of
Capella as they may be published or revised from time to time (in

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4


writing, on the Faculty Center website, or on the Stella intranet); or 5) your
gross misconduct directed toward learners, employees, or adjunct faculty.

Definition of Good Reason - "Good reason" shall be defined as a termination
initiated by you, whether or not preceded by a Change in Control, in any of the
following circumstances: (i) your position is changed to a position with a lower
pay grade or lesser responsibilities than the Senior Vice President of Marketing
position; (ii) your fixed compensation is decreased by more than 10 percent
(10%) in any twelve (12) month period; or (iii) you are reassigned to a work
location more than fifty (50) miles from the location in which you are working
immediately prior to the reassignment.

Attorneys' Fees - If either party breaches its obligations under this letter and
the referenced documents, the prevailing party shall be entitled to its costs
and reasonable attorneys' fees incurred in enforcing its rights.

Reed, we are pleased to be able to offer you this opportunity to join Capella!
We are confident you will find this a rewarding role where you will make a
valuable contribution to the company's success!

Sincerely,


/s/ Seth Lockner
-------------------------------------
Seth Lockner
Human Resources Director

cc: Ken Sobaski

Enclosures

PLEASE SIGN AND DATE BELOW YOUR ACCEPTANCE OF THIS OFFER AND RETURN IN THE
ENCLOSED ENVELOPE. PLEASE RETAIN THE ADDITIONAL COPY FOR YOUR RECORDS.


/s/ Reed A. Watson                      June 6, 2006
-------------------------------------   DATED
SIGNED