Stock-Based Compensation

Equity Plans

In May 2013, the Company's stockholders approved the Akamai Technologies, Inc. 2013 Stock Incentive Plan (as amended in 2015 and 2017, the "2013 Plan"). The 2013 Plan replaced the Akamai Technologies, Inc. 2009 Stock Incentive Plan (the "2009 Plan"), which in turn replaced the Akamai Technologies, Inc. 2006 Stock Incentive Plan, the Akamai Technologies, Inc. 2001 Stock Incentive Plan and the Akamai Technologies, Inc. 1998 Stock Incentive Plan (together with the 2009 Plan, the "Previous Plans"). The Company no longer issues equity awards under the Previous Plans, and they solely exist to satisfy outstanding equity awards previously granted under those plans. The 2013 Plan allows for the issuance of incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock, restricted stock units, other stock-based awards and cash-based awards up to 18.5 million shares of common stock to employees, officers, directors, consultants and advisers of the Company. Additionally, the Company may grant up to 3.8 million shares of common stock thereunder that were available for grant under the 2009 Plan immediately prior to stockholder approval of the 2013 Plan. Any shares of common stock that are currently outstanding under the Previous Plans that are terminated, canceled, surrendered or forfeited will become available to grant under the 2013 Plan. As of December 31, 2018, the Company had reserved approximately 8.4 million shares of common stock available for future issuance of equity awards under the 2013 Plan.

The Company has assumed certain stock option plans and the outstanding stock options of companies that it has acquired (“Assumed Plans”). Stock options outstanding as of the date of acquisition under the Assumed Plans were exchanged for the Company’s stock options and adjusted to reflect the appropriate conversion ratio as specified by the applicable acquisition agreement, but are otherwise administered in accordance with the terms of the Assumed Plans. Stock options under the Assumed Plans generally vest over four years and expire ten years from the date of grant.

The 1999 Employee Stock Purchase Plan ("1999 ESPP") permits eligible employees to purchase up to 1.5 million shares each June 1 and December 1, provided that the aggregate number of shares issued shall not exceed 20.0 million. The 1999 ESPP allows participants to purchase shares of common stock at a 15% discount from the fair market value of the stock as determined on specific dates at six-month intervals. During the years ended December 31, 2018, 2017 and 2016, the Company issued 1.0 million, 1.1 million and 0.9 million shares under the 1999 ESPP, respectively, with a weighted average purchase price per share of $52.04, $40.18 and $46.23, respectively. Total cash proceeds from the purchase of shares under the 1999 ESPP in the years ended December 31, 2018, 2017 and 2016 were $50.7 million, $42.3 million and $39.9 million, respectively. As of December 31, 2018, approximately $4.7 million had been withheld from employees for future purchases under the 1999 ESPP.

Stock-Based Compensation Expense

The following table summarizes the components of total stock-based compensation expense included in the Company’s consolidated statements of income for the years ended December 31, 2018, 2017 and 2016 (in thousands):



	2018			2017			2016
Cost of revenue	$	21,892		$	20,314		$	18,287
Research and development	44,034			38,864			29,739
Sales and marketing	64,373			60,246			55,407
General and administrative	53,514			44,884			41,073
Total stock-based compensation	183,813			164,308			144,506
Provision for income taxes	(48,502		)	(56,237		)	(49,014		)
Total stock-based compensation, net of taxes	$	135,311		$	108,071		$	95,492

In addition to the amounts of stock-based compensation reported in the table above, the Company’s consolidated statements of income for the years ended December 31, 2018, 2017 and 2016 also include stock-based compensation reflected as a component of amortization of capitalized internal-use software; the additional stock-based compensation was $25.2 million, $17.5 million and $13.8 million, respectively, before taxes.

The Company uses the Black-Scholes option pricing model to determine the fair value of the Company’s stock option awards. This model requires the input of subjective assumptions, including expected stock price volatility and the estimated term of each award. The estimated fair value of the Company's stock-based awards, less expected forfeitures, is amortized over the awards’ vesting period on a straight-line basis. Expected volatilities are based on the Company’s historical stock price volatility and implied volatility from traded options in its stock. The Company uses historical data to estimate the expected term of options granted within the valuation model. The risk-free interest rate for periods commensurate with the expected term of the option is based on the U.S. Treasury yield rate in effect at the time of grant. The expected dividend yield is zero, as the Company currently does not pay a dividend and does not anticipate doing so in the future.

The grant-date fair values of awards granted under the 1999 ESPP during the years ended December 31, 2018, 2017 and 2016 were estimated using the Black-Scholes option pricing model with the following weighted-average assumptions:



	2018		2017		2016
Expected term (in years)	0.5		0.5		0.5
Risk-free interest rate	1.9	%	1.0	%	0.5	%
Expected volatility	31.2	%	35.8	%	36.2	%
Dividend yield	—	%	—	%	—	%

For the years ended December 31, 2018, 2017 and 2016, the weighted average fair value of awards granted under the 1999 ESPP was $15.29 per share, $13.60 per share and $14.54 per share, respectively.

As of December 31, 2018, total pre-tax unrecognized compensation cost for stock options, restricted stock units, deferred stock units and shares of common stock issued under the 1999 ESPP was $268.4 million. The expense is expected to be recognized through 2022 over a weighted average period of 1.8 years.

Stock Options

The following table summarizes stock option activity during the year ended December 31, 2018:



	Shares (in thousands)		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value (in thousands)
Outstanding at January 1, 2018	339		$	36.36
Exercised	(219	)	35.83
Outstanding at December 31, 2018	120		$	37.33	1.78	$	2,852
Exercisable at December 31, 2018	120		$	37.33	1.78	$	2,852
Vested or expected to vest December 31, 2018	120		$	37.33	1.78	$	2,852

The total pre-tax intrinsic value of options exercised during the years ended December 31, 2018, 2017 and 2016 was $8.2 million, $12.3 million and $18.3 million, respectively. The total fair value of options vested for the year ended December 31, 2018 was insignificant. The total fair value of options vested for the years ended December 31, 2017 and 2016 was $1.2 million and $6.5 million, respectively.

The aggregate intrinsic value in the preceding table represents the total pre-tax intrinsic value, based on the Company’s closing stock price of $61.08 on December 31, 2018, that would have been received by the option holders had all option holders exercised their “in-the-money” options as of that date. The total number of shares issuable upon the exercise of “in-the-money” options exercisable as of December 31, 2018 was 0.1 million.

Deferred Stock Units

The Company has granted deferred stock units ("DSUs") to non-employee members of its Board of Directors. Each DSU represents the right to receive one share of the Company’s common stock upon vesting. The holder may elect to defer receipt of the vested shares of stock represented by the DSU for a period of at least one year but not more than ten years from the grant date. DSUs vest 100% on the first anniversary of the grant date. If a director has completed one year of Board service, vesting of 100% of the DSUs held by such director will accelerate at the time of his or her departure from the Board.

The following table summarizes the DSU activity for the year ended December 31, 2018:



	Units (in thousands)		Weighted Average Grant Date Fair Value
Outstanding at January 1, 2018	177		$	43.77
Granted	34		76.00
Vested and distributed	(40	)	46.25
Outstanding at December 31, 2018	171		$	49.54

The total pre-tax intrinsic value of DSUs that were vested and distributed during the years ended December 31, 2018, 2017 and 2016 was $3.0 million, $1.5 million and $1.4 million, respectively. The total fair value of DSUs that were vested and distributed during the years ended December 31, 2018, 2017 and 2016 was $1.8 million, $1.7 million and $1.6 million, respectively. The grant-date fair value is calculated based upon the Company’s closing stock price on the date of grant. As of December 31, 2018, 34,000 DSUs were unvested, with an aggregate intrinsic value of approximately $2.1 million and a weighted average remaining contractual life of approximately 0.4 years. These units are expected to vest in May 2019.

Restricted Stock Units

The following table summarizes the different types of restricted stock units ("RSUs") granted by the Company during the year ended December 31, 2018 (in thousands):



	December 31, 2018
RSUs with service-based vesting conditions	3,122
RSUs with market-based vesting conditions	115
RSUs with performance-based vesting conditions	251
Total	3,488

RSUs represent the right to receive one share of the Company’s common stock upon vesting. RSUs are granted at the discretion of the Board of Directors, a committee thereof or, subject to defined limitations, the Chief Executive Officer of the Company, acting as a committee of one director, to whom such authority has been delegated. The Company has issued RSUs that vest based on the passage of time assuming continued service with the Company, RSUs that vest only upon the achievement of defined performance metrics tied primarily to revenue and income targets and other key financial performance indicators and RSUs that vest based upon total shareholder return ("TSR") measured against the benchmark TSR of a peer group.

For RSUs with service-based vesting conditions, the fair value is calculated based upon the Company’s closing stock price on the date of grant, and the stock-based compensation expense is being recognized over the vesting period. Most RSUs with service-based vesting provisions vest in installments over a three- or four-year period following the grant date.

The Company granted RSUs with market-based vesting conditions to certain of its executive officers. The Company uses the Monte Carlo simulation model to determine the fair value of the Company’s RSUs based on TSR. This model requires the input of assumptions, including the estimated term of each award, the risk-free interest rate, historical stock price volatility of the Company's shares and historical stock price volatility of peer-company shares. The grant-date fair values of the Company's RSUs with market-based vesting conditions granted during the year ended December 31, 2018, 2017 and 2016 were estimated using a Monte Carlo simulation model with the following assumptions:



	2018		2017		2016
Expected term (in years)	3.0		3.0		3.0
Risk-free interest rate	2.3	%	1.4	%	0.8	%
Akamai historical share price volatility	35.5	%	33.2	%	34.3	%
Average volatility of peer-company share price	26.3	%	27.1	%	27.6	%

For the years ended December 31, 2018, 2017 and 2016, management measured compensation expense for performance-based RSUs based upon a review of the Company’s expected achievement against specified financial performance targets. Such compensation cost is being recorded using a graded-vesting method for each series of grants of performance-based RSUs, to the extent management has deemed that such awards are probable of vesting based upon the expected achievement against the specified targets. On a periodic basis, management reviews the Company’s expected performance and adjusts the compensation cost, if needed, at such time.

The following table summarizes the RSU activity for the year ended December 31, 2018:



	Units (in thousands)		Weighted Average Grant Date Fair Value
Outstanding at January 1, 2018	5,843		$	59.94
Granted	3,488		69.14
Vested	(2,954	)	60.18
Forfeited	(765	)	61.27
Outstanding at December 31, 2018	5,612		$	62.25

The total pre-tax intrinsic value of RSUs that vested during the years ended December 31, 2018, 2017 and 2016 was $173.6 million, $168.6 million and $128.5 million, respectively. The total fair value of RSUs that vested during the years ended December 31, 2018, 2017 and 2016 was $178.3 million, $173.6 million and $140.4 million, respectively. The grant-date fair value of each RSU is calculated based upon the Company’s closing stock price on the date of grant. As of December 31, 2018, 5.6 million RSUs were outstanding and unvested, with an aggregate intrinsic value of $342.9 million and a weighted average remaining vesting period of approximately 1.7 years. These RSUs are expected to vest on various dates through 2022.