Stock-Based Compensation:

Equity Plans

In 1998, the Board of Directors adopted the Akamai Technologies, Inc. 1998 Stock Incentive Plan (the “1998 Plan”) for the issuance of incentive and nonqualified stock options, restricted stock awards and other types of equity awards. Options to purchase common stock and other equity awards could be granted at the discretion of the Board of Directors or a committee thereof. In December 2001, the Board of Directors adopted the Akamai Technologies, Inc. 2001 Stock Incentive Plan (the “2001 Plan”) for the issuance of nonqualified stock options, restricted stock awards and other types of equity awards. In March 2006, the Board of Directors adopted the Akamai Technologies, Inc. 2006 Stock Incentive Plan (the “2006 Plan”) for the issuance of incentive and nonqualified stock options, restricted stock awards, restricted stock units and other types of equity awards. In March 2009, the Board of Directors adopted the Akamai Technologies, Inc. 2009 Stock Incentive Plan (the “2009 Plan”) for the issuance of incentive and nonqualified stock options, restricted stock awards, restricted stock units and other types of equity awards. The total number of shares of common stock approved for issuance under the 1998 Plan, the 2001 Plan, the 2006 Plan and the 2009 Plan were 48.3 million, 5.0 million, 7.5 million and 8.5 million shares, respectively. Equity incentive awards may not be issued to the Company’s directors or executive officers under the 2001 Plan. In October 2005, the Board of Directors delegated to the Company’s Chief Executive Officer, acting as a committee of one Director, the authority to grant equity incentive awards to employees of the Company below the level of Vice President, subject to certain specified limitations, under all then-existing and future plans. The Company no longer issues equity awards under the 1998 Plan, the 2001 Plan or the 2006 Plan.

Under the terms of the 1998 Plan, the 2006 Plan and the 2009 Plan, the exercise price of incentive stock options may not be less than 100% (110% in certain cases) of the fair market value of the common stock on the date of grant. Incentive stock options could not be issued under the 2001 Plan. The exercise price of nonqualified stock options issued under the 1998 Plan, the 2001 Plan, the 2006 Plan and the 2009 Plan may be less than the fair market value of the common stock on the effective date of grant, as determined by the Board of Directors, but in no case may the exercise price be less than the statutory minimum. Stock option vesting typically occurs over four years under all of the plans, and options are granted at the discretion of the Board of Directors. Under the 1998 Plan and 2001 Plan, the term of options granted may not exceed ten years, or five years for incentive stock options granted to holders of more than 10% of the Company’s voting stock. Under the 2006 Plan and the 2009 Plan, the term of options granted may not exceed seven years.

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.

In August 1999, the Board of Directors adopted the 1999 ESPP. The Company reserved 3.1 million shares of common stock for issuance under the 1999 ESPP. In May 2002, the stockholders of the Company approved an amendment to the 1999 ESPP that allows for an automatic increase in the number of shares of common stock available under the 1999 ESPP each June 1 and December 1 to restore the number of shares available for issuance to 1.5 million, provided that the aggregate number of shares issued under the 1999 ESPP 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, 2011, 2010 and 2009, the Company issued 0.5 million, 0.5 million and 0.7 million shares under the 1999 ESPP, respectively, with a weighted average purchase price per share of $25.75, $25.62 and $13.47, respectively. Total cash proceeds from the purchase of shares under the 1999 ESPP in 2011, 2010 and 2009 were $12.7 million, $12.2 million and $9.8 million, respectively. As of December 31, 2011, approximately $1.4 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 operations for the years ended December 31, 2011, 2010 and 2009 (in thousands):



	For the Years Ended December 31,
	2011			2010			2009
Stock-based compensation expense by type of award:
Stock options	$	13,533		$	15,154		$	17,636
Deferred stock units	1,885			1,885			2,085
Restricted stock units	47,807			62,928			41,584
Shares issued under the 1999 ESPP	5,553			4,319			3,772
Amounts capitalized as internal-use software	(7,473		)	(7,818		)	(6,280		)
Total stock-based compensation before income taxes	61,305			76,468			58,797
Less: Income tax benefit	(21,212		)	(26,566		)	(22,633		)
Total stock-based compensation, net of taxes	$	40,093		$	49,902		$	36,164
Effect of stock-based compensation on income by line item:
Cost of revenues	$	2,360		$	2,806		$	2,195
Research and development expense	11,125			14,539			10,967
Sales and marketing expense	27,990			35,525			27,411
General and administrative expense	19,830			23,598			18,224
Provision for income taxes	(21,212		)	(26,566		)	(22,633		)
Total cost related to stock-based compensation, net of taxes	$	40,093		$	49,902		$	36,164

In addition to the amounts of stock-based compensation reported in the table above, the Company’s consolidated statements of operations for the years ended December 31, 2011, 2010 and 2009 also included stock-based compensation reflected as a component of amortization of capitalized internal-use software; such additional stock-based compensation was $7.3 million, $7.5 million and $6.4 million, respectively, before tax.

Akamai has selected 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 estimated life of each award. The estimated fair value of Akamai’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 life of options granted within the valuation model. The risk-free interest rate for periods commensurate with the expected life of the option is based on the United States Treasury yield rate in effect at the time of grant.

The grant-date fair values of Akamai’s stock option awards granted during the years ended December 31, 2011, 2010 and 2009 were estimated using the Black-Scholes option pricing model with the following weighted-average assumptions:



	For the Years Ended December 31,
	2011	2010	2009
Expected life (years)	4.2	4.2	4.1
Risk-free interest rate (%)	1.3	1.4	1.7
Expected volatility (%)	48.9	50.9	54.8
Dividend yield (%)	—	—	—

For the years ended December 31, 2011, 2010 and 2009, the weighted average fair value of Akamai’s stock option awards granted was $14.93 per share, $16.49 per share and $8.44 per share, respectively.

The grant-date fair values of Akamai’s ESPP awards granted during the years ended December 31, 2011, 2010 and 2009 were estimated using the Black-Scholes option pricing model with the following weighted-average assumptions:



	For the Years Ended December 31,
	2011	2010	2009
Expected life (years)	0.5	0.5	0.5
Risk-free interest rate (%)	0.1	0.2	0.4
Expected volatility (%)	43.7	51.2	69.2
Dividend yield (%)	—	—	—

For the years ended December 31, 2011, 2010 and 2009, the weighted average fair value of Akamai’s ESPP awards granted was $10.24 per share, $9.86 per share and $4.11 per share, respectively.

As of December 31, 2011, 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 $110.9 million. This non-cash expense will be recognized through 2015 over a weighted average period of 1.3 years. Nearly all of the Company’s employees have received grants through these equity compensation programs. Income tax benefits realized from the exercise of stock options and vesting of restricted stock units and deferred stock units during the years ended December 31, 2011, 2010 and 2009 were approximately $79.0 million, $123.5 million and $68.0 million, respectively.

Stock Options

The following table summarizes stock option activity during the years ended December 31, 2011, 2010 and 2009:



	Shares (in thousands)		Weighted Average Exercise Price
Outstanding at December 31, 2008	10,380		$	18.76
Granted	1,146		19.11
Exercised	(1,178	)	10.09
Forfeited and expired	(326	)	33.68
Outstanding at December 31, 2009	10,022		19.34
Granted	1,577		39.72
Exercised	(2,366	)	14.21
Forfeited and expired	(287	)	39.69
Outstanding at December 31, 2010	8,946		23.63
Granted	656		37.33
Exercised	(1,044	)	12.09
Forfeited and expired	(541	)	43.96
Outstanding at December 31, 2011	8,017		$	24.89
Exercisable at December 31, 2011	6,247		$	22.54

The total pre-tax intrinsic value of options exercised during the years ended December 31, 2011, 2010 and 2009 was $22.6 million, $67.5 million and $11.2 million, respectively. The total fair value of options vested, excluding capitalized stock-based compensation, for the years ended December 31, 2011, 2010 and 2009 was $14.8 million, $14.6 million and $18.2 million, respectively. Cash proceeds from the exercise of stock options were $12.6 million, $33.6 million and $11.9 million for the years ended December 31, 2011, 2010 and 2009, respectively.

The following table summarizes stock options that are outstanding and expected to vest and stock options exercisable at December 31, 2011:



Range of Exercise Price ($)	Options Outstanding and Expected to Vest						Options Exercisable
Range of Exercise Price ($)	Number of Options	Weighted Average Remaining Contractual Life	Weighted Average Exercise Price		Aggregate Intrinsic Value		Number of Options	Weighted Average Remaining Contractual Life	Weighted Average Exercise Price		Aggregate Intrinsic Value
	(In thousands)	(In years)			(In thousands)		(In thousands)	(In years)			(In thousands)
0.31-0.49	43	2.2	$	0.31	$	1,366	43	2.2	$	0.31	$	1,366
0.89-1.33	249	0.7	0.91		7,816		248	0.7	0.91		7,782
1.40-1.65	170	1.0	1.62		5,217		170	1.0	1.62		5,217
2.27-3.33	64	0.9	2.84		1,871		64	0.9	2.84		1,871
3.71-5.56	448	1.5	4.89		12,272		446	1.5	4.89		12,235
8.28-12.26	375	3.1	12.10		7,579		375	3.1	12.10		7,576
12.76-19.07	2,444	3.5	15.30		41,506		2,183	3.4	15.60		37,588
19.21-28.38	1,403	5.0	24.67		10,678		914	4.6	24.56		7,054
29.36-43.99	1,532	5.7	36.34		582		866	5.6	34.40		353
44.27-56.60	1,204	4.2	50.81		—		938	3.7	51.43		—
	7,932	4.0	24.74		$	88,887	6,247	3.5	22.54		$	81,042
Expected forfeitures	85
Total options outstanding	8,017

The aggregate intrinsic value in the preceding table represents the total pre-tax intrinsic value, based on Akamai’s closing stock price of $32.28 on December 31, 2011, 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, 2011 was approximately 4.7 million.

Deferred Stock Units

The Company has granted deferred stock units (“DSUs”) to non-employee members of its Board of Directors and to the Company’s Chairman of the Board. 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 for at least one year but not more than ten years from the grant date. The DSUs typically vest 50% upon the first anniversary of grant date, with the remaining 50% vesting in equal installments of 12.5% each quarter thereafter so that all DSUs are vested in full at the end of two years from date of grant. 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 years ended December 31, 2011, 2010 and 2009:



	Units (in thousands)		Weighted Average Grant-Date Fair Value
Outstanding at December 31, 2008	207		$	24.86
Granted	97		21.56
Vested and distributed	(17	)	33.07
Outstanding at December 31, 2009	287		21.04
Granted	47		39.95
Vested and distributed	(77	)	18.40
Outstanding at December 31, 2010	257		25.31
Granted	58		32.48
Vested and distributed	(15	)	33.78
Forfeited	(1	)	39.95
Outstanding at December 31, 2011	299		$	26.25

The total pre-tax intrinsic value of DSUs vested and distributed during the years ended December 31, 2011, 2010 and 2009 was $0.5 million, $3.0 million and $0.4 million, respectively. The total fair value of DSUs vested and distributed during the years ended December 31, 2011, 2010 and 2009 was $0.5 million, $1.4 million and $0.6 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, 2011, 68,583 DSUs were unvested, with an aggregate intrinsic value of approximately $2.2 million and a weighted average remaining contractual life of approximately 1.2 years. These units are expected to vest through May 2013.

Restricted Stock Units

The following table summarizes the different types of restricted stock units (“RSUs”) granted by the Company (in thousands):



	For the Years Ended December 31,
	2011	2010	2009
RSUs with service-based vesting conditions	3,003	1,597	2,342
RSUs with performance-based vesting conditions	550	1,124	1,974
Total	3,553	2,721	4,316

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, as well as RSUs that vest only upon the achievement of defined performance metrics tied to corporate revenue and earnings per share targets.

For RSUs with service-based vesting conditions, the fair value was 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.

For the years ended December 31, 2011, 2010 and 2009, management measured compensation expense for performance-based RSUs based upon a review of the Company’s expected achievement of specified 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 of the specified targets. Management will continue to review periodically the Company’s expected performance and adjust the compensation cost, if needed, at such time.

The following table summarizes the RSU activity for the years ended December 31, 2011, 2010 and 2009:



	Units (in thousands)		Weighted Average Grant-Date Fair Value
Outstanding at December 31, 2008	6,199		$	34.64
Granted	4,316		18.73
Vested	(3,282	)	28.20
Forfeited	(370	)	25.99
Outstanding at December 31, 2009	6,863		27.63
Granted	2,721		26.56
Vested	(1,971	)	23.97
Forfeited	(1,406	)	47.47
Outstanding at December 31, 2010	6,207		23.76
Granted	3,553		33.75
Vested	(1,931	)	23.15
Forfeited	(1,312	)	30.62
Outstanding at December 31, 2011	6,517		$	27.95

The total pre-tax intrinsic value of RSUs vested during the years ended December 31, 2011, 2010 and 2009 was $68.0 million, $72.0 million and $55.9 million, respectively. The total fair value of RSUs vested during the years ended December 31, 2011, 2010 and 2009 was $44.7 million, $47.2 million and $92.6 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, 2011, 6.5 million RSUs were outstanding and unvested, with an aggregate intrinsic value of $181.9 million and a weighted average remaining contractual life of approximately 1.6 years. These RSUs are expected to vest on various dates through December 2015.