Stock-Based Compensation

Equity Plans

In May 2013, the Company's stockholders approved the Akamai Technologies, Inc. 2013 Stock Incentive Plan (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 8.0 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. As of December 31, 2013, the Company had reserved approximately 11.7 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, 2013, 2012 and 2011, the Company issued 0.6 million, 0.7 million and 0.5 million shares under the 1999 ESPP, respectively, with a weighted average purchase price per share of $34.26, $24.76 and $25.75, respectively. Total cash proceeds from the purchase of shares under the 1999 ESPP in 2013, 2012 and 2011 were $22.1 million, $16.8 million and $12.7 million, respectively. As of December 31, 2013, approximately $2.3 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, 2013, 2012 and 2011 (in thousands):



	2013			2012			2011
Cost of revenues	$	10,867		$	11,309		$	9,654
Research and development expense	17,472			17,275			11,125
Sales and marketing expense	39,290			34,322			20,697
General and administrative expense	28,255			27,679			19,829
Total stock-based compensation	95,884			90,585			61,305
Provision for income taxes	(34,829		)	(33,126		)	(21,212		)
Total stock-based compensation, net of taxes	$	61,055		$	57,459		$	40,093

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, 2013, 2012 and 2011 also included stock-based compensation reflected as a component of amortization of capitalized internal-use software; such additional stock-based compensation was $8.1 million, $7.7 million and $7.3 million, respectively, before tax.

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 United States 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 the Company's stock option awards granted during the years ended December 31, 2013, 2012 and 2011 were estimated using the Black-Scholes option pricing model with the following weighted-average assumptions:



	2013		2012		2011
Expected term (in years)	4.5		4.2		4.2
Risk-free interest rate	0.8	%	0.6	%	1.3	%
Expected volatility	44.4	%	50.8	%	48.9	%
Dividend yield	—	%	—	%	—	%

For the years ended December 31, 2013, 2012 and 2011, the weighted average fair value of stock option awards granted was $14.17 per share, $25.20 per share and $14.93 per share, respectively.

The grant-date fair values of the Company's ESPP awards granted during the years ended December 31, 2013, 2012 and 2011 were estimated using the Black-Scholes option pricing model with the following weighted-average assumptions:



	2013		2012		2011
Expected term (in years)	0.5		0.5		0.5
Risk-free interest rate	0.1	%	0.1	%	0.1	%
Expected volatility	42.0	%	51.0	%	43.7	%
Dividend yield	—	%	—	%	—	%

For the years ended December 31, 2013, 2012 and 2011, the weighted average fair value of ESPP awards granted was $11.34 per share, $8.71 per share and $10.24 per share, respectively.

As of December 31, 2013, 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 $133.2 million. This non-cash expense will be recognized through 2017 over a weighted average period of 1.2 years.

Stock Options

The following table summarizes stock option activity during the year ended December 31, 2013:



	Shares (in thousands)		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value (in thousands)
Outstanding at January 1, 2013	6,223		$	26.30
Granted	515		38.07
Exercised	(2,127	)	19.34
Expired	(153	)	36.82
Outstanding at December 31, 2013	4,458		$	30.67	3.34	$	210,719
Exercisable at December 31, 2013	3,303		$	29.56	2.51	$	155,813
Vested or expected to vest December 31, 2013	4,416		$	30.53	3.30	$	208,353

The total pre-tax intrinsic value of options exercised during the years ended December 31, 2013, 2012 and 2011 was $47.2 million, $47.9 million and $22.6 million, respectively. The total fair value of options vested for the years ended December 31, 2013, 2012 and 2011 was $12.4 million, $16.6 million and $14.8 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 $47.18 on December 31, 2013, 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, 2013 was approximately $3.8 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. 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 year ended December 31, 2013:



	Units (in thousands)		Weighted Average Grant Date Fair Value
Outstanding at January 1, 2013	285		$	25.93
Granted	35		48.03
Vested	(82	)	17.90
Outstanding at December 31, 2013	238		$	32.01

The total pre-tax intrinsic value of DSUs that vested during the years ended December 31, 2013, 2012 and 2011 was $3.8 million, $2.3 million and $0.5 million, respectively. The total fair value of DSUs that vested during the years ended December 31, 2013, 2012 and 2011 was $1.5 million, $2.4 million and $0.5 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, 2013, 48,000 DSUs were unvested, with an aggregate intrinsic value of approximately $2.3 million and a weighted average remaining contractual life of approximately 6.1 years. These units are expected to vest on various dates through May 2017.

Restricted Stock Units

The following table summarizes the different types of restricted stock units ("RSUs") granted by the Company during the years ended December 31, 2013, 2012 and 2011 (in thousands):



	December 31, 2013	December 31, 2012	December 31, 2011
RSUs with service-based vesting conditions	2,338	2,782	3,003
RSUs with performance-based vesting conditions	760	369	550
Total	3,098	3,151	3,553

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 primarily to corporate revenue and earnings per share targets or other key performance indicators.

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, 2013, 2012 and 2011, management measured compensation expense for performance-based RSUs based upon a review of the Company’s expected achievement against 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 against the specified targets. Management will continue to periodically review the Company’s expected performance and adjust the compensation cost, if needed, at such time.

The following table summarizes the RSU activity for the year ended December 31, 2013:



	Units (in thousands)		Weighted Average Grant Date Fair Value
Outstanding at January 1, 2013	5,946		$	32.97
Granted	3,098		37.96
Vested	(2,837	)	31.46
Forfeited	(669	)	32.68
Outstanding at December 31, 2013	5,538		$	36.43

The total pre-tax intrinsic value of RSUs that vested during the years ended December 31, 2013, 2012 and 2011 was $117.5 million, $98.3 million and $68.0 million, respectively. The total fair value of RSUs that vested during the years ended December 31, 2013, 2012 and 2011 was $89.2 million, $71.4 million and $44.7 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, 2013, 5.5 million RSUs were outstanding and unvested, with an aggregate intrinsic value of $261.3 million and a weighted average remaining contractual life of approximately 5.6 years. These RSUs are expected to vest on various dates through December 2017.