Employee Stock and Benefit Plans

Stock Options

2000 Equity Incentive Plan

Under the 2000 Equity Incentive Plan (the "2000 Plan"), the Company has been authorized to grant to eligible participants either incentive stock options (“ISOs”) or nonstatutory stock options (“NSOs”) to purchase up to 11,987,853 shares of common stock. The ISOs may be granted at a price per share not less than the fair market value at the date of grant. The NSOs may be granted at a price per share not less than 85% of the fair market value at the date of grant. Options granted to date are immediately exercisable, and unvested shares are subject to repurchase by the Company.

Options granted generally vest over a period of up to four years, with a maximum term of ten years. Upon termination of employment of an option holder, the Company has the right to repurchase at the original purchase price any issued but unvested common shares. At September 30, 2012 and December 31, 2011, there were 58,534 and 76,437 shares, respectively, that were subject to the Company’s right to repurchase. Shares repurchased by the Company are added to the pool of options available for future grant. The Company repurchased 3,334 unvested common shares in the three months ended September 30, 2011, and 60,125 and 10,001 unvested common shares in the nine months ended September 30, 2012 and 2011, respectively. There were no shares repurchased during the three months ended September 30, 2012. The amounts paid for these shares purchased under an early exercise of stock options are not reported as a component of stockholders’ equity (deficit) until those shares vest. The amounts received in exchange for these shares totaled $358,000 and $414,000 as of September 30, 2012 and December 31, 2011, respectively, have been recorded as an accrued liability in the accompanying condensed consolidated balance sheets and will be reclassified to common stock and additional paid-in capital as the shares vest.

Common shares purchased under the Plan are subject to certain restrictions, including the right of first refusal by the Company for sale or transfer of these shares to third parties. The Company’s right of first refusal terminates upon completion of an initial public offering of common stock.

Subsequent to September 30, 2012, the 2000 Plan was terminated in connection with the closing of the IPO, and accordingly, no shares are currently available for issuance under the 2000 Plan. The 2000 Plan continues to govern outstanding awards granted thereunder.

2012 Equity Incentive Plan

The 2012 Equity Incentive Plan (the "2012 Plan") was adopted and approved in September 2012 and became effective on September 26, 2012. Under the 2012 Plan, the Company has been authorized to grant to eligible participants ISOs, NSOs, stock appreciation rights, restricted stock, restricted stock units, performance units and performance shares equivalent to up to 3,050,000 shares of common stock. The number of shares of common stock available for issuance under the 2012 Plan includes an annual increase on January 1 of each year starting on January 1, 2014 by an amount equal to the least of 3,050,000 shares; 5% of the outstanding shares of stock as of the last day of our immediately preceding fiscal year; or an amount determined by the board of directors. Incentive stock options may only be granted to employees and any subsidiary corporations' employees. All other awards may be granted to employees, directors and consultants and our subsidiary corporations' employees and consultants. As of September 30, 2012, no shares had been granted under the 2012 Plan.

Stock-based employee compensation is included in the condensed consolidated statements of income as follows:



	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2012		2011		2012		2011
	(in thousands)
Cost of revenues	$	68	$	44	$	191	$	94
Research and development	167		118		461		334
Sales and marketing	306		173		746		399
General and administrative	244		204		723		603
Total stock-based employee compensation	$	785	$	539	$	2,121	$	1,430

Compensation cost is recognized on a straight-line basis over the service period. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

As of September 30, 2012 and December 31, 2011, the Company had $5,949,000 and $4,832,000, respectively, of total unrecognized employee compensation cost related to nonvested awards that it expects to recognize over a weighted-average period of 3 years.

The fair value of each option granted to employees is estimated on the date of grant using the Black-Scholes option-pricing model based on the following assumptions:



	Three Months Ended		Nine Months Ended
	September 30,		September 30,
	2012	2011	2012	2011
Expected term (in years)	5.3 - 6.0	5.6	5.3 - 6.0	5.6
Volatility	53%	55%	53%	55%
Risk-free interest rate	0.6% - 0.7%	1.0% - 1.6%	0.6% - 0.8%	1.0% - 2.3%
Dividend yield	—	—	—	—

The expected term of the options is based on evaluations of historical and expected future employee exercise behavior. The risk-free interest rate is based on the U.S. Treasury rates at the date of grant with maturity dates approximately equal to the expected term at the grant date. Volatility is based on historical volatility of several public entities that are similar to the Company, as the Company does not have sufficient historical transactions in its own shares on which to base expected volatility. The Company has not historically issued any dividends and does not expect to in the future.

The Company records compensation representing the fair value of stock options granted to non-employees. Stock-based non-employee compensation was $242,000 and $11,000 for the three months ended September 30, 2012 and 2011, respectively, and $431,000 and $71,000 for the nine months ended September 30, 2012 and 2011, respectively. Non-employee stock-based compensation is recognized over the vesting periods of the options. The value of options granted to non-employees is remeasured as they vest over a performance period.

A summary of the Company’s stock option activity is as follows:



	Outstanding Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)	Aggregate Intrinsic Value
						(in thousands)
Balance as of December 31, 2011	6,312,041		$	3.36	6.9	$	16,012
Granted	1,322,906		8.39
Exercised	(703,459	)	2.84
Canceled	(392,389	)	6.85
Balance as of September 30, 2012	6,539,099		4.23		7.0	$	64,953
Vested and expected to vest - September 30, 2012	6,100,152		4.00		6.9
Exercisable - September 30, 2012	6,537,727		4.23		7.0

401(k) Plan

The Company’s 401(k) Plan (the “401(k) Plan”) was established in 2000 to provide retirement and incidental benefits for its employees. As allowed under section 401(k) of the Internal Revenue Code, the 401(k) Plan provides tax-deferred salary deductions for eligible employees. Contributions to the 401(k) Plan are limited to a maximum amount as set periodically by the Internal Revenue Service. To date, the Company has not made any contributions to the 401(k) Plan.