Stock-based Compensation

Stock Options

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 is authorized to grant to eligible participants incentive stock options (“ISOs”), nonstatutory stock options (“NSOs”), stock appreciation rights ("SARs"), restricted stock awards ("RSAs"), restricted stock units ("RSUs"), 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 the immediately preceding fiscal year; or an amount determined by the board of directors. Options may be granted with an exercise price that is at least equal to the fair market value of the Company's stock at the date of grant and are exercisable when vested. Options granted generally vest over a period of up to four years, with a maximum term of ten years. ISOs may only be granted to employees and any subsidiary corporations' employees. All other awards may be granted to employees, directors and consultants and subsidiary corporations' employees and consultants. Options, SARs, RSAs, RSUs, performance units and performance awards may be granted with vesting terms as determined by the board of directors and expire no more than ten years after the date of grant or earlier if employment or service is terminated. As of September 30, 2013, 1,613,525 shares were available for grant under the 2012 Plan.

2000 Equity Incentive Plan

Under the 2000 Equity Incentive Plan (the "2000 Plan"), the Company was authorized to grant to eligible participants either ISOs or NSOs. The ISOs were granted at a price per share not less than the fair market value at the date of grant. The NSOs were granted at a price per share not less than 85% of the fair market value at the date of grant. Options granted generally vest over a period of up to four years, with a maximum term of ten years. The 2000 Plan was terminated in connection with the closing of the initial public offering ("IPO"), and accordingly, no shares are currently available for issuance under the 2000 Plan. The 2000 Plan continues to govern outstanding awards granted thereunder.

Options granted under the 2000 Plan were immediately exercisable, and unvested shares are subject to repurchase by the Company. 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. As of September 30, 2013 and December 31, 2012, there were 20,336 and 47,220 shares, respectively, that were subject to the Company’s right to repurchase. The Company repurchased 125 unvested common shares in the three and nine months ended September 30, 2013. There were no shares repurchased during the three months ended September 30, 2012. For the nine months ended September 30, 2012, the Company repurchased 60,125 unvested common shares. The amounts paid for these shares purchased under an early exercise of stock options are not reported as a component of stockholders’ equity until those shares vest. The amounts received in exchange for these shares totaled $0.1 million and $0.3 million as of September 30, 2013 and December 31, 2012, 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.

Employee Stock-based Compensation

Employee stock-based compensation is included in the condensed consolidated statements of operations as follows:



	Three Months Ended				Nine months ended
	September 30,				September 30,
	2013		2012		2013		2012
	(in thousands)
Cost of revenues	$	103	$	68	$	297	$	191
Research and development	253		167		687		461
Sales and marketing	363		306		804		746
General and administrative	507		244		1,299		723
Total stock-based employee compensation	$	1,226	$	785	$	3,087	$	2,121

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, 2013 and December 31, 2012, the Company had $8.7 million and $5.8 million, respectively, of total unrecognized employee compensation cost related to nonvested awards that it expects to recognize over a weighted-average period of 2 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,
	2013	2012	2013	2012
Expected term (in years)	5.4 to 6.1	5.3 to 6.0	5.4 to 6.1	5.3 to 6.0
Volatility	52% to 53%	53%	52% to 53%	53%
Risk-free interest rate	1.4% to 1.5%	0.6% to 0.7%	0.7% to 1.5%	0.6% to 0.8%
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.

Non-Employee Stock-based Compensation

The Company records compensation representing the fair value of stock options granted to non-employees. Non-employee stock-based compensation was $0.4 million and $0.2 million for the three months ended September 30, 2013 and 2012, respectively, and $0.7 million and $0.4 million for the nine months ended September 30, 2013 and 2012, 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.

Stock Option Plan Activity

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, 2012	6,513,508		$	4.39	6.6	$	67,711
Granted	1,412,325		13.34
Exercised	(816,166	)	4.13
Canceled	(339,713	)	9.07
Balance as of September 30, 2013	6,769,954		6.06		6.5	103,805
Vested and expected to vest - September 30, 2013	6,109,405		5.53		6.3	96,911
Exercisable - September 30, 2013	5,406,675		4.19		5.7	82,897

Restricted Stock

The terms and conditions of RSAs, including vesting criteria and timing are set by the board of directors. The cost of RSAs is determined using the fair value of the Company’s common stock on the date of the grant. Compensation cost is recognized on a straight-line basis over the requisite service period of each grant adjusted for estimated forfeitures. Recipients of RSAs generally have voting and dividend rights without regard to vesting. The Company has the right to repurchase shares that do not vest.

During the nine months ended September 30, 2013 and 2012, the Company granted 1,900 and 2,750 shares of restricted stock, respectively, which vested immediately and had no further restrictions or service period, and resulted in compensation expense of $20,000 and $32,000 for the nine months ended September 30, 2013 and 2012, respectively.