8. Equity Incentive Plans

In July 2003, we adopted the 2003 Equity Incentive Plan. Concurrent with the effectiveness of our registration statement on Form S-1 on June 28, 2010, we adopted the 2010 Equity Incentive Plan (the Plan) and all remaining common shares reserved for future grant or issuance under the 2003 Equity Incentive Plan were added to the 2010 Equity Incentive Plan. The Plan provides for the granting of stock options, RSUs and stock purchase rights to our employees, directors and consultants. Options granted under the Plan may be either incentive options or nonqualified stock options. Incentive stock options may be granted only to our employees including officers and directors. Nonqualified stock options and stock purchase rights may be granted to our employees and consultants. Generally, our stock options and RSUs vest over four years and are exercisable over a period not to exceed the contractual term of ten years from the date the stock options are granted. Continued vesting typically terminates when the employment or consulting relationship ends. As of December 31, 2013, 23,318,526 shares of common stock were reserved for issuance under the Plan.

The following table summarizes stock option and RSU activity under the Plan:


				Outstanding Stock Options					Outstanding RSUs
	Shares Available for Grant			Number of Options			Weighted Average Exercise Price		Number of RSUs			Weighted Average Grant Date Fair Value
Balance, December 31, 2010		9,407,975			13,738,122		$	8.62		—		$	—
Additional options reserved		3,796,342			—			—		—			—
Granted		(4,011,973	)		4,011,973			27.49		—			—
Exercised		—			(1,216,669	)		5.41		—			—
Cancelled		726,763			(726,763	)		15.26		—			—

Balance, December 31, 2011		9,919,107			15,806,663			13.35		—			—
Additional options reserved		1,064,046			—			—		—			—
Granted		(11,854,941	)		11,854,941			31.18		—			—
Exercised					(1,312,439	)		12.52		—			—
Cancelled		1,341,319			(1,341,389	)		25.51		—			—

Balance, December 31, 2012		469,531			25,007,776			21.20		—			—
Additional options reserved		3,426,428			—					—			—
Granted		(3,345,899	)		2,643,821			74.17		702,078			155.51
Exercised		—			(3,852,673	)		21.42		—			—
Cancelled		1,170,445			(1,157,982	)		36.47		(12,463	)		154.92
Released		—			—			—		(12,031	)		160.98

Balance, December 31, 2013		1,720,505			22,640,942		$	26.70		677,584		$	155.41

In addition to stock options issued from the Plan, there were 33,333 stock options as of December 31, 2011, that we had previously granted to non-employees outside of the Plan. These outstanding non-employee options had a weighted average exercise price of $1.80 as of December 31, 2011. During the year ended December 31, 2012, these stock options were fully exercised.

Additional information regarding all stock options outstanding and exercisable as of December 31, 2013 is summarized below:


	Options Outstanding						Options Exercisable
Range of Exercise Price	Number		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (in years)		Number		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (in years)
$0.15 - $6.15		523,182	$	3.16				516,728	$	3.16
$6.63 - $6.63		7,096,725		6.63				7,093,020		6.63
$9.96 - $28.35		2,266,058		22.08				1,302,499		19.70
$28.43 - $31.07		2,136,721		29.48				864,050		29.24
$31.07 - $31.07		5,715,734		31.17				91,541		31.17
$31.49 - $34.00		2,288,998		32.07				707,052		31.98
$34.57 - $141.60		2,266,350		60.57				127,674		45.62
$144.70 - $147.38		252,945		147.31				11,542		147.38
$160.70 - $160.70		18,975		160.70				—		—
$179.72 - $179.72		75,254		179.72				—		—

		22,640,942		26.70		6.37		10,714,106		12.37		4.01

Additional information regarding all stock options outstanding and exercisable as of December 31, 2012 is summarized below:


	Options Outstanding						Options Exercisable
Range of Exercise Price	Number		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (in years)		Number		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (in years)
$0.15 - $6.15		1,037,664	$	3.08				924,801	$	2.98
$6.63 - $6.63		7,475,413		6.63				6,456,263		6.63
$9.96 - $25.27		2,682,735		19.00				1,446,362		17.98
$27.25 - $29.12		2,522,885		28.18				801,246		28.30
$29.25 - $31.07		1,680,276		30.14				158,300		30.36
$31.17 - $31.17		5,865,560		31.17				19,524		31.17
$31.49 - $33.15		2,686,684		31.80				318,914		31.51
$33.22 - $34.00		390,314		33.29				103,184		33.22
$34.57 - $34.57		475,275		34.57				1,750		34.57
$36.01 - $36.01		190,970		36.01				1,549		36.01

		25,007,776		21.20		6.99		10,231,893		11.07		5.35

The aggregate intrinsic value represents the total pretax intrinsic value (i.e., the difference between our common stock price and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options. The aggregate intrinsic value of options outstanding as of December 31, 2013 and 2012 was $2.80 billion and $317.7 million, respectively. The intrinsic value of options exercisable was $1.48 billion and $233.3 million, and the intrinsic value of options vested and expected to vest was $2.80 billion and $280.7 million as of December 31, 2013 and 2012, respectively. The total intrinsic value of options exercised was $294.0 million and $35.1 million for the years ended December 31, 2013 and 2012, respectively. The aggregate intrinsic value of RSUs outstanding as of December 31, 2013 was $101.9 million.

Fair Value Adoption

We utilize the fair value method in recognizing stock-based compensation expense. Under the fair value method, we estimated the fair value of each option award and the ESPP on the grant date generally using the Black-Scholes option pricing model and the weighted average assumptions noted in the following table.


	Year Ended December 31,
	2013			2012			2011
Risk-free interest rate:
Stock options		1.3	%		1.0	%		2.0	%
ESPP		0.1	%		0.2	%		0.2	%
Expected term (in years):
Stock options		6.1			5.9			6.0
ESPP		0.5			0.5			0.5
Expected volatility:
Stock options		57	%		63	%		70	%
ESPP		43	%		51	%		59	%
Dividend yield:
Stock options		0.0	%		0.0	%		0.0	%
ESPP		0.0	%		0.0	%		0.0	%

The weighted-average grant-date fair value for option awards granted during the years ended December 31, 2013, 2012 and 2011 was $40.72, $16.37 and $17.43 per share, respectively. The weighted-average grant-date fair value for ESPP granted during the years ended December 31, 2013, 2012 and 2011 was $19.22, $8.99 and $7.52 per share, respectively. The fair value of RSUs is measured on the grant date based on the closing fair market value of our common stock.

Performance-Based Stock Options

In December 2009, our Board of Directors approved an option grant to our CEO representing 4% of our fully-diluted share base prior to such grant as of the grant date, or 3,355,986 stock options, with 1/4th of the shares vesting immediately, and 1/36th of the remaining shares scheduled to vest each month over three years, assuming continued employment through each vesting date in recognition of his and our company’s achievements and to create incentives for future success. In addition, to create incentives for the attainment of clear performance objectives around a key element of our business plan— the successful launch and commercialization of Model S—the Board of Directors approved an additional option grant to our CEO totaling an additional 4% of our fully-diluted shares prior to such grant as of the grant date, or 3,355,986 stock options, with a vesting schedule based entirely on the attainment of performance objectives as follows, assuming our CEO’s continued employment and service to us through each vesting date:

•

1/4th of the shares subject to the option are scheduled to vest upon the successful completion of Model S Engineering Prototype;

•

1/4th of the shares subject to the option are scheduled to vest upon the successful completion of Model S Validation Prototype;

•

1/4th of the shares subject to the option are scheduled to vest upon the completion of the first Model S Production Vehicle; and

•

1/4th of the shares subject to the option are scheduled to vest upon the completion of the 10,000th Model S Production Vehicle.

Through December 31, 2013, all performance milestones were achieved. Stock-based compensation expense related to this grant to our CEO was $0.4 million, $4.2 million and $6.3 million for the years ended December 31, 2013, 2012 and 2011, respectively.

Our Board of Directors also approved option grants in June and September 2010 to purchase our common stock of 666,300 and 20,000, respectively, to various members of our senior management with a vesting schedule based entirely on the attainment of the same performance objectives as those outlined for our CEO above. During the years ended December 31, 2013, 2012 and 2011, we recognized $0.8 million, $1.4 million and $4.9 million, respectively, of stock-based compensation expense related to the attainment of these performance objectives.

In August 2012, our Board of Directors granted 5,274,901 stock options to our CEO (2012 CEO Grant). The 2012 CEO Grant consists of ten vesting tranches with a vesting schedule based entirely on the attainment of both performance conditions and market conditions, assuming continued employment and service to us through each vesting date.

Each of the vesting tranches requires a combination of one of the ten pre-determined performance milestones outlined below and an incremental increase in our market capitalization of $4.0 billion, as compared to the initial market capitalization of $3.2 billion measured at the time of the 2012 CEO Grant.

•

Successful completion of the Model X Engineering Prototype (Alpha);

•

Successful completion of the Model X Vehicle Prototype (Beta);

•

Completion of the first Model X Production Vehicle;

•

Successful completion of the Gen III Engineering Prototype (Alpha);

•

Successful completion of the Gen III Vehicle Prototype (Beta);

•

Completion of the first Gen III Production Vehicle;

•

Gross margin of 30% or more for four consecutive quarters;

•

Aggregate vehicle production of 100,000 vehicles;

•

Aggregate vehicle production of 200,000 vehicles; and

•

Aggregate vehicle production of 300,000 vehicles.

The term of the 2012 CEO Grant is ten years, so any tranches that remain unvested at the expiration of the 2012 CEO Grant will be forfeited. In addition, unvested options will be forfeited if our CEO is no longer in that role, whether for cause or otherwise. Based on our current market valuation, we believe that the first two tranches of the 2012 CEO Grant (for successful completion of the Alpha and Beta Model X Prototypes) will vest during 2014.

We measured the fair value of the 2012 CEO Grant using a Monte Carlo simulation approach with the following assumptions: risk-free interest rate of 1.65%, expected term of ten years, expected volatility of 55% and dividend yield of 0%.

Stock-based compensation expense associated with the 2012 CEO Grant is recognized for each pair of performance and market conditions over the longer of the expected achievement period of the performance and market conditions, beginning at the point in time that the relevant performance condition is considered probable of being met.

As of December 31, 2013, the market conditions for three vesting tranches were achieved and the following three performance milestones were considered probable of achievement:

•

Successful completion of the Model X Engineering Prototype (Alpha);

•

Successful completion of the Model X Vehicle Prototype (Beta);

•

Completion of the first Model X Production Vehicle.

None of the stock options granted under the 2012 CEO Grant has vested thus far as the performance milestones have not yet been achieved as of December 31, 2013. However, as the above three performance milestones were considered probable of achievement, we recorded stock-based compensation expense of $14.5 million and $1.3 million for the years ended December 31, 2013 and 2012, respectively.

Additionally, no cash compensation has been received by our CEO for his services to the company.

Summary Stock Based Compensation Information

The following table summarizes the stock-based compensation expense by line item in the consolidated statements of operations (in thousands):


	Year Ended December 31,
	2013		2012		2011
Cost of sales	$	9,071	$	2,194	$	670
Research and development		35,494		26,580		13,377
Selling, general and administrative		39,090		21,371		15,372

Total	$	83,655	$	50,145	$	29,419

We realized no income tax benefit from stock option exercises in each of the periods presented due to recurring losses and valuation allowances. As required, we present excess tax benefits from the exercise of stock options, if any, as financing cash flows rather than operating cash flows.

As of December 31, 2013, we had $227.3 million of total unrecognized compensation expense, net, of estimated forfeitures, that will be recognized over a weighted-average period of 5.2 years.

Employee Stock Purchase Plan

Employees are eligible to purchase common stock through payroll deductions of up to 15% of their eligible compensation, subject to any plan limitations. The purchase price of the shares on each purchase date is equal to 85% of the lower of the fair market value of our common stock on the first and last trading days of each six-month offering period. During the years ended December 31, 2013 and 2012, 518,743 and 373,526 shares were issued under the ESPP for $13.8 million and $8.4 million, respectively. A total of 3,615,749 shares of common stock have been reserved for issuance under the ESPP, and there were 2,500,022 shares available for issuance under the ESPP as of December 31, 2013.