Fair Value of Financial Instruments

9 Months Ended

Sep. 30, 2017

The Company’s financial instruments consist of cash and cash equivalents, short-term investments, accrued revenue, restricted cash, accounts payable, certain accrued liabilities, and redeemable convertible preferred stock. The fair value of the Company’s financial instruments approximates their recorded values due to their short period to maturity. Fair value is defined as the exchange price that would be received for an asset or an exit price paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The current accounting guidance for fair value measurements defines a three-level valuation hierarchy for disclosures as follows:

Level I—Unadjusted quoted prices in active markets for identical assets or liabilities.

Level II—Inputs other than quoted prices included within Level I that are observable, unadjusted quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.

Level III—Unobservable inputs that are supported by little or no market activity, requiring the Company to develop its own assumptions.

The categorization of a financial instrument within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The Company’s financial instruments consist of Level I and Level II assets and liabilities. Level I assets include highly liquid money market funds that are included in cash and cash equivalents and Level II assets include certificates of deposit that are included as short-term investments, interest rate lock commitments ("IRLCs") and forward sales commitments, included in other current assets and other current liabilities. The certificates of deposit are measured by observable market data for substantially the full term of the assets or liabilities.

Interest rate lock commitments and forward sales commitments are measured by observable marketplace prices. The Company’s redeemable convertible preferred stock was categorized as Level III. Redeemable convertible preferred stock was valued at each reporting date, through March 31, 2017, based on unobservable inputs and management’s judgment due to the absence of quoted market prices, inherent lack of liquidity and the long-term nature of such financial instruments. For further description of the valuation methodology of the redeemable convertible preferred stock, please see Note 2 to the Company's consolidated financial statements in the Prospectus.

Changes in the fair value of redeemable convertible preferred stock were recognized as accretion expense (income) and included as an adjustment to net loss to arrive at net income (loss) attributable to common stock on the condensed consolidated statements of operations. Summary of changes in fair value are reflected in the condensed consolidated balance sheets, condensed consolidated statements of changes in redeemable convertible preferred stock and stockholders' deficit, and Note 6. The Company used the value of the common stock at the IPO price of $15.00 per share to determine the accretion amount for the three months ended September 30, 2017.

Significant unobservable inputs used in the determination of fair value of the Company’s redeemable convertible preferred stock, when outstanding, included the following:



	Three Months Ended September 30,		Nine Months Ended September 30,
	2016	2017	2016	2017

Valuation methodology:
Income approach (private company)	15.0%	N/A	15.0%	12.5%
Market approach (private company)	15.0%	N/A	15.0%	12.5%
PWERM (IPO)	52.5%	N/A	52.5%	60.0%
PWERM (M&A)	17.5%	N/A	17.5%	15.0%
IPO revenue multiple	3.25x-3.5x	N/A	3.0x-4.5x	2.8x-3.0x
Forecasted revenue growth rate	28.0%-40.0%	N/A	28.0%-40.9%	31.1%-40.0%
Discount rate	20.0%-25.0%	N/A	20.0%-25.0%	20.0%

A summary of assets, liabilities, and mezzanine equity at December 31, 2016 and September 30, 2017, related to our financial instruments, measured at fair value on a recurring basis, is set forth below:



		Fair Value
Financial Instrument	Fair Value Hierarchy	December 31,		September 30,
Financial Instrument		December 31,		September 30,
		2016		2017

Money market funds (included in cash and cash equivalents)	Level I	46,357		191,738
Certificates of deposit (included in short-term investments)	Level II	1,749		1,258
Interest rate lock commitments	Level II	—		6
Forward loan commitments	Level II	—		(2	)
Redeemable convertible preferred stock (mezzanine equity)	Level III	(655,416	)	—

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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