Note 10. Share-Based Compensation

A summary of share-based compensation expense recognized in the Company’s consolidated statements of operations is as follows (in thousands):

	Year Ended December, 31
	2017		2016		2015
Cost of revenues	$	3,735	$	3,165	$	2,054
Research and development		9,550		7,296		5,387
Sales and marketing		16,015		10,902		7,200
General and administrative		12,760		9,477		7,447
Total share-based compensation expense	$	42,060	$	30,840	$	22,088

A summary of share-based compensation expense by award type is as follows (in thousands):

	Year Ended December, 31
	2017		2016		2015
Options	$	6,803	$	9,626	$	11,170
Employee stock purchase plan rights		2,177		1,737		1,365
Restricted stock units		33,080		19,477		9,553
Total share-based compensation expense	$	42,060	$	30,840	$	22,088

Equity Incentive Plans

In September 2013, the Board adopted and the Company’s stockholders approved the 2013 Equity Incentive Plan (“2013 Plan”), which became effective on September 26, 2013. In connection with the adoption of the 2013 Plan, the Company terminated the 2010 Equity Incentive Plan (“2010 Plan”), under which stock options had been granted prior to September 26, 2013. The 2010 Plan was established in September 2010, when the 2003 Equity Incentive Plan (“2003 Plan”) was terminated. After the termination of the 2003 and 2010 Plans, no additional options were granted under these plans; however, options previously granted under these plans will continue to be governed by these plans, and will be exercisable into shares of Class B common stock. In addition, options authorized to be granted under the 2003 and 2010 Plans, including forfeitures of previously granted awards are authorized for grant under the 2013 Plan.

A total of 6,200,000 shares of Class A common stock have been reserved for issuance under the 2013 Plan. The 2013 Plan includes an annual increase on the first day of each fiscal year beginning in 2014, equal to the least of: (i) 6,200,000 shares of Class A common stock; (ii) 5% of the outstanding shares of all classes of common stock as of the last day of the Company’s immediately preceding fiscal year; or (iii) such other amount as the board of directors may determine. During the year ended December 31, 2017, a total of 3,719,091 shares of Class A common stock were added to the 2013 Plan in connection with the annual automatic increase provision. As of December 31, 2017, a total of 10,390,944 shares remain available for grant under the 2013 Plan.

The plans permit the grant of stock options and other share-based awards, such as restricted stock units, to employees, officers, directors, and consultants by the board of directors. Option awards are generally granted with an exercise price equal to the fair market value of the Company’s Class A common stock at the date of grant. Option awards generally vest according to a graded vesting schedule based on four years of continuous service. On January 29, 2014, the board of directors approved an amendment to decrease the contractual term of all equity awards issued from the 2013 Plan from 10 years to 7 years for all awards granted after January 29, 2014. Certain option awards provide for accelerated vesting if there is a change in control (as defined in the option agreement) and early exercise of options prior to vesting (subject to the Company’s repurchase right).

A summary of option activity under all of the plans at December 31, 2017 and changes during the periods then ended is presented in the following table:

						Weighted-
	Number of			Weighted-		Average		Aggregate
	Options			Average		Contractual		Intrinsic
	Outstanding			Exercise Price		Term		Value
	(in thousands)			Per Share		(in Years)		(in thousands)
Outstanding at December 31, 2014		9,158		$	8.23		7.2	$	61,367
Granted		1,881			16.35
Exercised		(2,323	)		6.82
Canceled/Forfeited		(668	)		11.42
Outstanding at December 31, 2015		8,048		$	10.27		6.2	$	107,091
Granted		547			16.53
Exercised		(962	)		10.01
Canceled/Forfeited		(249	)		15.50
Outstanding at December 31, 2016		7,384		$	10.59		5.3	$	74,065
Granted		25			23.99
Exercised		(1,722	)		10.39
Canceled/Forfeited		(401	)		16.04
Outstanding at December 31, 2017		5,286		$	10.30		4.2	$	201,480
Vested and expected to vest as of December 31, 2017		5,210		$	10.21		4.2	$	199,000
Exercisable as of December 31, 2017		4,609		$	9.41		4.1	$	179,743

The total intrinsic values of options exercised during the years ended December 31, 2017, 2016, and 2015 were as follows (in thousands):

	Year Ended December 31,
	2017		2016		2015
Total intrinsic value of options exercised	$	41,184	$	10,718	$	28,336

Valuation Assumptions

The Company estimated the fair values of each option awarded on the date of grant using the Black-Scholes-Merton option-pricing model, which requires inputs including the fair value of common stock, expected term, expected volatility, risk-free interest rate, and dividend yield.

Fair Value of Common Stock

The Company uses the daily adjusted closing stock price of its Class A common stock as reported by the New York Stock Exchange.

Expected Term

The expected term represents the period that option awards are expected to be outstanding. Prior to the fourth quarter of 2014, the Company did not have sufficient historical information to develop reasonable expectations about future exercise behavior. Therefore, the expected term for options issued to employees was calculated as the mean of the option vesting period and the contractual term (the “Simplified Method”) as these options were determined to be “plain-vanilla” as defined under current guidance. Beginning with the fourth quarter of 2014, the Company began incorporating its own historical data, assigning a 25% weighting to the Company’s historical data and a 75% weighting to the Simplified Method estimate. As time progressed and the Company generated additional historical data, the weighting of the Company’s historical data has increased while the weighting of the Simplified Method data has decreased. Accordingly, in the fourth quarters of 2016 and 2017, the Company’s historical data was weighted as 75% and 100%, respectively, while the Simplified Method data was weighted as 25% and 0%, respectively. The expected term for options issued to non-employees is the remaining contractual term.

Expected Volatility

The expected stock price volatility of common stock was derived from the historical volatilities of a peer group of similar publicly traded companies over a period that approximates the expected term of the option. Beginning in the fourth quarter of 2014, the Company incorporated its own historical volatility assigning a 25% weighting to the Company’s historical data and a 75% weighting to the historical volatilities of the peer group of similarly publicly traded companies. As time progressed and the Company generated additional historical data, the weighting of the Company’s historical data has increased while the weighting of the peer group data has decreased. Accordingly, in the fourth quarters of 2016 and 2017, the Company’s historical volatility was weighted as 75% and 100%, respectively, while the peer group data was weighted as 25% and 0%, respectively.

Risk-Free Interest Rate

The risk-free interest rate was based on the yield available on U.S. Treasury zero-coupon issues with a term that approximates the expected term of the option.

Expected Dividend Yield

The expected dividend yield was 0% as the Company has not declared, nor paid, and does not expect to pay cash dividends.

The weighted-average assumptions used in the option-pricing model and the resulting grant date fair value of stock options granted in the periods presented were as follows:

	Year ended December 31,
	2017			2016			2015
Expected term for employees (in years)		4.4			4.7			4.8
Expected term for non-employees (in years)		4.6			5.9			7.1
Expected volatility		44	%		47	%		48	%
Risk-free interest rate		1.78	%		1.12	%		1.22	%
Expected dividend yield		0	%		0	%		0	%
Grant date fair value of employee options	$	9.08		$	6.72		$	6.78

As of December 31, 2017 and 2016, there was approximately $3.8 million and $11.0 million of unrecognized share-based compensation expense, net of estimated forfeitures, related to stock option grants, which will be recognized on a straight-line basis over the remaining weighted-average vesting periods of approximately 1.4 years and 2.0 years, respectively.

Employee Stock Purchase Plan

The Employee Stock Purchase Plan (“ESPP”) allows eligible employees to purchase shares of the Company’s Class A common stock at a discounted price, through payroll deductions of up to the lesser of 15% of their eligible compensation or the IRS allowable limit per calendar year. A participant may purchase a maximum of 3,000 shares during an offering period. The offering periods are for a period of six months and generally start on the first trading day on or after May 11th and November 11th of each year. At the end of the offering period, the purchase price is set at the lower of: (i) 90% of the fair value of the Company’s common stock at the beginning of the six month offering period and (ii) 90% of the fair value of the Company’s Class A common stock at the end of the six month offering period.

The ESPP provides for annual increases in the number of shares available for issuance under the ESPP on the first day of each fiscal year beginning in fiscal 2014, equal to the least of: (i) 1% of the outstanding shares of all classes of common stock on the last day of the immediately preceding year; (ii) 1,250,000 shares; or (iii) such other amount as may be determined by the board of directors. During the year ended December 31, 2017, a total of 743,818 shares of Class A common stock were added to the ESPP Plan in connection with the annual increase provision. At December 31, 2017, a total of 2,719,701 shares were available for issuance under the ESPP.

The weighted-average assumptions used to value ESPP rights under the Black-Scholes-Merton option-pricing model and the resulting offering grant date fair value of ESPP rights granted in the periods presented were as follows:

	Year ended December 31,
	2017			2016			2015
Expected term (in years)		0.5			0.5			0.5
Expected volatility		34	%		41	%		42	%
Risk-free interest rate		1.20	%		0.50	%		0.25	%
Expected dividend yield		0	%		0	%		0	%
Offering grant date fair value of ESPP rights	$	9.52		$	5.29		$	5.05

As of December 31, 2017 and 2016, there was approximately $1.1 million and $0.7 million of unrecognized share-based compensation expense related to outstanding ESPP rights, which will be recognized on a straight-line basis over the remaining weighted average vesting periods of approximately 0.4 years, respectively.

Restricted Stock Units

The 2013 Plan provides for the issuance of RSUs to employees and consultants. RSUs issued under the 2013 Plan generally vest over four years. A summary of activity of RSUs under the 2013 Plan at December 31, 2017 and changes during the periods then ended is presented in the following table:

	Number of			Weighted-		Aggregate
	RSUs			Average		Intrinsic
	Outstanding			Grant Date Fair		Value
	(in thousands)			Value Per Share		(in thousands)
Outstanding at December 31, 2014		1,739		$	14.87	$	25,617
Granted		1,365			18.09
Released		(571	)		15.45
Canceled/Forfeited		(245	)		15.10
Outstanding at December 31, 2015		2,288		$	16.63	$	53,972
Granted		2,798			18.65
Released		(1,096	)		16.77
Canceled/Forfeited		(436	)		17.92
Outstanding at December 31, 2016		3,554		$	18.01	$	73,261
Granted		3,005			30.20
Released		(1,680	)		19.54
Canceled/Forfeited		(598	)		20.91
Outstanding at December 31, 2017		4,281		$	25.51	$	207,197

As of December 31, 2017 and 2016, there was a total of $79.1 million and $46.9 million of unrecognized share-based compensation expense, net of estimated forfeitures, related to RSUs, which will be recognized on a straight-line basis over the remaining weighted-average vesting periods of approximately 2.7 years and 2.8 years, respectively.