11. Share-Based Payments

2009 Stock Incentive Plan

The Company maintains the Eleven Biotherapeutics, Inc. 2009 Stock Incentive Plan (the “2009 Plan”), as amended and restated, for employees, directors, consultants, and advisors to the Company. Upon the closing of the Company’s IPO in February 2014, the Company ceased granting stock incentive awards under the 2009 Plan. The 2009 Plan provided for the grant of incentive and non-qualified stock options and restricted stock grants as determined by the Board of Directors. Under the 2009 Plan, stock options could not be granted at less than fair value on the date of the grant. Furthermore, the exercise price of ISOs granted to an employee, who, at the time of grant, is a 10% shareholder, could not be less than 110% of the fair value on the date of grant.

Terms of stock option agreements, including vesting requirements, are determined by the Board of Directors, subject to the provisions of the 2009 Plan. Options and restricted stock awards granted by the Company generally vest ratably over four years, with a one-year cliff for new employee awards, and are exercisable from the date of grant for a period of ten years. Restricted stock issuances and early exercises of stock options are subject to the Company’s right of repurchase at the original issuance price, which right lapses over the vesting period of the stock. For options and restricted stock awards granted to date, the exercise price equaled the estimated fair value of the common stock as determined by the Board of Directors on the date of grant.

2014 Stock Incentive Plan

In December 2013, the Company’s 2014 Stock Incentive Plan (the “2014 Plan”) was adopted by the Board of Directors and was approved by the Company’s stockholders in January 2014. The 2014 Plan became effective immediately prior to the closing of the Company’s IPO in February 2014. The 2014 Plan provides for the grant of incentive stock options, nonstatutory stock options, restricted stock awards, restricted stock units, stock appreciation rights and other stock-based awards. The number of shares of the Company’s common stock reserved for issuance under the 2014 Plan is the sum of (1) 708,661 shares, plus (2) the number of shares (up to 1,347,821 shares) equal to (x) 1,586 shares (representing the number of shares reserved for issuance under the 2009 Plan that remained available for future issuance as of the effectiveness of the 2014 Plan) and (y) the number of shares of the Company’s common stock subject to outstanding awards under the Company’s 2009 Plan that expire, terminate or are otherwise surrendered, cancelled, forfeited or repurchased without having been fully exercised or resulting in any common stock being issued, plus (3) an annual increase, to be added on the first day of each fiscal year, equal to the lowest of 1,102,362 shares of the Company’s common stock, 4% of the number of shares of the Company’s common stock outstanding on the first day of the applicable fiscal year and an amount determined by the Company’s board of directors.

A summary of the Company’s stock option activity and related information follows:


	Shares			Weighted-Average Exercise Price		Remaining Contractual Life (in years)
Outstanding at December 31, 2013		1,346,238		$	3.39		8.59
Granted		221,408			14.14
Exercised		(78,496	)		0.80
Cancelled or forfeited		(50,622	)		10.83

Outstanding at December 31, 2014		1,438,528		$	4.93		7.86

Exercisable at December 31, 2014		659,919		$	3.58		7.57

Vested and expected to vest at December 31, 2014(1)		1,180,696		$	5.44		8.08

(1)	Represents the number of vested options, plus the number of unvested options expected to vest.

The total intrinsic value of options vested and expected to vest as of December 31, 2014 was $8.0 million. The total intrinsic value of options exercised for the years ended December 31, 2014, 2013 and 2012 was $921,000, $170,000 and $29,000, respectively. The total fair value of employee options vested for the years ended December 31, 2014, 2013 and 2012 was $1.3 million, $40,000 and $9,000, respectively.

Restricted Stock

From time to time, upon approval by the Board of Directors, certain employees and advisors have been granted restricted shares of common stock. These shares of restricted stock are subject to repurchase rights. Accordingly, the Company has recorded the proceeds from the issuance of restricted stock as a liability in the balance sheets. The restricted stock liability is reclassified into stockholders’ (deficit) equity as the restricted stock vests. A summary of the status of unvested restricted stock as of December 31, 2014 and 2013, and changes during the year ended December 31, 2014 are presented below:


	Restricted Stock			Weighted-Average Grant Date Fair Value
Unvested at December 31, 2013		163,353		$	0.06
Granted		73,879			11.44
Vested		(112,205	)		1.62

Unvested at December 31, 2014		125,027		$	5.39

The Company issued 3,000 shares of restricted stock to non-employees during the year ended December 31, 2014. No restricted stock was granted to non-employees during the year ended December 31, 2013. The Company granted 2,755 shares of restricted stock to non-employees during the year ended December 31, 2012 at a purchase price of $0.06 per share. The non-employee restricted stock is revalued as it vests. There were 1,000 shares of non-employee unvested restricted stock outstanding at December 31, 2014. The expense related to the restricted stock granted to non-employees for the years ended December 31, 2014, 2013 and 2012 was $58,000, $481,000 and $71,000, respectively.

Performance-Based Stock Options

The Company has granted stock options to the founders of the Company, which contain both performance-based and service-based vesting criteria. Milestone events are specific to the Company’s corporate goals, including but not limited to certain preclinical and clinical development milestones related to the Company’s product candidates. Stock-based compensation expense associated with these performance-based stock options is recognized if the performance condition is considered probable of achievement using management’s best estimates. During the years ended December 31, 2014 and 2013, management determined that a performance-based milestone was achieved and recorded stock-based compensation expense of $293,000 and $106,000, respectively. There was no expense recorded for milestone based vesting awards during the year ended December 31, 2012. The remaining milestones were not deemed to be probable of achievement as of December 31, 2014. As of December 31, 2014, unrecognized compensation expense related to performance based awards was $2.1 million.

Stock-Based Compensation Expense

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


	Year Ended December 31,
	2014	2013	2012
Risk-free interest rate	1.67-2.02%	1.09-2.07%	0.57-0.95%
Expected dividend yield	—	—	—
Expected term (in years)	5.75-6	6	6
Expected volatility	60.00-69.58%	72.13-77.80%	70.48-70.80%

Volatility

Since the Company was privately held as of the date of these financial statements, it does not have relevant historical data to support its expected volatility. As such, the Company has used a weighted-average of expected volatility based on the volatilities of a representative group of publicly traded biopharmaceutical companies. For purposes of identifying representative companies, the Company considered characteristics such as stage of development and area of therapeutic focus. The expected volatility has been determined using a weighted-average of the historical volatilities of the representative group of companies for a period equal to the expected term of the option grant. The Company intends to continue to consistently apply this process using the same similar entities until a sufficient amount of historical information regarding the volatility of the Company’s own share price becomes available or until circumstances change, such that the identified entities are no longer representative companies. In the latter case, more suitable, similar entities whose share prices are publicly available would be utilized in the calculation.

Risk-Free Rate

The risk-free rate is based on the yield curve of U.S. Treasury securities with periods commensurate with the expected term of the options being valued.

Expected Term

The Company uses the “simplified method” to estimate the expected term of stock option grants. Under this approach, the weighted-average expected life is presumed to be the average of the contractual term (ten years) and the vesting term (generally four years) of the Company’s stock options, taking into consideration multiple vesting tranches. The Company utilizes this method due to lack of historical exercise data and the plain-vanilla nature of the Company’s share-based awards.

Dividends

The Company has never paid, and does not anticipate paying, any cash dividends in the foreseeable future, and therefore uses an expected dividend yield of zero in the option-pricing model.

Forfeitures

The Company is also required to estimate forfeitures at the time of grant, and revise those estimates in subsequent periods if actual forfeitures differ from its estimates. The Company uses historical data to estimate pre-vesting option forfeitures and record stock-based compensation expense only for those awards that are expected to vest. To the extent that actual forfeitures differ from the Company’s estimates, the difference is recorded as a cumulative adjustment in the period the estimates are revised. Stock-based compensation expense recognized in the financial statements is based on awards that are ultimately expected to vest.

Using the Black-Scholes option-pricing model, the weighted-average per share grant date fair values of options granted to employees in 2014, 2013 and 2012 were $8.68, $4.07 and $0.45, respectively. The expense related to the options granted to employees for the years ended December 31, 2014, 2013 and 2012 were $1.6 million, $187,000 and $14,000, respectively.

The Company did not grant stock options to non-employees during the year ended December 31, 2014. The Company granted 231,968 and 31,496 stock options to non-employees during the years ended December 31, 2013 and 2012, respectively, with weighted-average exercise prices of $ $1.77 and $0.76 per share, respectively. The fair value of each non-employee stock option granted is estimated using the Black-Scholes option-pricing model based on assumptions noted in the following table:


	Year Ended December 31,
	2014	2013	2012
Risk-free interest rate	1.67-2.04%	1.82-2.99%	1.60-2.19%
Expected dividend yield	0.00%	0.00%	0.00%
Expected option life (years)	10	10	10
Expected stock price volatility	57.65-80.98%	76.28-78.14%	75.51-78.29%

The total number of non-employee stock options outstanding at December 31, 2014 was 434,403. The non-employee stock options are revalued as they vest. The Company calculated the value of the stock options using the Black-Scholes option-pricing model. The expense related to the options granted to non-employees for the years ended December 31, 2014, 2013 and 2012 were $504,000, $486,000 and $45,000, respectively.

At December 31, 2014, there was $2.7 million of total unrecognized compensation cost related to non-vested stock options and unvested restricted stock with service-based vesting provisions, which is expected to be recognized over a weighted-average period of 2.54 years.