13. Stock-based Compensation

Equity Incentive Plan

In 2010, the Company adopted its 2010 Stock Incentive Plan (the “2010 Plan”) which provided for the granting of stock options to employees, directors and consultants of the Company. Options granted under the 2010 Plan were either incentive stock options (“ISOs”) or nonqualified stock options (“NSOs”).

In February 2012, the Company adopted its 2011 Stock Incentive Plan (the “2011 Plan”). The 2011 Plan is divided into two separate equity programs, an option and stock appreciation rights grant program and a stock award program. In conjunction with adopting the 2011 Plan, the Company discontinued the 2010 Plan and released the shares reserved and still available under that plan.

In connection with the consummation of the IPO in October 2015, the board of directors adopted the Company’s 2015 Equity Incentive Plan (the “2015 Plan” and collectively with the 2010 Plan and 2011 Plan, the “Plans”). In conjunction with adopting the 2015 Plan, the Company discontinued the 2011 Plan with respect to new equity awards.

The initial number of shares of common stock available for future issuance under the 2015 Plan was 2,444,735. Beginning on January 1, 2016 and continuing until the expiration of the 2015 Plan, the total number of shares of common stock available for issuance under the 2015 Plan will automatically increase annually on January 1 by 4% of the total number of issued and outstanding shares of common stock as of January 1 of the same year. As of December 31, 2017, 2,324,793 shares of common stock were available for future issuance under the 2015 Plan.

Stock Options

Options under the 2015 Plan may be granted for periods of up to ten years. All options issued to date have had a 10-year life. Under the terms of the 2015 Plan, options may be granted at an exercise price not less than the estimated fair value of the shares on the date of grant, as determined by the Company’s board of directors. For employees holding more than 10% of the voting rights of all classes of stock, the exercise price of ISOs and NSOs may not be less than 110% of the estimated fair value of the shares on the date of grant, as determined by the board of directors. To date, options granted generally vest over four years and vest at a rate of 25% upon the first anniversary of the issuance date and 1/48th per month thereafter.

Activity under the Company’s stock option plans is set forth below:

							Options Outstanding
	Options Available for Grant			Number of Options			Weighted- Average Exercise Price Per Share		Weighted- Average Remaining Contractual Life (years)		Aggregate Intrinsic Value
											(in thousands)
Balances at December 31, 2014		1,896,617			2,147,872		$	1.197
Options authorized		3,801,597			—			—
Options granted		(3,309,708	)		3,309,708			5.174
Options exercised		—			(173,929	)		1.507
Options forfeited		12,900			(12,900	)		1.405
Balances at December 31, 2015		2,401,406			5,270,751			1.197
Options authorized		1,441,328			—			—
Options granted		(1,367,546	)		1,356,546			13.234
Options exercised		—			(414,396	)		1.549
Options forfeited		18,000			(54,155	)		4.578
Balances at December 31, 2016		2,493,188			6,158,746			3.694
Options authorized		1,459,606			—			—
Options granted		(2,138,620	)		2,138,620			13.566
Options exercised		—			(764,576	)		4.140
Options forfeited		510,619			(1,029,332	)		9.118
Balances at December 31, 2017		2,324,793			6,503,458			8.157		7.2	$	84,243
Options Exercisable—December 31, 2017					3,727,754			5.509		6.2	$	58,159
Options vested and expected to vest—December 31, 2017					6,503,458			8.157		7.2	$	84,243

The aggregate intrinsic values of options outstanding, exercisable, vested and expected to vest were calculated as the difference between the exercise price of the options and the estimated fair value of the underlying common stock as of December 31, 2017, 2016 and 2015, respectively.

The aggregate intrinsic value of stock options exercised in the years ended December 31, 2017, 2016 and 2015 was $10.5 million, $4.6 million and $2.3 million, respectively.

The options granted in the years ended December 31, 2017, 2016 and 2016 had a weighted-average per share grant-date fair value of $8.207, $8.936, and $7.169, respectively. At December 31, 2017, the unrecognized compensation expense with respect to options granted to employees was $22.3 million, and is expected to be recognized over 2.4 years.

Early Exercise of Employee Options

Certain stock options granted under the Plans provide option holders the right to elect to exercise unvested options in exchange for restricted common stock. Such unvested restricted shares are subject to a repurchase right held by the Company at the original issuance price in the event the optionee’s service to the Company is terminated either voluntarily or involuntarily. The right usually lapses 25% on the first anniversary of the vesting start date and in 36 equal monthly amounts thereafter. These repurchase terms are considered to be a forfeiture provision. The cash or full recourse notes received from employees for exercise of unvested options is treated as a refundable deposit and is classified as a liability on the balance sheets.

Employee Stock Purchase Plan

Concurrent with the completion of the IPO in October 2015, the Company’s Employee Stock Purchase Plan (“ESPP”) became effective. The ESPP allows eligible employees to purchase shares of the Company’s common stock at a discount through payroll deductions of up to 15% of their eligible compensation, subject to any plan limitations. The ESPP generally provides for six-month offering periods, and at the end of each offering period, employees are able to purchase shares at 85% of the lower of the fair market value of the Company’s common stock on the first trading day of the offering period or on the last trading day of the offering period. We issued 67,746 shares and 31,564 shares of common stock under the ESPP in 2017 and 2016, respectively.

Shares available for future purchase under the ESPP were 980,389 at December 31, 2017. The compensation expense related to the ESPP was $247,000, $145,000 and $0 for the years ended December 31, 2017, 2016 and 2015, respectively. As of December 31, 2017 and 2016, there was $123,000 and $113,000, respectively, of unrecognized compensation cost related to the ESPP, which we expect to recognize over 5 months.

Stock Based Compensation

Total stock-based compensation recorded related to options granted to employees and non-employees and employee stock purchase plan was as follows (in thousands):

	Year Ended December 31,
	2017		2016		2015
Research and development	$	5,161	$	4,925	$	1,972
General and administrative		6,126		5,170		2,014
Total stock-based compensation expense	$	11,287	$	10,095	$	3,986

Stock-based compensation expense for employees was $11.0 million, $9.4 million and $3.2 million for the years ended December 31, 2017, 2016 and 2015, respectively.

Stock-based compensation expense related to stock options granted to non-employees is recognized as the stock options are earned. The Company determined that the estimated fair value of the stock options is more readily measurable than the fair value of the services received. The fair value of stock options granted to non-employees is calculated at each grant date and re-measured at each reporting date using the Black-Scholes option pricing model. The stock-based compensation expense related to a grant will fluctuate as the estimated fair value of the common stock fluctuates over the period from the grant date to the vesting date.

Stock-based compensation expense for non-employees was $0.3 million, $0.9 million and $0.8 million for the years ended December 31, 2017, 2016 and 2015, respectively.

The Company estimated the fair value of employee stock options and ESPP using the Black-Scholes valuation model based on the date of grant with the following assumptions:

	Options			ESPP
	Year Ended December 31,			Year Ended December 31,
	2017	2016	2015	2017	2016
Expected volatility	69.1%-72.4%	76.4% – 83.5%	62.9% – 68.9%	52.3%-63.8%	50.4% – 75.6%
Risk-free interest rate	1.7%-2.2%	1.2% – 2.1%	1.4% – 1.9%	1.1%-1.5%	0.5% – 0.6%
Dividend yield	— %	— %	— %	— %	— %
Expected term (in years)	4.9-5.3	5.3 – 5.9	5.2 – 7.2	0.5	0.5

Expected Term. The expected term of stock options represents the period that the stock options are expected to remain outstanding and is based on vesting terms, exercise term and contractual lives of the options. The expected term of the ESPP shares is equal to the six-month look-back period.

Expected Volatility. The expected stock price volatility for the Company’s stock options was derived from the average historical volatilities of the Company’s stock price and the stock price of several comparable publicly traded companies within the biotechnology and pharmaceutical industry. The Company will continue to apply this process until a sufficient amount of historical information on the Company’s own stock price becomes available. Volatility for ESPP shares is equal to our historical volatility over the six-month look-back period.

Risk-Free Interest Rate. The risk-free interest rate is based on the U.S. Treasury whose term was consistent with expected term of the Company’s stock options.

Dividend Rate. The expected dividend was assumed to be zero as the Company has never paid dividends and has no current plans to do so.