Convertible Preferred Stock, Common Stock and Stockholders' Deficit

12 Months Ended

Dec. 31, 2012

Convertible Preferred Stock, Common Stock and Stockholders' Deficit

10. Convertible Preferred Stock, Common Stock and Stockholders’ Deficit

Reverse stock split

On September 7, 2012, our board of directors approved a one-for-two reverse stock split of our common stock. The accompanying financial statements and notes to the financial statements give retroactive effect to the reverse split of our common stock for all periods presented.

Convertible Preferred Stock

Prior to the conversion in the initial public offering in October 2012, our convertible preferred stock was classified as temporary equity on the accompanying balance sheets instead of in stockholders’ equity (deficit) in accordance with authoritative guidance for the classification and measurement of redeemable securities. Upon certain change in control events that are outside of our control, including liquidation, sale or transfer of control of the Company, holders of the convertible preferred stock can cause its redemption.

Prior to our initial public offering, we were authorized to issue 27,500,000 shares of convertible preferred stock, of which 25,000,000 and 2,500,000 of the authorized shares are designated for the Convertible Series A Preferred Stock (“Series A Preferred Stock”) and the Convertible Series B Preferred Stock (“Series B Preferred Stock”), respectively. As of December 31, 2011, the number of outstanding shares of the Series A Preferred Stock and the Series B Preferred Stock was 24,900,000 and 2,499,999, respectively. As of December 31, 2012, all Series A Preferred Stock and Series B Preferred Stock had converted to common stock in conjunction with the initial public offering. Following our initial public offering, we filed an amended and restated certificate of incorporation to authorize 10,000,000 shares of undesignated preferred stock.

Series A Convertible Preferred Stock

In January 2009, we issued 14,900,000 shares of Series A Preferred Stock to Alnylam and Isis as part of our legal conversion from a limited liability company, or LLC, to a corporation. At the time of conversion, the number of shares issued to, and subsequent ownership by, Alnylam and Isis reflected their respective ownership percentages in the LLC.

In March 2009, we issued 10,000,000 shares of Series A Preferred Stock for proceeds of $20.0 million. Alnylam and Isis were the sole and equal investors in this financing.

Series B Convertible Preferred Stock

In October 2010, as part of the strategic alliance with Sanofi, we issued 2,499,999 shares of Series B Preferred Stock to Aventis Holdings, Inc., or Aventis, for proceeds of $10.0 million.

Common Stock

As of December 31, 2012, there were 35,831,808 shares of common stock outstanding. Each share of common stock is entitled to one vote. The holders of the common stock are also entitled to receive dividends whenever funds are legally available and when declared by our Board of Directors. Following our initial public offering, we filed an amended and restated certificate of incorporation to authorize 200,000,000 shares of common stock.

Shares Reserved for Future Issuance

The following shares of common stock are reserved for future issuance at December 31, 2012:

Common stock options outstanding	4,661,549
Common stock options available for future grant	946,403
Employee Stock Purchase Plan	150,000
Convertible note payable (Post-IPO GSK Note)	1,366,787
Total common shares reserved for future issuance	7,124,739

The combined total number of shares reserved for issuance under the 2009 Plan and 2012 Plan is 946,403 shares as of December 31, 2012. The following table summarizes our stock option activity under the 2009 Plan and 2012 Plan for the year ended December 31, 2012 (in thousands, except per share and contractual term data):

	Number of options			Weighted average exercise price		Weighted average remaining contractual term (in years)		Aggregate intrinsic value
Options outstanding at December 31, 2011		3,304		$	0.80
Granted		1,910		$	4.07
Exercised		(294	)	$	0.47
Canceled/forfeited/expired		(258	)	$	2.18
Options outstanding at December 31, 2012		4,662		$	2.08		7.89	$	19,665
Vested or expected to vest at December 31, 2012		4,576		$	2.05		7.86	$	19,453
Exercisable at December 31, 2012		2,265		$	0.71		6.44	$	12,668

The weighted average grant date fair value per share of employee stock options granted during the years ended December 31, 2012, 2011 and 2010 was $2.97, $1.14 and $0.26, respectively.

The total intrinsic value of stock options exercised was $0.8 million and $0.2 million during the years ended December 31, 2012 and 2011, respectively. No options were exercised during the year ended December 31, 2010. Cash received from the exercise of stock options was approximately $0.1 million and $0.1 million for the years ended December 31, 2012 and 2011, respectively.

The assumptions used to estimate the fair value of stock options using the Black-Scholes option pricing model were as follows:

	Year ended December 31,
	2012			2011			2010
Employee Stock Options:
Risk-free interest rate		0.9	%		2.3	%		3.0	%
Expected dividend yield		0.0	%		0.0	%		0.0	%
Expected volatility		73.4	%		72.9	%		80.6	%
Expected term (years)		6.1			6.1			6.1

Risk-free interest rate — We base the risk-free interest rate assumption on observed interest rates appropriate for the expected term of the stock option grants.

Expected dividend yield — We base the expected dividend yield assumption on the fact that we have never paid cash dividends and have no present intention to pay cash dividends.

Expected volatility — The expected volatility assumption is based on volatilities of a peer group of similar companies whose share prices are publicly available. The peer group was developed based on companies in the biotechnology industry.

Expected term — The expected term represents the period of time that options are expected to be outstanding. Because we do not have historic exercise behavior, we determine the expected life assumption using the simplified method, which is an average of the contractual term of the option and its ordinary vesting period.

Forfeitures — We reduce stock-based compensation expense for estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

Stock-based compensation is reflected in the statement of operations and comprehensive loss as follows (in thousands):

	Year Ended December 31,
	2012		2011		2010
Research and development	$	912	$	557	$	403
General and administrative		638		268		200
Total	$	1,550	$	825	$	603

The total compensation cost related to non-vested awards not yet recognized was $4.6 million as of December 31, 2012. The weighted-average period over which this expense is expected to be recognized is approximately 1.8 years.

Employee Stock Purchase Plan

In October 2012, we adopted the 2012 Employee Stock Purchase Plan (“2012 Purchase Plan”), which enables participants to contribute up to 15% of such participant’s eligible compensation during a defined rolling six-month periods to purchase our common stock. The purchase price of common stock under the 2012 Purchase Plan will be the lesser of: (i) 85% of the fair market value of our common stock at the inception of the enrollment period or (ii) 85% of the fair market value of our common stock at the applicable purchase date. As of December 31, 2012 a maximum of 150,000 shares of our common stock were reserved for future issuance and have been authorized for purchase under the 2012 Purchase Plan.