11. Stock-Based Compensation

As of December 31, 2017, we maintained three stock-based employee compensation plans: the Gogo Inc. 2016 Omnibus Incentive Plan (the “2016 Omnibus Plan”), the Gogo Inc. 2013 Omnibus Incentive Plan (the “2013 Omnibus Plan”), and The Aircell Holdings Inc. Stock Option Plan (the “2010 Plan”), collectively referred to as the “Stock Plans”. Our Stock Plans provide for the grant of both equity and cash awards, including non-qualified stock options, incentive stock options, stock appreciation rights, performance awards (shares and units), restricted stock, restricted stock units (“RSUs”), deferred share units (“DSUs”) and other stock-based awards and dividend equivalents to eligible employees, directors and consultants, as determined by the Compensation Committee of our Board of Directors.

Under the Stock Plans, 20,006,570 shares of common stock were reserved for issuance. As of December 31, 2017, 3,387,202 shares remained available for grant under our Stock Plans.

The contractual life of granted options is 10 years. All options that are unvested as of the date on which a recipient’s employment terminates, as well as vested options that are not exercised within a prescribed period following termination, are forfeited and become available for future grants. Options granted to date include options that a) vest 20% upon grant with the remainder vesting in equal annual increments over a four-year period, b) vest over a four-year period with 25% vesting at the end of each year or c) vest on the date of grant for options granted to directors. Beginning in 2013 we granted RSUs that vest in equal annual increments over a four-year period. Vested RSUs will be settled, at the discretion of the Compensation Committee, in shares of our common stock or in cash equal to the value of the applicable number of shares of our common stock on the vesting date. We also granted directors DSUs that were vested at grant. DSUs will be settled in shares of our common stock 90 days after the director ceases to serve as a director. Beginning in 2014 we granted restricted stock, which vests in equal annual increments over a four-year period. These shares are deemed issued as of the date of grant, but not outstanding until they vest. We intend to settle RSU, DSU and restricted stock awards in stock and have the shares available to do so. In June 2016, the Compensation Committee approved grants of both non-market based awards and market based awards. The contractual term and time-based vesting provisions for the non-market based awards are consistent with prior grants as noted above. The market based awards vest based on achieving one or more predetermined market conditions and completion of the same time-based vesting requirements applicable to the non-market based awards.

The following is a summary of our stock-based compensation expense included in the consolidated statements of operations for the years December 31, 2017, 2016 and 2015 (in thousands):


	2017		2016		2015
Cost of service revenue	$	1,748	$	1,499	$	1,161
Cost of equipment revenue		185		117		86
Engineering, design and development		3,656		3,046		2,584
Sales and marketing		4,751		4,962		4,107
General and administrative		9,481		7,997		7,361

Total stock-based compensation expense	$	19,821	$	17,621	$	15,299

A summary of stock option activity for the year ended December 31, 2017, is as follows:


	Number of Options			Weighted Average Exercise Price Per Share		Weighted Average Remaining Contractual Life		Aggregate Intrinsic Value (in thousands)
Options outstanding—January 1, 2017		9,119,542		$	14.51		6.81	$	1,789
Granted		2,031,292		$	11.99
Exercised		(50,392	)	$	8.92
Forfeited		(441,090	)	$	14.01
Expired		(271,976	)	$	18.53

Options outstanding—December 31, 2017		10,387,376		$	13.96		6.22	$	8,924

Options exercisable—December 31, 2017		6,306,064		$	14.85		4.74	$	5,270

There were no stock options exercised prior to 2013. As of December 31, 2017, total unrecognized compensation costs related to unvested stock options were approximately $15 million which is expected to be recognized over a weighted average period of approximately 2.5 years. The total grant date fair value of stock options vested in 2017, 2016 and 2015 was approximately $10.0 million, $9.0 million and $8.0 million, respectively.

We estimate the fair value of stock options using the Black-Scholes option-pricing model. Weighted average assumptions used and weighted average grant date fair value of stock options granted for the years ended December 31, 2017, 2016, and 2015, were as follows:


	2017			2016			2015
Approximate risk-free interest rate		2.3	%		1.3	%		1.8	%
Average expected life (years)		6.14			6.12			6.17
Dividend yield		N/A			N/A			N/A
Volatility		45.3	%		45.3	%		33.1	%
Weighted average grant date fair value of common stock underlying options granted	$	11.97		$	8.72		$	20.65
Weighted average grant date fair value of stock options granted	$	5.59		$	3.88		$	7.39

The risk-free interest rate assumptions were based on the U.S. Treasury yield curve for the term that mirrored the expected term in effect at the time of grant. The expected life of our stock options was determined based upon a simplified assumption that the stock options will be exercised evenly from vesting to expiration, as we do not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected life. The dividend yield was based on expected dividends at the time of grant. We have not been a public company long enough to calculate volatility based exclusively on our own common stock. Therefore, the expected volatility is calculated as of each grant date based on a weighting of our own common stock and reported data for a peer group of publicly traded companies for which historical information is available.

The following table summarizes the activities for our unvested RSUs and DSUs for the year ended December 31, 2017:


	Number of Underlying Shares			Weighted Average Grant Date Fair Value
Unvested—January 1, 2017		1,492,348		$	12.81
Granted		961,183		$	10.68
Vested		(485,219	)	$	14.38
Forfeited/canceled		(250,455	)	$	12.23

Unvested—December 31, 2017		1,717,857		$	11.27

As of December 31, 2017, there was approximately $14 million of unrecognized compensation cost related to unvested employee RSUs. This amount is expected to be recognized over a weighted-average period of approximately 2.3 years. The total grant date fair value of RSUs and DSUs vested in 2017 was approximately $8 million.

The following table summarizes the activity for our restricted stock for the year ended December 31, 2017:


	Number of Underlying Shares			Weighted Average Grant Date Fair Value
Unvested—January 1, 2017		233,972		$	14.26
Granted		92,910		$	12.19
Vested		(112,738	)	$	13.76
Forfeited/canceled		—		$	—

Unvested—December 31, 2017		214,144		$	13.62

As of December 31, 2017, there was approximately $2 million of unrecognized compensation cost related to unvested employee restricted stock. This amount is expected to be recognized over a weighted-average period of approximately 2.3 years.

ESPP—In June 2013 the Board of Directors and stockholders approved the Employee Stock Purchase Plan (“ESPP”), which became effective on June 26, 2013 and during 2017, increased the number of shares reserved under the ESPP. The ESPP allows eligible employees to purchase a limited number of shares of common stock during pre-specified offering periods at a discount established by the Compensation Committee not to exceed 15% of the fair market value of the common stock at the beginning or end of the offering period (whichever is lower). Under the ESPP, 1,200,000 shares were reserved for issuance and 153,628 shares of common stock were issued during the year ended December 31, 2017.