6. Stock-based compensation

In March 2012, the Company’s board of directors and stockholders approved the 2012 Stock Incentive Plan (the “2012 Plan”). The 2012 Plan provides for the grant of incentive stock options, stock appreciation rights, restricted stock units and other stock-based or cash awards to purchase shares of common stock to eligible employees, officers, directors and consultants. The number of shares of the Company’s common stock that is reserved for issuance under the 2012 Plan is equal to the sum of (1) 1,453,253 shares of common stock issuable under the 2012 Plan plus the number of shares of the Company’s common stock subject to outstanding awards under the 2011 Plan, described below, that expire, terminate or are otherwise surrendered, cancelled, forfeited or repurchased by the Company at their original issuance price pursuant to a contractual repurchase right (up to 679,622 shares) plus (2) an annual increase, to be added on the first day of each year beginning in 2013 and each subsequent anniversary until the expiration of the 2012 Plan, equal to the lowest of 975,000 shares of its common stock, 4.0% of the number of shares of the Company’s common stock outstanding on the first day of the year and an amount determined by the Company’s board of directors. The Company began making grants under the 2012 Plan following June 11, 2012, the effective date of the Company’s registration of securities on Form 10. The Company ceased granting options under the 2011 Plan following the effective date of the Company’s registration of securities on Form 10.

Founders’ stock

In April 2011, the Company issued 3,509,634 shares of its common stock to founders at a purchase price of $0.002 per share, which was determined by the board of directors to be the fair value of the common stock on the date of issuance. The shares were issued under restricted stock purchase agreements and not pursuant to the 2011 Plan. These restricted stock purchase agreements allow the Company, at its discretion, to repurchase unvested shares if the founder’s relationship with the Company is terminated. The shares issued to three of the co-founders vested with respect to 25% of the shares on the grant date and with respect to the remaining shares in approximately equal quarterly installments through the fourth anniversary of the grant date. The shares issued to the remaining two co-founders vest in approximately equal quarterly installments from and after the grant date. Additionally, 25% of the then-unvested shares issued to the remaining two co-founders vested in July 2011 in connection with the Series A Preferred Stock financing. As of March 31, 2013, there were 1,480,634 shares subject to repurchase by the Company.

The Company records stock-based compensation expense for the common stock subject to repurchase based on the grant date intrinsic value for employees and the vesting date intrinsic value for non-employees. All of the restricted shares were issued at fair value.

Stock options and restricted stock

A summary of the Company’s stock option activity and related information is as follows (in thousands, except share and per share data):

	Shares		Weighted average exercise price per share	Weighted average remaining contractual term (years)	Aggregate intrinsic value
Outstanding at December 31, 2012	1,218,153		3.83	9.32	$	5,535
Granted	437,542		12.78
Exercised	(24,049	)	0.04
Outstanding at March 31, 2013	1,631,646		6.28	9.31	$	6,091
Exercisable at March 31, 2013	227,503		1.55	8.75	1,694
Vested and expected to vest at March 31, 2013	1,487,084		6.22	8.75	$	5,652

Stock options

The fair value of each employee stock-based award is estimated on the grant date using the Black-Scholes option pricing model.

The Company uses the simplified method as prescribed by the Securities and Exchange Commission Staff Accounting Bulletin No. 107, Share-Based Payment, to calculate the expected term as it does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term for options granted to employees and utilizes the contractual term for options granted to non-employees. The expected term is applied to the stock option grant group as a whole, as the Company does not expect substantially different exercise or post-vesting termination behavior among its employee population. The risk-free interest rate is based on a treasury instrument whose term is consistent with the expected life of the stock options.

The computation of expected volatility is based on the historical volatility of a representative group of companies with similar characteristics to the Company, including stage of product development and life science industry focus. The representative group of companies consisted of BioSante Pharmaceuticals, Inc., Corcept Therapeutics Inc., Cardiome Pharmaceutical Corporation, Polymedix, Inc. and Sangamo Biosciences, Inc. As a result of being a development stage company in a very early stage of product development with no revenues, the representative group of companies has certain similar, but not all similar, characteristics to the Company. The Company believes the group selected has sufficient similar economic and industry characteristics and includes companies that are most representative of the Company.

The fair value of each stock-based award is estimated on the grant date using the Black-Scholes option pricing model using the following assumptions:

	March 31, 2013	March 31, 2012
Risk-free interest rate	0.9% - 1.1%	1.2% - 1.84%
Dividend yield	—	—
Volatility	89% - 91%	79% - 82%
Expected term (years)	5.3 — 9.7	6.0 - 9.75

During the three months ended March 31, 2013, the Company granted 437,542 options to purchase common stock with a weighted average exercise price of $12.78 per share to employees at a weighted average grant date fair value of $9.42 per share. During the three months ended March 31, 2012, the Company granted 60,799 options to purchase common stock with a weighted average exercise price of $4.01 per share to employees at a weighted average grant date fair value of $2.84 per share. There were 1,774,111 options granted during the period from April 5, 2011 (inception) to March 31, 2013.

The Company recognized total stock-based compensation expense for employee stock option grants of $342,000 and $44,000 for the three months ended March 31, 2013 and 2012, respectively and $688,000 for the period from April 5, 2011 (inception) to March 31, 2013.

The Company did not grant any options to purchase common stock to non-employees during the three months ended March 31, 2013. The Company granted 12,356 options to purchase common stock with an exercise price of $4.01 per share to non-employees for the three months ended March 31, 2012. For the period from April 5, 2011 (inception) to March 31, 2013, the Company granted 205,024 options to purchase common stock with a weighted average exercise price of $0.96 per share to non-employees.

Stock-based awards issued to non-employees, including directors for non-board related services, are accounted for using the fair value method. These stock-based option awards are revalued on each vesting and reporting date. The Company recognized total stock-based compensation of $363,000 and $215,000 for the three months ended March 31, 2013 and 2012, respectively, and $1,362,000 for the period from April 5, 2011 (inception) to March 31, 2013 for these non-employee awards.

At March 31, 2013, there was $9,434,000 of total unrecognized compensation cost related to non-vested stock options and restricted stock shares. The Company expects to recognize these costs over a remaining weighted average period of 3.2 years.

Restricted Stock Units

On December 5, 2012, the Company issued a total of 192,308 restricted stock units (“RSUs”) to its Chief Executive Officer. This grant included 128,205 RSUs with time-based vesting as follows: 16,025 shares on March 31, 2013 and 16,025 shares each quarter thereafter until December 31, 2014. The grant also included 64,103 RSUs that will vest only upon the achievement of performance conditions as determined by the Company’s board of directors. On March 19, 2013, the board of directors established performance criteria for the first tranche of the award and communicated the performance criteria to the grant recipient. The weighted average exercise price is $0.001 per share for these awards. The fair value of the time-based RSUs is based on the closing price of the Company’s common stock on the award date, or $7.80 per share. The stock-based compensation expense for this grant will be recognized on a straight-line basis over the vesting period. The Company recognized total stock-based compensation for the time-based awards and performance based awards of $132,000 for the three months ended March 31, 2013 and $168,000 for the period from April 5, 2011 (inception) to March 31, 2013.

A summary of the status of non-vested RSUs as of March 31, 2013 is as follows:

	Restricted Stock Units	Weighted- Average Grant Date Fair Value
Non-vested at December 31, 2012	192,308	$	8.80
Vested	16,025	$	7.80
Non-vested at March 31, 2013	176,283	$	8.80

As of March 31, 2013, there was $1,525,000 of total unrecognized stock-based compensation expense related to non-vested RSUs granted under the 2012 Plan. The expense is expected to be recognized over a weighted-average period of 1.8 years.