Note 6. Stock-Based Compensation Expense

(a)

General

Stock-based compensation expense for restricted stock, restricted stock units, stock options and issuances of common stock pursuant to our employee stock purchase plan was classified in the accompanying consolidated statements of operations as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2016		2015		2016		2015
	(in thousands)
Stock-based compensation expense:
Cost of revenue	$	166	$	102	$	445	$	203
Research and development		1,600		507		4,617		917
Sales and marketing		1,328		418		5,453		728
General and administrative		1,083		400		2,822		985

Total stock-based compensation expense	$	4,177	$	1,427	$	13,337	$	2,833

We recognize compensation cost of all awards on a straight-line basis over the applicable vesting period, which is generally four years.

(b)

Restricted Stock and Restricted Stock Units

Restricted stock and restricted stock unit activity during the nine months ended September 30, 2016 was as follows:


	Restricted Stock			Weighted Average Grant Date Fair Value
Unvested balance as of December 31, 2015		1,149,257		$	19.34
Granted		800,791			13.12
Vested		(494,554	)		19.86
Forfeited		(101,880	)		14.27

Unvested balance as of September 30, 2016		1,353,614		$	15.85

As of September 30, 2016, the unrecognized compensation expense related to our unvested restricted stock and restricted stock units expected to vest was $15.4 million. This unrecognized compensation expense will be recognized over an estimated weighted-average amortization period of 2.6 years.

During the nine months ended September 30, 2016, we repurchased 47,003 shares of our common stock in settlement of employee tax withholding obligations due upon the vesting of restricted stock.

(c)

Stock Options

Stock option activity during the nine months ended September 30, 2016 was as follows:


	Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (in years)		Aggregate Intrinsic Value (in thousands)
Outstanding as of December 31, 2015		4,246,525		$	5.99
Granted		1,279,034			13.12
Exercised		(576,154	)		4.29			$	5,791
Forfeited/cancelled		(429,343	)		10.69

Outstanding as of September 30, 2016		4,520,062			7.89		7.4	$	44,403

Vested and exercisable as of September 30, 2016		2,725,099			5.35		6.5	$	33,624
Vested and expected to vest as of September 30, 2016		4,174,837			7.51		7.3	$	42,556

As of September 30, 2016, the unrecognized compensation expense related to our unvested stock options expected to vest was $7.2 million. This unrecognized compensation expense will be recognized over an estimated weighted-average amortization period of 2.7 years.

The total fair value of stock options vested in the nine months ended September 30, 2016 was $2.6 million. The weighted-average grant date fair value of stock options granted in the nine months ended September 30, 2016 was $6.44 per share.

(d)

Employee Stock Purchase Plan

Under the Rapid7, Inc. 2015 Employee Stock Purchase Plan (ESPP), employees may set aside up to 15% of their gross earnings, on an after-tax basis, to purchase our common shares at a discounted price, which is calculated at 85% of the lesser of: (i) the market value of our common stock at the beginning of each offering period and (ii) the market value of our common stock on the applicable purchase date.

On March 15, 2016, we issued 192,676 shares of common stock to employees for aggregate proceeds of $2.1 million. The purchase price of the shares of common stock was $10.88 per share, which was discounted in accordance with the terms of the ESPP from the closing price of our common stock on March 15, 2016 of $12.80.

On September 15, 2016, we issued 153,602 shares of common stock to employees for aggregate proceeds of $1.6 million. The purchase price of the shares of common stock was $10.60 per share, which was discounted in accordance with the terms of the ESPP from the closing price of our common stock on March 16, 2016 of $12.47.

(e)

Employee Transition and Release Agreement

On August 5, 2016, we entered into a transition and release agreement with Steven Gatoff, our Chief Financial Officer. Under the agreement, we made certain modifications to his outstanding stock options and restricted stock units which will generate incremental stock-based compensation expense of $0.3 million. Of the $0.3 million incremental stock-based compensation expense, $0.1 million was recorded within general and administrative expense in the three months ended September 30, 2016.