22. Equity-Based Compensation

2013 Incentive Plan

The Company’s board of directors adopted, and its equity holders approved, the Sprouts Farmers Market, Inc. 2013 Incentive Plan (the “2013 Incentive Plan”). The 2013 Incentive Plan became effective July 31, 2013 in connection with the Company’s IPO and replaced the 2011 Option Plan (as defined below) (except with respect to outstanding options under the 2011 Option Plan). The 2013 Incentive Plan serves as the umbrella plan for the Company’s stock-based and cash-based incentive compensation programs for its directors, officers and other team members.

Under the 2013 Incentive Plan, upon the pricing of the Company’s IPO, the Company granted to certain officers and team members options to purchase 396,000 shares of common stock at an exercise price of $18.00 per share, with grant date fair values of $4.65 to $5.92. The Company also granted to independent directors options to purchase 11,112 shares of common stock at an exercise price of $18.00 per share, with a grant date fair value of $4.65. The options vest in accordance with the terms set forth in the grant letter and vary depending on if they are time-based or performance-based. Time-based options generally vest ratably over a period of 12 quarters (three years) and performance-based options vest over a period of three years based on financial performance targets set for each year. The options expire seven years from grant date.

On March 4, 2014, under the 2013 Incentive Plan, the Company granted to certain officers and team members time-based options to purchase an aggregate of 320,041 shares of common stock at an exercise price of $39.01 per share, with a grant date fair value of $10.66 per share. The Company also granted an aggregate of 108,980 RSUs with a grant date fair value of $39.01. The options vest ratably over a period of 12 quarters (three years) and the RSUs vest either one-third each year for three years or one-half each year for two years. The options expire seven years from grant date.

On May 19, 2014, under the 2013 Incentive Plan, the Company granted to a team member and to independent members of the Company’s board of directors time-based options to purchase an aggregate of 37,047 shares of common stock at an exercise price of $28.50 per share, with a grant date fair value of $8.07. The Company also granted to this team member 2,174 RSUs with a grant date fair value of $28.50 per share. The options vest ratably over a period of 12 quarters (three years) and the RSUs vest either one-third each year for three years. The options expire seven years from grant date.

On March 11, 2015, under the 2013 Incentive Plan, the Company granted to certain officers and team members time-based options to purchase an aggregate of 277,833 shares of common stock at an exercise price of $34.33 per share, with a grant date fair value of $9.42 per share. The Company also granted an aggregate of 87,394 RSUs with a grant date fair value of $34.33 per share, and 71,753 PSAs (as described below) with a grant date fair value of $34.33 per share. The options vest ratably over a period of 12 quarters (three years) and the RSUs vest one-third each year for three years. The options expire seven years from grant date.

On May 21, 2015, under the 2013 Incentive Plan, the Company granted to independent members of its board of directors time-based options to purchase an aggregate of 14,492 shares of common stock at an exercise price of $30.30 per share, with a grant date fair value of $8.28. The Company also granted to the independent directors an aggregate of 3,896 RSUs with a grant date fair value of $30.30. The options vest ratably over a period of 12 quarters (three years) and the RSUs vest either one-third each year for three years or one-half each year for two years. The options expire seven years from grant date.

On August 11, 2015, under the 2013 Incentive Plan, the Company granted to an independent member of its board of directors and certain officers and team members time-based options to purchase an aggregate of 2,138,899 shares of common stock at an exercise price of $20.98 per share, with a grant date fair value of $5.79 per share. The Company also granted an aggregate of 5,660 RSUs with a grant date fair value of $20.98 per share. The options vest ratably over a period of 12 quarters (three years) and the RSUs vest either one-third each year for three years or one-half each year for two years. The options expire seven years from grant date.

On November 10, 2015, under the 2013 Incentive Plan, the Company granted to an independent member of its board of directors time-based options to purchase 4,431 shares of common stock at an exercise price of $23.26 per share, with a grant date fair value of $6.77 per share. The Company also granted to this independent director an aggregate of 1,370 RSUs with a grant date fair value of $23.26. The options vest ratably over a period of 12 quarters (three years) and the RSUs vest one-third each year for three years. The options expire seven years from grant date.

The aggregate number of shares of common stock that may be issued to team members and directors under the 2013 Incentive Plan may not exceed 10,089,072. Shares subject to awards granted under the 2013 Incentive Plan which are subsequently forfeited, expire unexercised or are otherwise not issued will not be treated as having been issued for purposes of the share limitation. As of January 3, 2016, 6,727,450 shares of common stock are reserved for issuance under the 2013 Incentive Plan.

2011 Option Plan

In May 2011, the Company adopted the Sprouts Farmers Markets, LLC Option Plan (the “2011 Option Plan”) to provide team members or directors of the Company with options to acquire shares of the Company. The Company had authorized 12,100,000 shares for issuance under the 2011 Option Plan. Options may no longer be issued under the 2011 Option Plan.

During 2013, the Company awarded 209,000 options to team members under the 2011 Option Plan at exercise prices of $9.15 and grant date fair values of $2.33 to $3.10.

Stock Options

Prior to the IPO, options were granted to certain team members at a price determined by the Board in its sole discretion. The maximum contractual term for such options was seven years. The options vest in accordance with the terms set forth in the grant letter and vary depending on if they are time-based or performance-based. Time-based options generally vest ratably over a period of 12 quarters (three years) and performance-based options vest over a period of three years based on financial performance targets set for each year. Vesting schedules of future grants may differ. In the event of a change in control as defined in the 2013 Incentive Plan and 2011 Option Plan, all options become immediately vested and exercisable.

In the event of a change in control as defined in the award agreements issued under the 2013 Incentive Plan and in the 2011 Option Plan, all options and awards issued prior to 2015 become immediately vested and exercisable.

For grants issued in 2015, the options and awards only become immediately vested in the event of a change in control (as defined in the applicable team member award agreement) if the grants are not continued or assumed by the acquiror on a substantially equivalent basis. If the options and awards continue or are assumed on a substantially equivalent basis, but employment is terminated by the Company or an acquirer without cause or by the team member for good reason (as such terms are defined in the applicable team member award agreement) within 24 months following the change in control, such options or awards will become immediately vested upon such termination. Under all other scenarios, the awards continue to vest per the schedule outlined in the applicable team member award agreement.

Shares issued for option exercises and RSU vesting are newly issued shares.

The estimated fair values of options granted during 2015, 2014 and 2013 range from $2.33 to $10.66, and were calculated using the following assumptions:

	2015			2014			2013
Dividend yield		0.00	%		0.00	%		0.00	%
Expected volatility	30.61% to 32.51%			31.19% to 32.19%			31.03% to 37.38%
Risk free interest rate	1.44% to 1.67%			1.20% to 1.33%			0.56% to 1.36%
Expected term, in years		4.31			4.31		4.00 to 5.00

The grant date weighted average fair value of the 2.1 million options issued but not vested as of January 3, 2016 was $6.32. The grant date weighted average fair value of the 0.9 million options issued but not vested as of December 28, 2014 was $5.42. The grant date weighted average fair value of the 2.7 million options issued but not vested as of December 29, 2013 was $2.09.

The following table summarizes grant date weighted average fair value of options granted and options forfeited:

	Year Ended
	January 3, 2016		December 28, 2014		December 29, 2013
Grant date weighted average fair value of options granted	$	6.22	$	10.39	$	4.27
Grant date weighted average fair value of options forfeited	$	5.36	$	6.79	$	1.85

Expected volatility is calculated based upon historical volatility data from a group of comparable companies and the Company over a timeframe consistent with the expected life of the awards. The expected term is estimated based on the expected period that the options are anticipated to be outstanding after initial grant until exercise or expiration based upon various factors including the contractual terms of the awards and vesting schedules. The expected risk-free rate is based on the U.S. Treasury yield curve rates in effect at the time of the grant using the term most consistent with the expected life of the award. Dividend yield was estimated at zero as the Company does not anticipate making regular future distributions to stockholders.

The following table summarizes option activity:

	Number of Options			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (In Years)		Aggregate Intrinsic Value
Outstanding at December 28, 2014		6,884,997		$	5.82
Granted		2,435,655			22.56
Forfeited		(144,225	)		18.30
Exercised		(1,773,518	)		3.56			$	53,373
Outstanding at January 3, 2016		7,402,909			11.63		4.10	$	116,336
Exercisable—January 3, 2016		5,286,752			7.11		3.16	$	106,012
Vested/Expected to vest—January 3, 2016		7,268,675			11.43		4.06	$	115,690

RSUs

In the event of a change in control as defined in the award agreements issued under the 2013 Incentive Plan, all RSUs granted prior to 2015 become immediately vested.

RSUs granted in 2015 only become immediately vested in the event of a change in control (as defined in the applicable team member award agreement) if the awards are not continued or assumed by the acquiror on a substantially equivalent basis. If the awards continue or are assumed on a substantially equivalent basis, but employment is terminated by the Company or an acquirer without cause or by the team member for good reason (as such terms are defined in the applicable team member award agreement) within 24 months following the change in control, such awards will become immediately vested upon such termination. Under all other scenarios, the awards continue to vest per the schedule outlined in the applicable team member award agreement.

Shares issued for RSU vesting are newly issued shares.

The estimated fair value of RSUs granted during 2015 and 2014 range from $20.98 to $39.01, and were calculated based on the closing price on the grant date.

The total grant date fair value of RSUs granted during 2015 was $3.3 million. The total grant date fair value of RSUs released upon vesting during 2015 was $1.5 million. There were no RSUs released during 2014. The total grant date fair value of RSUs forfeited during 2015 was $0.7 million. The grant date weighted average fair value of the 0.1 million RSUs issued but not released as of January 3, 2016 was $5.0 million.

The total grant date fair value of RSUs granted during 2014 was $4.3 million. There were no RSUs released during 2014. The total grant date fair value of RSUs forfeited during 2014 was $0.3 million. The grant date weighted average fair value of the 0.1 million RSUs issued but not released as of December 28, 2014 was $4.0 million.

The following table summarizes RSU activity:

	Number of RSUs			Weighted Average Grant Date Fair Value
Outstanding at December 28, 2014		102,939			38.78
Awarded		98,320			33.25
Released		(39,311	)		38.82
Forfeited		(18,753	)		36.64
Outstanding at January 3, 2016		143,195			35.26

PSAs

The PSAs were granted in March 2015 and are earned based on the Company’s achievement of certain earnings per share performance targets during 2015. If earned, such PSAs vest 50% on the second anniversary of the grant date (2017), and 50% on the third anniversary of the grant date (2018).

The PSAs only become immediately vested in the event of a change in control (as defined in the applicable team member award agreement) if the awards are not continued or assumed by the acquiror on a substantially equivalent basis. If the awards continue or are assumed on a substantially equivalent basis, but employment is terminated by the Company or an acquirer without cause or by the team member for good reason (as such terms are defined in the applicable team member award agreement) within 24 months following the change in control, such awards will become immediately vested upon such termination. Under all other scenarios, the awards continue to vest per the schedule outlined in the applicable team member award agreement.

Shares issued for PSA vesting are newly issued shares.

The estimated fair values of PSAs granted during 2015 is $34.33, and was calculated based on the closing price on the grant date.

The total grant date fair value of PSAs granted during 2015 was $2.5 million. There were no PSAs released during 2015. The total grant date fair value of PSAs forfeited during 2015 was $0.1 million. The grant date weighted average fair value of the 0.1 million PSAs issued but not released as of January 3, 2016 was $2.4 million. Subsequent to January 3, 2016, the Company’s board of directors determined that the performance targets were met and 0.1 million PSAs were earned.

The following table summarizes PSA activity:

	Number of PSAs			Weighted Average Grant Date Fair Value
Outstanding at December 28, 2014		—			—
Awarded		71,753			34.33
Released		—			—
Forfeited		(1,614	)		34.33
Outstanding at January 3, 2016		70,139			34.33

Equity-based compensation expense was as follows:

	Year Ended
	January 3, 2016		December 28, 2014		December 29, 2013
Cost of sales, buying and occupancy	$	681	$	695	$	672
Direct store expenses		1,103		788		104
Selling, general and administrative expenses		6,234		3,872		5,004
Total equity-based compensation expense	$	8,018	$	5,355	$	5,780

The Company recognized income tax benefits of $3.1 million, $2.1 million and $2.3 million for 2015, 2014, and 2013, respectively.

As of January 3, 2016, total unrecognized compensation expense related to outstanding options was $5.3 million, which, if the service and performance conditions are fully met, is expected to be recognized over the next 2.3 years on a weighted-average basis.

As of January 3, 2016, total unrecognized compensation expense related to outstanding RSUs was $2.9 million, which, if the service and performance conditions are fully met, is expected to be recognized over the next 1.4 years on a weighted-average basis.

As of January 3, 2016, total unrecognized compensation expenses related to outstanding PSAs was $1.6 million, which, if the service and performance conditions are fully met, is expected to be recognized over the next 1.7 years on a weighted-average basis.

During 2015, 2014 and 2013, the Company received $6.6 million, $11.1 million and $3.8 million in cash proceeds from the exercise of options, respectively.

During 2015, 2014 and 2013, the Company recorded $20.0 million, $47.3 million and $13.4 million of excess tax benefits from the exercise of options, respectively.