EQUITY AWARD PLANS

Stock Plans—In June 2010, the Company adopted the 2010 Stock Plan (“2010 Plan”), and in December 2011, the Company adopted the 2011 Stock Plan (“2011 Plan”). In December 2015, the Board adopted the 2016 Equity Incentive Plan (“2016 Plan” and together with the 2010 Plan and 2011 Plan, the “Stock Plans”), which was amended in September 2016. The Company’s stockholders approved the 2016 Plan in March 2016 and it became effective in connection with the Company’s IPO. As a result, upon the IPO, the Company ceased granting additional stock awards under the 2010 Plan and 2011 Plan and the 2010 Plan and 2011 Plan terminated. Any outstanding stock awards under the 2010 Plan and 2011 Plan will remain outstanding, subject to the terms of the applicable plan and award agreements, until such shares are issued under those stock awards, by exercise of stock options or settlement of RSUs, or until those stock awards become vested or expired by their terms. Under the 2016 Plan, the Company may grant incentive stock options (“ISO”), non-statutory stock options (“NSO”), restricted stock (“RS”), restricted stock units (“RSU”) and stock appreciation rights (“SAR”) to employees, directors and consultants. The Company has initially reserved 22,400,000 shares of the Company’s Class A common stock for issuance under the 2016 Plan. The number of shares of Class A common stock available for issuance under the 2016 Plan will also include an annual increase on the first day of each fiscal year beginning in fiscal year 2018, equal to the lesser of: 18,000,000 shares, 5% of the outstanding shares of all classes of common stock as of the last day of the Company’s immediately preceding fiscal year, or such other amount as may be determined by the Board. In addition, up to a maximum of 38,667,284 shares of Class B common stock returned to the 2010 Plan and 2011 Plan as the result of expiration or termination of awards after the IPO will also become available for issuance under the 2016 Plan. As of July 31, 2017, the Company had reserved a total of 52,860,210 shares for the issuance of equity awards under the Stock Plans, of which 15,149,589 shares were still available for grant.

Restricted Stock Units

Performance RSUs. The Company grants RSUs that contain both service and performance conditions to its executives and employees. Vesting of the Performance RSUs is subject to continuous service with the Company and satisfaction of certain liquidity events of the Company, including the expiration of a lock-up period established in connection with the IPO, or both certain liquidity events and specified performance targets (collectively, the “Performance RSUs”). While the Company recognizes cumulative stock-based compensation expense for the portion of the awards for which the service condition has been satisfied when it is probable that the performance conditions will be met, vesting and settlement of the Performance RSUs are subject to the performance conditions actually being met. During the first quarter of fiscal 2017, the Company began to recognize Performance RSUs with liquidity event performance conditions as the satisfaction of the performance conditions for vesting became probable.

The Company’s summary of RSU activity under the Stock Plans is as follows:



	Number of Shares		Grant Date Fair Value per Share
Outstanding—July 31, 2016	12,265,369		$	13.23
Granted	12,986,597		$	21.84
Released	(6,146,169	)	$	15.63
Canceled/forfeited	(1,729,707	)	$	13.57
Outstanding—July 31, 2017	17,376,090		$	18.85

Offer to Exchange Stock Options for RSUs (the “Tender Offer”). In July 2016, the Company approved a tender offer stock option exchange program under which outstanding employee stock options with exercise prices of $8.41 or greater per share could be exchanged for a specified number of Performance RSUs based on a predetermined exchange ratio granted with a new vesting period. As a result of the Tender Offer, on August 16, 2016, stock options to purchase 1,361,317 common shares were cancelled and, in exchange, the Company granted 911,489 Performance RSUs to eligible employees. The Tender Offer resulted in a total incremental stock-based compensation expense of approximately $3.4 million.

Employee Stock Purchase Plan—In December 2015, the Board adopted the 2016 Employee Stock Purchase Plan, which was subsequently amended in January 2016 and September 2016 and approved by the Company’s stockholders in March 2016 (the “2016 ESPP”). The 2016 ESPP became effective in connection with the Company’s IPO. A total of 3,800,000 shares of Class A common stock were initially reserved for issuance under the 2016 ESPP. The number of shares of Class A common stock available for sale under the 2016 ESPP will also include an annual increase on the first day of each fiscal year beginning in fiscal 2018, equal to the lesser of: 3,800,000 shares, 1% of the outstanding shares of all classes of common stock as of the last day of the Company’s immediately preceding fiscal year, or such other amount as may be determined by the Board.

The 2016 ESPP allows eligible employees to purchase shares of the Company’s Class A common stock at a discount through payroll deductions of up to 15% of eligible compensation, subject to caps of $25,000 in any calendar year and 1,000 shares on any purchase date. The 2016 ESPP provides for 12-month offering periods generally beginning March and September of each year, and each offering period consists of two six-month purchase periods. The initial offering period began in September 2016 and will end in September 2017.

On each purchase date, participating employees will purchase Class A common stock at a price per share equal to 85% of the lesser of the fair market value of the Company’s Class A common stock on (i) the first trading day of the applicable offering period and (2) the last trading day of each purchase period in the applicable offering period. If the stock price of the Company's Class A common stock on any purchase date in an offering period is lower than the stock price on the enrollment date of that offering period, the offering period will immediately reset after the purchase of shares on such purchase date and automatically roll into a new offering period.

For the first offering period, which began on September 30, 2016, the fair market value of the common stock used for the first offering period was $16, the IPO price of the Company’s Class A common stock, and on April 5, 2017, 1,246,054 shares of common stock were purchased for an aggregate amount of $16.9 million. As of July 31, 2016, 2,553,946 shares were available for future issuance under the 2016 ESPP.

The Company uses the Black-Scholes option-pricing model to determine the fair value of shares purchased under the 2016 ESPP with the following weighted-average assumptions on the date of grant (on October 11, 2016 and April 5, 2017):



	Fiscal Year Ended July 31, 2017
Expected term (in years)	0.75
Risk-free interest rate	0.6	%
Volatility	51.0	%
Dividend yield	—	%

Stock Options

The Board determines the period over which stock options become exercisable and stock options generally vest over a four-year period. Stock options generally expire 10 years from the date of grant. The term of an ISO grant to a 10% stockholder will not exceed five years from the date of the grant. The exercise price of an ISO will not be less than 100% of the estimated fair value of the shares of common stock underlying the stock option (or 110% of the estimated fair value in the case of an ISO granted to a 10% stockholder) on the date of grant. The exercise price of a NSO is determined by the Board at the time of grant, and is generally not less than 100% of the estimated fair value of the shares of common stock underlying the stock option on the date of grant.

The Company’s stock option activity under the Stock Plan is as follows:



	Options Outstanding
	Number of Shares			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Life	Aggregate Intrinsic Value
						(In years)	(In thousands)
Outstanding—August 1, 2016	26,166,968		(1)	$	4.39	7.5	$	208,101
Options granted	1,047,950			12.14
Options exercised	(4,786,381	)		3.27
Options canceled/forfeited	(2,094,006	)		8.89
Outstanding—July 31, 2017	20,334,531			4.59		6.4	338,787
Exercisable—July 31, 2017	19,645,676			4.43		6.3	330,486
Vested and expected to vest—July 31, 2017	20,334,531			4.59		6.4	338,787

(1)

Includes 455,000 stock options with both service and performance conditions with a weighted-average fair value per share of $3.78 (the “Performance Stock Options”). Vesting of the Performance Stock Options was subject to continuous service with the Company (the “service condition”) and satisfaction of certain liquidity events of the Company (the “performance condition”). The Company recognized cumulative stock-based compensation expense related to the Performance Stock Options in the first quarter of fiscal year 2017 as the performance condition was met upon the Company's successful IPO. The cumulative stock-based compensation expense recorded in the first quarter of fiscal 2017 was for the portion of the awards for which the relevant service condition had been satisfied and the remaining expense is being recognized over the remaining service period.

The stock options exercisable as of July 31, 2017 include 15,241,715 of stock options are related to vested options and 4,403,961 of stock options that are unvested with an early exercise provision. The weighted-average grant-date fair value per share of stock options granted was $4.86, $6.36 and $6.41 for the years ended July 31, 2015, 2016 and 2017, respectively. The aggregate intrinsic value of stock options exercised was $16.2 million, $18.3 million and $73.9 million for the years ended July 31, 2015, 2016 and 2017, respectively. Aggregate intrinsic value represents the difference between the exercise price of the options and the estimated fair value of the Company’s common stock. The total grant date fair value of stock options vested was $10.8 million, $23.9 million and $16.1 million for the years ended July 31, 2015, 2016 and 2017, respectively. The vested and expected to vest amounts included in the table above exclude early exercised stock options of 243,148 as of July 31, 2017.

Early Exercise of Stock Options. The Company issued 1,019,223, 269,737 and 67,360 shares of common stock for total proceeds of $3.3 million, $0.8 million and $0.2 million, respectively, related to exercises of unvested stock options (the “early exercised stock options”) during the years ended July 31, 2015, 2016 and 2017. The shares of common stock issued in connection with the early exercised stock options are subject to the Company’s repurchase right at the original purchase price. The proceeds initially are recorded as a liability and reclassified to common stock and additional paid in capital as the Company’s repurchase right lapses. As of July 31, 2016 and 2017, 954,215 and 243,148 respectively, shares of common stock related to the early exercised stock options held by employees at an aggregate price of $2.3 million and $0.9 million, respectively, were subject to the Company’s repurchase right.

Stock-Based Compensation—Total stock-based compensation expense recognized for stock awards granted under the equity award plans in the consolidated statements of operations is as follows (in thousands):



	Fiscal Year Ended July 31,
	2015		2016		2017
Cost of revenue:
Product	$	363	$	391	$	3,066
Support and other services	718		968		10,411
Sales and marketing	6,474		8,006		78,117
Research and development	5,411		6,259		109,044
General and administrative	4,174		4,432		30,853
Total stock-based compensation expense	$	17,140	$	20,056	$	231,491

Fiscal year 2017 included cumulative stock-compensation expense related to stock awards with performance conditions, which vesting was deemed probable in the first quarter of fiscal 2017 upon the Company’s successful IPO. Prior to fiscal 2017, no expense was recognized related to these stock awards with performance conditions as vesting was not deemed probable. The cumulative stock-based compensation expense recorded in the first quarter of fiscal 2017 was for the portion of the awards for which the relevant service condition had been satisfied and the Company has continued to recognize the remaining expense over the remaining service period.

As of July 31, 2017, unrecognized stock-based compensation expense related to the outstanding stock awards was approximately $273.6 million and is expected to be recognized over a weighted-average period of approximately 2.2 years.

Determination of Fair Value—The fair value of options granted to employees is estimated on the grant date using Black-Scholes. Compensation expense related to options granted to non-employees is recognized as the equity instruments vest, and such options are revalued at each reporting date. As a result, compensation expense related to unvested options granted to non-employees fluctuates as the fair value of the Company’s common stock fluctuates.

The valuation model for stock-based compensation expense requires the Company to make assumptions and judgments about the variables used in the calculation, including the expected term (weighted-average period of time that the options granted are expected to be outstanding), the expected volatility of the Company’s common stock, a risk-free interest rate and expected dividend yield.

The fair value of the Company’s stock options was estimated using the following weighted-average assumptions:



	Fiscal Year Ended July 31,
	2015			2016			2017
Fair value of common stock	$	10.29		$	14.81		$	12.14
Expected term (in years)	6.1			6.1			6.1
Risk-free interest rate	1.7		%	1.6		%	1.3		%
Volatility	46		%	42		%	52		%
Dividend yield	—			—			—

The fair value of each grant of stock options was determined using Black-Scholes and assumptions discussed below. Each of these inputs is subjective and generally requires significant judgment to determine.

Fair Value of Common Stock—Prior to the Company’s IPO, the fair value of the common stock underlying its stock options was determined by its board of directors. The valuations of its common stock were determined in accordance with the guidelines outlined in the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation. The Board, with input from management, exercised significant judgment and considered numerous objective and subjective factors to determine the fair value of the Company’s common stock at each grant date, including but not limited to, (i) contemporaneous valuations of common stock performed by unrelated third-party specialists; (ii) recent private stock sales transactions; (iii) the prices, rights, preferences and privileges of the Company’s convertible preferred stock relative to those of our common stock; (iv) the lack of marketability of the Company’s common stock; (v) developments in the business; (vi) the likelihood of achieving a liquidity event, such as an IPO or a merger or acquisition of the Company’s business, given prevailing market conditions; (vii) the market performance of comparable publicly traded companies; (viii) the Company’s actual operating and financial performance; (ix) U.S. and global capital market conditions; (x) the illiquidity of stock-based awards involving securities in a private company; (xi) the Company’s stage of development; and (xii) the Company’s history and the timing of the introduction of new products and services.

Subsequent to its IPO, the Company uses the market closing price for our Class A common stock as reported on the NASDAQ Global Select Market on the date of grant.

Expected Term—The expected term represents the period that the stock-based awards are expected to be outstanding. For option grants that are considered to be “plain vanilla,” the Company determines the expected term using the simplified method as provided by the Securities and Exchange Commission. The simplified method deems the term to be the average of the time-to-vesting and the contractual life of the options.

Risk-Free Interest Rate—The risk-free interest rate is based on U.S. Treasury yield curve in effect at the time of grant for zero-coupon U.S. Treasury notes with maturities approximately equal to the option’s expected term.

Expected Volatility—Since the Company does not have a long trading history of its common stock, the expected volatility was derived from the average historical stock volatilities of several unrelated public companies within the Company’s industry that its considers to be comparable to its business over a period equivalent to the expected term of the stock option grants.

Dividend Rate—The expected dividend was assumed to be zero, as the Company has never paid dividends and have no current plans to do so.