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Stock-Based Compensation and Employee Benefit Plan
9 Months Ended
Sep. 30, 2018
Compensation Related Costs [Abstract]  
Stock-Based Compensation and Employee Benefit Plan
Stock-Based Compensation and Employee Benefit Plan
2002 Stock Plan
The Company's 2002 Stock Plan (the 2002 Plan) was approved in April 2002 and amended in June 2011. In August 2012 and in connection with the adoption of the 2012 Plan, shares authorized for issuance under the 2002 Plan were cancelled, except for those shares reserved for issuance upon exercise of outstanding stock options. Any outstanding stock options granted under the 2002 Plan will remain outstanding, subject to the terms of the 2002 Plan and applicable award agreements until such shares are issued under those awards (by exercise of stock options) or until the awards terminate or expire by their terms. No additional awards have been or will be granted under the 2002 Plan.
As of September 30, 2018, options to purchase 2.4 million shares of Class B common stock were outstanding under the 2002 Plan and no shares were available for future grant. As of September 30, 2018, the weighted average exercise price of outstanding options was $20.04 per share.
2012 Equity Incentive Plan
The Company's 2012 Equity Incentive Plan (the 2012 Plan) was approved in August 2012. The 2012 Plan provides for the grant of incentive stock options, non-statutory stock options, stock appreciation rights and restricted stock awards (RSUs), all of which may be granted to employees, including officers, and to non-employee directors and consultants except the Company may grant incentive stock options only to employees. Under the 2012 Plan, incentive and nonqualified stock options may be granted at a price not less than fair value and 85% of the fair value of common stock, respectively, and at 110% of fair value to holders of 10% or more of voting stock.
As of September 30, 2018, options to purchase 11,007,146 shares of Class B common stock were outstanding under the 2012 Plan and no shares were available for future grant. As of September 30, 2018, the weighted average exercise price of outstanding options under the 2012 Plan was $27.13 per share.
As of September 30, 2018, the Company had outstanding RSUs that may be settled for 15,289,021 shares of Class B common stock which were granted pursuant to the Company's 2012 Equity Incentive Plan.
Original grants under the 2002 Plan and the 2012 Plan were of "common stock". Pursuant to the Twelfth Amended and Restated Articles of Incorporation authorized in July 2018, all such shares automatically converted to Class B shares of common stock.
2018 Equity Incentive Plan
The 2018 Equity Incentive Plan (the 2018 Plan) was approved in April, 2018. The 2018 Plan became effective upon the IPO and will serve as the successor to the 2012 Plan. The Company has reserved 20,135,603 shares of Class A common stock under the 2018 Plan and no more than 26,666,667 shares of Class A common stock will be issued pursuant to the exercise of incentive stock options.
The 2018 Plan authorizes the award of stock options, restricted stock awards, stock appreciation rights, RSUs, performance awards and stock bonuses. The 2018 Plan will provide for the grant of awards to employees, directors, consultants, independent contractors and advisors provided the consultants, independent contractors, directors and advisors render services not in connection with the offer and sale of securities in a capital-raising transaction. The exercise price of stock options will be at least equal to the fair market value of Class A common stock on the date of grant.
As of September 30, 2018, options to purchase 1,597,548 shares of Class A common stock were outstanding under the 2018 Plan and 18,535,077 shares were available for future grant. As of September 30, 2018, the weighted average exercise price of outstanding options under the 2018 Plan was $27.65 per share.
As of September 30, 2018, the Company had outstanding RSUs that may be settled for 1,497,548 shares of Class A common stock which were granted pursuant to the Company's 2018 Equity Incentive Plan.
Activity
The following table summarizes the components of stock-based compensation expense (in thousands):
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
 
Cost of revenue
 
$
16,156

 
$
1,906

 
$
20,025

 
$
5,543

Research and development
 
15,127

 
1,354

 
18,504

 
4,060

Sales and marketing
 
12,900

 
1,002

 
15,066

 
3,622

General and administrative
 
27,494

 
3,424

 
33,856

 
9,124

 
 
$
71,677

 
$
7,686

 
$
87,451

 
$
22,349


Stock option and RSU activity is as follows:
 
 
 
 
Outstanding Options/RSUs
 
 
 
 
Options/
RSUs
Available
for Grant
 
Number of
Shares
 
Outstanding
Options
Weighted
Average
Exercise
Price
 
Remaining
Contractual
Life (Years)
 
Aggregate
Intrinsic
Value
 
 
 
 
 
 
 
 
 
 
(in thousands)
Balances at December 31, 2016
 
2,768,450

 
13,171,196

 
$
23.85

 
6.11
 
$
74,717

Added to plan
 
647,159

 

 
 
 
 
 
 
Granted
 
(2,698,594
)
 
2,698,594

 
$
30.96

 
 
 
 
Exercised
 

 
(157,049
)
 
$
2.76

 
 
 
 
Cancelled
 
967,760

 
(967,760
)
 
$
7.44

 
 
 
 
Expired
 
(647,159
)
 

 
 
 
 
 
 
Balances at December 31, 2017
 
1,037,616

 
14,744,981

 
$
26.42

 
6.19
 
$
52,703

Added to plan
 
40,782,196

 

 
 
 
 
 
 
Granted
 
(16,853,050
)
 
16,853,050

 
$
16.24

 
 
 
 
Exercised
 

 
(395,611
)
 
$
4.03

 
 
 
 
Cancelled
 
916,572

 
(916,572
)
 
$
9.96

 
 
 
 
Expired
 
(7,348,257
)
 

 
 
 
 
 
 
Balances at September 30, 2018
 
18,535,077

 
30,285,848

 
$
25.88

 
6.75
 
$
110,750

Vested and expected to vest at September 30, 2018
 
 
 
13,038,789

 
$
26.07

 
6.67
 
$
104,482

Exercisable at September 30, 2018
 
 
 
7,858,582

 
$
27.51

 
5.15
 
$
51,608


Stock Options - During the three months ended September 30, 2018 and 2017, the Company recognized $71.7 million and $7.7 million of stock-based compensation expense, respectively. During the nine months ended September 30, 2018 and 2017, the Company recognized $87.5 million and $22.3 million of stock-based compensation expense, respectively. No stock-based compensation costs were capitalized in the three and nine months ended September 30, 2018 and 2017.
During the three months ended September 30, 2018 and 2017, the intrinsic value of stock options exercised was $2.9 million and $0.6 million, respectively. During the nine months ended September 30, 2018 and 2017, the intrinsic value of stock options exercised was $8.8 million and $3.1 million, respectively.
The Company granted 1,600,526 and zero options for Class A common stock during the three months ended September 30, 2018 and 2017, respectively. The Company granted 1,600,526 and zero options during the nine months ended September 30, 2018 and 2017, respectively.
The Company granted 14,828,664 and 113,612 options for Class B common stock during the three months ended September 30, 2018 and 2017, respectively. The Company granted 15,252,524 and 1,795,296 options during the nine months ended September 30, 2018 and 2017, respectively.
As of September 30, 2018 the Company had unrecognized compensation cost related to unvested stock options of $64.9 million. This expense is expected to be recognized over the remaining weighted-average period of 2.76 years. The Company had no excess tax benefits in the three and nine months ended September 30, 2018 and 2017.
Restricted Stock Units (RSUs) - RSU award shares under the 2012 and 2018 Plans shall begin vesting on January 21, 2019, the end of the lock-up period following the IPO, and the remaining shares will vest over a period of three years from such date. The estimated fair value of RSU awards is based on the fair value of the Company’s common stock on the date of grant.
The total fair value of RSUs granted during the three months ended September 30, 2018 and 2017 was $219.1 million and $1.5 million, respectively. The total fair value of RSUs granted during the nine months ended September 30, 2018 and 2017, was $220.4 million and $16.4 million, respectively.
As of September 30, 2018, the Company had $238.6 million of unrecognized stock-based compensation cost related to unvested RSUs. This expense is expected to be recognized over a weighted average period of 1.1 years.
A summary of the Company’s RSU activity and related information is as follows:
 
 
Number of
Awards
Outstanding
 
Weighted
Average Grant
Date Fair
Value
 
 
 
 
 
Unvested Balance at December 31, 2016
 
2,666,446

 
$
30.95

Granted
 
552,481

 
30.96

Vested
 
(33,896
)
 
30.96

Forfeited
 
(44,453
)
 
30.95

Unvested Balance at December 31, 2017
 
3,140,578

 
30.95

Granted
 
13,788,433

 
15.98

Vested
 
(17,793
)
 
19.67

Forfeited
 
(124,649
)
 
25.13

Unvested Balance at September 30, 2018
 
16,786,569

 
$
18.71


2018 Employee Stock Purchase Plan
In April 2018, the Company adopted the 2018 Employee Stock Purchase Plan (ESPP). The ESPP became effective upon the Company's IPO in July 2018. The ESPP is intended to qualify under Section 423 of the Internal Revenue Code. 3,333,333 shares of Class A common stock are initially reserved for issuance under the plan, subject to annual additions to a limit of 33,333,333 total shares. The ESPP allows eligible employees to purchase shares, within limits, of the Company’s Class A common stock through payroll deductions at a price per share equal to 85% of the lesser of the fair market value of the Company’s Class A common stock (i) on the first trading day of the applicable purchase period and (ii) the last trading day of each purchase period in the offering period. The ESPP provides for four 6-month purchase periods beginning in February 15 and August 15 of each year within each twenty-four month offering period. The initial offering period began in July 2018 and ends on August 14, 2020. Subsequent offering periods begin each February 15 and August 15.
Employee Benefit Plan
The Company maintains a tax-qualified 401(k) retirement plan for all employees who satisfy certain eligibility requirements, including requirements relating to age. Under the 401(k) plan, employees may elect to defer up to 60% of eligible compensation, subject to applicable annual Code limits. The Company does not match any contributions made by employees, including executives, but has the discretion to do so. The Company intends for the 401(k) plan to qualify under Section 401(a) and 501(a) of the Internal Revenue Code so that contributions and income earned on contributions are not taxable to employees until withdrawn from the plan.