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 remain outstanding, subject to the terms of the 2002 Plan, until such shares are issued under those awards (by exercise of stock options) or until the awards terminate or expire by terms.

Grants under the 2002 Plan generally vest ratably over a four-year period from the vesting commencement date and expire ten years from grant date. Original grants under the 2002 Plan were for "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.

As of December 31, 2018, options to purchase 2,371,247 shares of Class B common stock were outstanding under the 2002 Plan and no additional awards had been or were available for grant for the year. As of December 31, 2018, the weighted average exercise price of outstanding options was $20.19 per share.

2012 Equity Incentive Plan

The Company's 2012 Equity Incentive Plan (the "2012 Plan") was approved in August 2012. The 2012 Plan provided 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.

Grants under the 2012 Plan generally vest ratably over a four-year period from the vesting commencement date and expire ten years from grant date. Original grants under the 2012 Plan were for "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. As of December 31, 2018, options to purchase 10,952,351 shares of Class B common stock were outstanding under the 2012 Plan and no shares were available for future grant. As of December 31, 2018, the weighted average exercise price of outstanding options under the 2012 Plan was $27.13 per share. As of December 31, 2018, the Company had outstanding RSUs that may be settled for 15,202,179 shares of Class B common stock under the plan.

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 20,278,268 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 provides 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 is at least equal to the fair market value of Class A common stock on the date of grant. Grants under the 2018 Plan generally vest ratably over a four-year period from the vesting commencement date and expire ten years from grant date.

As of December 31, 2018, options to purchase 1,234,822 shares of Class A common stock were outstanding under the 2018 Plan and 17,457,847 shares were available for future grant. As of December 31, 2018, the weighted average exercise price of outstanding options under the 2018 Plan was $26.33 per share. As of December 31, 2018, the Company had outstanding RSUs that may be settled for 1,582,621 shares of Class A common stock which were granted pursuant to the plan.

Stock-Based Compensation Expense

The Company used the following weighted-average assumptions in applying the Black-Scholes valuation model:



	Years Ended December 31,
	2018	2017	2016

Risk-free interest rate	2.49% - 3.06%	1.95% -2.08%	1.23% -1.69%
Expected term (years)	6.18—6.69	6.08—6.62	6.00—6.54
Expected dividend yield	—	—	—
Expected volatility	52.4% -56.1%	55.6% - 61.0%	59.3% - 60.9%

The following table summarizes the components of stock-based compensation expense in the consolidated statements of operations (in thousands):



	Years Ended December 31,
	2018		2017		2016

Cost of revenue	$	41,481	$	7,734	$	6,005
Research and development	39,030		5,560		4,686
Sales and marketing	32,284		4,684		5,600
General and administrative	67,489		12,501		11,866
	$	180,284	$	30,479	$	28,157

Activity

The following table summarizes the stock option activity under our stock plans during the reporting period (in thousands), except per share amounts:



	Outstanding Options
	Number of Shares		Weighted Average Exercise Price		Remaining Contractual Life (Years)	Aggregate Intrinsic Value

						(in thousands)
Balances at December 31, 2016	10,504,750		$	23.85	6.11	$	74,717
Granted	2,146,113		30.96
Exercised	(123,153	)	3.51
Cancelled	(923,307	)	10.78
Balances at December 31, 2017	11,604,403		26.42		6.01	52,682
Granted	4,202,284		19.79
Exercised	(398,704	)	3.98
Cancelled	(849,563	)	12.51
Balances at December 31, 2018	14,558,420		25.93		6.78	3,084
Vested and expected to vest at December 31, 2018	14,133,451		26.09		6.69	3,084
Exercisable at December 31, 2018	8,282,247		27.72		5.09	3,084

Stock-based Compensation - During the years ended December 31, 2018, 2017 and 2016, the Company recognized $180.3 million, $30.5 million and $28.2 million of total stock-based compensation expense, respectively. No stock-based compensation costs were capitalized in the years ended December 31, 2018, 2017 and 2016.

Stock Options - During the years ended December 31, 2018, 2017 and 2016, the Company recognized $33.3 million, $29.2 million and $27.8 million of stock-based compensation expense for stock options, respectively.

During the years ended December 31, 2018, 2017 and 2016, the intrinsic value of stock options exercised was $9.2 million, $3.4 million and $2.6 million, respectively.

The Company granted 2,823,266 options for Class A common stock during the year ended December 31, 2018. The Company granted 15,252,524 options for Class B common stock during the years ended December 31, 2018. The weighted-average grant-date fair value of the awards was $14.85.

The Company granted 2,698,594 and 4,883,710 options for Class B common stock for the years ended and December 31, 2017 and 2016, respectively. The weighted-average grant-date fair value of the awards was $20.25 and $23.94, for the years ended and December 31, 2017 and 2016, respectively.

As of December 31, 2018 and 2017, the Company had unrecognized compensation expense related to unvested stock options of $70.4 million and $62.4 million, respectively. This expense is expected to be recognized over the remaining weighted-average period of 2.8 years and 2.4 years, respectively. The Company had no excess tax benefits in the years ended December 31, 2018 and 2017. Cash received from stock options exercised totaled $1.6 million, $0.4 million and $1.2 million for the years ended December 31, 2018, 2017 and 2016, respectively.

Restricted Stock Units (RSUs) - RSU award shares under the 2012 and 2018 Plans began 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.

During the years ended December 31, 2018, 2017 and 2016, the Company recognized $142.4 million, $1.3 million and $0.3 million of stock-based compensation expense for RSUs, respectively.

The total weighted-average grant-date fair value of RSUs granted during the years ended December 31, 2018, 2017 and 2016, was $16.02, $30.96 and $30.96, respectively.

As of December 31, 2018, the Company had $163.8 million of unrecognized stock-based compensation cost related to unvested RSUs. This expense is expected to be recognized over a weighted average period of 0.8 years. As of December 31, 2017, the Company had $97.2 million of unrecognized stock-based compensation cost related to unvested RSUs. This expense was expected to be recognized over a weighted average period of 2.1 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	13,873,506		16.02
Vested	(17,793	)	19.67
Forfeited	(211,491	)	21.22
Unvested Balance at December 31, 2018	16,784,800		18.74

The following table presents the stock activity and the total number of shares available for grant under our stock plans as of December 31, 2018:



	Plan Shares Available for Grant


Balances at December 31, 2016	2,768,450
Added to plan	647,159
Granted	(2,698,594	)
Exercised	—
Cancelled	967,760
Expired	(647,159	)
Balances at December 31, 2017	1,037,616
Added to plan	40,924,861
Granted	(18,075,790	)
Exercised	—
Cancelled	1,061,054
Expired	(7,489,894	)
Balances at December 31, 2018	17,457,847

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. A total of 3,333,333 shares of Class A common stock were initially reserved for issuance under the plan. The number of shares reserved for issuance under our ESPP will increase automatically on the 1st day of January of each of the first nine years following the first offering date by the number of shares equal to 1% of the total outstanding shares of our common stock and common stock equivalents as of the immediately preceding December 31 (rounded to the nearest whole share). The aggregate number of our shares that may be issued over the term of our ESPP is 33,333,333 Class A common stock.

The ESPP allows eligible employees to purchase shares, subject to purchase limits of 2,500 shares during each six-month period or $25,000 worth of stock for each calendar year, 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.

For the first offering period, which began on July 14, 2018, the fair market value of the common stock used for the first offering period was $15.00 per share, the IPO price of the Company’s Class A common stock. As of December 31, 2018, the Company recognized $4.6 million of compensation expense related to the ESPP plan.

We use the Black-Scholes option pricing model to determine the fair value of shares purchased under the 2018 ESPP with the following weighted average assumptions on the date of grant:



		Year Ended December 31,
		2018

Risk-free interest rate		2.20% - 2.67%
Expected term (years)		0.56—2.05
Expected dividend yield		—
Expected volatility		47.0% - 52.7%

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. Therefore, the costs of the plan were immaterial for the years ended December 31, 2018 and 2017. 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.

Common Stock Warrants

In connection with the 6% Convertible Promissory Notes, the Company agreed to issue common stock warrants to related parties J.P. Morgan and CPPIB for the right to purchase the Company’s common stock up to a maximum of 146,666 shares and 166,222 shares, respectively. On August 31, 2017, J.P. Morgan assigned their warrants to CPPIB giving all 312,888 warrant shares to CPPIB and the warrants were net exercised for 312,575 net shares of Class B Common stock upon the completion of the IPO in July 2018.