Equity-Based Compensation

2005 Common Membership Unit Plan

In 2005, Switch, Ltd. established the 2005 Common Membership Unit Plan (the "Unit Option Plan") for the purpose of attracting and retaining the best available personnel for positions of substantial responsibility, to provide additional incentive to employees and consultants of Switch and to promote the success of its business.

All options granted under the Unit Option Plan were intended to be treated as non-statutory unit options under the Internal Revenue Code of 1986, as amended. The term of each option was the term stated in the option agreement, which was no more than 10 years from the date of grant.

Options exercised under the plan provide the purchaser with full rights equivalent to those of existing members and holders as of the date of exercise. Since the inception of the Unit Option Plan through December 31, 2017, members have exercised or exchanged 21,440,000 unit awards.

The unit option activity under the Unit Option Plan is summarized as follows:



	Number of Units (in thousands)		Weighted Average Exercise Price per Unit		Weighted Average Remaining Contractual Life (Years)	Aggregate Intrinsic Value⁽¹⁾ (in thousands)
Unit options outstanding—December 31, 2014	6,752		$	2.07
Unit options exercised	(2,575	)	2.00
Unit options settled	(3,536	)	2.04
Unit options outstanding—December 31, 2015	641		2.52		4.73	$	1,930
Unit options exercised	(119	)	2.67
Unit options settled	(160	)	2.67
Unit options forfeited	(195	)	2.67
Unit options outstanding—December 31, 2016	167		2.09		1.75	$	939
Unit options exercised	(57	)	2.85
Unit options outstanding—December 31, 2017	110		$	2.85	0.75	$	1,691
Unit options vested and exercisable—December 31, 2015	167		$	2.09	2.75	$	574
Unit options vested and exercisable—December 31, 2016	167		$	2.09	1.75	$	939
Unit options vested and exercisable—December 31, 2017	110		$	2.85	0.75	$	1,691

________________________________________


(1)	The intrinsic value is calculated as the difference between the fair value of the unit on December 31, 2017, 2016, and 2015 and the exercise price of the option.

The number and weighted average grant date fair value for nonvested unit options outstanding are as follows:



	Number of Nonvested Options Outstanding (in thousands)		Weighted Average Grant Date Fair Value per Option
Nonvested unit options outstanding—December 31, 2014	1,398		$	0.93
Options vested	(924	)	0.90
Nonvested unit options outstanding—December 31, 2015	474		0.97
Options forfeited	(195	)	0.97
Unit options vested	(279	)	0.97
Nonvested unit options outstanding—December 31, 2016	—		—
Nonvested unit options outstanding—December 31, 2017	—		$	—

In February 2015, Switch, Ltd. settled the outstanding notes receivable issued to members including accrued interest of $18.3 million by repurchasing 4,286,000 units from certain of its members. Additionally, Switch, Ltd. permitted employees holding 4,293,000 options to exercise their options by net settling the exercise price through a repurchase of 2,433,000 units from those employees.

In addition, in November 2015, Switch, Ltd. permitted employees holding 1,758,000 options to exercise their options by net settling the exercise price of $3.9 million and related payroll taxes of $1.5 million, for a total value of $5.4 million.

The following additional disclosures are provided for unit options during the periods presented:



	Years Ended December 31,
	2017		2016		2015
	(in thousands)
Total fair value of unit options vested	$	—	$	271	$	835
Total aggregate intrinsic value of unit options exercised⁽¹⁾	$	869	$	601	$	9,098

________________________________________


(1)	The intrinsic value is calculated as the difference between the fair value of the unit on December 31, 2017, 2016, and 2015 and the exercise price of the option.

Common Unit Awards

In 2012, Switch, Ltd. began issuing common unit awards ("Incentive Units") containing a hurdle amount (similar to an exercise price) where employees benefited from any appreciation in the value of their awards above the hurdle amount under the Switch, Ltd. operating agreement.

In September 2017, Switch, Ltd. granted 7,500,000 Incentive Units to its Chief Executive Officer (the "CEO Award"). Switch, Ltd. also granted 1,511,572 Incentive Units to its President with a hurdle amount of $11.69 per Incentive Unit (the "President Award"). The CEO Award contained a provision that caused the Incentive Units underlying the CEO Award to convert into Common Units on a one-to-one basis in connection with the closing of Switch, Inc.'s IPO. Each of the CEO Award and President Award vested as to 40% of the award on the closing of Switch, Inc.'s IPO and will subsequently vest as to 2.5% of the award on each of the eight quarterly anniversaries of the closing of Switch, Inc.'s IPO and 5% of the award each quarterly anniversary thereafter, subject to continued service. As vesting of the CEO Award and President Award commenced solely upon the closing of Switch, Inc.'s IPO or other qualifying event, they were treated as performance based awards. In connection with the closing of Switch, Inc.'s IPO, all outstanding Incentive Units, other than the CEO Award and the President Award, accelerated in full and were converted into Common Units after net settling the hurdle amount. In connection with the effectiveness of the Switch Operating Agreement, the CEO Award converted into 7,500,000 Common Units and the President Award converted into 472,144 Common Units after net settling the hurdle amount. As of December 31, 2017, unvested Common Units related to the CEO Award and President Award totaled 4,783,286 with a weighted average grant date fair value per unit of $11.11. As of December 31, 2017, total equity-based compensation cost related to all unvested Common Units is $46.3 million, which is expected to be recognized over a weighted average period of 3.78 years. If a forfeiture of unvested Common Units under the CEO Award and President Award occurs, the associated shares of Class C common stock and Class B common stock, respectively, are also forfeited.

The Incentive Unit activity is summarized below:



	Number of Units (in thousands)		Weighted Average Hurdle Amount per Unit		Weighted Average Remaining Contractual Life (Years)	Aggregate Intrinsic Value⁽¹⁾ (in thousands)
Incentive Units outstanding—December 31, 2014	8,760		$	3.53
Incentive Units granted	10,444		4.35
Incentive Units forfeited	(899	)	3.71
Incentive Units outstanding—December 31, 2015	18,305		3.99		2.85	$	28,235
Incentive Units granted	2,197		6.38
Incentive Units forfeited	(1,109	)	5.08
Incentive Units outstanding—December 31, 2016	19,393		4.20		1.98	$	68,139
CEO Award	7,500		—
President Award	1,512		11.69
Incentive Units forfeited	(873	)	4.62
Incentive Units net settled at IPO	(5,589	)	5.74
Incentive Units converted into Common Units at IPO	(21,943	)	2.87
Incentive Units outstanding—December 31, 2017	—		$	—	—	$	—
Incentive Units vested—December 31, 2015	1,191		$	3.47	1.94	$	2,454
Incentive Units vested—December 31, 2016	4,558		$	3.97	1.50	$	17,053
Incentive Units vested—December 31, 2017	22,125		$	3.82	—	$	318,033

________________________________________


(1)	The intrinsic value is calculated as the difference between the fair value of the Incentive Unit on December 31, 2017, 2016, and 2015 and the hurdle amount of the Incentive Unit.

The number and weighted average grant date fair value for nonvested Incentive Units granted and outstanding are as follows:



	Number of Nonvested Incentive Units Outstanding (in thousands)		Weighted Average Grant Date Fair Value per Incentive Unit
Nonvested Incentive Units outstanding—December 31, 2014	7,977		$	1.36
Incentive Units granted	10,444		$	1.18
Incentive Units forfeited	(899	)	$	1.26
Incentive Units vested	(408	)	$	1.36
Nonvested Incentive Units outstanding—December 31, 2015	17,114		$	1.26
Incentive Units granted	2,197		$	2.04
Incentive Units forfeited	(1,109	)	$	1.75
Incentive Units vested	(3,367	)	$	1.24
Nonvested Incentive Units outstanding—December 31, 2016	14,835		$	1.34
CEO Award	7,500		$	11.69
President Award	1,512		$	1.98
Incentive Units forfeited	(873	)	$	0.97
President Award net settled at IPO	(624	)	$	1.98
Nonvested Incentive Units converted into nonvested Common Units at IPO—CEO Award	(4,500	)	$	11.69
Nonvested Incentive Units converted into nonvested Common Units at IPO—President Award	(283	)	$	1.98
Incentive Units vested	(17,567	)	$	3.14
Nonvested Incentive Units outstanding—December 31, 2017	—		$	—

The weighted average assumptions used in estimating the grant date fair value of these awards, exclusive of the CEO Award, are listed in the table below:



	Years Ended December 31,
	2017		2016		2015
Expected volatility	29.3	%	39.8	%	35.1	%
Risk-free interest rate	1.4	%	1.5	%	1.4	%
Expected term (in years)	2.0		3.7		3.1
Dividend rate	0.6	%	0.9	%	1.3	%

As the CEO Award contained a provision that caused the Incentive Units underlying the CEO Award to convert into Common Units on a one-to-one basis in connection with the closing of Switch, Inc.'s IPO, the grant date fair value of the underlying units was $11.69 per unit.

Excluding $17.1 million of fair value attributable to the accelerated vesting of Incentive Units as a result of the IPO and $1.2 million and $35.1 million of fair value related to the vesting of the President Award and CEO Award, respectively, in 2017 the total fair value of Incentive Units vested for the years ended December 31, 2017, 2016, and 2015 was $1.8 million, $4.2 million, and $555,000, respectively.

During the year ended December 31, 2017, Switch, Ltd. awarded 150,880 fully vested Common Units at a fair market value of $7.39 per unit totaling $1.1 million in equity-based compensation. During the year ended December 31, 2016, Switch, Ltd. awarded 150,895 fully vested Common Units at a fair market value of $5.53 per unit totaling $835,000 in equity-based compensation.

2017 Incentive Award Plan

On September 22, 2017, Switch, Inc.'s Board of Directors adopted the 2017 Incentive Award Plan (the "2017 Plan"). The 2017 Plan provides that the initial aggregate number of shares of Class A common stock reserved and available for issuance be 25,000,000 shares of Class A common stock plus an increase each January 1, beginning on January 1, 2018 and ending on and including January 1, 2027, equal to the lesser of (A) 17,000,000 shares of Class A common stock, (B) 5% of the aggregate number of shares of Switch, Inc.'s Class A common stock, Class B common stock and Class C common stock outstanding on the final day of the immediately preceding calendar year and (C) such smaller number of shares of Class A common stock as is determined by the Board of Directors. This number is subject to adjustment in the event of a stock split, stock dividend or other defined changes in Switch, Inc.'s capitalization. The 2017 Plan was effective as of its adoption date.

All awards granted under the 2017 Plan are intended to be treated as (i) stock options, including incentive stock options, (ii) stock appreciation rights, (iii) non-statutory stock options under the Internal Revenue Code of 1986, as amended, (iv) restricted stock, (v) restricted stock units ("RSUs"), or (vi) other stock or cash based awards as may be determined by the plan's administrator from time to time. The term of each option award shall be no more than 10 years from the date of grant. Options exercised under the 2017 Plan provide the purchaser with full rights equivalent to those of existing Class A common stock holders and holders as of the date of exercise. The Company's policy for issuing shares upon stock option exercise is to issue new shares of Class A common stock. Additionally, the Switch Operating Agreement states that Switch, Ltd. will maintain at all times a one-to-one ratio between the number of Common Units owned by Switch, Inc. and the number of outstanding shares of Class A common stock, including those issued as a result of stock option exercises and vesting of RSU awards.

In October 2017, Switch, Inc. granted stock options covering 5,724,896 shares of Class A common stock under the 2017 Plan with an exercise price of $17.00 per share, the public offering price per share of the Class A common stock in Switch, Inc.'s IPO. Of these stock options, stock options covering 5,626,470 shares of Class A common stock were vested in full as of the closing date of the IPO resulting in equity-based compensation expense of $28.1 million recorded on the closing date of the IPO. Stock options covering the remaining 98,426 shares of Class A common stock will vest ratably over three years.

The following table summarizes information related to stock options:



	Number of Stock Options (in thousands)	Weighted Average Exercise Price per Stock Option		Weighted Average Remaining Contractual Life (Years)	Aggregate Intrinsic Value⁽¹⁾ (in thousands)
Stock options outstanding—December 31, 2016	—	$	—
Stock options granted	5,725	$	17.00
Stock options outstanding—December 31, 2017	5,725	$	17.00	9.77	$	6,813
Stock options vested and exercisable—December 31, 2017	5,626	$	17.00	9.77	$	6,695

________________________________________


(1)	The intrinsic value is calculated as the difference between the fair value of the stock option on December 31, 2017 and the exercise price of the stock option.

The number and weighted average grant date fair value for nonvested stock options granted and outstanding are as follows:



	Number of Stock Options (in thousands)		Weighted Average Grant Date Fair Value
Nonvested stock options outstanding—December 31, 2016	—		$	—
Stock options granted	5,725		$	5.00
Stock options vested	(5,626	)	$	4.99
Nonvested stock options outstanding—December 31, 2017	99		$	5.37

The weighted average assumptions used in estimating the grant date fair value of the stock options are listed in the table below:



	Year Ended December 31, 2017
Expected volatility	31.8	%
Risk-free interest rate	1.9	%
Expected term (in years)	5.0
Dividend rate	0.6	%

As of December 31, 2017, total equity-based compensation cost related to all unvested stock options is $451,000, which is expected to be recognized over a weighted average period of 2.76 years.

Pursuant to the terms of the CEO Award, since the total number of Common Units granted under the CEO Award was equal to less than 3% of all outstanding shares of Switch, Inc. following the closing of its IPO, including the exercise of the underwriters' option to purchase additional shares (the "Threshold"), Switch, Inc. granted 50,638 RSUs (the "CEO RSU Award") to the Chief Executive Officer of Switch, Ltd. under the 2017 Plan in December 2017, such that the CEO Award together with the CEO RSU Award represented a number of shares of common stock of Switch, Inc. equal to the Threshold. The CEO RSU Award vested as to 40% of the award on the grant date and will subsequently vest as to 2.5% of the award on each of the eight quarterly anniversaries of the closing of Switch, Inc.'s IPO and 5% of the award each quarterly anniversary thereafter, subject to continued service.

The following table summarizes information related to RSUs:



	Number of RSUs (in thousands)		Weighted Average Grant Date Fair Value per RSU
RSUs outstanding—December 31, 2016	—		$	—
CEO RSU Award	51		$	18.01
RSUs vested	(20	)	$	18.01
RSUs outstanding—December 31, 2017	31		$	18.01

As of December 31, 2017, total equity-based compensation cost related to all unvested RSU awards is $547,000, which is expected to be recognized over a weighted average period of 3.78 years.

Total equity-based compensation recognized in the consolidated statements of operations and comprehensive income (loss) for the 2017 Plan, Unit Option Plan, Incentive Units, and Common Units is as follows for each of the periods presented:



	Years Ended December 31,
	2017		2016		2015
	(in thousands)
Cost of revenue	$	1,289	$	181	$	—
Selling, general and administrative	83,501		5,754		5,237
Total equity-based compensation expense	$	84,790	$	5,935	$	5,237