7. Stockholders’ Equity and Employee Benefit Plans

Common stock and preferred stock

In connection with the Company’s IPO, the Company’s stockholders approved the Fourth Amended and Restated Certificate of Incorporation to authorize the issuance of up to 900,000,000 shares, consisting of 800,000,000 shares of common stock at par value of $0.00001 per share and 100,000,000 shares of preferred stock at par value $0.00001 per share. In connection with the Fourth Amended and Restated Certificate of Incorporation, common stock and additional paid-in capital amounts in consolidated balance sheets have been adjusted to reflect the change in par value.

During the nine months ended September 30, 2018, the Company repurchased approximately $16,000 of common stock (1,159 shares) at a price of $13.65 per share, which was approximately the fair value of common stock at such time. During the nine months ended September 30, 2017, the Company repurchased approximately $144,000 of common stock (11,791 shares) at $12.21 per share, which was approximately the fair value of common stock.

Equity Incentive Plans

The Company has two equity incentive plans: the 2011 Equity Incentive Plan ( the “2011 Plan”) and the 2018 Equity Incentive Plan (the “2018 Plan”). The Company’s stockholders approved the 2018 Plan on September 5, 2018, and established it with an adjustable reserve of 9,394,744 shares of common stock. Additionally, upon the completion of the Company’s IPO in September 2018, the 2011 Plan was terminated and all shares that remained available for future issuance under the 2011 Plan at that time were transferred to the 2018 Plan. To the extent that grants outstanding under the 2011 Plan terminate, cancel or are forfeited, the shares reserved for issuance under such grants are transferred to the 2018 Plan and become available for subsequent grant thereunder.

Under the 2018 Plan, the Board or a committee of the Board, may grant incentive and nonqualified stock options, stock appreciation rights, restricted or unrestricted stock awards, restricted stock units (“RSUs”), phantom stock, performance awards or other stock-based awards to employees, directors and other individuals providing services to the Company. The purpose of the 2018 Plan is to promote the long-term growth and profitability of the Company by (i) providing employees with incentives to improve stockholder value and to contribute to the growth and financial success of the Company through their future services, and (ii) enabling the Company to attract, retain and reward the best‑available persons. The options granted under the 2018 Plan, may be granted at a price not less than the fair market value on the grant date.

The Board, or a committee of the Board, has granted options with an exercise price at or which approximates the fair value on the grant date to new hires, except for the out-of-the-money options granted to certain employees as discussed below. Grants of time-based awards generally vest over a four-year period for new hires and over a three-year period for subsequent grants to existing employees. The service condition for the majority of these awards are satisfied generally over the applicable vesting period. Options expire as determined by the Board, or committee of the Board, but not more than ten years after the date of the grant. In 2015, the Company began granting restricted stock units that contain both a service condition and Performance Vesting Condition. Both the service condition and Performance Vesting Condition must be met in order for these awards to vest and issue. The Performance Vesting Condition occurred upon the effectiveness of the registration statement for the Company's IPO, which was September 25, 2018.

As of September 30, 2018, 13,906,190 shares of common stock remain available for grant under the 2018 Plan.

The following is a summary of stock option activity for the current year period:

	Stock Options
	Number of Shares			Weighted Average Exercise Price	Aggregate Intrinsic Value (in thousands)	Weighted Average Remaining Contractual Term (in years)
Outstanding, vested and expected to vest at December 31, 2017		13,809,069		$14.82	$9,292		7.8
Granted		5,455,835		$13.32
Exercised		(66,265	)	$6.62
Forfeited		(690,207	)	$15.23
Expired		(139,558	)	$13.95
Outstanding, vested and expected to vest at September 30, 2018		18,368,874		$14.39	$30,217		7.8
Exercisable at September 30, 2018		9,400,643		$14.19	$17,425		6.7

The following is a summary of restricted stock awards for the current year period:

	Restricted Stock Awards
	Number of Shares			Weighted Average Grant-Date Fair Value	Weighted Average Remaining Contractual Term (in years)
Unvested at December 31, 2017		480,866		$14.38		0.6
Vested		(480,866	)	$14.38
Unvested at September 30, 2018		—		$0.00		0.0

The following is a summary of restricted stock units for the current year period:

	Restricted Stock Units
	Number of Shares			Weighted Average Grant-Date Fair Value	Weighted Average Remaining Contractual Term (in years)
Unvested at December 31, 2017		8,838,281		$12.52		2.2
Granted		3,483,580		$13.33
Vested, gross of shares withheld for employee payroll taxes		(5,158,846	)	$12.70
Forfeited/canceled, including shares withheld for employee payroll taxes		(866,208	)	$12.64
Unvested at September 30, 2018		6,296,807		$12.81		1.2

Fair Value of Stock Options

Lattice-Binomial Option Valuation Model

Stock options granted during the three and nine months ended September 30, 2017 were out-of-the-money and valued using the Lattice-Binomial Option Valuation Model which estimates fair value based on the assumed changes in prices for the option grants’ underlying asset over their contractual life. The fair value of the out-of-the-money stock options is being amortized on a straight-line basis over the requisite service period of the awards granted. The fair value of each out-of-the-money stock option was estimated on their grant dates using the following assumptions:

	Three Months Ended September 30,		Nine Months Ended September 30,
	2018	2017	2018	2017
Expected life (in years)	n/a	5.7 to 6.1	n/a	5.7 to 6.1
Risk-free interest rate	n/a	2.4%	n/a	2.4%
Volatility	n/a	50%	n/a	50%
Dividend yield	n/a	—%	n/a	—%
Fair value of common stock	n/a	$11.84	n/a	$11.84

Black-Scholes Option Valuation Model

Stock options granted during the three and nine months ended September 30, 2018 were at-the-money and valued using the Black-Scholes Valuation Model. The fair value of the at-the-money stock options is being amortized on a straight-line basis over the requisite service period of the awards granted. The fair value of each at-the-money stock option was estimated on their grant dates using the following assumptions:

	Three Months Ended September 30,		Nine Months Ended September 30,
	2018	2017	2018	2017
Expected life (in years)	5.8 to 6.0	n/a	5.8 to 6.0	n/a
Risk-free interest rate	2.8% - 3.0%	n/a	2.7% - 3.0%	n/a
Volatility	44% - 60%	n/a	43% - 60%	n/a
Dividend yield	—%	n/a	—%	n/a
Fair value of common stock	$12.00 to $13.65	n/a	$12.00 to $13.65	n/a

2018 Employee Stock Purchase Plan

On September 5, 2018, the Company’s stockholders approved the 2018 Employee Stock Purchase Plan (the “ESPP”), which became effective prior to the completion of the IPO, and established with an initial reserve of 2,673,444 shares of common stock. As of September 30, 2018, 2,673,444 shares of common stock remain available for grant under the 2018 ESPP.

Except for the initial offering period, the ESPP provides for 24-month offering periods beginning May 22 and November 22 of each year, and each offering period will consist of four six-month purchase periods. The initial offering period began on September 25, 2018 and will end on November 22, 2020. On each purchase date, eligible employees will purchase the shares at a price per share equal to 85% of the lesser of (1) the fair market value of the Company’s common stock on the offering date, or (2) the fair market value of its common stock on the purchase date.

Stock-Based Compensation Expense

Stock-based compensation expense recognized in the condensed consolidated financial statements is as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2018		2017		2018		2017
Cost of revenue	$	6,472	$	634	$	7,776	$	1,870
Research and development		37,490		2,799		43,903		7,065
Sales and marketing		14,496		1,322		16,411		6,622
General and administrative		40,354		3,667		48,014		10,806
Stock-based compensation expense, net of amounts capitalized		98,812		8,422		116,104		26,363
Capitalized stock-based compensation expense		495		587		1,251		2,510
Stock-based compensation expense	$	99,307	$	9,009	$	117,355	$	28,873

Between November 2013 through May 2015, the Company granted approximately 16.7 million of stock options at $42.33 per share. In August 2015, the Company repriced and exchanged (representing a probable to probable modification pursuant to ASC 718) approximately 11.9 million stock options at a ratio of two original options to purchase shares issued per one new option to purchase shares. As a result, the Company issued approximately 6.0 million options with an exercise price of $16.03 (the fair value per common share was $14.38 at the exchange date) in exchange for the previously granted stock options. The reprice and exchange resulted in an additional $19.8 million of stock-based compensation expense to be recognized over the requisite service period of the new award which was four years from exchange date. As of September 30, 2018, approximately $2.0 million of unrecognized compensation expense remains relating to the repriced and exchanged awards which will be recognized over the remaining service periods through 2019.

In the second quarter of 2017, the Company modified (an improbable to probable modification pursuant to ASC 718) the terms of approximately 0.5 million restricted stock awards which resulted in a reduction in stock-based compensation expense (as the award fair value at the modification date was less than at the grant date) of $1.1 million and was fully recognized at the modification date and recognized as sales and marketing costs in the consolidated statement of operations during the nine months ended September 30, 2017.

During the three months ended March 31, 2018, the Company modified (an improbable to probable modification pursuant to ASC 718) the terms of approximately 0.5 million restricted stock awards which resulted in a reduction in stock-based compensation expense (as the award fair value at the modification date was less than at the grant date) of $0.5 million and was fully recognized at the modification date (in the first quarter of 2018) and recognized as research and development, and sales and marketing costs in the consolidated statement of operations during the nine months ended September 30, 2018.

As of September 30, 2018, unamortized stock-based compensation was as follows:

	Unrecognized stock-based compensation (in thousands)		Weighted average vesting period (in years)
Stock options	$	51,020		2.4
Restricted stock units (service-based)		4,800		1.1
Restricted stock units (performance-based)⁽¹⁾		37,865		1.6
Total unrecognized stock-based compensation	$	93,685

(1)

The Performance Vesting Condition occurred upon the effectiveness of the registration statement for the Company's IPO, which was September 25, 2018. The remaining unrecognized stock-based compensation expense is recognized on an accelerated basis over the weighted-average remaining requisite service period.

401(k) Plan

In the United States, the Company offers its employees a defined contribution plan that qualifies as a deferred salary arrangement under Section 401 of the U.S. Internal Revenue Code (“401(k) Plan”). Under the 401(k) Plan, participating employees may defer a portion of their pretax earnings not to exceed the maximum amount allowed by the Internal Revenue Service. The Company currently provides a matching contribution of 25% of deferrals for eligible employees. Compensation expense for the Company's matching contributions was $0.5 million and $1.8 million during the three and nine months ended September 30, 2018, respectively, and $0.4 million and $1.5 million during the three and nine months ended September 30, 2017, respectively.