Stockholders' Equity

Employee and Director Stock Options, Restricted Stock and ESPP

We have four equity incentive plans (the "1996 Stock Incentive Plan," the "2001 Stock Plan," the "2013 Incentive Plan" and the "2011 Non-Employee Director Equity Incentive Plan"). Awards granted under the 1996 Stock Incentive Plan and the 2001 Stock Plan remain outstanding, but no shares are available for future awards under these plans. Shares remain available for grants to employees and non-employee directors only under the 2013 Incentive Plan and the 2011 Non-Employee Director Equity Incentive Plan. "Incentive stock options" under Section 422 of the U.S. Internal Revenue Code and restricted stock unit ("RSU") grants are part of our equity compensation practices for employees who receive equity grants. Options and RSUs generally vest quarterly over a four-year period beginning on the grant date. The contractual terms of options granted do not exceed ten years.

In May 2012, the Company's stockholders approved the 2012 Employee Stock Purchase Plan ("2012 ESPP"), which authorizes the issuance of 3.0 million shares of common stock to eligible employees to purchase shares of common stock through payroll deductions, which cannot exceed 10% of an employee's compensation. The purchase price of the shares is the lower of 85% of the fair market value of the stock at the beginning of each six-month offering period or 85% of the fair market value at the end of such period. Employees are required to hold purchased shares for six months. We have treated the 2012 ESPP as a compensatory plan and recorded related compensation expense of $0.6 million, $0.4 million and $0.3 million for the fiscal years 2016, 2015 and 2014, respectively.

At December 31, 2016, a total of 1.3 million shares of our common stock were available for future grants under the 2013 Incentive Plan and the 2011 Non-Employee Director Equity Incentive Plan. Shares subject to stock option grants that expire or are canceled, without delivery of such shares, generally become available for re-issuance under equity incentive plans. At December 31, 2016, a total of 1.9 million shares of our common stock were available for future purchases under the 2012 ESPP. On March 10, 2015, in conjunction with the acquisition of Silicon Image, we assumed certain outstanding stock option and RSU grants of the Silicon Image Equity Incentive Plans. We assumed all stock option grants that were unvested or vested and out-of-the-money and all outstanding unvested RSU grants. The exchange ratio for the conversion was 1.09816 for all grants. The conversion ratio was determined by the weighted average closing price of Lattice common stock for the ten days prior to the acquisition date divided by the offer price of $7.30. The converted outstanding option grants totaled 2,087,605 shares and converted RSU grants totaled 2,025,255 shares as of March 10, 2015. As of December 31, 2016, 787,130 options and 228,659 RSU shares arising from this conversion remained outstanding.

Stock-Based Compensation

Total stock-based compensation expense included in our Consolidated Statements of Operations was as follows:



	Year Ended
(In thousands)	December 31, 2016		January 2, 2016		January 3, 2015
Cost of products sold	$	888	$	1,416	$	819
Research and development	7,928		9,141		5,176
Selling, general, and administrative	7,397		6,793		6,807
Acquisition related charges	—		4,293		—
Total stock-based compensation	$	16,213	$	21,643	$	12,802

Of the $21.6 million total stock-based compensation for the twelve months ended January 2, 2016, $3.9 million was paid in cash during the period as a result of the acquisition of Silicon Image on March 10, 2015.

ASC 718, “Compensation-Stock Compensation (“ASC 718”),” requires that we recognize compensation expense for only the portion of employee and director options and ESPP rights that are expected to vest.

The fair values of each option award on the date of grant and of the shares expected to be issued under the employee stock purchase plan are estimated using the Black-Scholes valuation model and the assumptions noted in the following table. The expected term is based on historical vested option exercises and includes an estimate of the expected term for options that are fully vested and outstanding. The expected volatility of both stock options and ESPP shares is based on the daily historical volatility of our stock price, measured over the expected term of the option or the ESPP purchase period. The risk-free interest rate is based on the implied yield on a U.S. Treasury zero-coupon issue with a remaining term closest to the expected term of the option. The dividend yield reflects that we have not paid any cash dividends since inception and do not intend to pay any cash dividends in the foreseeable future.

The following table summarizes the assumptions used in the valuation of stock option and ESPP compensation for fiscal years 2016, 2015, and 2014:



	Year Ended
	December 31, 2016	January 2, 2016	January 3, 2015
Employee and Director Stock Options
Expected volatility	44.2% to 50.8%	43.6% to 47.3%	45.4% to 50.4%
Risk-free interest rate	.94% - 2.06%	1.4% to 1.7%	1.5% to 1.7%
Expected term (years)	4.06 - 4.78	4.08 to 4.75	4.1 to 4.7
Dividend yield	—%	—%	—%
Employee Stock Purchase Plan
Weighted average expected volatility	57.9%	33.6%	38.7%
Weighted average risk-free interest rate	0.43%	0.12%	0.08%
Expected term	6 months	6 months	6 months
Dividend yield	—%	—%	—%

At December 31, 2016, there was $11.0 million of total unrecognized compensation cost related to unvested employee and director stock options, which is expected to be recognized over a weighted average period of 2.6 years. Our current practice is to issue new shares to satisfy option exercises. Compensation expense for all stock-based compensation awards is recognized using the straight-line method.

The following table summarizes our stock option activity and related information for the year ended December 31, 2016:



(Shares and aggregate intrinsic value in thousands)	Shares		Weighted average exercise price		Weighted average remaining contractual term (years)	Aggregate Intrinsic Value
Balance, January 2, 2016	11,444		$	5.46
Granted	3,907		5.65
Exercised	(1,466	)	3.91
Forfeited or expired	(1,319	)	5.47
Balance, December 31, 2016	12,566		$	5.70
Vested and expected to vest at December 31, 2016	12,566		$	5.70	4.39	$	20,966
Exercisable, December 31, 2016	6,876		$	5.65	3.15	$	11,851

The aggregate intrinsic value in the table above represents the total pretax intrinsic value (the difference between the Company's closing stock price on the last trading day of the fiscal year and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on that day. This amount changes based on the fair market value of the Company's stock. Total intrinsic value of options exercised for fiscal 2016, 2015 and 2014, and was $3.3 million, $2.5 million and $7.8 million, respectively. The total fair value of options and RSUs vested and expensed in fiscal 2016, 2015 and 2014 and was $15.6 million, $18.0 million and $12.8 million, respectively.

The resultant grant date weighted-average fair values for stock options granted, calculated using the Black-Scholes option pricing model with the noted assumptions for stock options, were $2.14, $2.35 and $2.93 for fiscal years 2016, 2015 and 2014, respectively. The weighted average fair values for the ESPP, calculated using the Black-Scholes option pricing model with the noted assumptions for the ESPP, were $1.82, $1.51 and $1.73 for fiscal years 2016, 2015 and 2014, respectively.

The following table summarizes our RSU activity for the year ended December 31, 2016:



(Shares in thousands)	Shares		Weighted average grant date fair value
Balance, January 2, 2016	4,757		$	5.95
Granted	1,376		5.64
Exercised	(1,742	)	5.97
Forfeited or expired	(1,144	)	5.68
Balance, December 31, 2016	3,247		$	5.90

At December 31, 2016 there was $16.2 million of total unrecognized compensation cost related to unvested RSUs. Our current practice is to issue new shares when RSUs vest. Compensation expense for RSUs is recognized using the straight-line method over the related vesting period.

We granted stock options and RSUs with a market condition to certain executives, amounting to approximately 321,900 stock options during fiscal 2016 and approximately 327,200 stock options and 70,000 RSUs during fiscal 2015. Of fiscal 2015 grants, 21,540 stock options and 70,000 RSUs were canceled in fiscal 2016 upon the departure of certain executives. The options and RSUs have a two year vesting and vest between 0% and 200% of the target amount, based on the Company's relative Total Shareholder Return (TSR) when compared to the TSR of a component of companies of the PHLX Semiconductor Sector Index over a two year period. TSR is a measure of stock price appreciation plus dividends paid, if any, in the performance period. The fair values of the options were determined and fixed on the date of grant using a lattice-based option-pricing valuation model, which incorporates a Monte-Carlo simulation, and considered the likelihood that we would achieve the market condition. Of these grants with a market condition, approximately 596,600 stock options were outstanding as of December 31, 2016. We incurred stock compensation expense related to these market condition awards of approximately $0.8 million in fiscal 2016 and approximately $0.6 million in fiscal 2015.

During fiscal year 2014, we granted approximately 98,600 market-based RSUs in two equal tranches, each of which vest upon achievement of certain market-based conditions. The fair values of the market-based RSUs were determined and fixed on the date of grant using a lattice-based option-pricing valuation model, which incorporates a Monte-Carlo simulation, and considered the likelihood that we would achieve the market-based conditions. Both tranches vested and we incurred total stock compensation expense related to performance based awards of $0.7 million for the fiscal year ended January 3, 2015.

The following table summarizes the assumptions used in the valuation of stock options and RSUs with a market condition for fiscal years 2016, 2015 and 2014:



	Year Ended
	December 31, 2016	January 2, 2016	January 3, 2015
Executive stock options with a market condition
Expected volatility	46%	44% to 46%	n/a
Risk-free interest rate	1.1%	1.4%	n/a
Expected term (years)	4.5	4.5	n/a
Dividend yield	—%	—%	n/a
Executive RSUs with a market condition
Expected volatility	n/a	36.9%	53.5%
Risk-free interest rate	n/a	0.6%	2.2%
Expected term (years)	n/a	2.0	0.2
Dividend yield	n/a	—%	—%