Our equity incentive plan provides for grants of nonqualified and incentive stock options, common stock, restricted stock, restricted stock units (RSUs) and stock appreciation rights to employees, directors, officers and consultants. We award RSUs as our principal equity incentive awards, including performance-based awards that are earned based on achievement of performance criteria established by the Compensation Committee of our Board of Directors. Each RSU represents the contingent right to receive one share of our common stock.

For performance-based awards, we recognize stock-based compensation based on expected achievement of performance criteria. We measure the cost of employee services received in exchange for RSU awards based on the fair value of the RSU awards on the date of grant. That cost is recognized over the period during which an employee is required to provide service in exchange for the award. We account for forfeitures as they occur, rather than estimate expected forfeitures.

Our employee stock purchase plan (ESPP) allows eligible employees to contribute up to 10% of their base salary, up to a maximum of $25,000 per year and subject to other plan limitations, toward the purchase of our common stock at a discounted price. The purchase price of the shares on each purchase date is equal to 85% of the lower of the fair market value of our common stock on the first and last trading days of each offering period. The ESPP is qualified under Section 423 of the Internal Revenue Code. We estimate the fair value of each purchase right under the ESPP on the date of grant using the Black-Scholes option valuation model and use the straight-line attribution approach to record the expense over the six-month offering period.

The following table shows restricted stock unit activity for the three months ended December 31, 2020:

(in thousands, except grant date fair value data)	Number of RSUs			Weighted-Average Grant Date Fair Value Per RSU
Balance of outstanding restricted stock units, October 1, 2020		3,509		$	79.13
Granted⁽¹⁾		925		$	100.20
Vested		(801	)	$	79.41
Forfeited or not earned		(36	)	$	78.79
Balance of outstanding restricted stock units, December 31, 2020		3,597		$	84.61

(in thousands)

Restricted Stock Units

Grant Period

Performance-

based RSUs⁽¹⁾

Service-based

RSUs⁽²⁾

Total Shareholder

Return RSUs⁽³⁾

First three months of 2021

712

The number of TSR RSUs that vest over the three-year period will be determined based on the performance of PTC stock relative to the stock performance of an index of PTC peer companies established as of the grant date, as determined at the end of three measurement periods ending on September 30, 2021, 2022 and 2023, respectively. The RSUs earned for each period will vest on November 15 following each measurement period, up to a maximum of two times the number of TSR RSUs eligible to be earned for the period (up to a maximum aggregate of 179 thousand RSUs). No vesting will occur in a period unless an annual threshold requirement is achieved. If the return to PTC shareholders is negative but still meets or exceeds the peer group indexed return, a maximum of 100% of the TSR RSUs will vest for the measurement period.

The weighted-average fair value of the TSR RSUs was $124.04 per target RSU on the grant date. The fair value of the TSR RSUs was determined using a Monte Carlo simulation model, a generally accepted statistical technique used to simulate a range of possible future stock prices for PTC and the peer group. The method uses a risk-neutral framework to model future stock price movements based upon the risk-free rate of return, the historical volatility of each entity, and the pairwise correlations of each entity being modeled. The fair value for each simulation is the product of the payout percentage determined by PTC’s TSR rank against the peer group, the projected price of PTC stock, and a discount factor based on the risk-free rate.

The significant assumptions used in the Monte Carlo simulation model were as follows:

Average volatility of peer group	41.5	%
Risk free interest rate	0.21	%
Dividend yield	—	%

Compensation expense recorded for our stock-based awards is classified in our Consolidated Statements of Operations as follows:

(in thousands)	Three months ended
	December 31, 2020		December 28, 2019
Cost of license revenue	$	20	$	—
Cost of support and cloud services revenue		2,302		1,486
Cost of professional services revenue		2,112		1,557
Sales and marketing		14,999		7,452
Research and development		8,443		6,932
General and administrative		18,212		10,509
Total stock-based compensation expense	$	46,088	$	27,936

Stock-based compensation expense includes $1.9 million in the first quarter of 2021 and $1.5 million in the first quarter of 2020 related to the ESPP.