STOCK-BASED COMPENSATION

IAC currently has two active plans under which awards have been granted. These plans cover stock options to acquire shares of IAC common stock, RSUs and PSUs, as well as provide for the future grant of these and other equity awards. These plans authorize the Company to grant awards to its employees, officers, directors and consultants. At December 31, 2018, there are 11.5 million shares available for grant under the plans.

The plans were adopted in 2013 and 2018, have a stated term of ten years, and provide that the exercise price of stock options granted will not be less than the market price of the Company's common stock on the grant date. The plans do not specify grant dates or vesting schedules of awards as those determinations have been delegated to the Compensation and Human Resources Committee of IAC's Board of Directors (the "Committee"). Each grant agreement reflects the vesting schedule for that particular grant as determined by the Committee. Broad-based stock option awards issued to date have generally vested in equal annual installments over a four-year period and RSU awards currently outstanding generally vest in three 33% installments over a three-year period, in each case, from the grant date. PSU awards currently outstanding cliff-vest after a three-year period from the date of grant.

The amount of stock-based compensation expense recognized in the consolidated statement of operations is net of estimated forfeitures, as the expense recorded is based on awards that are ultimately expected to vest. The forfeiture rate is estimated at the grant date based on historical experience and revised, if necessary, in subsequent periods if actual forfeitures differ from the estimated rate. At December 31, 2018, there is $326.0 million of unrecognized compensation cost, net of estimated forfeitures, related to all equity-based awards, which is expected to be recognized over a weighted average period of approximately 2.3 years.

The total income tax benefit recognized in the accompanying consolidated statement of operations for the years ended December 31, 2018, 2017 and 2016 related to all stock-based compensation is $189.0 million, $423.0 million and $34.8 million, respectively. The increase in total income tax benefit recognized in the consolidated statement of operations during 2017 relative to 2016 is due to the adoption of ASU 2016-09, effective January 1, 2017, which required the recognition of excess tax benefits attributable to stock-based compensation to be included as a component of the provision for income taxes rather than recognized in equity. The aggregate income tax benefit recognized related solely to stock options for the years ended December 31, 2018, 2017 and 2016, including the portion recognized as a component of equity in 2016 is $169.0 million, $411.6 million, and $63.4 million, respectively.

As the Company is currently in an NOL position, there will be some delay in the timing of the realization of the cash benefit of the income tax deductions related to stock-based compensation because it will be dependent upon the amount and timing of future taxable income and the timing of estimated income tax payments.

IAC Stock Options

Stock options outstanding at December 31, 2018 and changes during the year ended December 31, 2018 are as follows:



	December 31, 2018
	Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (In Years)	Aggregate Intrinsic Value
	(Shares and intrinsic value in thousands)
Options outstanding at January 1, 2018	6,586		$	60.57
Granted	80		152.53
Exercised	(774	)	52.56
Forfeited	(72	)	57.52
Expired	(6	)	19.51
Options outstanding at December 31, 2018	5,814		$	62.97	6.1	$	698,128
Options exercisable	3,592		$	59.64	5.3	$	443,293

The aggregate intrinsic value in the table above represents the difference between IAC's closing stock price on the last trading day of 2018 and the exercise price, multiplied by the number of in-the-money options that would have been exercised had all option holders exercised their options on December 31, 2018. The total intrinsic value of stock options exercised during the years ended December 31, 2018, 2017 and 2016 is $83.7 million, $164.6 million and $17.1 million, respectively.

The following table summarizes the information about stock options outstanding and exercisable at December 31, 2018:



	Options Outstanding				Options Exercisable
Range of Exercise Prices	Outstanding at December 31, 2018	Weighted- Average Remaining Contractual Life in Years	Weighted- Average Exercise Price		Exercisable at December 31, 2018	Weighted- Average Remaining Contractual Life in Years	Weighted- Average Exercise Price
	(Shares in thousands)
$20.01 to $30.00	30	1.1	$	21.60	30	1.1	$	21.60
$30.01 to $40.00	389	2.3	32.30		389	2.3	32.30
$40.01 to $50.00	1,541	5.8	43.35		961	5.0	44.26
$50.01 to $60.00	246	3.2	59.85		244	3.2	59.86
$60.01 to $70.00	1,173	6.3	65.27		767	6.0	65.62
$70.01 to $80.00	1,840	7.4	75.33		822	6.8	74.72
$80.01 to $90.00	500	6.3	84.31		375	6.3	84.31
Greater than $90.01	95	9.1	148.30		4	8.9	125.08
	5,814	6.1	62.97		3,592	5.3	59.64

The fair value of stock option awards, with the exception of market-based awards, is estimated on the grant date using the Black-Scholes option pricing model. The Black-Scholes option pricing model incorporates various assumptions, including expected volatility and expected term. During 2018, 2017 and 2016, expected stock price volatilities were estimated based on the Company's historical volatility. The risk-free interest rates are based on U.S. Treasuries with comparable terms as the awards, in effect at the grant date. Expected term is based upon the historical exercise behavior of our employees and the dividend yields are based on IAC's historical dividend payments. The following are the weighted average assumptions used in the Black-Scholes option pricing model:



	Years Ended December 31,
	2018		2017		2016
Expected volatility	27	%	29	%	29	%
Risk-free interest rate	2.7	%	2.0	%	1.2	%
Expected term	6.2 years		5.2 years		4.8 years
Dividend yield	—	%	—	%	—	%

During 2018, the Company granted market-based stock options that only vest if the price of IAC common stock exceeds the relevant price threshold for a twenty-day consecutive period and the service requirement is met. The market-based vesting condition was achieved in the fourth quarter of 2018. The service requirement provides that this award vests in two installments, the first 50% in 2021 and the second 50% in 2022. The grant date fair value of the market-based award was estimated using a lattice model that incorporates a Monte Carlo simulation of IAC's stock price. The inputs used to fair value this award included an expected volatility of 29%, risk-free interest rate of 2.8% and a zero-dividend yield. The expected term of 1.8 years for this award was derived from the output of the option valuation model. Expense is recognized over the longer of the vesting period of each of the two installments or the expected term.

Approximately less than 0.1 million, 1.2 million and 1.7 million stock options were granted by the Company during the years ended December 31, 2018, 2017 and 2016, respectively. The weighted average fair value of stock options granted during the years ended December 31, 2018, 2017 and 2016 are $53.94, $22.94 and $12.34, respectively.

Cash received from stock option exercises for the years ended December 31, 2018, 2017 and 2016 was $41.7 million, $82.4 million and $25.8 million, respectively.

The Company has historically settled its stock options on a gross basis. Assuming all stock options outstanding on December 31, 2018 were net settled on that date, the Company would have remitted $349.1 million (of which $221.6 million is related to vested stock options and $127.4 million is related to unvested stock options) in cash for withholding taxes (assuming a 50% withholding rate).

IAC Restricted Stock Units and Performance-based Stock Units

RSUs and PSUs are awards in the form of phantom shares or units denominated in a hypothetical equivalent number of shares of IAC common stock and with the value of each RSU and PSU equal to the fair value of IAC common stock at the date of grant. Each RSU and PSU grant is subject to service-based vesting, where a specific period of continued employment must pass before an award vests. PSUs also include performance-based vesting, where certain performance targets set at the time of grant must be achieved before an award vests. For RSU grants, the expense is measured at the grant date as the fair value of IAC common stock and expensed as stock-based compensation over the vesting term. For PSU grants, the expense is measured at the grant date as the fair value of IAC common stock and expensed as stock-based compensation over the vesting term if the performance targets are considered probable of being achieved.

Unvested RSUs and PSUs outstanding at December 31, 2018 and changes during the year ended December 31, 2018 are as follows:



	RSUs				PSUs
	Number of shares		Weighted Average Grant Date Fair Value		Number of shares		Weighted Average Grant Date Fair Value
	(Shares in thousands)
Unvested at January 1, 2018	360		$	80.81	130		$	76.00
Granted	153		183.33		30		152.53
Vested	(49	)	78.54		—		—
Forfeited	(5	)	98.81		(17	)	76.00
Unvested at December 31, 2018	459		$	115.12	143		$	92.02

The weighted average fair value of RSUs and PSUs granted during the years ended December 31, 2018, 2017 and 2016 based on market prices of IAC's common stock on the grant date was $178.29, $90.04 and $46.92, respectively. The total fair value of RSUs and PSUs that vested during the years ended December 31, 2018, 2017 and 2016 was $8.9 million, $32.5 million and $13.5 million, respectively.

Equity Instruments Denominated in the Shares of Certain Subsidiaries

Non-publicly-traded Subsidiaries

The following description excludes awards denominated in the shares of the Company's publicly-traded subsidiaries, MTCH and ANGI. MTCH and ANGI stock-based awards are issued pursuant to their respective stock incentive plans.

The Company has granted stock settled stock appreciation rights denominated in the equity of certain non-publicly traded subsidiaries to employees and management of those subsidiaries. These equity awards vest over a period of years or upon the occurrence of certain prescribed events. The value of the stock settled stock appreciation rights is tied to the value of the common stock of these subsidiaries. Accordingly, these interests only have value to the extent the relevant business appreciates in value above the initial value utilized to determine the exercise price. These interests can have significant value in the event of significant appreciation. The fair value of these interest is generally determined by negotiation or arbitration, when settled; which will occur at various dates through 2025. These equity awards are settled on a net basis, with the award holder entitled to receive a payment in IAC common shares equal to the intrinsic value of the award at exercise less an amount equal to the required cash tax withholding payment. The number of IAC common shares ultimately needed to settle these awards may vary significantly from the estimated number below as a result of both movements in our stock price and a determination of fair value of the relevant subsidiary that is different than our estimate. The expense associated with these equity awards is initially measured at fair value at the grant date and is expensed as stock-based compensation over the vesting term. The number of IAC common shares that would be required to settle these interests at current estimated fair values, including vested and unvested interests, at December 31, 2018 is 0.1 million shares. Withholding taxes, which will be paid by the Company on behalf of the employees upon exercise, would have been $16.0 million at December 31, 2018, assuming a 50% withholding rate.

MTCH

MTCH currently settles substantially all equity awards on a net basis. Assuming all MTCH equity awards outstanding on December 31, 2018 were net settled on that date, MTCH would have issued 9.7 million common shares (of which 1.7 million is related to vested shares and 8.0 million is related to unvested shares) and would have remitted $416.2 million (of which $75.0 million is related to vested shares and $341.2 million is related to unvested shares) in cash for withholding taxes (assuming a 50% withholding rate). If MTCH decided to issue a sufficient number of shares to cover the $416.2 million employee withholding tax obligation, 9.7 million additional shares would be issued by MTCH.

Following the completion of the MTCH IPO, equity awards that related to certain subsidiaries (principally Tinder, Inc.) of MTCH were settleable, at IAC's election, in shares of IAC common stock or MTCH common stock. Pursuant to the Employee Matters Agreement between IAC and MTCH, to the extent shares of IAC common stock are issued in settlement of these awards, MTCH reimburses IAC for the cost of those shares in cash or by issuing IAC shares of MTCH common stock. In July 2017, Tinder was merged into MTCH and as a result, all Tinder denominated equity awards were converted into MTCH tandem stock options ("Tandem Awards"). All of the MTCH Tandem Awards exercised during 2018 and 2017 were exercised on a net basis and were settled in IAC common shares; the Company issued 0.7 million and 2.0 million shares, respectively, of its common stock to settle these awards and MTCH issued 2.5 million and 11.3 million shares, respectively, of its common stock to IAC as reimbursement. Assuming all vested and unvested Tandem Awards outstanding on December 31, 2018 were exercised on that date and settled using IAC stock, 0.3 million IAC common shares would have been issued in settlement and MTCH would have issued 1.4 million shares, which is included in the amount above, to IAC as reimbursement.

During 2017, MTCH also purchased certain fully vested Tandem Awards, and made cash payments of approximately $520 million to cover both the withholding taxes paid on behalf of employees exercising these converted awards and the purchase of certain fully vested awards.

During 2016, the Company granted a nominal amount of IAC denominated market-based awards to certain MTCH employees. The number of awards that ultimately vest is dependent upon MTCH's stock price. The grant date fair value of each market-based award is estimated using a lattice model that incorporates a Monte Carlo simulation of MTCH's stock price. Each market-based award is subject to service-based vesting, where a specific period of continued employment must pass before an award vests. Some of the market-based awards contain performance targets set at the time of grant that must be achieved before an award vests.

ANGI

In connection with the Combination, previously issued stock appreciation rights related to the common stock of HomeAdvisor (US) were converted into ANGI stock appreciation rights that are settleable, at ANGI's option, on a net basis with ANGI remitting withholding taxes on behalf of the employee or on a gross basis with ANGI issuing a sufficient number of Class A shares to cover the withholding taxes. In addition, at IAC's option, these awards can be settled in either Class A shares of ANGI or shares of IAC common stock. If settled in IAC common stock, ANGI reimburses IAC in either cash or through the issuance of Class A shares to IAC. Assuming all of the stock appreciation rights outstanding on December 31, 2018 were net settled on that date using IAC stock, 1.1 million IAC common shares would have been issued in settlement and IAC would have been issued 12.8 million shares of ANGI Class A stock and ANGI would have remitted $205.9 million in cash for withholding taxes (assuming a 50% withholding rate). If ANGI decided to issue a sufficient number of shares to cover the $205.9 million employee withholding tax obligation, 12.8 million additional Class A shares would be issued by ANGI. ANGI's cash withholding obligation on all other ANGI net settled awards outstanding on December 31, 2018 is $36.5 million (assuming a 50% withholding rate), which is the equivalent of 2.3 million shares.

Prior to the Combination in 2017, the Company issued a number of IAC denominated PSUs to certain ANGI employees. Vesting of the PSUs is contingent upon ANGI's performance. Assuming all of the PSUs outstanding on December 31, 2018 were net settled on that date using IAC stock, 0.1 million IAC common shares would have been issued in settlement and IAC would have been issued 0.6 million shares of ANGI Class A stock and ANGI would have remitted $10.4 million in cash for withholding taxes (assuming a 50% withholding rate).

Modification of awards

During 2018, the Company modified certain equity awards and recognized modification charges of $7.9 million. In addition, in connection with the ANGI chief executive officer transition during the fourth quarter of 2018, ANGI accelerated $3.9 million of expense into 2018 from 2019.

In connection with the Combination, the previously issued HomeAdvisor (US) stock appreciation rights were converted into ANGI equity awards resulting in a modification charge of $217.7 million of which $56.9 million and $93.4 million were recognized as stock-based compensation expense in the years ended December 31, 2018 and 2017, respectively, and the remaining charge will be recognized over the vesting period of the modified awards.

During the second quarter of 2017, the Company modified certain HomeAdvisor (US) denominated equity awards and recognized a modification charge of $6.6 million.

During 2016, the Company modified certain subsidiary denominated equity awards resulting in a modification charge of $7.3 million (subsequently reduced to $7.1 million due to forfeitures) of which $0.1 million, $0.7 million and $6.3 million were recognized as stock-based compensation in the years ended December 31, 2018, 2017 and 2016, respectively.

During 2014, the Company granted an equity award denominated in shares of a subsidiary of the Company to a non-employee, which was marked to market each reporting period. In the third quarter of 2016, MTCH settled the vested portion of the award for cash of $13.4 million. In the third quarter of 2017, the award was modified and MTCH settled the remaining portion of the award for cash of $33.9 million.