Note 8. Stock-Based Compensation

2016 Equity Incentive Plan

In June 2016, our board of directors adopted and our stockholders approved the 2016 Equity Incentive Plan, or the 2016 Plan, which became effective in July 2016 at which time the 2010 Equity Incentive Plan, or the 2010 Plan, was terminated. Our 2000 Stock Plan was terminated in March 2010. Shares of common stock reserved for issuance under the 2016 Plan consist of (a) 1,096,234 shares of common stock initially available for grants under the 2016 Plan, plus (b) 674,790 shares of common stock previously reserved but unissued and not subject to outstanding awards under the 2010 Plan that are now available for issuance under the 2016 Plan. The number of shares of common stock reserved for issuance under the 2016 Plan may increase on January 1 of each year, beginning on January 1, 2017 and ending on and including January 1, 2026, by the lesser of (1) 1,825,000; (2) 5% of the total number of shares of common stock outstanding on December 31 of the preceding calendar year; or (3) a lesser number of shares determined by our board of directors. All options granted under the 2000 Stock Plan, the 2010 Plan and the 2016 Plan have a maximum 10-year term and generally vest and become exercisable over four years of continued employment or service as defined in each option agreement. We generally grant stock options with exercise prices that equal the fair value of the common stock on the date of grant.

As of December 31, 2016, we have reserved 3,536,156 shares of common stock for issuance under our stock option plans.

Prior to the adoption of our 2016 Equity Incentive Plan, we provided employees with the opportunity to early exercise stock options subject to the original vesting schedule of the option. In the event of voluntary or involuntary termination of employment with us, we have an irrevocable and exclusive option to repurchase the unvested portion of the shares at the original exercise price after the termination of employment. We account for cash received in consideration for the purchase of unvested shares of common stock or the early exercise of unvested stock options as a current liability and include it in accrued compensation and employee related benefits on the consolidated balance sheet. We repurchased 0 and 2,020 unvested shares from terminated employees in 2016 and 2015, respectively.

The following table summarizes activity of unvested shares of our common stock for the year ended December 31, 2016:

	SHARES OUTSTANDING
	NUMBER OF SHARES			WEIGHTED- AVERAGE EXERCISE PRICE PER SHARE
	(in thousands, except per share amounts)
Outstanding at January 1, 2016		136		$	1.76
Issued		59			5.35
Vested		(77	)		2.15
Outstanding at December 31, 2016		118		$	3.30

The following table summarizes option award activity for the year ended December 31, 2016:

				WEIGHTED-		WEIGHTED-
	NUMBER OF			AVERAGE		AVERAGE
	SHARES			EXERCISE		REMAINING		TOTAL
	UNDERLYING			PRICE PER		CONTRACTUAL		INTRINSIC
	OPTIONS			SHARE		LIFE (YEARS)		VALUE
	(in thousands, except per share amounts)
Outstanding at January 1, 2016		1,896		$	3.72		7.77	$	8,666
Granted		707			20.59
Exercised		(196	)		3.05
Forfeited or cancelled		(97	)		6.28
Outstanding at December 31, 2016		2,310			8.84		7.68		61,203
Vested and exercisable December 31, 2016		1,067		$	2.69		6.15	$	34,831

We estimate the weighted-average fair value of options granted during 2016, 2015 and 2014, some with exercise prices less than the estimated per share value of our common stock for financial reporting purposes on the grant date, was $9.60, $3.12 and $4.08 per share, respectively.

The total intrinsic value of options exercised during 2016, 2015 and 2014 was $1.1 million, $3.8 million and $1.9 million, respectively. The total fair value of options vested was $1.4 million, $1.3 million and $1.8 million during 2016, 2015 and 2014, respectively.

As of December 31, 2016, our total unrecognized stock-based compensation cost related to stock options was $8.6 million, which will be recognized over the weighted-average remaining requisite service period of 2.9 years.

Employee Stock Purchase Plan

In 2016, we adopted the 2016 Employee Stock Purchase Plan, the ESPP, which became effective in July 2016. Under the ESPP, eligible employees can authorize payroll deductions for amounts up to 15% of their eligible compensation. A participant may purchase a maximum of 4,000 shares each six-month period or some lesser number of shares as determined by IRS rules. The offering periods generally start on the first trading day on or after February 20 and August 20 of each year, except for the first offering period, which commenced on July 21, 2016 and will end on the first trading day on or after February 20, 2017. Participants in an offering period will be granted the right to purchase common shares at a price per share that is 85% of the least of the fair market value of the shares at (1) the first day of the offering period and (2) the end of each purchase period within the offering period. The fair value of the ESPP options granted is determined using a Black-Scholes model and is amortized on a straight-line basis. The initial number of shares of common stock that may be issued under the ESPP was 365,411 and as of December 31, 2016 were reserved for future grants under the ESPP. The number of shares reserved for the ESPP may increase each year, beginning on January 1, 2017 and continuing through and including January 1, 2036, by the least of (1) 1% of the total number of shares of common stock outstanding on the first day of such year; (2) 365,411 shares of common stock; and (3) such amount as determined by our board of directors.

As of December 31, 2016, the total unrecognized stock-based compensation related to the ESPP was $335,000 and will be recognized on a straight-line basis over the weight-average remaining service period of 0.1 years.

Black-Scholes Option Pricing Model

In determining the fair value of stock awards granted, the following weighted-average assumptions were used in the Black-Scholes option pricing model for awards granted in the periods indicated:

	EMPLOYEE STOCK PURCHASE PLAN		STOCK OPTIONS
	YEAR ENDED DECEMBER 31,		YEAR ENDED DECEMBER 31,
	2016		2016	2015	2014
Risk-free interest rates		0.4%	1.1% – 1.4%	1.2% – 1.6%	1.8% – 2.0%
Expected term	0.5 years		4.3 – 6.1 years	4.3 – 6.0 years	6.0 years
Expected dividends yield	None		None	None	None
Volatility		61.8%	40.8% – 49.5%	41.5% – 43.4%	43.8% – 46.9%

We determined that it was not practicable to calculate the volatility of our share price since we do not have an extensive public trading history for shares of our common stock. Therefore, we estimated our volatility based on a combination of our historical volatility since becoming a publicly traded company and reported market value data for a group of publicly-traded entities that we believe are relatively comparable after consideration of their size, stage of lifecycle, profitability, growth and risk and return on investment. We used a smaller weighting of our historical volatility since becoming a publicly traded company and the average volatility rates reported by the comparable group for the expected term estimated by us.

Stock-Based Compensation Expense

The following table presents the detail of stock-based compensation expense amounts included in our consolidated statements of operations for the periods indicated:

	YEAR ENDED DECEMBER 31,
	2016		2015		2014
	(in thousands)
Cost of revenue	$	96	$	31	$	49
Research and development expense		983		305		362
Sales and marketing expense		1,289		692		413
General and administrative expense		397		150		313
Offering costs		—		—		38
Total stock-based compensation expense	$	2,765	$	1,178	$	1,175