Employee Benefit Plans

2003 Stock Plan

In April 2003, the Company adopted the 2003 Stock Plan (the “2003 Plan”). The 2003 Plan provided for the granting of stock options to employees and consultants of the Company. During the second fiscal quarter of 2013, the Company's 2003 Stock Plan expired. No further equity awards can be granted under the 2003 Plan. Outstanding awards under the 2003 Stock Plan remain subject to the terms and conditions of the 2003 plan.

2006 Long Term Incentive Plan

In April 2006, the Company adopted the 2006 Long Term Incentive Plan (the “2006 Plan”). The 2006 Plan provides for the granting of stock options, stock appreciation rights, restricted stock, performance awards and other stock awards, to eligible directors, employees and consultants of the Company. The Company's 2006 Plan expired on April 13, 2016 by its terms. No further equity awards can be granted under the 2006 Plan. Outstanding awards under the 2006 Stock Plan remain subject to the terms and conditions of the 2006 plan.

2016 Equity Incentive Plan

In April 2016, the Company's Board of Directors adopted the 2016 Equity Incentive Plan (the "2016 Plan") which was approved by the Company's stockholders at the 2016 Annual Meeting of Stockholders on June 3, 2016. The 2016 Plan provides for the granting of stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares and performance units to eligible directors, employees and consultants of the Company. Award vesting periods for this plan are generally four years. The original maximum aggregate number of shares that could be issued under the 2016 Plan was 2.5 million Shares, plus (i) any shares that were available for grant under the Company’s 2006 Plan as of immediately prior to the 2006 Plan's expiration by its terms, which was 699,827 shares, plus (ii) any shares granted under the 2006 Plan that expire, are forfeited to or repurchased by the Company. In May 2018, the Company adopted amendments to the 2016 Plan which increased the number of shares of the Company’s common stock that may be issued under the 2016 plan by an additional 1.7 million shares. As of December 31, 2018, upon the Distribution, approximately 1.7 million shares remained available for future grants under the 2016 Plan. In January 2019, the Company received the approval from its Compensation Committee to increase the number of shares that the Company may be issued under the 2016 plan to a new total of 3.1 million shares, pursuant to the adjustment provisions of the 2016 Plan as a result of the Distribution.

Options granted under the 2016 Plan may be either incentive stock options or nonstatutory stock options. Incentive stock options (“ISO”) may be granted only to Company employees (including officers and directors who are also employees). Nonstatutory stock options (“NSO”) may be granted to Company employees, directors and consultants. Options may be granted for periods of up to ten years and at prices no less than the estimated fair value of the common stock on the date of grant. In addition, the exercise price of an ISO granted to a 10% shareholder shall not be less than 110% of the estimated fair value of the shares on the date of grant. Options granted under the 2016 Plan generally vest over four years, the first tranche at the end of twelve months and the remaining shares underlying the option vesting monthly over the remaining three years.

Stock Appreciation Rights may be granted under the 2016 Plan subject to the terms specified by the plan administrator, provided that the term of any such right may not exceed ten years from the date of grant. The exercise price may not be less than the fair market value of the Company’s common stock on the date of grant.

Restricted stock awards may be granted under the 2016 Plan subject to the terms specified by the plan administrator. The period over which any restricted award may fully vest is generally no less than three years. Restricted stock awards are nonvested stock awards that may include grants of restricted stock or grants of restricted stock units. Restricted stock awards are rights to acquire or purchase shares that generally are subject to transferability and forfeitability restrictions for a specified period. Restricted stock has the same voting rights as other common stock and is considered to be currently issued and outstanding. Restricted stock units do not have the voting rights of common stock, and the shares underlying the restricted stock units are not considered issued and outstanding. The Company expenses the cost of the restricted stock awards, which is determined to be the fair market value of the shares at the date of grant, ratably over the period during which the restrictions lapse.

Performance units and performance shares are awards that result in a payment to a participant only if specified performance objectives or other vesting provisions are achieved during a specified performance period. Each performance unit will have an initial value established by the Administrator on or before the grant date. Each performance share will have an initial value equal to the fair market value of a share on the grant date. The plan administrator will determine the number of performance awards that will be granted and will establish the performance goals and other conditions for payment of such performance awards. The period of measuring the achievement of performance goals will be specified by an award agreement.

Other stock or cash awards may be granted under the 2016 Plan subject to the terms specified by the plan administrator.

Any shares subject to restricted stock, restricted stock units, performance units, or performance shares awarded under the 2016 Plan will be counted against the shares available for issuance under the 2016 Plan as one and fifty-eight hundredths (1.58) shares for every one share subject to such awards. Any shares of common stock subject to an award that is forfeited, settled in cash, expires or is otherwise settled without the issuance of shares shall again be available for awards under the 2016 Plan. Additionally, any shares that are tendered by a participant of the 2016 Plan or retained by the Company as full or partial payment to the Company for the purchase of an award or to satisfy tax withholding obligations in connection with an award shall no longer again be made available for issuance under the 2016 Plan.

Employee Stock Purchase Plan

The Company sponsors an Employee Stock Purchase Plan (the “ESPP”), pursuant to which eligible employees may contribute up to 10% of compensation, subject to certain income limits, to purchase shares of the Company’s common stock. Prior to February 16, 2016, employees could purchase stock semi-annually at a price equal to 85% of the fair market value on the purchase date. Beginning February 16, 2016, the terms of the plan include a look-back feature that enables employees to purchase stock semi-annually at a price equal to 85% of the lesser of the fair market value at the beginning of the offering period or the purchase date. The duration of each offering period is generally six-months. In April 2016, the Company approved an amendment to the plan to increase the number of shares of common stock authorized for sale under the plan by 1.0 million shares to a total of 2.0 million shares. For the years ended December 31, 2018, 2017, and 2016, the Company recognized ESPP compensation expense of $1.4 million, $1.2 million and $1.1 million, respectively. 124,000 shares of common stock were purchased at an average exercise price of $54.40 in fiscal 2018. As of December 31, 2018, 0.7 million shares were reserved for future issuance under the ESPP.

Modifications of Equity Awards

In connection with Arlo's Distribution on December 31, 2018, under the provisions of the existing plans, the Company adjusted its outstanding equity awards in accordance with the terms of the Employee Matters Agreement (equitable adjustment) to preserve the intrinsic value of the awards immediately before and after the Distribution. Upon the Distribution, employees holding stock options and restricted stock units ("RSUs") denominated in pre-Distribution NETGEAR stock received a number of otherwise-similar awards in post-Distribution NETGEAR stock and/or Arlo stock based on the conversion ratios outlined for each group of employees in the Employee Matters Agreement that the Company entered into in connection with the Distribution. For purposes of the vesting of these equity awards, continued employment or service with NETGEAR or with Arlo is treated as continued employment for purposes of both NETGEAR's and Arlo's equity awards and the vesting terms of each converted grant remained unchanged. As of December 31, 2018, the employees participating in the ESPP plan were all NETGEAR employees. There were no changes to the plan terms described above with the exception that the price on the grant date, or August 16, 2018, was adjusted to exclude the value of Arlo based on the conversion ratios applied to other equity awards.

Due to the modification of the equity awards as a result of the Distribution, the Company compared the fair value of the outstanding equity awards immediately before and after the Distribution and no incremental fair value was recognized as a result of the above adjustments due to immateriality.

Option Activity

Stock option activity during the year ended December 31, 2018 was as follows:



	Number of Shares		Weighted Average Exercise Price Per Share		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value
	(In thousands)		(In dollars)		(In years)	(In thousands)
Outstanding as of December 31, 2017 ¹	1,879		$	34.08
Granted ¹	378		69.70
Exercised ¹	(289	)	23.76
Expired ¹	(6	)	21.45
Equitable adjustment - options granted ²	1,969		25.30
Equitable adjustment - options cancelled ²	(1,962	)	42.50
Outstanding as of December 31, 2018	1,969		$	25.30	6.29	$	17,338

As of December 31, 2018
Vested and expected to vest	1,969		$	25.30	6.29	$	17,338
Exercisable Options	1,230		$	20.53	4.94	$	14,511

_________________________


⁽¹⁾	Weighted average exercise price was calculated using exercise price prior to the Distribution.

⁽²⁾The equitable adjustments represented equity awards modifications upon the Distribution discussed above.

The aggregate intrinsic values in the table above represent the total pre-tax intrinsic values (the difference between the Company’s adjusted closing stock price on the last trading day of 2018, or December 31, 2018, and the adjusted exercise price per the equity awards modification described above, multiplied by the number of shares underlying the in-the-money options) that would have been received by the option holders had all option holders exercised their options on December 31, 2018. The Company’s adjusted closing price on December 31, 2018 was calculated by Nasdaq to exclude the value of Arlo following the Distribution. This amount changes based on the fair market value of the Company’s stock. Total intrinsic value of options exercised for the year ended December 31, 2018, 2017, and 2016 was $11.0 million, $7.7 million and $14.5 million, respectively.

The total fair value of options vested during the years ended December 31, 2018, 2017, and 2016 was $3.8 million, $3.8 million and $4.2 million, respectively.

The following table summarizes significant ranges of outstanding and exercisable stock options as of December 31, 2018:



	Options Outstanding				Options Exercisable
Range of Exercise Prices	Shares Outstanding	Weighted- Average Remaining Contractual Life	Weighted- Average Exercise Price Per Share		Shares Exercisable	Weighted- Average Exercise Price Per Share
	(In thousands)	(In years)	(In dollars)		(In thousands)	(In dollars)
$7.28 - $19.32	512	5.05	$	18.47	479	$	18.46
$19.33 - $20.98	418	3.12	20.04		417	20.04
$21.86 - $25.37	633	7.58	24.36		328	24.00
$29.23 - $38.32	50	9.27	34.68		6	29.23
$41.67 - $41.67	356	9.07	41.67		—	—
$7.28 - $41.67	1,969	6.29	$	25.30	1,230	$	20.53

RSU Activity

RSU activity during the year ended December 31, 2018 was as follows:



	Number of Shares		Weighted Average Grant Date Fair Value Per Share
	(In thousands)		(In dollars)
Outstanding as of December 31, 2017 ¹	1,130		$	43.22
Granted ¹	971		67.78
Vested ¹	(439	)	41.24
Cancelled ¹	(89	)	55.66
Equitable adjustment - granted ²	1,627		34.31
Equitable adjustment - cancelled ²	(1,573	)	$	58.23
Outstanding as of December 31, 2018	1,627		$	34.31

_________________________

⁽¹⁾ Weighted average grant date fair value was calculated using grant date fair value prior to the Distribution.

⁽²⁾ The equitable adjustments represented equity awards modifications upon the Distribution discussed above.

The total fair value of RSUs vested during the years ended December 31, 2018, 2017 and 2016 was $25.7 million, $19.5 million and $15.4 million, respectively. The grant date fair value of RSUs vested during the years ended December 31, 2018, 2017 and 2016 was $18.1 million, $14.6 million and $10.8 million, respectively.

Valuation and Expense Information

The Company measures stock-based compensation at the grant date based on the estimated fair value of the award. Estimated compensation cost relating to RSUs is based on the closing fair market value of the Company’s common stock on the date of grant. Prior to February 16, 2016, the fair value of ESPP is based on the 15% discount at purchase, since the price of the shares is determined at the purchase date. The fair value of options granted and the shares offered under the ESPP commencing February 16, 2016 is estimated on the date of grant using a Black-Scholes-Merton option valuation model that uses the assumptions noted in the following table. The estimated expected term of options granted is derived from historical data on employee exercise and post-vesting employment termination behavior. The risk free interest rate of options granted and the purchase rights granted under the ESPP is based on the implied yield currently available on U.S. Treasury securities with a remaining term commensurate with the estimated expected term. Expected volatility of options granted and the purchase rights granted under the ESPP is based on historical volatility over the most recent period commensurate with the estimated expected term.

The following table sets forth the weighted-average assumptions used to estimate the fair value option grants and purchase rights granted under the ESPP during the years ended December 31, 2018, 2017 and 2016:



	Year Ended December 31,
	2018		2017		2016		2018		2017		2016
	Stock Options						ESPP
Expected life (in years)	4.4		4.4		4.4		0.5		0.5		0.5
Risk-free interest rate	2.36	%	1.66	%	1.28	%	2.00	%	0.93	%	0.43	%
Expected volatility	31.1	%	31.6	%	35.4	%	37.9	%	29.7	%	38.3	%
Dividend yield	—		—		—		—		—		—

The above table does not include the impacts of the equitable adjustment resulting from the Distribution discussed above. The weighted average estimated fair value of options granted during the years ended December 31, 2018, 2017 and 2016 was $20.63, $12.35 and $12.28, respectively.

The following table sets forth the stock-based compensation expense resulting from stock options, restricted stock awards, and the Employee Stock Purchase Plan included in the Company’s consolidated statements of operations:



	Year Ended December 31,
	2018		2017		2016
	(In thousands)
Cost of revenue	$	2,435	$	1,406	$	1,473
Research and development	4,283		2,968		2,726
Sales and marketing	8,267		5,481		4,934
General and administrative	11,476		9,114		8,008
Total	$	26,461	$	18,969	$	17,141

The Company recognizes these compensation costs on a straight-line basis over the requisite service period of the award, which is generally the award vesting term of four years. Forfeitures are accounted for as they occur.

Total stock-based compensation cost capitalized in inventory was less than $0.7 million in the years ended December 31, 2018, 2017 and 2016.

As of December 31, 2018, $8.5 million of unrecognized compensation cost related to stock options is expected to be recognized over a weighted-average period of 2.5 years. As of December 31, 2018, $45.5 million of unrecognized compensation cost related to unvested RSUs is expected to be recognized over a weighted-average period of 2.5 years. If there are any modifications or cancellations of the underlying unvested awards, we may be required to accelerate, increase or cancel all or a portion of the remaining unearned stock-based compensation expense.

401(k) Plan

In April 2000, the Company adopted the NETGEAR 401(k) Plan to which employees may contribute up to 100% of salary subject to the legal maximum. In the first fiscal quarter of 2012, the Company began matching 50% of contributions for employees that remain active with the Company through the end of the fiscal year, up to a maximum of $6,000 in employee contributions. During the years ended December 31, 2018, 2017 and 2016 the Company recognized $0.9 million, $0.8 million and $0.8 million, respectively, in expenses related to the 401(k) match.