Stock-based Compensation and Awards

Equity Incentive Plans

The Company has three equity incentive plans: the 2000 Stock Option Plan (the "2000 Plan"), the 2006 Stock Option Plan (the "2006 Plan") and the 2012 Stock Option Plan (the "2012 Plan"). On March 26, 2012, all shares that were reserved under the 2006 Plan but not subject to outstanding awards became available for grant under the 2012 Plan. No additional shares will be issued under the 2006 Plan. The 2000 Plan terminated in March 2010 and no additional shares will be issued under this plan. All options currently outstanding under the 2000 Plan and the 2006 Plan continue to be governed by the terms and conditions of those plans. Under the 2012 Plan, the Company has the ability to issue incentive stock options (“ISOs”), stock appreciation rights, restricted stock, restricted stock units (“RSUs”), performance awards and stock bonuses. The ISOs will be granted at a price per share not less than the fair value at date of grant. Options granted to date generally vest over a four-year period with 25% vesting at the end of one year and the remaining vest monthly thereafter. Options granted generally are exercisable up to 10 years.

Early Exercise of Stock Options

The Company typically allows employees to exercise options granted under the 2000 and 2006 Plans prior to vesting. The unvested shares are subject to the Company’s repurchase right at the original purchase price. The proceeds initially are recorded as an accrued liability from the early exercise of stock options (see Note 6, Accrued Liabilities), and reclassified to common stock as the Company’s repurchase right lapses. As of September 30, 2012 and December 31, 2011, 63,472 and 112,967 shares held by employees were subject to repurchase at an aggregate price of $0.2 million and $0.4 million, respectively.

Employee Stock Purchase Plan

In March 2012, the Company’s 2012 Employee Stock Purchase Plan (the “ESPP”) was approved. The ESPP allows eligible employees to purchase shares of the Company’s common stock at a discount through payroll deductions of up to 15% of their eligible compensation, subject to any plan limitations. The ESPP provides for six-month offering periods, except for the first offering period which is for 11 months, and at the end of each offering period, employees are able to purchase shares at 85% of the lower of the fair market value of the Company’s common stock on the first trading day of the offering period or on the last day of the offering period.

Stock Option Activity

A summary of the stock option activity for the nine months ended September 30, 2012 is presented below:



	Shares Available for Grant		Number of Options		Weighted Average Exercise Price		Weighted average remaining contractual term	Aggregate intrinsic value
	Shares Available for Grant		Number of Options		Weighted Average Exercise Price		(in years)	(in thousands)
Outstanding at December 31, 2011	1,101,111		3,808,222		$	3.57	6.68	$	28,682
Shares removed from the plan	(167,166	)	—
Options granted	(534,870	)	534,870		$	22.81
Options exercised	—		(731,602	)	$	2.03
Options canceled	38,658		(38,658	)	$	5.35
Options expired	5,399		(5,399	)	$	2.68
Early exercised options repurchased and added back to the pool	1,454		—
Outstanding at September 30, 2012	444,586		3,567,433		$	6.75	6.68	$	86,181

At September 30, 2012, there was $7.5 million of unrecognized net compensation cost related to options which is expected to be recognized over a weighted-average period of 2.8 years. The Company did not grant non-employee options in either of the three or nine months ended September 30, 2012. For the three and nine months ended September 30, 2011 the Company granted 400,000 non-employee options which were fully vested on the date of grant. In connection with this grant the Company recognized $446,000 immediately. The fair value of these options was calculated using the Black Scholes option pricing model using the following assumptions: expected term of 10.0 years, volatility of 52.4%, interest rate of 2.09% and dividend yield of 0%.

On March 27, 2012, the Company granted to a certain member of the board of directors options to purchase an aggregate of 33,333 shares of common stock at an exercise price of $16.00. The aggregate intrinsic value, which was $0.2 million. at March 31, 2012, has increased to $0.5 million at September 30, 2012. Aggregate intrinsic value represents the difference between the Company’s closing stock price on the last trading day of the period, which was $30.91 per share as of September 30, 2012, and the exercise price multiplied by the number of related options.

The Company uses the Black-Scholes option-pricing model to calculate the fair value of stock options on their grant date. This model requires the following major inputs: the estimated fair value of the underlying common stock, the expected life of the option, the expected volatility of the underlying common stock over the expected life of the option, the risk-free interest rate and expected dividend yield.

The following assumptions were used for each respective period:



	Three months ended September 30,		Nine months ended September 30,
	2012	2011	2,012	2,011
Expected Term (in years)	5.48	5.77	5.48 - 5.60	5.49 - 5.72
Volatility	48.0%	44.7%	47.9% - 48.7%	44.7% - 45.0%
Interest Rate	0.72%	1.73%	0.72% - 1.03%	1.73% - 2.48%
Dividend yield	0%	0%	0%	0%

Restricted Stock Awards and Restricted Stock Units

In 2012, the Company began incorporating restricted stock awards and RSUs as an element of the Company's compensation plans. In February 2012, the Company granted certain of its directors restricted stock which vests 50% on the first anniversary of the grant and 50% on the second anniversary of the grant. In May 2012, the Company granted certain employees RSUs, which vest one-third on the first anniversary of the grant date, one-third on the second anniversary of the grant date and one-third upon the third anniversary of the grant date.

A summary of restricted stock activity for the nine months ended September 30, 2012 is presented below:



	Restricted Stock Awards			Restricted Stock Units
	Number of shares	Weighted Average Grant Date Fair Value per Share		Number of shares		Weighted Average Grant Date Fair Value per Share
Outstanding at December 31, 2011	—	—		—		—
Granted	24,152	$	12.42	300,660		$	25.12
Vested	—	—		—		—
Forfeited	—	—		(2,200	)	$	24.15
Outstanding at September 30, 2012	24,152	$	12.42	298,460		$	25.13

At September 30, 2012, there was $0.2 million of unrecognized net compensation cost related to restricted stock awards which is expected to be recognized over a weighted-average period of 1.4 years. At September 30, 2012, there was $6.4 million of unrecognized net compensation cost related to RSUs which is expected to be recognized over a weighted-average period of 2.7 years.