(8) Employee Benefit Plans

Employee Stock Option Plan

The Company’s stock option program is a long-term retention program that is intended to attract, retain, and provide incentives for talented employees, officers, and directors, and to align stockholder and employee interests. The Company considers its option program critical to its operation and productivity.

The following table summarizes the weighted-average fair value of stock options granted during the period:



	Three Months Ended June 30,				Six Months Ended June 30,
	2013		2014		2013		2014
Stock options granted (in thousands)		78		723		530		933
Weighted average fair value at date of grant	$	11.70	$	17.72	$	11.69	$	19.81

Stock option activity for the six months ended June 30, 2014 is as follows (shares in thousands):



				Remaining	Aggregate intrinsic
		Weighted average		contractual term	value (dollars in
	Shares	exercise price		(years)	thousands)
Outstanding at December 31, 2013	2,989	$	11.80	6.55	$	142,377
Granted	933		42.11
Exercised	(376)		10.09
Forfeited	(41)		29.68
Outstanding as of June 30, 2014	3,505	$	19.84	7.17	$	101,376
Vested and expected to vest at June 30, 2014	3,389	$	19.34	7.09	$	99,639
Exercisable at June 30, 2014	2,006	$	9.48	5.62	$	77,679

As of June 30, 2014, there was $21.1 million of total unrecognized compensation cost related to unvested stock options which are expected to vest. The cost is expected to be recognized over a weighted average period of approximately 3.28 years as of June 30, 2014.

The weighted average assumptions used in the Black-Scholes option pricing model to value option grants during the three and six months ended June 30, 2013 and 2014 were as follows:



	Three Months Ended June 30,		Six Months Ended June 30,
	2013	2014	2013	2014
Expected volatility	51.51%	47.00%	51.60%	47.08%
Risk-free interest rate	0.80%	1.86%	1.04%	1.87%
Expected term (in years)	5.34	6.08	5.95	6.07
Dividend yield	—%	—%	—%	—%

The determination of the fair value of stock-based awards on the date of grant using an option pricing model is affected by the Company’s stock price as well as assumptions regarding a number of complex and subjective variables. Expected volatility is determined using weighted average volatility of peer publicly traded companies as well as the Company’s own historical volatility. The Company expects that it will increase weighting of its own historical data in future periods, as that history grows over time. The risk-free interest rate is determined by using published zero coupon rates on treasury notes for each grant date given the expected term on the options. The dividend yield of zero is based on the fact that the Company expects to invest cash in operations and has never paid cash dividends on common stock. The Company uses the “simplified” method to estimate expected term as determined under Staff Accounting Bulletin No. 110 due to the lack of option exercise history as a public company.

Restricted Stock Units

The Company grants restricted stock units to certain employees, officers, and directors under the 2010 Equity Incentive Plan. Restricted stock units vest upon performance-based, market-based or service-based criteria.

Performance-based restricted stock units vest based on the satisfaction of specific performance criteria. At each vesting date, the holder of the award is issued shares of the Company’s common stock. Compensation expense from these awards is equal to the fair market value of the Company’s common stock on the date of grant and is recognized over the remaining service period based on the probable outcome of achievement of the financial metrics. Management’s estimate of the number of shares expected to vest is based on the anticipated achievement of the specified performance criteria.

Market-based performance restricted stock units are granted such that they vest upon the achievement of certain per share price targets of the Company’s common stock during a specified performance period. The fair market values of market-based performance restricted stock units are determined using the Monte Carlo simulation method. The Monte Carlo simulation method is subject to variability as several factors utilized must be estimated including the future daily stock price of the Company’s common stock over the specified performance period, our stock price volatility and risk-free interest rate. The amount of compensation expense is equal to the per share fair value calculated under the Monte Carlo simulation multiplied by the number of market-based performance restricted stock units granted, recognized over the specified performance period.

Generally, service-based restricted stock units vest over four years with 25% vesting after one year and the balance vesting monthly over the remaining period. Compensation expense is recognized over the requisite service period.

In the first quarter of 2014, the Company granted a total of 106,500 performance-based restricted stock units to certain executive officers and employees. Performance-based restricted stock units are typically granted such that they vest upon the achievement of certain revenue growth rates, and other financial metrics, during a specified performance period for which participants have the ability to receive up to 150% of the target number of shares originally granted.

In the second quarter of 2014, the Company granted a total of 199,000 market-based performance restricted stock units to certain executive officers. The number of shares to be vested is subject to change based on certain market conditions.

Stock-based compensation expense related to restricted stock units was $2.7 million and $3.5 million for the three and six months ended June 30, 2014, respectively. Stock-based compensation expense related to restricted stock units was $0.7 million and $0.9 million for the three and six months ended June 30, 2013, respectively. As of June 30, 2014, there was $23.8 million of total unrecognized compensation cost related to unvested restricted stock units which are expected to vest. The cost is expected to be recognized over a weighted average period of approximately 2.32 years as of June 30, 2014.

The following table summarizes information about restricted stock units issued to officers, directors, and employees under our 2010 Plan:



		Weighted Average
		Grant Date
	Shares	Fair Value
	(in thousands)
Unvested at December 31, 2013	384	$	24.48
Granted	330		51.05
Vested	(40)		23.97
Forfeitures	(6)		23.76
Unvested at June 30, 2014	668	$	37.66

Stock-based compensation is classified in the consolidated statements of income in the same expense line items as cash compensation. None of the stock-compensation cost was capitalized as amounts were immaterial. Amounts recorded as expense in the consolidated statements of income are as follows (in thousands):



	Three Months Ended June 30,				Six Months Ended June 30,
	2013		2014		2013		2014
Cost of revenue	$	285	$	594	$	398	$	826
Technology and development		192		287		342		495
Sales and marketing		301		570		486		899
General and administrative		1,707		2,789		2,332		4,058
Total	$	2,485	$	4,240	$	3,558	$	6,278