10. Convertible Preferred Stock and Stockholders’ Deficit

Convertible Preferred Stock

In September and December 2008, the Company issued 1,749,425 shares and 1,015,357 shares, respectively, of Series D convertible preferred stock (Series D Preferred) at a price of $11.57 per share, for gross proceeds of $32.0 million. In March 2009, the Company issued 431,973 shares of Series D Preferred at a price of $11.57 per share, for gross proceeds of $5.0 million.

As of December 31, 2011, convertible preferred stock balances were as follows:


	Shares Authorized		Shares Issued and Outstanding		Carrying Value		Liquidation Amount
					(In thousands)		(In thousands)
Series A		1,527,611		428,922	$	1,835	$	2,200
Series B-1		3,425,152		961,720		4,726		4,932
Series B-2		14,811,323		4,119,759		21,039		21,128
Series C		6,944,450		1,949,874		19,905		20,000
Series D		12,400,000		3,196,755		35,673		37,002

		39,108,536		10,657,030	$	83,178	$	85,262

In May and June 2012, the Company issued 1,672,300 shares of Series E Preferred at a price of $12.11 per share, for gross proceeds of $20.3 million. As of December 31, 2012, convertible preferred stock balances were as follows:


	Shares Authorized		Shares Issued and Outstanding		Carrying Value		Liquidation Amount
					(In thousands)		(In thousands)
Series A		1,527,611		428,922	$	1,835	$	2,200
Series B-1		3,425,152		961,720		4,726		4,932
Series B-2		14,811,323		4,119,759		21,039		21,128
Series C		6,944,450		1,949,874		19,905		20,000
Series D		11,385,196		3,196,755		35,673		37,002
Series E		22,058,823		1,672,300		18,845		20,250

		60,152,555		12,329,330	$	102,023	$	105,512

As of December 31, 2012, the Company had six series of outstanding convertible preferred stock: Series A convertible preferred stock (Series A Preferred), Series B-1 convertible preferred stock (Series B-1 Preferred), Series B-2 Preferred, Series C convertible preferred stock (Series C Preferred), Series D Preferred and Series E Preferred. The convertible preferred stock was initially recorded at fair value on the date of issuance, net of issuance costs. All shares of convertible preferred stock were effectively redeemable in the event of a change in control at the applicable original purchase price per share. As all convertible preferred stock was redeemable upon an event outside the control of the Company (i.e., a change in control), the related amounts were presented outside of stockholders’ deficit. The carrying value of convertible preferred stock would have been adjusted to redemption value if it became probable that a redemption would occur but no such redemption occurred prior to the conversion of the convertible preferred stock into common stock upon the completion of the Company’s IPO.

The redemption amount of outstanding Series A Preferred, Series B-1 Preferred, Series B-2 Preferred, Series C Preferred, Series D Preferred and Series E Preferred is equal to the applicable original purchase price of the stock, or $5.13, $5.13, $5.13, $10.26, $11.57 and $12.11 per share, respectively. The significant rights, privileges, and preferences of the convertible preferred stock were as follows as of December 31, 2012:

Dividend Provisions

Until the earlier of October 31, 2013 and the date on which there is an automatic conversion of all of the outstanding shares of convertible preferred stock, the holders of shares of each series of convertible preferred stock shall be entitled to receive noncumulative dividends prior and in preference to any declaration or payment of any dividend on the common stock at the applicable dividend rate, payable when, as and if declared by the Board of Directors, with any such dividend being paid pari passu among all of the then outstanding shares of convertible preferred stock until the dividend rate for each such outstanding share of convertible preferred stock has been paid in full. The dividend rate shall be $0.43 per annum for each share of Series A Preferred, Series B-1 Preferred and Series B-2 Preferred, $0.8206 per annum for each share of Series C Preferred, $0.93 per annum for each share of Series D Preferred and $0.61 per annum for each share of Series E Preferred.

From October 31, 2013 to the date on which there is an automatic conversion of all of the outstanding shares of convertible preferred stock, the holders of Series E Preferred shall be entitled to receive cumulative dividends of $0.61 per share annually payable whether or not they have been declared by the Board of Directors. All such dividends shall accrue automatically on a daily basis and all accrued and unpaid dividends shall be fully paid quarterly prior to payment of any other dividend. If the dividends are not paid when they are due, the dividend rate increases from $0.61 to $1.21 per share annually until such dividends are paid in full. If other dividends are declared, such dividends shall first be paid pari passu among all of the then outstanding shares of Series A Preferred, Series B-1 Preferred, Series B-2 Preferred, Series C Preferred and Series D Preferred until the dividend rate for each such series has been paid in full.

Following the payment of dividends to the convertible preferred stockholders as described above, any declared dividends will be distributed among the holders of convertible preferred and common stock pro rata based upon the number of shares of common stock held by each determined on an as-if converted to common stock basis. No dividends have been declared to date.

Liquidation Preference

In the event of any liquidation, dissolution, winding up or change in control of the Company, the holders of Series E Preferred are entitled to receive a liquidation amount of $12.11 per share plus all cumulative and all declared but unpaid dividends prior and in preference to the holders of Series D Preferred, Series C Preferred, Series B-2 Preferred, Series B-1 Preferred and Series A Preferred and the common stockholders. Following payment of this liquidation amount, if proceeds for distribution remain, the holders of Series D Preferred are entitled to receive a liquidation amount of $11.57 per share plus all declared but unpaid dividends prior and in preference to the holders of Series C Preferred, Series B-2 Preferred, Series B-1 Preferred and Series A Preferred and the common stockholders. Following payment of this liquidation amount, if proceeds for distribution remain, the holders of Series C Preferred are entitled to receive a liquidation amount of $10.26 per share plus all declared but unpaid dividends prior and in preference to the holders of Series B-2 Preferred, Series B-1 Preferred and Series A Preferred and the common stockholders. Following payment of these liquidation amounts, if proceeds for distribution remain, the holders of Series B-2 Preferred are entitled to receive a liquidation amount of $5.13 per share plus all declared but unpaid dividends prior and in preference to the holders of Series B-1 Preferred and Series A Preferred and the common stockholders. Following payment of these liquidation amounts, if proceeds for distribution remain, the holders of the Series B-1 Preferred and Series A Preferred are each entitled to receive a liquidation amount of $5.13 per share plus all declared but unpaid dividends prior and in preference to the common stockholders. Following payment of these liquidation amounts, the convertible preferred and the common stockholders shall share in any remaining proceeds pro rata based on the number of common shares held by each, determined on an as-if converted to common stock basis, until the holders of Series A Preferred, Series B-1 Preferred and Series B-2 Preferred have received an additional $10.26 per share (for a total of $15.39 per share), the holders of Series C Preferred have received an additional $15.39 per share (for a total of $25.64 per share), the holders of Series D Preferred have received an additional $17.34 per share (for a total of $28.92 per share) and the holders of Series E Preferred have received an additional $18.16 per share (for a total of $30.27 per share). Thereafter, any proceeds remaining for distribution would be distributed pro rata among the common stockholders.

Conversion Rights

Each share of convertible preferred stock is convertible, at the option of the holder, at any time after the date of issuance, into one fully paid and nonassessable share of common stock, subject to certain anti-dilution adjustments. Each share of convertible preferred stock, subject to certain anti-dilution adjustments, will be automatically converted into one fully paid and nonassessable share of common stock upon the earlier of: (i) the Company’s IPO with a pre-IPO valuation of at least $225 million that results in gross proceeds to the Company of not less than $30 million, (ii) the effective date of a registration statement on Form S-1 registering for re-sale shares of common stock issued in, or shares of common stock issued upon the conversion of preferred stock issued in, a qualifying private placement, or (iii) the date specified by written consent or agreement of the holders of not less than sixty percent of the then outstanding shares of convertible preferred stock; provided, however, that (x) if such conversion is in connection with a liquidation event in which holders of Series D Preferred would receive an amount less than $28.92 per share, then the automatic conversion of each share of Series D Preferred shall also require the written consent or agreement of the holders of not less than a majority of the then outstanding shares of Series D Preferred and (y) the automatic conversion of each share of Series E Preferred shall also require the written consent or agreement of the holders of not less than sixty percent of the then outstanding shares of Series E Preferred.

Subject to customary exceptions, the Company’s amended and restated certificate of incorporation provides anti-dilution protection for holders of the convertible preferred stock in the event the Company issues additional shares of the Company’s common stock, options or rights to purchase the Company’s common stock or securities convertible into the Company’s common stock without consideration or at a price per share that is less than the then effective conversion price of any series of the convertible preferred stock, which is referred to as a dilutive issuance. The Company’s amended and restated certificate of incorporation provides that the conversion price shall be adjusted to protect holders of the convertible preferred stock from certain dilutive issuances based on a weighted average formula.

In addition to the anti-dilution protections described above, the conversion price of the convertible preferred stock is subject to adjustments for stock splits, dividends and recapitalizations, among other things.

Voting Rights

The holder of each share of convertible preferred stock shall have the right to one vote for each share of common stock into which such share of convertible preferred stock could be converted. Additionally, specific protective provisions require that certain actions by the Company such as the completion of a liquidation event may be taken only upon the approval of the holders of at least sixty percent of the outstanding shares of convertible preferred stock.

Election of Directors

The holders of convertible preferred stock are entitled to elect two members of the Company’s Board of Directors. All remaining members of the Company’s Board of Directors are elected by the holders of common and convertible preferred stock, voting together as a single class, on an as-if converted to common stock basis.

Right of First Offer

Each holder of at least 280,782 shares of convertible preferred stock (or the common stock issued upon conversion thereof) has the right to participate in certain future equity issuances of the Company in order to maintain their pro rata ownership percentage of the Company. The right expires upon the earlier of: (i) an initial public offering with a pre initial public offering valuation of at least $225 million and resulting in gross proceeds to the Company of not less than $30 million; (ii) the effective date of a registration statement on Form S-1 registering for re-sale shares of common stock issued in, or shares of common stock issued upon the conversion of preferred stock issued in, a qualifying private placement, or (iii) the completion of a liquidation event of the Company.

Right of First Refusal and Co-Sale

Holders of convertible preferred stock have a secondary right of first refusal (if not exercised by the Company) and certain rights of co-sale with respect to certain shares of common stock held by common stockholders. The rights expire upon the earlier of: (i) an IPO with a pre-IPO valuation of at least $225 million and resulting in gross proceeds to the Company of not less than $30 million; (ii) the effective date of a registration statement on Form S-1 registering for re-sale shares of common stock issued in, or shares of common stock issued upon the conversion of preferred stock issued in, a qualifying private placement, (iii) the completion of a liquidation event, and (iv) the date specified by written consent or agreement of the holders of not less than sixty percent of the then outstanding convertible preferred stock.

Common Stock

The Company had reserved the following shares of common stock for issuance as of December 31, 2012


Conversion of Series A Preferred			428,922
Conversion of Series B-1 Preferred			961,720
Conversion of Series B-2 Preferred			4,119,759
Exercise and conversion of Series B-2 and Series E Preferred warrants			72,029
Conversion of Series C Preferred			1,949,874
Conversion of Series D Preferred			3,196,755
Conversion of Series E Preferred			1,672,300
Common stock available for grant of stock awards			2,129,055
Common stock options outstanding			1,030,795

			15,561,209

Stock Plans and Stock-Based Compensation

Under the Company’s 2001 Stock Plan (the 2001 Plan), the Company was able to grant shares and/or options to purchase up to 3,408,247 shares of common stock to employees, directors, consultants, and other service providers at prices not less than the fair market value at the date of grant for incentive stock options and not less than 85% of the fair market value for nonstatutory options. These options generally vest over four years, expire 10 years from the date of grant, and are generally exercisable at any time following the date of grant. Unvested options exercised are subject to the Company’s repurchase right that lapses as the options vest.

The Company’s board of directors adopted the 2012 Equity Incentive Plan in July 2012. The 2012 Equity Incentive Plan went into effect and the 2001 Plan was terminated in August 2012. However, the awards under the 2001 Plan outstanding as of and subsequent to the termination of the 2001 Plan will continue to be governed by their existing terms.

Under the 2012 Equity Incentive Plan, the aggregate number of common shares issued shall not exceed the sum of (a) 1,123,131 common shares, (b) the number of common shares reserved under the 2001 Plan that were not issued or subject to outstanding awards under the 2001 Plan upon its termination, and (c) any common shares subject to outstanding options under the 2001 Plan upon its termination that subsequently expire or lapse unexercised and common shares issued pursuant to awards granted under the 2001 Plan that were outstanding upon its termination and that are subsequently forfeited to or repurchased by the Company; provided, however, that no more than 1,066,975 common shares, in the aggregate, shall be added to the 2012 Equity Incentive Plan pursuant to clauses (b) and (c). In addition, the number of shares reserved for issuance under the 2012 Equity Incentive Plan will be increased automatically on the first business day of each fiscal year of the Company, starting with fiscal year 2013 and ending in fiscal year 2022, by a number equal to the lesser of (a) 5% of the total number of common shares outstanding on December 31 of the prior year, (b) 842,348 common shares, subject to certain adjustments in accordance with the 2012 Equity Incentive Plan, or (c) a number of common shares determined by the Company’s board of directors.

Under the 2012 Equity Incentive Plan, the Company may grant shares, stock units, stock appreciation rights, performance cash awards and/or options to employees, directors, consultants, and other service providers. For options, the per share exercise price may not be less than the fair market value of a Company common share on the date of grant. Awards generally vest over four years and expire 10 years from the date of grant. Options generally become exercisable as they vest following the date of grant.

In general, to the extent that awards under the 2012 Equity Incentive Plan are forfeited or lapse without the issuance of shares, those shares will again become available for awards.

The Company’s board of directors has discretion to administer the 2012 Equity Incentive Plan. The 2012 Equity Incentive Plan provides that in the event of certain significant corporate transactions, each outstanding award will be treated in the manner described in the definitive transaction agreement. Outstanding options granted under the 2001 Plan will become fully vested unless continued or assumed by a surviving entity in a significant corporate transaction. An individual award agreement or any other written agreement between a participant and the Company may provide that an award will be subject to additional acceleration of vesting and exercisability in the event of certain change in control transactions.

The Company’s board of directors may amend or terminate the 2012 Equity Incentive Plan at any time. If the Company’s board of directors amends the plan, it need not seek stockholder approval of the amendment unless required by applicable law, regulation or rule. The 2012 Equity Incentive Plan will continue in effect for 10 years from its adoption date, unless the Company’s board of directors decides to terminate the plan earlier.

Activity under the Company’s stock plans is as follows:


	Shares Available for Grant			Number of Shares Subject to Options Outstanding			Weighted- Average Exercise Price
Balances at December 31, 2009		522,497			1,040,658		$	1.00
Stock awards granted		(134,530	)		—
Options granted		(145,375	)		145,375			1.46
Options canceled		76,098			(76,098	)		1.07
Options exercised		—			(147,154	)		0.82

Balances at December 31, 2010		318,690			962,781			1.07
Additional shares authorized		912,544			—
Stock awards granted		(72,441	)		—
Options granted		(324,585	)		324,585			1.46
Options canceled		165,980			(165,980	)		1.25
Options exercised		—			(35,087	)		0.96
Stock awards canceled and forfeited		11,462			—

Balances at December 31, 2011		1,011,650			1,086,299			1.18
Additional shares authorized		1,123,131			—
Options granted		(444,607	)		444,607			4.77
Options canceled		421,987			(421,987	)		1.26
Options exercised		—			(78,124	)		1.08
Stock awards canceled and forfeited		16,894			—

Balances at December 31, 2012		2,129,055			1,030,795			2.68
Options vested and expected to vest at December 31, 2012					979,255			2.68

In February 2010, the Company authorized awards to executive officers for a total of 153,026 shares of common stock. Awards of 56,998 shares of common stock vested in January 2011 based on the attainment in 2010 of certain agreed-upon performance milestones as determined by the Board of Directors. In January 2011, the Company authorized awards to executive officers for a total of 141,795 shares of common stock. In January and July 2012, all outstanding awards of common stock vested based on the attainment in 2011 and 2012 of certain agreed-upon performance milestones as determined by the Board of Directors. The Company recorded total stock-based compensation expense of $401,000, $52,000 and $92,000 for the years ended December 31, 2012, 2011 and 2010, respectively, related to these stock awards. At December 31, 2012, no shares of common stock were subject to repurchase related to these awards.

Additional information regarding options outstanding as of December 31, 2012 is as follows:


	Options Outstanding and Exercisable
Exercise Price	Number of Shares Outstanding		Weighted- Average Remaining Contractual Life (In Years)
$0.50		37,240		2.28
0.53		45,625		4.02
0.89		15,723		4.54
1.03		182,754		5.31
1.21		177,387		6.13
1.46		128,020		7.75
2.17		66,394		9.19
4.74		349,574		9.58
11.36		28,078		9.81

		1,030,795

At December 31, 2012, 592,950 shares of the 1,030,795 options outstanding were vested. The weighted-average remaining contractual life of options exercisable at December 31, 2012 and 2011 is 6 years and 6.4 years, respectively. The aggregate intrinsic value of options outstanding and exercisable at December 31, 2012 and 2011 was $8.9 million and $1.1 million, respectively. The aggregate intrinsic value of options vested and expected to vest, net of expected forfeitures, at December 31, 2012 was $10.4 million with an average remaining contractual life of 7.4 years.

The Company estimated the fair value-based measurement of each stock award on the date of grant using the Black-Scholes option-pricing model. The Company does not believe that it is able to rely on its historical exercise and post-vesting termination activity to provide accurate data for estimating its expected term for use in determining the fair value-based measurement of its options. Therefore, the Company has opted to use the simplified method for estimating the expected term of its options. The risk-free interest rate assumptions are based on the yield of U.S. Treasury instruments with similar durations as the expected term of the related awards. The expected dividend yield assumption is based on the Company’s absence of dividend payouts. Expected volatility is based on the average volatility of a peer group of publicly traded entities. Forfeitures are estimated such that the Company only recognizes expense for those shares expected to vest, and adjustments are made if actual forfeitures differ from those estimates.

The weighted-average fair value-based measurement of employee and director stock options granted under the Company’s stock plans in the years ended December 31, 2012, 2011, and 2010 were $6.98, $0.82, and $1.07 per share, respectively. The fair value-based measurement of employee and director stock options granted under the Company’s stock plans was estimated at the date of grant using the Black-Scholes model with the following assumptions:


	Year Ended December 31,
	2012	2011	2010
Expected term	6 years	6 years	6 years
Expected volatility	57-59%	58-60%	87-88%
Risk-free interest rate	0.8-1.4%	1.9-2.7%	1.5-2.9%
Expected dividend yield	0%	0%	0%

The Company has historically granted stock options at exercise prices not less than the fair market value of its common stock as determined by the board of directors based on input from management. The determination of the estimated fair value of the Company’s common stock on the date of grant is based on a number of objective and subjective factors including: recent sales of convertible preferred stock to investors; comparable rights and preferences of other outstanding equity securities; progress of research and development efforts and milestones attained; results of operations, financial position and levels of debt and available capital resources of the Company; perspective provided by valuation analyses of the Company’s common stock performed by third- party valuation specialists; and the likelihood of a liquidity event such as an initial public offering or the sale of the Company given prevailing market and biotechnology sector conditions.

Total employee and director stock-based compensation expense recognized was as follows:


	Years Ended December 31,
(In thousands)	2012		2011		2010
General and administrative	$	423	$	93	$	152
Research and development		398		128		147

	$	821	$	221	$	299

At December 31, 2012, the Company had $2.8 million of total unrecognized compensation expense, net of estimated forfeitures, related to outstanding stock options that will be recognized over a weighted-average period of 3.3 years.

The total intrinsic value of options exercised was $607,000 for the year ended December 31, 2012. The total intrinsic value of options exercised in the years ended December 31, 2011, and 2010 was not significant.