4. Fair Value of Financial Instruments

Cash, accounts payable, and accrued liabilities are carried at cost, which approximates fair value given their short-term nature. Marketable securities, cash equivalents and warrants to purchase convertible preferred stock are carried at fair value.

The fair value of financial instruments reflects the amounts that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The fair value hierarchy is based on three levels of inputs that may be used to measure fair value, of which the first two are considered observable, and the third is considered unobservable, as follows:

Level 1 – Quoted prices in active markets for identical assets or liabilities.

Level 2 – Inputs other than those included in Level 1 that are directly or indirectly observable, such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The Company measures the fair value of financial assets and liabilities using the highest level of inputs that are reasonably available as of the measurement date. The following tables summarize the fair value of financial assets and liabilities (investments and convertible preferred stock warrant liabilities) that are measured at fair value and the classification by level of input within the fair value hierarchy:


	Fair Value Measurements as of
	September 30, 2013
*(in thousands)*	Level 1		Level 2		Level 3		Total
Investments:
Money market funds	$	22,831	$	—	$	—	$	22,831
Federal agency securities		—		17,925		—		17,925
Commercial paper		—		11,750		—		11,750
Corporate debt securities		—		1,969		—		1,969

Total investments	$	22,831	$	31,644	$	—	$	54,475


	Fair Value Measurements as of
	December 31, 2012
*(in thousands)*	Level 1		Level 2		Level 3		Total
Investments:
Money market funds	$	5,923	$	—	$	—	$	5,923
Federal agency securities		—		9,351		—		9,351

Total investments	$	5,923	$	9,351	$	—	$	15,274

Convertible preferred stock warrant liabilities	$	—	$	—	$	157	$	157

The Company’s Level 2 investments include U.S. government-backed securities, commercial paper, and corporate securities that ) are valued using third-party pricing sources that apply applicable inputs and other relevant data, such as quoted prices, interest rates and yield curves, into their models to estimate fair value. The average remaining maturity of the Company’s Level 2 investments as of September 30, 2013 is less than six months and all of these investments are rated by S&P and Moody’s at AAA or AA+

The following table presents changes in financial instruments measured at fair value using Level 3 inputs:


	Convertible
	Preferred Stock
	Warrant
	Liabilities
	*(in thousands)*
Balance at December 31, 2012	$	157
Reclassification of preferred stock warrant liabilities to additional paid-in capital in conjunction with the conversion of the convertible preferred stock into common stock upon the closing of the Company’s IPO		(157	)

Balance at September 30, 2013	$	—

The estimated fair value of the notes payable as of September 30, 2013, based upon current rates for similar borrowings, as measured using Level 3 inputs, is $8.3 million.