Stock-Based Compensation

6 Months Ended

Jun. 30, 2011

Stock-Based Compensation

Stock-Based Compensation

Note 9 — Stock-Based Compensation

Stock Option Plans

The Company historically granted options through two plans, the Company's 2004 Omnibus Share Plan and the 2008 Share Option Plan (collectively, the "2004 and 2008 Option Plans"). Concurrent with the effectiveness of the Company's registration statement on Form S-1 on March 24, 2011 for ServiceSource's IPO (see Note 1), the Company's 2011 Equity Incentive Plan (the "2011 Plan") became effective and all remaining common stock reserved for future grant or issuance under the 2004 and 2008 Options Plan were added to the 2011 Plan. Shares of common stock reserved for issuance under the 2011 Plan consist of (a) 5,760,000 shares of common stock initially available for future grants under the 2011 Plan plus (b) 2,584,015 shares of common stock previously reserved but unissued under the 2004 and 2008 Option Plans that are now available for issuance under the 2011 Plan. To the extent outstanding awards under the 2004 and 2008 Option Plans are forfeited or lapse unexercised and would otherwise have been returned to the share reserves under the 2004 and 2008 Option Plans, the shares of common stock subject to such awards instead will be available for future issuance under the 2011 Plan. The Company's board of directors and as delegated to its compensation committee administers the 2011 Plan and has authority to determine the directors, officers, employees and consultants to whom options or restricted stock may be granted, the option price or restricted stock purchase price, the timing of when each share is exercisable and the duration of the exercise period and the nature of any restrictions or vesting periods applicable to an option or restricted stock grant.

Under the 2011 Plan, options granted are generally subject to a four-year vesting period whereby options become 25% vested after a one-year period and then vest monthly through the end of the vesting period. Vested options may be exercised up to ten years from the vesting commencement date, as defined in the 2011 Option Plan. Vested but unexercised options expire three months after termination of employment with the Company.

Determining Fair Value of Stock Options

The Company estimates the fair value of stock option awards at the date of grant using the Black-Scholes option-pricing model. Options are granted with an exercise price equal to the fair value of the common stock as of the date of grant. Compensation expense is amortized net of estimated forfeitures on a straight-line basis over the requisite service period of the options, which is generally four years.

The weighted average Black-Scholes model assumptions for the three and six months ended June 30, 2011 and 2010 were as follows:

	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
Expected term (in years)		5.4			5.4			5.4			5.4
Expected volatility		54	%		54	%		54	%		54	%
Risk-free interest rate		1.95	%		2.17	%		2.13	%		2.29	%
Expected dividend yield		—			—			—			—

Option and restricted stock activity under the Company's Plans for the six months ended June 30, 2011 were as follows: (shares in thousands):

				Options Outstanding					Restricted  Stock Outstanding
	Shares and  Units Available for Grant			Number of Shares			Weighted- Average Exercise Price		Number of Shares
Outstanding — December 31, 2010		2,871			17,723		$	4.32		—
Additional shares reserved under the 2011 equity incentive plan		5,760			—			—		—
Granted		(1,162	)		1,082			10.23		80
Exercised		—			(572	)		4.10		—
Forfeited		517			(517	)		4.80		—
Outstanding — June 30, 2011 (unaudited)		7,986			17,716		$	4.67		80

The weighted average grant-date fair value of employee stock options granted during the three months ended June 30, 2011 and 2010 was $14.11 and $4.70 per share, respectively and for the six months ended June 30, 2011 and 2010 was $11.70 and $4.66 per share, respectively.

The Company accounts for all stock-based compensation to employees and directors, including grants of stock options, as stock-based compensation costs in the Condensed Consolidated Financial Statements based on the fair value measured as of the date of grant. These costs are recognized as an expense in the Condensed Consolidated Statements of Operations over the requisite service period and increase additional paid-in capital.

The following table summarizes the consolidated stock-based compensation expense by line item in the Condensed Consolidated Statements of Operations (in thousands):

	Three Months Ended June  30,				Six Months Ended June 30,
	2011		2010		2011		2010
Cost of revenue	$	447	$	299	$	816	$	573
Sales and marketing		949		742		1,870		1,445
Research and development		269		144		537		293
General and administrative		1,023		733		1,913		1,578
Total stock-based compensation	$	2,688	$	1,918	$	5,136	$	3,889

Employee Stock Purchase Plan

Concurrent with the effectiveness of our registration statement on Form S-1 on March 24, 2011 for ServiceSource's IPO, the Company's 2011 Employee Stock Purchase Plan (the "ESPP") became effective and is intended to qualify under Section 423 of the Internal Revenue Code of 1986. Under the ESPP, domestic employees are eligible to purchase common stock through payroll deductions of up to 10% of their eligible compensation, subject to any plan limitations. The purchase price of the shares on each purchase date is equal to 85% of the lower of the fair market value of the Company's common stock on the first and last trading days of each six-month offering period.

The Company estimates the fair value of purchase rights under the ESPP using the Black-Scholes valuation model. The fair value of each purchase right under the ESPP was estimated on the date of grant using the Black-Scholes option valuation model and the straight-line attribution approach with the following weighted-average assumptions:

	Three Months Ended June 30, 2011			Six Months Ended June 30, 2011
Expected term (in years)		0.39			0.39
Expected volatility		36	%		36	%
Risk-free interest rate		0.18	%		0.18	%
Expected dividend yield		—			—

A total of 900,000 shares of common stock have been reserved for issuance under the ESPP as of June 30, 2011. The ESPP provides that additional shares are reserved under the plan annually on the first day of each fiscal year in an amount equal to the lesser of (i) 1.5 million shares, (ii) one percent of the outstanding shares of common stock on the last day of the immediately preceding fiscal year, or (iii) an amount determined by the board of directors. The first purchase date is August 15, 2011 and therefore no shares have been issued under this plan as of June 30, 2011.