Stock-based compensation

2018 Equity Incentive Plan

In July 2018, the Board adopted the 2018 Equity Incentive Plan (the “2018 Plan”), which became effective in connection with the IPO, and ceased granting awards under the 2003 Stock Plan (the "2003 Plan"). The Company initially reserved 21,839,258 shares of its common stock for issuance under the 2018 Plan, which included any remaining shares available for issuance under the 2003 Plan on the effective date of the 2018 Plan. The number of shares reserved for issuance under the 2018 Plan will also be increased by expired or forfeited shares under the 2003 Plan, or shares issued under the 2003 Plan which are repurchased at their original issue price. Shares subject to awards under the 2003 Plan that are used to pay the exercise price of an option or withheld to satisfy the tax withholding obligations related to any award will not become available for future grant or sale under the 2018 Plan. The number of shares reserved for issuance under the 2018 Plan will increase automatically on January 1 of each year beginning in 2019 and continuing through 2028 by a number of shares of common stock equal to the lesser of (x) 5% of the total outstanding shares of the Company’s common stock and common stock equivalents as of the immediately preceding December 31 (rounded to the nearest whole share) and (y) a number of shares determined by the Board. As of September 28, 2019, there were 25,280,393 shares reserved for future issuance under the 2018 Plan.

Stock options

Pursuant to the 2018 Plan, the Company issues stock options to employees. The fair value of the stock options is based on the Company’s closing stock price on the trading day immediately prior to the date of grant. The option price, number of shares and grant date are determined at the discretion of the Board. For so long as the optionholder performs services for the Company, the options generally vest over 48 months, with cliff vesting after one year and generally vest on a monthly or quarterly basis thereafter, and are exercisable for a period not to exceed ten years from the date of grant.

The summary of the Company’s stock option activity is as follows:



	Number of Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value
					(in years)	(in thousands)
Outstanding at September 29, 2018	48,504,182		$	10.33	6.6	$	276,959
Granted	1,714,328		13.34
Exercised	(7,925,897	)	3.98
Forfeited	(5,137,045	)	13.48
Outstanding at September 28, 2019	37,155,568		$	11.39	6.3	$	94,288
At September 28, 2019
Options exercisable	26,436,074		$	10.23	5.5	$	92,281
Options vested and expected to vest	35,606,324		$	11.25	6.2	$	93,836

During fiscal 2019, 2018 and 2017, the Company granted options with a fair value of $8.4 million, $50.2 million and $39.4 million, respectively, with a weighted-average grant date fair value of $4.91, $5.39 and $4.84 per share, respectively. Options vested in 2019, 2018 and 2017, respectively, have a fair value of $34.3 million, $38.3 million, and $34.8 million.

The total intrinsic value of stock options exercised was $61.1 million, $31.3 million and $42.0 million for fiscal 2019, 2018 and 2017, respectively.

As of September 28, 2019 and September 29, 2018, the Company had $43.9 million and $71.5 million, respectively, of unrecognized stock-based compensation cost, which is expected to be recognized over a weighted-average period of 2.0 years and 2.6 years, respectively.

The Company’s policy for issuing stock upon stock option exercise is to issue new common stock.

The Company uses the Black- Scholes option pricing model to estimate the fair value of stock options. This model requires the input of highly subjective assumptions including the expected term of the option, expected stock price volatility and expected dividends. If any of the assumptions used in the Black-Scholes model changes significantly, stock-based compensation expense may differ materially in the future from that recorded in the current period. The fair value of options at the date of grant was estimated with the following weighted-average assumptions:



	2019		2018		2017
Expected term (years)	6.51		6.25		6.25
Risk-free interest rate	2.67	%	2.73	%	1.95	%
Expected volatility	30.7	%	30.2	%	32.4	%
Expected dividend yield	—	%	—	%	—	%

Expected term

The expected term represents the period over which the Company anticipates stock-based awards to be outstanding. The Company does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term. As a result, the Company elected the simplified method, which is the average of the options’ vesting and contractual terms.

Risk-free interest rate

The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for the expected term of the option.

Expected share price volatility

The Company’s computation of expected volatility is based on the historical volatility of selected comparable publicly traded companies over a period equal to the expected term of the option.

Expected dividend yield

The Company used a zero-dividend yield, as the Company has never paid dividends and does not plan to pay dividends in the near future.

Fair value of common stock

Prior to the IPO, in accordance with the American Institute of Certified Public Accountants Accounting and Valuation Guide, Valuation of Privately-Held Company Equity Securities Issued as Compensation, the Board exercised reasonable judgment and considered numerous objective and subjective factors to determine the best estimate of fair value of the Company’s common stock, including but not limited to the prices at which the Company sold shares of its common stock to outside investors in arm’s-length transactions; independent third-party valuations of the Company’s common stock; the rights, preferences and privileges of redeemable convertible preferred stock relative to those of common stock; the Company’s operating results, financial position and capital resources; and additional relevant economic information.

Subsequent to the Company's IPO, the Company began using the market closing price for its common stock as reported on The Nasdaq Global Select Market.

Restricted stock units

Pursuant to the 2018 Plan, the Company issues RSUs to employees. The fair value of RSUs is based on the Company's closing stock price on the trading day immediately preceding the date of grant. RSUs typically have an initial annual cliff vest and then vest quarterly over the service period, which is generally four years. The summary of the Company’s unvested RSU activity is as follows:



	Number of Units		Weighted Average Grant Date Fair Value		Aggregate Intrinsic Value
					(in thousands)
Outstanding at September 29, 2018	—		$	—	$	—
Granted	7,915,980
Exercised	(829,270	)
Forfeited	(369,924	)
Expired	—
Outstanding at September 28, 2019	6,716,786		$	11.4	$	90,744
At September 28, 2019
Units expected to vest	5,207,691		$	11.4	$	70,356

As of September 28, 2019, the Company had $55.6 million of unrecognized stock-based compensation expense related to their RSUs, which is expected to be recognized over a weighted-average period of 3.4 years.

Total stock-based compensation expense by function category was as follows:



	2019		2018		2017
(In thousands)
Cost of revenue	$	985	$	198	$	240
Research and development	17,643		13,960		13,605
Sales and marketing	12,965		15,885		15,086
General and administrative	14,982		8,602		7,619
Total stock-based compensation expense	$	46,575	$	38,645	$	36,550