11. Equity Incentive Plans

In July 2003, we adopted the 2003 Equity Incentive Plan. Concurrent with the effectiveness of our registration statement on Form S-1 on June 28, 2010 (see Note 10), we adopted the 2010 Equity Incentive Plan (the Plan) and all remaining common shares reserved for future grant or issuance under the 2003 Equity Incentive Plan were added to the 2010 Equity Incentive Plan. The Plan provides for the granting of stock options and stock purchase rights to employees, directors and consultants of Tesla. Options granted under the Plan may be either incentive options or nonqualified stock options. Incentive stock options may be granted only to our employees including officers and directors. Nonqualified stock options and stock purchase rights may be granted to our employees and consultants. Generally, our stock options vest over four years and are exercisable over a period not to exceed the contractual term of ten years from the date the stock options are granted. Continued vesting typically terminates when the employment or consulting relationship ends. As of December 31, 2011, there were 9,919,107 shares of common stock reserved for issuance under the Plan.

The following table summarizes option activity under the Plan:


	Outstanding Options
	Shares Available for Grant			Number of Options			Weighted Average Exercise Price
Balance, December 31, 2008		1,550,059			2,862,424		$	1.88
Additional options reserved		8,366,666			—			—
Repurchased restricted stock		4,836			—			0.90
Granted		(10,275,974	)		10,275,974			5.98
Exercised		—			(195,264	)		1.19
Cancelled		1,369,100			(1,369,100	)		2.70

Balance, December 31,2009		1,014,687			11,574,034			5.44
Additional options reserved		11,269,286			—			—
Repurchased restricted stock		9,170			—			0.90
Granted		(3,328,705	)		3,328,705			17.96
Exercised		—			(721,080	)		1.84
Cancelled		443,537			(443,537	)		6.61

Balance, December 31, 2010		9,407,975			13,738,122			8.62
Additional options reserved		3,796,342			—
Granted		(4,011,973	)		4,011,973			27.49
Exercised		—			(1,216,669	)		5.41
Cancelled		726,763			(726,763	)		15.26

Balance, December 31, 2011		9,919,107			15,806,663			13.35

In addition to stock options issued from the Plan, there were 33,333 stock options as of December 31, 2011 and 66,666 stock options as of December 31, 2010 and 2009, respectively, that we had previously granted to non-employees outside of the Plan. These outstanding non-employee options had a weighted average exercise price of $1.80 as of each year end.

Additional information regarding all stock options outstanding and exercisable as of December 31, 2011 is summarized below:


	Options Outstanding						Options Exercisable
Range of Exercise Price	Number		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (in years)		Number		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (in years)
$0.15 - $6.15		1,617,294	$	3.06				1,099,285	$	2.83
$6.63 - $6.63		7,695,280		6.63				4,694,483		6.63
$9.96 - $20.72		2,039,559		15.70				826,053		15.17
$22.88 - $27.88		1,788,889		24.48				126,574		25.00
$27.91 - $28.35		479,412		28.14				8,152		28.05
$28.43 - $28.43		428,212		28.43				5,312		28.43
$28.45 - $28..45		971,262		28.45				215,150		28.45
$30.41 - $30.41		179,838		30.41				2,450		30.41
$30.55 - $30.55		258,500		30.55				71,956		30.55
$33.22 - $33.22		381,750		33.22				3,939		33.22

		15,839,996		13.33		6.20		7,053,354		8.34		5.15

Additional information regarding all stock options outstanding and exercisable as of December 31, 2010 is summarized below:


	Options Outstanding						Options Exercisable
Range of Exercise Price	Number		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (in years)		Number		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (in years)
$0.15 - $2.10		517,493	$	1.31				463,216	$	1.23
$2.70 - $2.70		1,568,473		2.70				772,729		2.70
$2.94 - $6.15		549,642		4.99				180,599		4.80
$6.63 - $6.63		7,943,740		6.63				2,050,354		6.63
$9.96 - $13.23		627,112		11.24				18,245		11.10
$14.17 - $14.17		1,090,915		14.17				14,987		14.17
$20.24 - $20.24		216,614		20.24				3,084		20.24
$20.72 - $20.72		564,752		20.72				4,446		20.72
$24.98 - $24.98		455,580		24.98				369		24.98
$30.55 - $30.55		270,467		30.55				1,250		30.55

		13,804,788		8.59		6.06		3,506,279		5.05		5.19

The aggregate intrinsic value represents the total pretax intrinsic value (i.e., the difference between our common stock price and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options. The aggregate intrinsic value of options outstanding as of December 31, 2011 and 2010 was $243.9 million and $250.1 million, respectively. The intrinsic value of options exercisable was $142.8 million and $75.7 million, and the intrinsic value of options vested and expected to vest was $220.5 million and $203.0 million as of December 31, 2011 and 2010, respectively. The total intrinsic value of options exercised was $27.8 million and $10.0 million for the years ended December 31, 2011 and 2010, respectively.

Fair Value Adoption

We adopted the fair value method on January 1, 2006 in recognizing stock-based compensation expense. Under the fair value method, we estimated the fair value of each option award and Employee Stock Purchase Plan (the ESPP) on the grant date using the Black-Scholes option pricing model and the weighted average assumptions noted in the following table.


	Year Ended December 31,
	2011			2010			2009
Risk-free interest rate:
Stock options		2.0	%		2.0	%		2.2	%
ESPP		0.2	%		—			—
Expected term (in years):
Stock options		6.0			5.3			4.6
ESPP		0.5			—			—
Expected volatility:
Stock options		70	%		71	%		64	%
ESPP		59	%		—			—
Dividend yield:
Stock options		0.0	%		0.0	%		0.0	%
ESPP		0.0	%		—			—

The weighted-average grant-date fair value for option awards granted during the years ended December 31, 2011, 2010 and 2009 was $17.43, $10.99 and $3.00 per share, respectively. The weighted-average grant-date fair value for ESPP granted during the year ended December 31, 2011 and 2010 was $7.52 and $5.49 per share, respectively.

The fair value of the shares of common stock underlying the stock options has historically been determined by the Board of Directors as there was no public market for our common stock. The Board of Directors has determined fair value of the common stock at the time of each grant of options by considering a number of objective and subjective factors including valuation of comparable companies, sales of convertible preferred stock to unrelated third parties, operating and financial performance, the lack of liquidity of capital stock, and trends in the broader automobile industry. We have not granted stock options with an exercise price that is less than the fair value of the underlying common stock as determined at the time of grant by our Board of Directors, with input from management. The fair market value of the underlying common stock was determined by the Board of Directors until the completion of our IPO when our common stock was listed on an established stock exchange.

Information regarding our stock option grants during 2009 and the six months prior to the completion of our IPO, including the grant date; the number of stock options issued with each grant; and the exercise price, which equals the grant date fair value of the underlying common stock for each grant of stock options, is summarized as follows:


Grant Date	Number of Options Granted		Exercise Price and Fair Value per Share of Common Stock
March 2, 2009		214,813	$	2.70
April 13, 2009		1,005,837		2.70
April 22, 2009		105,184		2.70
August 4, 2009		323,063		2.94
October 21,2009		590,638		6.15
December 4, 2009		7,977,444		6.63
December 16, 2009		58,995		6.63
March 3, 2010		402,660		9.96
April 28, 2010		256,320		13.23
June 12, 2010		1,135,710		14.17

Included in our December 4, 2009 stock option grants were 6,711,972 stock options granted to our Chief Executive Officer in two separate grants. In recognition of his and our company's achievements and to create incentives for future success, our Board of Directors approved an option grant to our Chief Executive Officer representing 4% of our fully-diluted share base prior to such grant as of December 4, 2009, or 3,355,986 stock options, with 1/4th of the shares vesting immediately, and 1/36th of the remaining shares scheduled to vest each month over three years, assuming continued employment through each vesting date. In addition, to create incentives for the attainment of clear performance objectives around a key element of our current business plan—the successful launch and commercialization of Model S—the Board of Directors approved an additional option grant to our Chief Executive Officer totaling an additional 4% of our fully-diluted shares prior to such grant as of December 4, 2009, or 3,355,986 stock options, with a vesting schedule based entirely on the attainment of performance objectives as follows, assuming Mr. Musk's continued employment and service to us through each vesting date:

•

1/4th of the shares subject to the option are scheduled to vest upon the successful completion of Model S Engineering Prototype;

•

1/4th of the shares subject to the option are scheduled to vest upon the successful completion of Model S Validation Prototype;

•

1/4th of the shares subject to the option are scheduled to vest upon the completion of the first Model S Production Vehicle; and

•

1/4th of the shares subject to the option are scheduled to vest upon the completion of the 10,000th Model S Production Vehicle.

If he does not meet one or more of the above milestones prior to the fourth anniversary of the date of the grant, he will forfeit his right to the unvested portion of the grant.

Due to the significant number of stock options granted to our Chief Executive Officer, we valued these December 2009 grants by using the following grant-specific Black-Scholes assumptions: risk-free interest rate of 1.7%, expected term of 4.1 years, expected volatility of 70% and dividend yield of 0%. Stock-based compensation expense related to Mr. Musk's grants was $6.3 million and $9.2 million for the years ended December 31, 2011 and 2010, respectively.

Included in our June 2010 and September 2010 stock option grants were 666,300 and 20,000, respectively, of stock options granted to various members of our senior management with a vesting schedule based entirely on the attainment of the same performance objectives as those outlined for Mr. Musk above. Through December 31, 2011, the first two performance milestones were achieved and the remaining performance milestones were considered probable of achievement. For the years ended December 31, 2011 and 2010, we recognized $4.9 million and $8.9 million, respectively, of stock-based compensation expense related to the attainment of performance objectives.

The following table summarizes the consolidated stock-based compensation expense by line item in the consolidated statements of operations (in thousands):


	Year Ended December 31,
	2011		2010		2009
Cost of sales	$	670	$	243	$	61
Research and development		13,377		4,139		376
Selling, general and administrative		15,372		16,774		997

Total	$	29,419	$	21,156	$	1,434

We realized no income tax benefit from stock option exercises in each of the periods presented due to recurring losses and valuation allowances. As required, we present excess tax benefits from the exercise of stock options, if any, as financing cash flows rather than operating cash flows.

As of December 31, 2011, we had $55.2 million of total unrecognized compensation expense, net of estimated forfeitures, that will be recognized over a weighted-average period of 2.38 years.

Employee Stock Purchase Plan

Concurrent with the effectiveness of our registration statement on Form S-1 on June 28, 2010 (see Note 10), we established the ESPP. Under the ESPP, employees are eligible to purchase common stock through payroll deductions of up to 15% 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 our common stock on the first and last trading days of each six-month offering period. During the year ended December 31, 2011, 223,458 shares were issued under the ESPP for $3.9 million. A total of 2,615,749 shares of common stock have been reserved for issuance under the ESPP, and there were 2,392,291 shares available for issuance under the ESPP as of December 31, 2011.