Note 13 – Equity Incentive Plans

In 2010, we adopted the 2010 Equity Incentive Plan (the “2010 Plan”). The 2010 Plan provides for the granting of stock options, RSUs and stock purchase rights to our employees, directors and consultants. Options granted under the 2010 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 option and RSU awards vest over up to four years and are exercisable over a maximum period of ten years from their grant dates. Vesting typically terminates when the employment or consulting relationship ends.

In addition, as a result of our acquisition of SolarCity, we assumed its equity award plans and its outstanding equity awards as of the acquisition date. The assumed equity awards were converted into equity awards of Tesla common stock in share amounts and prices based on the exchange ratio specified in the acquisition agreement, with the assumed equity awards retaining the same vesting and other terms and conditions as in effect immediately prior to the acquisition. The assumed equity awards have vesting and other terms and conditions that are substantially the same as those under the 2010 Plan.

As of March 31, 2017, there were 16,856,143 shares underlying outstanding equity awards.

2014 Performance-Based Stock Option Awards

In 2014, to create incentives for continued long-term success beyond the Model S program and to closely align executive pay with our stockholders’ interests in the achievement of significant milestones by us, the Compensation Committee of our Board of Directors granted stock option awards to certain employees (excluding our Chief Executive Officer) to purchase an aggregate of 1,073,000 shares of our common stock. Each award consisted of four vesting tranches with a vesting schedule based entirely on the attainment of performance milestones, assuming continued employment and service through each vesting date:

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1/4th of each award vested upon completion of the first Model X production vehicle;

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1/4th of each award is scheduled to vest upon achieving aggregate production of 100,000 vehicles in a trailing 12-month period;

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1/4th of each award is scheduled to vest upon completion of the first Model 3 production vehicle; and

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1/4th of each award is scheduled to vest upon achieving an annualized gross margin of greater than 30.0% for any three-year period.

As of March 31, 2017, the following performance milestone was achieved:

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Completion of the first Model X production vehicle.

As of March 31, 2017, the following performance milestones were considered probable of achievement:

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Completion of the first Model 3 production vehicle; and

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Achieving aggregate production of 100,000 vehicles in a trailing 12-month period.

We begin recognizing stock-based compensation expense as each performance milestone becomes probable of achievement. As of March 31, 2017, we had unrecognized stock-based compensation expense of $17.1 million for the performance milestone that was not considered probable of achievement. For the three months ended March 31, 2017 and 2016, we recorded stock-based compensation expense of $2.7 million and $9.0 million, respectively, related to these awards.

2012 Chief Executive Officer Awards

In August 2012, our Board of Directors granted 5,274,901 stock option awards to our Chief Executive Officer (the “2012 CEO Grant”). The 2012 CEO Grant consists of 10 vesting tranches with a vesting schedule based entirely on the attainment of both performance conditions and market conditions, assuming continued employment and service through each vesting date. Each vesting tranche requires a combination of a pre-determined performance milestone and an incremental increase in our market capitalization of $4.0 billion, as compared to our initial market capitalization of $3.2 billion at the time of the 2012 CEO Grant. As of March 31, 2017, the market conditions for eight vesting tranches and the following seven performance milestones were achieved:

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Successful completion of the Model X alpha prototype;

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Successful completion of the Model X beta prototype;

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Completion of the first Model X production vehicle;

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Aggregate production of 100,000 vehicles;

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Successful completion of the Model 3 alpha prototype,

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Successful completion of the Model 3 beta prototype; and

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Aggregate production of 200,000 vehicles.

As of March 31, 2017, the following performance milestones were considered probable of achievement:

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Completion of the first Model 3 production vehicle; and

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Aggregate production of 300,000 vehicles.

We begin recognizing stock-based compensation expense as each milestone becomes probable of achievement. As of March 31, 2017, we had $3.5 million of total unrecognized stock-based compensation expense for those performance milestones that were considered probable of achievement, which will be recognized over a weighted-average period of 1.4 years. As of March 31, 2017, we had unrecognized stock-based compensation expense of $5.7 million for the performance milestone that was not considered probable of achievement. For the three months ended March 31, 2017 and 2016, we recorded stock-based compensation expense of $1.4 million and $10.4 million, respectively, related to the 2012 CEO Grant.

Our Chief Executive Officer earns a base salary that reflects the currently applicable minimum wage requirements under California law, and he is subject to income taxes based on such base salary. However, he has never accepted and currently does not accept his salary.

Summary Stock-Based Compensation Information

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

	Three Months Ended March 31,
	2017		2016
Cost of sales	$	10,031	$	6,403
Research and development		49,192		39,602
Selling, general and administrative		44,494		43,652
Total	$	103,717	$	89,657

We realized no income tax benefits from stock option exercises in each of the periods presented due to recurring losses and valuation allowances. As of March 31, 2017, we had $1.22 billion of total unrecognized stock-based compensation expense, net of estimated forfeitures, related to non-performance awards, which will be recognized over a weighted-average period of 3.0 years.