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. Nonqualified stock options and stock purchase rights may be granted to our employees, including directors, 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.

As of September 30, 2017, there were 15,014,437 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 September 30, 2017, the following performance milestones had been achieved:

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Completion of the first Model X production vehicle;

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Aggregate production of 100,000 vehicles in a trailing 12-month period; and

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Completion of the first Model 3 production vehicle.

We begin recognizing stock-based compensation expense as each performance milestone becomes probable of achievement. As of September 30, 2017, we had unrecognized stock-based compensation expense of $17.1 million for the performance milestone that was considered not probable of achievement. For the three and nine months ended September 30, 2017, we recorded stock-based compensation expense of $0.5 million and $6.8 million, respectively, related to these awards. For the three and nine months ended September 30, 2016, we recorded stock-based compensation expense of $11.6 million and $22.8 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 grant. As of September 30, 2017, the market capitalization conditions for all of the vesting tranches and the following eight performance milestones had been 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;

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Aggregate production of 200,000 vehicles; and

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Completion of the first Model 3 production vehicle.

As of September 30, 2017, the following performance milestone was considered probable of achievement:

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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 September 30, 2017, we had $1.0 million of total unrecognized stock-based compensation expense for the performance milestone that was considered probable of achievement, which will be recognized over a weighted-average period of 0.3 years. As of September 30, 2017, we had unrecognized stock-based compensation expense of $5.7 million for the performance milestone that was considered not probable of achievement. For the three and nine months ended September 30, 2017, we recorded stock-based compensation expense of $1.2 million and $4.3 million, respectively, related to the 2012 CEO Grant. For the three and nine months ended September 30, 2016, we recorded stock-based compensation expense of $4.6 million and $14.9 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 September 30,				Nine Months Ended September 30,
	2017		2016		2017		2016
Cost of sales	$	10,166	$	8,939	$	27,663	$	21,837
Research and development		51,066		40,220		158,052		113,328
Selling, general and administrative		51,421		40,384		146,697		111,347
Total	$	112,653	$	89,543	$	332,412	$	246,512

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 September 30, 2017, we had $1.1 billion of total unrecognized stock-based compensation expense related to non-performance awards, which will be recognized over a weighted-average period of 2.9 years.