DRS

Confidential Draft No. 1 submitted to the Securities and Exchange Commission on June 27, 2017

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Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.

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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☐

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

We have not authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectuses we have prepared. We do not take responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. This prospectus is an offer to sell only the shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date.

PROSPECTUS SUMMARY

This summary highlights selected information that is presented in greater detail elsewhere in this prospectus. This summary does not contain all the information you should consider before investing in our common stock. You should carefully read this prospectus in its entirety before investing in our common stock, including the sections of this prospectus titled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus. Unless the context otherwise requires, we use the terms “Avalara,” the “Company,” “we,” “us,” and “our” in this prospectus to refer to Avalara, Inc. and, where appropriate, our consolidated subsidiaries.

Overview

Avalara’s motto is “Tax compliance done right.” The rise of digital commerce and international trade, coupled with constantly shifting taxation and reporting obligations imposed by the global patchwork of local, regional, state, and national taxing authorities, has created a tremendously complex and onerous compliance burden for businesses of all sizes. Avalara’s mission is to provide solutions for this challenge, allowing companies to focus on their core operations. We provide a leading suite of cloud-based solutions designed to improve accuracy and efficiency by automating the processes of determining taxability, identifying applicable tax rates, determining and collecting taxes, preparing and filing returns, remitting taxes, maintaining tax records, and managing compliance documents. In 2016, we processed an average of over 8.5 million tax determinations per day. Our vision is to be part of every transaction in the world.

Thousands of local, regional, state, and national taxing authorities in the United States and internationally impose a variety of transaction taxes that businesses operating in those jurisdictions collect from customers. Businesses must comply with these transaction tax obligations, which require determination, collection, and remittance of taxes, as well as maintaining records of registrations, taxes collected, tax exemption certificates, and other compliance documents. Transaction tax rules and regulations change frequently and are neither intuitive nor consistent across taxing jurisdictions, of which there are more than 16,000 in the United States alone, creating a massively complex compliance challenge. Determining the tax due on a particular sale depends not only on the precise geographic location of the transaction within the relevant taxing jurisdictions and the classification of the product or service in one of thousands of categories, it can also vary because of temporary tax incentives that change the tax rate for specific products, time periods, and transaction thresholds. Further complications arise from the thousands of rule changes enacted every year as taxing authorities amend their tax rates and taxability rules, modify jurisdictional boundaries, and implement other regulatory changes.

In addition to being complex, transaction tax determinations often must be performed and communicated to various invoice-generating systems in real time, at the time of the transaction. Compliance is even more burdensome for businesses required to collect tax on numerous products or services in multiple jurisdictions, which is increasingly common with the rise of ecommerce, globalization, and omnichannel retailing.

dissatisfaction and financial penalties. Many businesses conduct transactions using business applications such as accounting, enterprise resource planning (ERP), ecommerce, point of sale (POS), recurring billing, and customer relationship management (CRM) systems. Although these systems may include rudimentary tax calculation capabilities, they are not sufficiently robust or current to provide accurate tax determinations for many businesses.

The Avalara Compliance Cloud combines an advanced database of broad, deep, and up-to-date tax content with technology for executing compliance processes, including tax determination, tax document management, and returns preparation and filing. Our platform powers a suite of solutions that enable businesses to address the complexity of transaction tax compliance, process transactions in real time, produce detailed records of transaction tax determinations, and reduce errors, audit exposure, and total transaction tax compliance costs. Businesses that use our solutions can allocate fewer personnel to manage transaction tax compliance and focus their efforts on core business operations.

The Avalara Compliance Cloud is designed to integrate seamlessly with our customers’ business applications and be easy to administer and maintain. As transactions are executed in our customers’ business applications, the Avalara Compliance Cloud performs a series of operations to deliver tax compliance functionality in real time. We enable this through our more than 580 pre-built integrations that are designed to link the Avalara Compliance Cloud to business applications used for accounting, ERP, ecommerce, POS, recurring billing, and CRM systems. These integrations typically require little customer configuration or ongoing oversight. Our cloud architecture ensures that our tax content updates are immediately and automatically applied to our customers’ transactions. Our powerful and intuitive web-based console simplifies configuration and unifies administration, reporting, and returns processing across a customer’s multiple business applications.

As a result of our competitive strengths, our platform becomes deeply embedded in our customers’ business processes and systems, providing them with an automated solution central to their ability to transact. Our strategic position drives long-term customer relationships, as evidenced by our net revenue retention rate, which was 109% in the first quarter of 2017 and was 107% on average for the four quarters ended March 31, 2017.

Businesses across industries and of all sizes, ranging from small businesses to Fortune 100 companies, use our solutions. Mid-market customers, with 20 to 500 employees, have been and remain our primary target market segment for marketing and selling our solutions. Our diverse customer base included approximately 6,250 and 6,650 core customers as of December 31, 2016 and March 31, 2017, respectively. In 2016, our core customers represented more than 85% of our total revenue. As the offerings on our platform have expanded, so too has our addressable customer base. Our number of core customers represents less than half of our total number of customers and does not include a substantial number of customers of various sizes who do not meet the revenue threshold to be considered a core customer. These customers provide us with market share and awareness, and we anticipate that some may grow into core customers. While most of our customers today are located in the United States, we support transaction tax compliance in Europe, South America, and Asia and are expanding our international presence.

We sell our solutions primarily on a subscription basis. We target most prospects via cost-effective digital marketing strategies and qualify them using predictive analytics. The majority of our sales, to new and existing customers, are direct and conducted via telephone, requiring minimal in-person interaction. Our sales force also manages a network of business application providers and other customer referral sources that provides us with qualified leads. In some cases, particularly for

customers with larger and more complex needs, we conduct some in-person sales. Our small business customers generally subscribe to our solutions via an automated, self-service ordering process.

We have acquired and integrated multiple businesses, primarily to augment the tax content of the Avalara Compliance Cloud, to serve the needs of businesses in different geographies or industries, or to improve our ability to serve all aspects of transaction tax compliance. Substantial portions of our business, including our tax return preparation and filing, and our compliance document management solutions, are based on acquired content and technology. Since 2014, we have acquired our excise tax, lodging tax, communications tax, portions of our European VAT, and Brazil tax solutions. We intend to continue pursuing opportunities to broaden our suite of solutions and international presence, and integrating new content and solutions.

We generated revenue of $122.7 million, $167.2 million, and $49.0 million in 2015, 2016, and the three months ended March 31, 2017, respectively. We had net losses of $78.3 million, $58.2 million, and $15.9 million in 2015, 2016, and the three months ended March 31, 2017, respectively, primarily due to our investments in growth.

Industry Background

Transaction taxes are ubiquitous and complex, and compliance is increasingly difficult for businesses of all sizes.

Businesses, regardless of size, industry, or location, are subject to transaction tax compliance requirements. These requirements are burdensome even for a business transacting only in a single location, and become exponentially more complex for the increasing number of companies doing business in multiple taxing jurisdictions and offering numerous products and services that are taxed in myriad ways.

The responsibility for accurately determining and collecting sales tax generally falls on the seller, which must go through a series of steps to determine the tax due for each transaction. These steps involve complexities that are often prone to error and difficult to manage when conducted manually. Varying dynamics in local, regional, state, and national legislative processes in the United States and internationally have resulted in a patchwork of transaction tax rules that are not intuitive, often confusing, and inconsistent across jurisdictions. For example, digital music downloads are currently taxable in New Jersey but tax exempt in Iowa. Even within states, tax rules applied to similar products can vary widely. In New York, nuts are currently tax exempt, unless those nuts are honey-roasted, candy-coated, or chocolate-covered. Further complications arise from the thousands of changes enacted every year as taxing authorities amend their tax rates and taxability rules, modify taxing jurisdictions, and implement other regulatory changes.

Adding to the complexity is the fact that businesses face a variety of transaction tax types that vary based on industry and location, including sales and use tax, VAT, excise tax, lodging tax, and communications tax. Each of these tax types have different methods for calculating and applying the applicable rate, requiring different processes for compliance.

Due to the importance of tax revenue, taxing authorities conduct transaction tax audits to verify accurate and timely collection and payment. These audits can be time consuming and distracting to a business, and can cost hundreds of thousands, or even millions, of dollars, including internal and external audit management costs, as well as payment of uncollected taxes, penalties, and interest.

Commerce across multiple jurisdictions increases the burden of transaction tax compliance.

Conducting commerce across multiple jurisdictions involves a complex set of location-by-location, region-by-region, state-by-state, country-by-country, and product-by-product application of tax laws. Businesses that operate in multiple jurisdictions must stay up to date in each one as governing bodies amend their tax rates and taxability rules, modify jurisdictional boundaries, and implement other regulatory changes. Ecommerce, globalization, and omnichannel retailing have facilitated cross-jurisdiction transactions for businesses of all sizes, increasing their transaction tax compliance burden and risk, and the need for an automated compliance solution.

Challenges exist with current approaches.

Many businesses attempt to handle transaction tax compliance processes manually, risking miscalculations and incorrect collections, which can result in customer dissatisfaction and financial penalties. Some businesses supplement their internal manual efforts with costly outsourced professional service firms to perform tax compliance functions. Many businesses conduct transactions using business applications such as accounting, ERP, ecommerce, POS, recurring billing, and CRM systems. These systems sometimes include rudimentary tax calculation capabilities, but they are not sufficiently robust or current to provide accurate tax determinations for many businesses. Businesses may also rely on tax-specific software products from providers other than Avalara, but these often automate only part of the tax compliance process, offer limited pre-built integrations with critical business applications, can require manual updates, are deployed on-premises, or have a high cost of ownership.

Our Opportunity

We believe that the total addressable market for transaction tax compliance solutions is large and underpenetrated. We estimate that the addressable market in the United States alone for the solutions we offer today is approximately $4 billion. We calculate this figure by identifying the number of U.S. companies across all industries using certain data from S&P Global Market Intelligence. We then segment these companies into three separate cohorts based on the number of employees: companies that have between 20 and 100 employees, companies that have between 101 and 500 employees, and companies that have 501 employees or more. We then multiply the number of U.S. companies in each cohort by our estimated 2016 average annual revenue per customer within each cohort.

We believe this $4 billion figure significantly understates our total addressable market, as it does not account for U.S. small businesses with fewer than 20 employees, businesses outside the United States, or potential future expansion in the solutions that we are able to offer and corresponding potential increases in average annual revenue per customer.

We believe that the total addressable market for our solutions is also driven in part by transaction taxes collected, which, for 2015, the Organisation for Economic Co-operation and Development (OECD) estimates includes $366 billion of sales taxes in the United States. We estimate that our AvaTax solution determined approximately $5.8 billion of remitted sales and use taxes in the United States in 2016. In addition, the OECD estimates that in 2015 $433 billion of other transaction taxes were collected in the United States, including excise taxes, customs and import duties, and taxes on specific services, such as transportation, communications, insurance, advertising, hotels and lodging, restaurants, entertainments, gambling, and sporting events.

While most of our revenue is currently generated from customers located in the United States, we support transaction tax compliance in Europe, South America, and Asia and believe we have a

significant growth opportunity in these markets. For example, the OECD estimates that in 2015, over $1.0 trillion of VAT was collected in Europe. Although we are in the early stages of developing our international presence and therefore have less historical data with which to assess the size of our market opportunities, we believe that Europe and other jurisdictions throughout the world represent a significant additional addressable market for our transaction tax compliance solutions.

We intend to capture more of our total addressable market as we pursue our vision to be a part of every transaction in the world and solve compliance challenges with respect to the trillions of dollars of transaction taxes collected globally every year.

Avalara Compliance Cloud

The Avalara Compliance Cloud enables customers to address the complexity of transaction tax compliance, process transactions in real time, produce detailed records of transaction tax determinations, and reduce errors, audit exposure, and total transaction tax compliance costs. Our platform powers a suite of compliance solutions for transaction tax determination; tax return preparation, filing, and remittance; tax records maintenance; and exemption certificate and other compliance document storage and management. Our solutions use an advanced database of broad, deep, and up-to-date tax content for a wide and growing range of transaction taxes, such as sales and use tax, VAT, excise tax, lodging tax, and communications tax.

Compared to on-premises products, our comprehensive, integrated suite of automated, cloud-based compliance solutions requires substantially less upfront deployment effort, hardware purchases, and ongoing maintenance and support costs. Our solutions reduce our customers’ need for manual research and the related higher personnel costs, and eliminate the need for a patchwork of disparate products and services for separate transaction tax compliance functions.

Our Competitive Strengths

Our key competitive strengths include:

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Powerful technology. Our proprietary platform powers a comprehensive and integrated set of transaction tax compliance solutions that enable our customers to automate and accurately manage their transaction tax compliance processes. Our platform combines an extensive proprietary database containing tax jurisdiction boundaries, tax rates, product- and date-specific taxability rules, and return preparation and filing requirements, with advanced algorithms for precise real-time address validation via geolocation technology, application of taxability rules, tax determination, tax return preparation and filing, tax remittance, and tax forms and records management. Our AvaTax solution processes transaction tax determinations in under 90 milliseconds on average and in 2016 we processed an average of over 8.5 million tax determinations per day, including over 39.5 million on Cyber Monday 2016, the most significant day for online sales in U.S. history.

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Extensive integrations. We have invested in developing and maintaining more than 580 pre-built integrations that are designed to embed our solutions seamlessly into leading business applications, including accounting, ERP, ecommerce, POS, recurring billing, and CRM systems. We believe that maintaining pre-built integrations with a broad range of business applications provides a competitive advantage, to which we refer as a moat, as these integrations dramatically reduce implementation time, effort, and cost; enable our solutions to function seamlessly with the core applications our customers use to process and manage their

transactions; and allow customers to easily and efficiently manage tax compliance across multiple business applications. We offer far more pre-built integrations with these applications than other tax software providers and we plan to continue to add more. Our solutions are integrated with leading business application providers such as Netsuite, Sage, Epicor, Oracle, SAP, Microsoft, Magento, Shopify, Stripe, and many others.

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Extensive content. We have amassed, expanded, and integrated an extensive database of statutory tax content, including product classifications and taxability rules, exemption conditions, tax holidays, jurisdiction boundaries, tax rates, thresholds, registration, and return preparation and filing requirements, as well as more than 14 million uniform product codes, or UPC codes, linked to taxability rules. We employ a large group of tax research analysts who continually update this extensive library of content. Our extensive tax content and forms databases have enabled us to serve the compliance needs of an ever-expanding list of businesses in different geographies and industries such as fuels, communications, and lodging.

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Comprehensive, easy-to-use, scalable solutions. We provide solutions to a full range of transaction tax compliance burdens. All of our solutions can be configured and managed using our intuitive administrative console, which we regard as a significant differentiator from other transaction tax services because it facilitates fast and easy company-specific configuration, detailed transaction analysis, and access to detailed reports, worksheets, calendars, and other management functions.

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Broad ecosystem. We have strategically built a broad range of relationships with a network of business application providers and their reseller channels, integration developers, implementation specialists, and accounting and financial advisors. These relationships provide us with an effective distribution channel, the majority of our pre-built integrations, a source of referral business, occasions for cross-selling, new opportunities for compliance automation, and early access to developing technologies.

Our Growth Strategies

We plan to continue investing to provide our customers with best-in-class solutions and to expand our market opportunity. Our primary growth strategies include:

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Broaden our base of customers. We believe that the market for comprehensive, automated transaction tax compliance solutions is large and underserved, and therefore we can significantly increase our customer base. In addition, as businesses expand their product and jurisdictional footprints, we believe the need for cost-effective transaction tax compliance solutions increases. We will continue to invest in our sales and marketing efforts, both domestically and internationally, and intend to expand into new markets to grow our customer base.

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Grow revenue from our existing customers. Many of our customers begin with a single solution, such as our AvaTax determination solution. This initial entry point establishes Avalara as a trusted part of a customer’s financial system, and as a customer’s sales increase and the number of transactions processed grows, our volume-based subscription model generates

more revenue. The initial entry point also provides us with significant cross-sell opportunities, including tax return preparation and filing, tax remittance, and tax exemption certificate and other compliance documents management. These solutions work together to provide customers with a comprehensive automated solution for all of their transaction tax compliance needs.

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Continue to expand our partner ecosystem. We have an extensive network of business application providers and other customer referral sources that provides us with qualified leads and new customer opportunities. We intend to expand our partner ecosystem by actively seeking new relationships that offer exposure to potential customers and integrations with more business applications.

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Expand international reach. We believe that we have a significant opportunity to expand our suite of solutions for use outside of the United States. Of our 16 worldwide offices, six are located outside the United States and we support transaction tax compliance in Europe, South America, and Asia. We plan to continue investing in these geographies, while also expanding our solutions and growing our sales force to expand into new regions.

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Broaden our content and suite of solutions. We devote substantial resources to continuously improve the Avalara Compliance Cloud, add innovative new features and functionalities, add content, build technology to support new content types, and improve the user experience for our solutions. We have also made and intend to continue to make significant investments to acquire accurate, relevant content and expertise to best serve the transaction tax compliance needs of our customers. For example, we acquired our excise tax, communications tax, lodging tax, portions of our European VAT, Brazilian transaction tax, and tariffs and duties solutions. These acquisitions accelerate the expansion of our tax content, solutions, customer base, cross-selling opportunities, and geographic reach. We intend to continue pursuing opportunities to acquire businesses and technologies that accomplish our strategic objectives.

Risks Affecting Us

Our business is subject to numerous risks and uncertainties, including those highlighted in the section of this prospectus titled “Risk Factors” immediately following this prospectus summary. These risks include, but are not limited to:

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we have incurred significant operating losses in the past and may never achieve or maintain profitability;

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our revenue growth rate depends on existing customers renewing and upgrading their subscriptions, and if we fail to retain our customers or upgrade their subscriptions, our business will be harmed;

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if we are unable to attract new customers on a cost-effective basis, our business will be harmed;

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our revenue growth rate may not be sustainable;

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if we fail to effectively manage our growth, our business, results of operations, and financial condition would likely be harmed;

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we derive substantially all of our revenue from the delivery of our sales and use tax determination solution, and any failure of this solution to satisfy customer demands or to achieve increased market acceptance could adversely affect our business, results of operations, financial condition, and growth prospects;

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we may not successfully develop or introduce new solutions that achieve market acceptance, or successfully integrate acquired products, services, or content with our existing solutions, and our business could be harmed and our revenue could suffer as a result;

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our business and success depends in part on our strategic relationships with third parties, including our partner ecosystem, and our business would be harmed if we fail to maintain or expand these relationships;

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our acquisitions of, and investments in, other businesses, products, or technologies may not yield expected benefits and our inability to successfully integrate acquisitions may negatively impact our business, financial condition, and results of operations; and

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we face significant competition from other transaction tax compliance software providers and professional services firms, as well as the challenge of convincing businesses using do-it-yourself approaches to switch to our solutions.

Corporate Information

Our principal executive offices are located at 1100 2^nd Avenue, Suite 300, Seattle, Washington 98101, and our telephone number is (206) 826-4900. Our website is www.avalara.com. Information contained on, or that can be accessed through, our website is not a part of this prospectus and the inclusion of our website address in this prospectus is an inactive textual reference only. We were incorporated in the State of Washington in August 1999 under the name Advantage Solutions, Inc. and changed our name to Avalara, Inc. in December 2005.

Avalara, the Avalara logo, AvaTax, the Avalara Compliance Cloud, “Tax compliance done right,” and other trademarks or service marks of Avalara appearing in this prospectus are the property of Avalara. Other trade names, trademarks, and service marks appearing in this prospectus are the property of their respective holders. We have omitted the ^® and ™ designations, as applicable, for the trademarks used in this prospectus.

Implications of Being an Emerging Growth Company

We qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act, or the JOBS Act, enacted in April 2012. An emerging growth company may take advantage of reduced disclosure and regulatory requirements that are otherwise generally applicable to public companies, including presenting only two years of audited financial statements and related financial disclosure, not being required to obtain an attestation report from our independent registered public accounting firm on our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, presenting reduced disclosure regarding executive compensation in our periodic reports and proxy statements, and not being required to hold nonbinding advisory shareholder votes on executive compensation or golden parachute arrangements.

In addition, pursuant to the JOBS Act, as an “emerging growth company” we have elected to take advantage of an extended transition period for complying with new or revised accounting standards. This effectively permits us to delay adoption of certain accounting standards until those standards would otherwise apply to private companies. As a result, our consolidated financial statements may not be comparable to the financial statements of issuers who are required to comply with the effective dates for new or revised accounting standards that are applicable to public companies, which may make our common stock less attractive to investors.

THE OFFERING

Common stock offered by us

Option to purchase additional shares

Common stock to be outstanding after this offering

shares ( shares if the option to purchase additional shares is exercised in full)

Use of proceeds

We estimate that the net proceeds from this offering will be approximately $ million (or approximately $ million if the underwriters’ option to purchase additional shares of our common stock is exercised in full), assuming an initial public offering price of $ per share, which is the midpoint of the price range set forth on the cover page of this prospectus, and after deducting the underwriting discount and estimated offering expenses payable by us. We intend to use the net proceeds from this offering for working capital and other general corporate purposes. We also may use a portion of the net proceeds to acquire or invest in complementary businesses, products, services, technologies, or other assets. However, we have not entered into any agreements or commitments with respect to any specific acquisitions or investments at this time. See the section of this prospectus titled “Use of Proceeds” for additional information.

Proposed symbol

“AVLR”

The number of shares of our common stock to be outstanding after the closing of this offering is based on 112,648,738 shares of our common stock outstanding as of March 31, 2017 and excludes:

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20,702,517 shares of common stock issuable upon the exercise of options outstanding as of March 31, 2017, with a weighted average exercise price of $4.55 per share;

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408,525 shares of common stock issuable upon the exercise of a warrant outstanding as of March 31, 2017, with an exercise price of $0.48 per share;

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2,152,427 shares of common stock reserved for future issuance under our 2006 Equity Incentive Plan, or the 2006 Plan;

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an estimated shares of common stock reserved for future issuance under our 2017 Equity Incentive Plan, or the 2017 Plan, to be effective on the date of this prospectus; and

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an estimated shares of common stock reserved for future issuance under our 2017 Employee Stock Purchase Plan, or the ESPP, to be effective on the date of this prospectus.

The 2017 Plan will initially authorize the issuance of 8% of the total number of shares outstanding on the closing of this offering. The ESPP will initially authorize the issuance of 1.5% of the total number of shares of common stock outstanding as of the effective date of this offering, up to 3,000,000 shares.

On the date of this prospectus, any remaining shares available for issuance under the 2006 Plan will be added to the shares of our common stock reserved for issuance under the 2017 Plan and we will cease granting awards under the 2006 Plan. In addition, any shares covered by awards under the 2006 Plan that expire, are settled in cash without the delivery of shares, or are forfeited, surrendered, cancelled, repurchased, or withheld will become available for issuance under the 2017 Plan, with the maximum number of shares to be added to our 2017 Plan from our 2006 Plan equal to 22,613,987 shares. The 2017 Plan and the ESPP also provide for automatic annual increases in the number of shares reserved thereunder. See the section of this prospectus titled “Executive Compensation—Employee Benefit and Stock Plans” for additional information.

Unless otherwise noted, the information in this prospectus reflects and assumes the following:

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a -for- reverse stock split of our shares of common stock and preferred stock to be effected prior to the effectiveness of the registration statement of which this prospectus is a part;

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the issuance of shares of common stock issuable upon the automatic net exercise of warrants outstanding as of March 31, 2017, with a weighted average exercise price of $4.55 per share, immediately prior to the closing of this offering, assuming an initial public offering price of $ per share, which is the midpoint of the price range set forth on the cover page of this prospectus;

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the conversion of all outstanding shares of our preferred stock into an aggregate of 101,786,205 shares of common stock upon the effectiveness of the registration statement of which this prospectus forms a part;

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the filing of our amended and restated articles of incorporation in connection with the closing of this offering;

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no exercise of outstanding options or warrants after March 31, 2017 (except as described above); and

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no exercise by the underwriters of their option to purchase up to an additional shares of common stock from us.

SUMMARY CONSOLIDATED FINANCIAL DATA

We derived the following selected consolidated statements of operations data for the years ended December 31, 2015 and 2016 from audited consolidated financial statements appearing elsewhere in this prospectus. We derived the following selected consolidated statements of operations data for the three months ended March 31, 2016 and 2017 and the summary consolidated balance sheet data as of March 31, 2017 from unaudited consolidated financial statements appearing elsewhere in this prospectus. In the opinion of management, the unaudited consolidated financial statements reflect all adjustments, which include normal recurring adjustments, necessary for a fair presentation of the financial statements. Historical results are not necessarily indicative of the results that may be expected in the future and the results for the three months ended March 31, 2017 are not necessarily indicative of the results that may be expected for the full year or any other period. The selected financial data set forth below should be read together with the financial statements and the related notes to those statements, as well as the sections of this prospectus titled “Selected Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”


	Year Ended December 31,						Three Months Ended March 31,
	2015			2016			2016			2017
							(unaudited)
	(in thousands, except per share data)
Consolidated Statements of Operations Data:
Revenue:
Subscription and returns	$	112,298		$	154,706		$	35,721		$	45,899
Professional services and other		10,354			12,459			2,843			3,117

Total revenue		122,652			167,165			38,564			49,016
Cost of revenue⁽¹⁾:
Subscription and returns		35,020			41,775			9,920			11,244
Professional services and other		5,725			6,738			1,674			2,319

Total cost of revenue		40,745			48,513			11,594			13,563

Gross profit		81,907			118,652			26,970			35,453

Operating expenses:
Research and development⁽¹⁾		29,787			32,848			8,422			9,682
Sales and marketing⁽¹⁾		98,686			103,483			23,665			30,300
General and administrative⁽¹⁾		33,683			36,955			8,668			10,613

Total operating expenses		162,156			173,286			40,755			50,595

Operating loss		(80,249	)		(54,634	)		(13,785	)		(15,142	)

Total other (income) expense, net		1,614			2,955			74			954

Loss before income taxes		(81,863	)		(57,589	)		(13,859	)		(16,096	)
Provision for (benefit from) income taxes		(3,593	)		640			101			(149	)

Net loss	$	(78,270	)	$	(58,229	)	$	(13,960	)	$	(15,947	)

Net loss attributable to common shareholders—basic and diluted⁽²⁾	$	(78,270	)	$	(58,229	)	$	(13,960	)	$	(15,947	)

Net loss per share attributable to common shareholders—basic and diluted⁽²⁾	$	(8.53	)	$	(5.10	)	$	(1.20	)	$	(1.48	)

Weighted average shares of common stock outstanding—basic and diluted⁽²⁾		9,173			11,412			11,592			10,779

Pro forma net loss attributable to common shareholders—basic and diluted (unaudited)⁽²⁾				$						$

Pro forma net loss per share attributable to common shareholders—basic and diluted (unaudited)⁽²⁾				$						$

Pro forma weighted average shares of common stock outstanding—basic and diluted (unaudited)⁽²⁾

Non-GAAP Financial Data (unaudited):
Non-GAAP operating loss⁽³⁾	$	(69,166	)	$	(41,448	)	$	(10,489	)	$	(10,687	)
Free cash flow⁽⁴⁾		(47,692	)		(27,383	)		(11,461	)		(8,070	)

⁽¹⁾	The stock-based compensation expense included above was as follows:


	Year Ended December 31,				Three Months Ended March 31,
	2015		2016		2016		2017
					(unaudited)
	(in thousands)
Cost of revenue	$	496	$	856	$	194	$	226
Research and development		1,120		1,265		320		491
Sales and marketing		1,705		2,209		470		837
General and administrative		3,699		3,782		1,088		1,468

Total stock-based compensation	$	7,020	$	8,112	$	2,072	$	3,022

The amortization of acquired intangibles included above was as follows:


	Year Ended December 31,				Three Months Ended March 31,
	2015		2016		2016		2017
					(unaudited)
	(in thousands)
Cost of revenue	$	2,512	$	3,244	$	767	$	896
Research and development		—		—		—		19
Sales and marketing		1,423		1,706		428		480
General and administrative		128		124		29		38

Total amortization of acquired intangibles	$	4,063	$	5,074	$	1,224	$	1,433

⁽²⁾

See Note 13 of the notes to our consolidated financial statements included in this prospectus for an explanation of the method used to calculate basic and diluted net loss per share and pro forma net loss per share attributable to common shareholders and the weighted-average number of shares used in the computation of the per share amounts.

⁽³⁾

We calculate non-GAAP operating loss as operating loss before stock-based compensation expense and amortization of acquired intangibles. For more information about non-GAAP operating loss and a reconciliation of non-GAAP operating loss to operating loss, the most directly comparable financial measure calculated and presented in accordance with U.S. generally accepted accounting principles, or GAAP, see the section of this prospectus titled “Selected Consolidated Financial Data—Use of Non-GAAP Financial Measures.”

⁽⁴⁾

We define free cash flow as net cash used in operating activities less cash used for the purchase of property and equipment. For more information about free cash flow and a reconciliation of free cash flow to net cash used in operating activities, the most directly comparable financial measure calculated and presented in accordance with GAAP, see the section of this prospectus titled “Selected Consolidated Financial Data—Use of Non-GAAP Financial Measures.”


	As of March 31, 2017
	Actual			Pro Forma⁽¹⁾		Pro Forma As Adjusted⁽²⁾
	(unaudited)
	(in thousands)
Consolidated Balance Sheet Data:
Cash and cash equivalents	$	13,876		$	13,876	$
Working capital (excluding deferred revenue)		3,298			3,298
Total assets		171,451			171,451
Deferred revenue (current and noncurrent)		77,433			77,433
Credit facility (current and noncurrent)		26,732			26,732
Total liabilities		156,313			156,313
Convertible preferred stock		370,921			—
Total shareholders’ equity (deficit)		(355,783	)

⁽¹⁾

Reflects (1) the conversion of all outstanding shares of preferred stock into an aggregate of 101,786,205 shares of common stock as of March 31, 2017, (2) the issuance of shares of common stock issuable upon the automatic net exercise of warrants outstanding as of March 31, 2017, with a weighted average exercise price of $4.55 per share, immediately prior to the closing of this offering, assuming an initial public offering price of $ per share, which is the midpoint of the price range set forth on the cover page of this prospectus, and (3) the filing and effectiveness of our amended and restated articles of incorporation, in each case as if such conversion, issuance, filing, and effectiveness had occurred on March 31, 2017.

Investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below, together with all of the other information in this prospectus, including our consolidated financial statements and related notes, before deciding whether to purchase shares of our common stock. If any of the following risks is realized, our business, financial condition, results of operations, and prospects could be harmed. In that event, the price of our common stock could decline and you could lose part or all of your investment.

We have incurred significant operating losses in the past and may never achieve or maintain profitability.

We have incurred significant operating losses since our inception, including net losses of $78.3 million, $58.2 million, and $15.9 million in 2015, 2016, and the three months ended March 31, 2017. We had an accumulated deficit of $364.7 million and a working capital deficit of $65.4 million as of March 31, 2017. Because the market for our solutions is not fully developed and is rapidly evolving, it is difficult for us to predict our results of operations. We expect our operating expenses to continue to increase in future periods as we hire additional sales and other personnel, improve the Avalara Compliance Cloud, invest in sales and marketing initiatives, expand our international reach, and potentially acquire complementary technology and businesses. If our revenue does not increase to offset increases in our operating expenses, we may never achieve or maintain profitability. Revenue growth may slow, revenue may decline, or we may incur significant losses in the future for a number of possible reasons, including slowing demand for our solutions, general macroeconomic conditions, increasing competition, a decrease or slowing in the growth of the markets in which we compete, or if we fail for any reason to capitalize on growth opportunities. Additionally, we may encounter unforeseen operating expenses, difficulties, complications, delays, service delivery and quality problems, regulatory or legislative changes, and other unknown factors that may result in losses in future periods. If these losses exceed our expectations or if our revenue growth expectations are not met in future periods, our financial performance will be harmed.

Our revenue growth rate depends on existing customers renewing and upgrading their subscriptions, and if we fail to retain our customers or upgrade their subscriptions, our business will be harmed.

We cannot accurately predict customer behavior. Our customers have no obligation to renew their subscriptions for our solutions after the expiration of their subscription periods and our customers may not renew subscriptions for a similar mix of solutions or transaction volumes. Our renewal rates may decline as a result of a number of factors, including customer dissatisfaction, customers’ spending levels, decreased customer transaction volumes, increased competition, changes in tax laws or rules, pricing changes, deteriorating general economic conditions, or legislative changes affecting tax compliance providers. If our customers do not renew their subscriptions, or reduce the solutions or transaction volumes purchased under their subscriptions, our revenue may decline and our business may be harmed.

Our future success also depends in part on our ability to sell additional solutions and transaction volumes to existing customers. For example, many of our customers initially start with our AvaTax sales tax determination solution and then later combine that determination solution with one or more of our other solutions, such as returns preparation and filing, tax remittance, determination for additional tax types, or tax exemption certificate management. If our efforts to sell our additional solutions to our customers are not successful, our customers may not buy additional solutions and may not increase their transaction volumes and the value of their subscription contracts, which may decrease our revenue growth and harm our business, results of operations, and financial condition.

If we are unable to attract new customers on a cost-effective basis, our business will be harmed.

To grow our business, we must continue to grow our customer base in a cost-effective manner. Increasing our customer base and achieving broader market acceptance of our solutions will depend, to a significant extent, on our ability to effectively expand our sales and marketing activities, as well as our partner network of business application providers and other customer referral sources. We may not be able to recruit qualified sales and marketing personnel, train them to perform, and achieve an acceptable level of production from them on a timely basis or at all. In the past, it has usually taken new members of our sales force at least six months to integrate into our operations and start converting sales leads at our expected levels. In addition, if we cannot continue to maintain or expand our relationships with our partner network, we may receive fewer referrals, the set of integrations we offer may not keep up with the market, and our customer acquisition strategy may become less effective. If we are unable to maintain effective sales and marketing activities and maintain and expand our partner network, our ability to attract new customers could be harmed, our sales and marketing expenses could increase substantially, and our business, results of operations, and financial condition may suffer.

Our revenue has grown rapidly, from $122.7 million in 2015 to $167.2 million in 2016. As our revenue base grows, we expect that our revenue growth rate will decline over time, and you should not rely on the revenue growth of any prior period as an indication of our future performance. This risk may increase with any future acquisition, particularly if the revenue growth rate of the acquired business has been lower than ours.

If we fail to effectively manage our growth, our business, results of operations, and financial condition would likely be harmed.

We have experienced, and may continue to experience, rapid growth in our headcount and operations, both domestically and internationally, which has placed, and may continue to place, significant demands on our management and our administrative, operational, and financial reporting resources. We have also experienced significant growth in the number of customers, number of transactions, and the amount of tax content that our platform and solutions support. Our growth will require us to hire additional employees and make significant expenditures, particularly in sales and marketing but also in our technology, professional services, finance, and administration teams, as well as in our facilities and infrastructure. Our ability to effectively manage our growth will also require the allocation of valuable management and employee resources and improvements to our operational and financial controls and our reporting procedures and systems. In addition, as we seek to continue to expand internationally, we will likely encounter unexpected challenges and expenses due to unfamiliarity with local requirements, practices, and markets. Our expenses may increase more than we plan and we may fail to hire qualified personnel, expand our customer base, enhance our existing solutions, develop new solutions, integrate any acquisitions, satisfy the requirements of our existing customers, respond to competitive challenges, or otherwise execute our strategies. If we are unable to effectively manage our growth, our business, results of operations, and financial condition would likely be harmed.

We derive a substantial portion of our revenue from the delivery of our sales and use tax determination solution, and any failure of this solution to satisfy customer demands or to achieve increased market acceptance could adversely affect our business, results of operations, financial condition, and growth prospects.

We currently derive a substantial portion of our revenue from subscriptions to our sales and use tax determination solution. We have added, and will continue to add, additional solutions to expand our

offerings, but, at least in the near term, we expect to continue to derive the majority of our revenue from sales and use tax determination. As such, market acceptance of our sales and use tax determination solution is critical to our success. Demand for any of our solutions is affected by a number of factors, many of which are beyond our control, such as continued market acceptance of our solutions by existing and new customers, the timing of development and release of upgraded or new solutions on our platform, products and services introduced or upgraded by our competitors, pricing offered by our competitors, technological change, and growth or contraction in our addressable market. If we are unable to meet customer demands to offer our sales and use tax determination solution in a manner that is effective and at a price that the market will accept, or if we otherwise fail to achieve more widespread market acceptance of alternative solutions, our business, results of operations, financial condition, and growth prospects will suffer.

We may not successfully develop or introduce new solutions that achieve market acceptance, or successfully integrate acquired products, services, or content with our existing solutions, and our business could be harmed and our revenue could suffer as a result.

Our ability to attract new customers and increase revenue from existing customers will likely depend upon the successful development, introduction, and customer acceptance of new and enhanced versions of our solutions and on our ability to integrate any products, services, and content that we may acquire into our existing and future solutions. Moreover, if we are unable to expand our solutions beyond our current transaction tax compliance solutions, our customers could migrate to competitors who may offer a broader or more attractive range of products and services. Our business could be harmed if we fail to deliver new versions, upgrades, or other enhancements to our existing solutions to meet customer needs on a timely and cost-effective basis. Unexpected delays in releasing new or enhanced versions of our solutions, or errors following their release, could result in loss of sales, delay in market acceptance of our solutions, or customer claims against us, any of which could harm our business. The success of any new solution depends on several factors, including timely completion, adequate quality testing, and market acceptance. We may not be able to develop new solutions successfully or to introduce and gain market acceptance of new solutions in a timely manner, or at all. Additionally, we must continually modify and enhance our solutions to keep pace with changes in hardware systems and software applications, database technology, and evolving technical standards and interfaces. As a result, uncertainties related to the timing and nature of business application providers, announcements or introductions of new solutions, or modifications by vendors of existing hardware systems or back-office or Internet-related software applications, could harm our business and cause our revenue to decline.

Our business and success depends in part on our strategic relationships with third parties, including our partner ecosystem, and our business would be harmed if we fail to maintain or expand these relationships.

We depend on, and anticipate that we will continue to depend on, various third-party relationships to sustain and grow our business. We are highly dependent on relationships with third-party publishers of software business applications, including accounting, enterprise resource planning (ERP), ecommerce, point-of-sale (POS), recurring billing, and customer relationship management (CRM) systems, because the integration of our solutions with their applications allows us to reach their sizeable customer bases. Our sales and our customers’ user experience are dependent on our ability to connect easily to such third-party software applications. We may fail to retain and expand these integrations or relationships for many reasons, including due to third parties’ failure to maintain, support, or secure their technology platforms in general and our integrations in particular, or errors, bugs, or defects in their technology, or changes in our technology platform. Any such failure could harm our relationship with our customers, our reputation and brand, and our business and results of operations.

As we seek to add different types of partners to our partner ecosystem described in the section of this prospectus titled “Business—Partners,” including integration partners, referral partners, Avalara Included Partners, and professional service partners, it is uncertain whether these third parties will be successful in building integrations, co-marketing our solutions to provide a significant volume and quality of lead referrals and orders, and continuing to work with us as their own products evolve. Identifying, negotiating, and documenting relationships with additional partners requires significant resources. In addition, integrating third-party technology can be complex, costly, and time-consuming. Third parties may be unwilling to build integrations, and we may be required to devote additional resources to develop integrations for business applications on our own. Providers of business applications with which we have integrations may decide to compete with us or enter into arrangements with our competitors, resulting in such providers withdrawing support for our integrations. In addition, any failure of our solutions to operate effectively with business applications could reduce the demand for our solutions, resulting in customer dissatisfaction and harm to our business. If we are unable to respond to these changes or failures in a cost-effective manner, our solutions may become less marketable, less competitive, or obsolete, and our results of operations may be negatively impacted.

In addition, we leverage the sales and referral resources of our network of referral partners through a variety of incentive programs. In the event that we are unable to effectively utilize, maintain, and expand these relationships, our revenue growth would slow, we would need to devote additional resources to the development, sales, and marketing of our solutions, and our financial results and future growth prospects would be harmed. Additionally, our referral partners may demand, or demand greater, referral fees or commissions.

Our acquisitions of, and investments in, other businesses, products, or technologies may not yield expected benefits and our inability to successfully integrate acquisitions may negatively impact our business, financial condition, and results of operations.

We have acquired a significant number of businesses, products, content (such as tax rate information), and technologies over the past several years, and we may acquire or invest in other businesses, products, content, or technologies in the future. Since 2014 we have acquired our fuel excise tax, lodging tax, communications tax, portions of our European VAT, and Brazil tax solutions. We may not realize the anticipated benefits, or any benefits, from our past or future acquisitions. In addition, if we finance acquisitions by incurring debt or by issuing equity or convertible or other debt securities, our existing shareholders may be diluted or we could face constraints related to the repayment of indebtedness, which could affect the market value of our capital stock. To the extent that the acquisition consideration is paid in the form of an earn-out on future financial results, the success of such an acquisition will not be fully realized by us for a period of time as it is shared with the sellers. Further, if we fail to properly evaluate and execute acquisitions or investments, our business and prospects may be seriously harmed and the value of your investment may decline. For us to realize the benefits of past and future acquisitions, we must successfully integrate the acquired businesses, products, or technologies with ours, which may take time. Some of the challenges to successful integration of our acquisitions include:

Our failure to address these risks or other problems encountered in connection with our past or future acquisitions and investments could cause us to fail to realize the anticipated benefits of such acquisitions or investments and negatively impact our business, financial condition, and results of operations.

We face significant competition from other transaction tax compliance software providers and professional services firms, as well as the challenge of convincing businesses using do-it-yourself approaches to switch to our solutions.

We face significant competitive challenges from do-it-yourself approaches, outsourced transaction tax compliance services offered by accounting and specialized consulting firms, and tax-specific software vendors. Traditional do-it-yourself approaches are people-intensive and involve internal personnel manually performing compliance processes, often relying on transaction-specific research, static tax tables, non-tax specific software, or rate calculator services, as well as manual filing and remittance activities. Many businesses using do-it-yourself approaches believe that these manual processes are adequate and may be unaware that there is an affordable solution that is more effective, resulting in an inertia that can be difficult to overcome. In addition, the up-front costs of our solutions can limit our sales to businesses using do-it-yourself processes.

In addition, there are a number of competing tax-specific software vendors, some of which have substantially greater revenue, personnel, and other resources than we do. Our larger competitors, such as CCH Incorporated (a subsidiary of Wolters Kluwer NV), Exactor, ONESOURCE Indirect Tax (a division of Thomson Reuters), Sovos, and Vertex, Inc., as well as the state and local tax services offered by large accounting firms, have historically targeted primarily large enterprise customers, but many of them also market to small to medium-sized businesses in search of growth in revenue or market share. In addition, our competitors who currently focus their tax compliance services on small to medium-sized businesses, such as TPS Unlimited, Inc. d/b/a TaxJar, may be better positioned than larger competitors to increase their market share with small to medium-sized businesses, whether competing based on price, service, or otherwise. We also face a growing number of private transaction tax compliance businesses focused primarily on ecommerce. Increased competition may impact our ability to add new customers at the rates we have historically achieved. It is also possible that large enterprises with substantial resources that operate in adjacent compliance, finance, or ecommerce verticals may decide to pursue transaction tax compliance automation and become immediate, significant competitors. Our failure to successfully and effectively compete with current or future competitors could lead to lost business and negatively affect our revenue growth.

We face significant risks in selling our solutions to enterprise customers, and if we do not manage these efforts effectively, our results of operations and ability to grow our customer base could be harmed.

Sales to enterprise customers typically involve higher customer acquisition costs and longer sales cycles and we may be less effective at predicting when we will complete these sales. The historical

sales cycle and conversion rate trends associated with our existing customers, most of whom to date have been mid-market businesses, may not apply to larger enterprise businesses for whom purchasing decisions may require the approval of more technical personnel and management levels. This potential customer base may require us to invest more time educating prospects about the benefits of our solutions, causing our sales cycle to lengthen and become less predictable. In addition, larger customers may demand more integration services and customization, and our standard pricing model may be less attractive to certain customers with very high volumes of transactions. As a result of these factors, sales opportunities to larger businesses may require us to devote greater research and development, sales, support, and professional services resources to individual prospective customers, resulting in increased acquisition costs and strains on our limited resources. Moreover, these larger transactions may require us to delay recognizing the associated revenue we derive from these prospective customers until any technical or implementation requirements have been met. Furthermore, because we have limited experience selling to larger businesses, our investment in marketing our solutions to these potential customers may not be successful, which could harm our results of operations and our overall ability to grow our customer base.

Our quarterly and annual results of operations are likely to fluctuate in future periods.

We expect to experience quarterly or annual fluctuations in our results of operations due to a number of factors, many of which are outside of our control. This makes our future results difficult to predict and could cause our results of operations to fall below expectations or our predictions. Factors that might cause quarterly or annual fluctuations in our results of operations include:

Any one of the factors above, or the cumulative effect of some or all of the factors referred to above, may result in significant fluctuations in our quarterly and annual results of operations. This variability and unpredictability could result in our failure to meet or exceed our internal operating plan.

In addition, a percentage of our operating expenses is fixed in nature and is based on forecasted financial performance. In the event of revenue shortfalls, we may not be able to mitigate the negative impact on our results of operations quickly enough to avoid short-term impacts.

Because we recognize revenue from subscriptions for our solutions over the terms of the subscriptions and expense commissions associated with sales of our solutions immediately upon execution of a subscription agreement with a customer, our financial results in any period may not be indicative of our financial health and future performance.

We generally recognize revenue from subscription fees paid by customers ratably over the terms of their subscription agreements. As a result, most of the subscription revenue we report in each quarter is the result of agreements entered into during previous quarters. Consequently, a decline in new or renewed subscriptions in any one quarter will not be fully reflected in our revenue results for that quarter. Any such decline, however, will negatively affect our revenue in future quarters. Our subscription model also makes it difficult for us to rapidly increase our revenue through additional sales in any period, as subscription revenue from new customers must be recognized over the applicable subscription terms.

In contrast, we expense commissions paid to our sales personnel and to our referral partners in the period in which we enter into an agreement for the sale of our solutions. Although we believe increased sales is a positive indicator of the long-term health of our business, increased sales could increase our operating expenses and decrease earnings in any particular period. Thus, we may report poor results of operations due to higher sales or customer referral source commissions in a period in which we experience strong sales of our solutions. Alternatively, we may report better results of operations due to the reduction of sales or customer referral source commissions in a period in which we experience a slowdown in sales. Therefore, you should not rely on our financial results during any one quarter as an indication of our financial health and future performance.

Our business is substantially dependent upon the continued development of the market for cloud-based software solutions.

We derive, and expect to continue to derive, substantially all of our revenue from the sale of subscriptions for our cloud-based software solutions. The market for cloud-based software solutions is not as mature as the market for on-premises software applications. We do not know whether the trend of adoption of cloud-based software solutions that we have experienced in the past will continue in the future, and the adoption rate of cloud-based software solutions may be slower at companies in industries with heightened data security interests or sensitivity to communication network slowdowns or outages. Our success will depend to a substantial extent on the widespread adoption of cloud-based software solutions in general, and of cloud-based tax software solutions in particular. Many businesses have invested substantial personnel and financial resources to integrate on-premises software products into their businesses and have been reluctant or unwilling to migrate to cloud-based software solutions. Furthermore, many larger businesses have been reluctant or unwilling to use cloud-based solutions because they have concerns regarding the risks associated with the security of their data and the reliability of the technology and service delivery model associated with solutions like ours. In addition, if we or other cloud-based providers experience security incidents, loss of customer data, disruptions in delivery, or other problems, the market for cloud-based software solutions as a whole, including for our solutions, may be negatively impacted. If the adoption of cloud-based software solutions does not continue at the rate we anticipate, the market for these solutions may stop developing or may develop more slowly than we expect, either of which would harm our results of operations.

We hold significant amounts of money that we remit to taxing authorities on behalf of our customers, and this may expose us to liability from errors, delays, fraud, or system failures, which may not be covered by insurance.

We handle significant amounts of our customers’ money so that we can remit those amounts to various taxing jurisdictions on their behalf. If our banks’ or our own internal compliance procedures regarding cash management fail, are hacked or sabotaged, or if our banks or we are the subject of fraudulent behavior by personnel or third parties, we could face significant financial losses. Our efforts to remit tax payments to applicable taxing jurisdictions only after receiving the corresponding funds from our customers may fail, which would expose us to the financial risk of collecting from our customers after we have remitted funds on their behalf.

Additionally, we are subject to risk from concentration of cash and cash equivalent accounts, including cash from our customers that is to be remitted to taxing jurisdictions, with financial institutions where deposits routinely exceed federal insurance limits. If the financial institutions in which we deposit our customers’ cash were to experience insolvency or other financial difficulty, our access to cash deposits could be limited, any deposit insurance may not be adequate, we could lose our cash deposits entirely, and we could be exposed to liability to our customers. Any of these events would negatively impact our liquidity and results of operations.

If we make errors in our customers’ transaction tax determinations, or remit their tax payments late or not at all, our reputation, results of operations, and growth prospects could suffer.

The tax determination functions we perform for customers are complicated from a data management standpoint, time-sensitive, and dependent on the accuracy of the database of tax content underlying our solutions. Some of our processes are not fully automated, such as our process for monitoring updates to tax rates and rules, and even to the extent our processes are automated, our solutions are not proven to be without any possibility of errors. If we make errors in our customers’ tax determinations, or remit their tax payments late or not at all, our customers may be assessed interest and penalties. For example, as a certified provider in the Streamlined Sales Tax program we determine and remit sales taxes to certain states on behalf of our customers, and that agreement contains provisions detailing the circumstances under which we may become liable to member states in the event of delinquent payment of taxes. In a situation where the state is conducting a sales tax audit and our customer has declared bankruptcy or otherwise terminated operations before the appropriate documentation or tax liabilities have been remitted to the taxing jurisdiction, we could be held to be financially responsible for certain tax liabilities. For certain of our solutions, we guarantee the accuracy of the results or output provided by those solutions, and could be liable under such guarantee for up to 12 months’ service fees for those solutions in the event of an error that results in uncollected taxes, penalties, or interest. Although our agreements have disclaimers of warranties and limit our liability (beyond the amounts we agree to pay pursuant to our guarantee, if applicable), a court could determine that such disclaimers and limitations are unenforceable as a matter of law and hold us liable for these errors. Further, in some instances we have negotiated agreements with specific customers or assumed agreements in connection with our acquisitions that do not limit this liability or disclaim these warranties. Additionally, erroneous tax determinations could result in overpayments to taxing authorities that are difficult to reclaim from the applicable taxing authorities. Any history of erroneous tax determinations for our customers could also cause our reputation to be harmed, could result in negative publicity, loss of or delay in market acceptance of our solutions, loss of customer renewals, and loss of competitive position. In addition, our errors and omissions insurance coverage may not cover all amounts claimed against us if such errors or failures occur. The financial and reputational costs associated with any erroneous tax determinations may be substantial and could harm our results of operations.

Changes in tax laws and regulations or their interpretation or enforcement may cause us to invest substantial amounts to modify our solutions, cause us to change our business model, or draw new competitors to the market.

Changes in tax laws or regulations or interpretations of existing taxation requirements in the United States or in other countries may require us to change the manner in which we conduct some aspects of our business and could harm our ability to attract and retain customers. For example, a material portion of our revenue is generated by performing what can be complex transaction tax determinations and corresponding preparation of tax returns and remittance of taxes. Changes in tax laws or regulations that reduce complexity or decrease the frequency of tax filings could negatively impact our revenue. In addition, there is considerable uncertainty as to if, when, and how tax laws and regulations might change. As a result, we may need to invest substantially to modify our solutions to adapt to new tax laws or regulations. If our platform and solutions are not flexible enough to adapt to changes in tax laws and regulations, our financial condition and results of operations may suffer.

A number of states have considered or adopted laws that attempt to require out-of-state retailers to collect sales taxes on their behalf. There has also been consideration of federal legislation related to taxation of ecommerce sales, including the Marketplace Fairness Act, which, if enacted into law, would allow states to require online and other out of state merchants to collect and remit sales and use tax on products and services that they may sell. Similar issues exist outside of the United States, where the application of value-added taxes or other indirect taxes on online retailers is uncertain and evolving. The effect of changes in tax laws and regulations is uncertain and dependent on a number of factors. Depending on the content of any sales tax legislation, the role of third-party compliance vendors may change, we may need to invest substantial amounts to modify our solutions or our business model, we could see a decrease in demand, we could see new competitors enter the market, or we could be negatively impacted by such legislation in a way not yet known.

Cybersecurity, data security, and data privacy breaches may create liability for us, damage our reputation, and harm our business.

We face risks of cyber-attacks, computer break-ins, theft, denial-of-service attacks, and other improper activity that could jeopardize the performance of our platform and solutions and expose us to financial and reputational harm. Such harm could be in the form of theft of our, or our customers’ confidential information, the inability of our customers to access our systems, or the improper re-routing of customer funds through fraudulent transactions. Third parties, including vendors that provide products and services for our operations, could also be a source of security risk to us in the event of a failure of their own security systems and infrastructure. Our network of business application providers could also be a source of vulnerability to the extent their business applications interface with ours, whether unintentionally or through a malicious backdoor. We do not review the software code included in third-party integrations in all instances. Because the techniques used to obtain unauthorized access, or to sabotage systems, change frequently and generally are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. Malicious third parties may also conduct attacks designed to temporarily deny customers access to our solutions, such as denial of service attacks. Any of these occurrences could create liability for us, put our reputation in jeopardy, and harm our business.

Our customers provide us with information that our solutions store, some of which is confidential information about them or their financial transactions. In addition, we store personal information about our employees and, to a lesser extent, those who purchase products or services from our customers. We have security systems and information technology infrastructure designed to protect against unauthorized access to such information. The security systems and infrastructure we maintain may not be successful in protecting against all security breaches and cyber-attacks, social-engineering attacks,

computer break-ins, theft, and other improper activity. Threats to our information technology security can take various forms, including viruses, worms, and other malicious software programs that attempt to attack our solutions or platform or to gain access to the data of our customers or their customers. Any significant violations of data privacy could result in the loss of business, litigation, regulatory investigations, loss of customers, and penalties that could damage our reputation and adversely affect the growth of our business.

Failures in Internet infrastructure or interference with broadband or wireless access could cause current or potential customers to believe that our platform or solutions are unreliable, leading these customers to switch to our competitors or to avoid using our solutions, which could negatively impact our revenue or harm our opportunities for customer growth.

Our solutions depend on our customers’ high-speed broadband or wireless access to the Internet, particularly for our POS and ecommerce customers whose businesses require real-time tax determinations. Increasing numbers of customers and bandwidth requirements may degrade the performance of our solutions due to capacity constraints and other Internet infrastructure limitations, and additional network capacity to maintain adequate data transmission speeds may be unavailable or unacceptably expensive. If adequate capacity is not available to us, our solutions may be unable to achieve or maintain sufficient data transmission, reliability, or performance. In addition, if Internet service providers and other third parties providing Internet services, including incumbent phone companies, cable companies, and wireless companies, have outages or suffer deterioration in their quality of service, our customers may not have access to or may experience a decrease in the quality of our solutions. These providers may take measures that block, degrade, discriminate, disrupt, or increase the cost of customer access to our solutions. Any of these disruptions to data transmission could lead customers to switch to our competitors or avoid using our solutions, which could negatively impact our revenue or harm our opportunities for growth.

Our platform, solutions, and internal systems may be subject to disruption that could harm our reputation and future sales or result in claims against us.

Because our operations involve delivering a suite of transaction tax compliance solutions to our customers through a cloud-based software platform, our continued growth depends in part on the ability of our platform and related computer equipment, infrastructure, and systems to continue to support our solutions. In the past, we have experienced temporary platform disruptions, outages in our solutions, and degraded levels of performance due to human and software errors, file corruption, and capacity constraints associated with the number of customers accessing our platform simultaneously. While our past experiences have not materially impacted us, in the future we may face more extensive disruptions, outages, or performance problems. In addition, malicious third parties may also conduct attacks designed to sabotage our platform, impede the performance of our solutions, or temporarily deny customers access to our solutions. If an actual or perceived disruption, outage, performance problem, or attack occurs, it could:

Any of these events may increase non-renewals, limit our ability to acquire new customers, result in delayed or withheld payments from customers, or result in claims against us.

Undetected errors, bugs, or defects in our solutions could harm our reputation or decrease market acceptance of our solutions, which would harm our business and results of operations.

Our solutions may contain undetected errors, bugs, or defects. We have experienced these errors, bugs, or defects in the past in connection with new solutions and solution upgrades and we expect that errors, bugs, or defects may be found from time to time in the future in new or enhanced solutions after their commercial release. Our solutions are often used in connection with large-scale computing environments with different operating systems, system management software, equipment, and networking configurations, which may cause or reveal errors or failures in our solutions or in the computing environments in which they are deployed. Despite testing by us, errors, bugs, or defects may not be found in our solutions until they are deployed to or used by our customers. In the past, we have discovered software errors, bugs, and defects in our solutions after they have been deployed to customers.

Since our customers use our solutions for compliance reasons, any errors, bugs, defects, disruptions in service, or other performance problems with our solutions may damage our customers’ business and could hurt our reputation. We may also be required, or may choose, for customer relations or other reasons, to expend additional resources to correct actual or perceived errors, bugs, or defects in our solutions. If errors, bugs, or defects are detected or perceived to exist in our solutions, we may experience negative publicity, loss of competitive position, or diversion of the attention of our key personnel; our customers may delay or withhold payment to us or elect not to renew their subscriptions; or other significant customer relations problems may arise. We may also be subject to liability claims, including pursuant to our accuracy guarantee, for damages related to errors, bugs, or defects in our solutions. A material liability claim or other occurrence that harms our reputation or decreases market acceptance of our solutions may harm our business and results of operations.

Our solutions are primarily delivered out of third-party data centers, and disruption of service at or interference with our use of these facilities would interrupt or delay delivery of our solutions to customers, and could harm our business.

We currently host our most significant solutions at third-party data centers. Our primary data center is in Seattle, Washington, and we began, in 2017, to also provide our solutions through a hosted environment provided by Amazon Web Services (AWS). We previously used AWS for cloud-based disaster recovery services, but have begun migrating our production environments to AWS as well. Although the majority of our services are not currently hosted by AWS, we intend to use AWS for an increasing share of our services in the future. We also currently operate a failover data center in Tukwila, Washington.

In the event of an outage at our primary data center, failover data center, or an AWS facility, there could be a delay in activating our mirrored data center or our disaster recovery system. Our business depends on our ability to protect the growing amount of information stored in our data centers and related systems, offices, and hosting facilities, against damage from earthquake, floods, fires, other extreme weather conditions, power loss, telecommunications failures, hardware failures, unauthorized intrusion, overload conditions, and other events. If our data centers or related systems fail to operate properly or become disabled even for a brief period of time, we could suffer financial loss, a disruption of our business, liability to customers, or damage to our reputation. Our response to any type of disaster may not be successful in preventing the loss of customer data, service interruptions, and disruptions to our operations, or damage to our important facilities.

AWS and our existing data center facilities providers have no obligations to renew their agreements with us on commercially reasonable terms, or at all. As we migrate more of our services to AWS, it is possible that we will not be able to switch our AWS operations to another cloud provider or data center provided in a timely and cost effective manner should the need arise. As a result, any disruption of or interference with our use of AWS would impact our operations and our business would

be adversely impacted. AWS provides us with computing and storage capacity pursuant to an agreement that continues through April 2021. The agreement requires AWS to provide us their standard computing and storage capacity and related support in exchange for timely payment by us and compliance by us with their standard usage policies. If our agreement with AWS is terminated or impaired, we could experience interruptions in our services, as well as delays and additional expenses in arranging new facilities and services. If we are unable to renew our agreements with these providers on commercially reasonable terms, or if in the future we add additional data center facility providers, we may face additional costs or expenses or downtime, which could harm our business.

Incorrect or improper implementation, integration, or use of our solutions could result in customer dissatisfaction and negatively affect our business, results of operations, financial condition, and growth prospects.

Our solutions are deployed in a wide variety of technology environments and integrated into a broad range of complex workflows and third-party software. If we or our customers are unable to implement our solutions successfully, are unable to do so in a timely manner, or our integration partners are unable to integrate with our solutions through our integrations, customer perceptions of our solutions may be impaired, our reputation and brand may suffer, and customers may choose not to renew or expand the use of our solutions.

Our customers may need training or education in the proper use of and the variety of benefits that can be derived from our solutions to maximize their potential benefits. If our solutions are not implemented or used correctly or as intended, inadequate performance may result. Because our customers rely on our solutions to manage a wide range of tax compliance operations, the incorrect or improper implementation or use of our solutions, or our failure to provide adequate support to our customers, may result in negative publicity or legal claims against us, which could harm our business, results of operations and financial condition. Also, as we continue to expand our customer base, any failure by us to properly provide training and support will likely result in lost opportunities for additional subscriptions for our solutions.

We rely on third-party computer hardware, software, content, and services for use in our solutions. Errors and defects, or failure to successfully integrate or license necessary third-party software, content, or services, could cause delays, errors, or failures of our solutions, increases in our expenses, and reductions in our sales, which could harm our results of operations.

We rely on computer hardware purchased or leased from, software licensed from, content licensed from, and services provided by a variety of third parties to offer our solutions, including database, operating system, virtualization software, tax requirement content, and geolocation content and services. Any errors, bugs, or defects in third-party hardware, software, content, or services could result in errors or a failure of our solutions, which could harm our business. For example, a failure by a third-party geo-location service provider in 2015 resulted in a period of higher than usual latency during a peak period, which negatively impacted some customers. In the future, we might need to license other hardware, software, content, or services to enhance our solutions and meet evolving customer requirements. Any inability to use hardware or software could significantly increase our expenses and otherwise result in delays, a reduction in functionality, or errors or failures of our products until equivalent technology is either developed by us or, if available, is identified, obtained through purchase or license, and integrated into our solutions, any of which may reduce demand for our solutions. In addition, third-party licenses may expose us to increased risks, including risks associated with the integration of new technology, the diversion of resources from the development of our own proprietary technology, and our inability to generate revenue from new technology sufficient to offset associated acquisition and maintenance costs, all of which may increase our expenses and harm our results of operations.

If we fail to effectively maintain and enhance our brand, our business may suffer.

We believe that continuing to strengthen our brand will be critical to achieving widespread acceptance of our solutions and will require continued focus on active marketing efforts. We may need to increase our investment in, and devote greater resources to, sales, marketing, and other efforts to create and maintain brand awareness among customers. Our brand awareness efforts will require investment not just in our core U.S. sales tax determination service, but also in newer services we have developed or acquired, such as our excise or lodging tax services, and in foreign markets. The demand for and cost of online and traditional advertising have been increasing and may continue to increase. Brand promotion activities may not yield increased revenue, and even if they do, any increased revenue may not offset the expenses incurred in building our brand. If we fail to promote and maintain our brand, or if we incur substantial expense in an unsuccessful attempt to promote and maintain our brand, our business could suffer.

Changes in the application, scope, interpretation, or enforcement of laws and regulations pertaining to our business may harm our business or results of operations, subject us to liabilities, and require us to implement new compliance programs or business methods.

We perform a number of critical business functions for our customers, including remittance of the taxes our customers owe to taxing authorities. Our electronic payment of customers’ taxes may be subject to federal or state laws or regulations relating to money transmission. The federal Bank Secrecy Act requires that financial institutions, of which money transmitters are a subset, register with the U.S. Department of Treasury’s Financial Crimes Enforcement Network and maintain policies and procedures reasonably designed to monitor, identify, report and, where possible, avoid money laundering and criminal or terrorist financing by customers. Most U.S. states also have laws that apply to money transmitters, and impose various licensure, examination, and bonding requirements on them. We believe these federal and state laws and regulations were not intended to cover the business activity of remitting transaction taxes that taxpayers owe to the various states. However, if federal or state regulators were to apply these laws and regulations to this business activity, whether through expansion of enforcement activities, new interpretations of the scope of certain of these laws or regulations or of available exemptions, or otherwise, or if our activities are held by a court to be covered by such laws or regulations, we could be required to expend time, money, and other resources to deal with enforcement actions and any penalties that might be asserted, to institute and maintain a compliance program specific to money transmission laws, and possibly to change aspects of how we conduct business to achieve compliance or minimize regulation. Application of these laws to our business could also make it more difficult or costly for us to maintain our banking relationships. Financial institutions may also be unwilling to provide banking services to us due to concerns about the large dollar volume moving in and out of our accounts on behalf of our customers in the ordinary course of our business. As we continue to expand the solutions we offer and the jurisdictions in which we offer them, we could become subject to other licensing, examination, or regulatory requirements relating to financial services.

Determining the transaction taxes owed by our customers involves providing our platform with the types and prices of products they sell, as well as information regarding addresses that products are shipped from and delivered to. Our tax exemption certificate management solution also requires input of certain information regarding the purchasers who are entitled to tax exemptions. Numerous federal, state, and local laws and regulations govern the collection, dissemination, use, and safeguarding of certain information that could be used to commit identity theft or fraud. Although most of the data that is provided to our services by our customers cannot be used to identify individual consumers, we may be subject to these laws in certain circumstances. Most states have also adopted data security breach laws that require notice be given to affected consumers in the event of a security breach. In the event of a security breach, our compliance with these laws may subject us to costs associated with notice and remediation, as well as potential investigations from federal regulatory agencies and state

attorneys general. A failure on our part to safeguard consumer data adequately or to destroy data securely may subject us, depending on the personal information in question, to costs associated with notice and remediation, as well as potential regulatory investigations or enforcement actions, and possibly to civil liability, under federal or state data security or unfair practices or consumer protection laws. If federal or state regulators were to expand their enforcement activities, or change their interpretation of the applicability of these laws, or if new laws regarding privacy and protection of consumer data were to be adopted, the burdens and costs of complying with them could increase significantly, harming our results of operations and possibly the manner in which we conduct our business. As our business increasingly involves dealings with foreign customers or compliance with foreign tax regimes, we may also become subject to similar data security and privacy protection requirements in foreign jurisdictions.

We may not be able to secure additional financing on favorable terms, or at all, to meet our future capital needs, which could harm our business, results of operations, financial condition, and prospects.

We intend to continue making substantial investments to fund our business and support our growth. In addition to the revenue we generate from our business, we may need to engage in equity or debt financings to provide necessary funds. The success of any future financing efforts depends on many factors outside of our control, including market forces, investment banking trends, and demand by investors. We may not be successful in raising additional capital at an acceptable valuation, on favorable terms, when we require it, or at all. If we raise additional funds through future issuances of equity or convertible debt securities, our existing shareholders could suffer dilution, and any new equity securities we issue could have rights, preferences, and privileges senior to those of holders of our capital stock. Debt financing, if available, may involve restrictive covenants relating to our capital raising activities and other financial and operational matters, which could reduce our operational flexibility or make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, our ability to continue to support our business growth and to respond to business challenges could be significantly impaired, and our business may suffer. In addition, our inability to generate or obtain the financial resources needed may require us to delay, scale back, or eliminate some or all of our operations, which may harm our business, results of operations, financial condition, and prospects.

Debt service obligations, financial covenants, and other provisions of our credit agreement could adversely affect our financial condition and impair our ability to operate our business.

In June 2016, we entered into a loan and security agreement, or the Senior Credit Facility, with Silicon Valley Bank and Ally Bank, or the Lenders. The credit arrangements include a senior secured $25.0 million term loan facility and a $25.0 million revolving credit facility. In June 2016, we also entered into a subordinated loan and security agreement, or the Subordinated Credit Facility, with Silicon Valley Bank, which together with the Senior Credit Facility we refer to as the 2016 Credit Facilities. This credit arrangement includes a $10.0 million subordinated term loan facility. The 2016 Credit Facilities paid off our 2015 Credit Facility. Each of the 2016 Credit Facilities are described in the section of this prospectus titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Borrowings.”

The 2016 Credit Facilities could have significant negative consequences to us, such as:

Our ability to meet our debt obligations and other expenses will depend on our future performance, which will be affected by financial, business, economic, regulatory, and other factors, many of which we are unable to control. If our business does not perform as expected, or if we generate less than anticipated revenue or encounter significant unexpected costs, we may default under the 2016 Credit Facilities, which could require us to repay outstanding obligations, terminate the 2016 Credit Facilities, suffer cross-defaults in other contractual obligations, or pay significant damages. For example, for a period in early 2017, we were not in compliance with the minimum net billing covenant under either 2016 Credit Facility and, as a result, we entered into amendments to the 2016 Credit Facilities to modify this covenant in each respective facility. If we are unable to satisfy our debt covenants in the future, or otherwise default under the 2016 Credit Facilities, our operations may be interrupted, and our ability to fund our operations or obligations, as well as our business, financial results, and financial condition, could suffer.

If we fail to attract and retain qualified personnel, our business could be harmed.

Our success depends in large part on our ability to attract, integrate, motivate, and retain highly qualified personnel at a reasonable cost, particularly sales and marketing personnel, software developers, technical support, and research and development personnel on the terms we desire. Competition for skilled personnel is intense and we may not be successful in attracting, motivating, and retaining needed personnel. We also may be unable to attract or integrate into our operations qualified personnel on the schedule we desire. Our inability to attract, integrate, motivate, and retain the necessary personnel could harm our business. Dealing with the loss of the services of our executive officers or key personnel and the process to replace any of our executive officers or key personnel may involve significant time and expense, take longer than anticipated, and significantly delay or prevent the achievement of our business objectives, which would harm our financial condition, results of operations, and business.

We need to continue making significant investments in software development and equipment to improve our business.

To improve the scalability, security, efficiency, and failover aspects of our solutions, and to support the expansion of our solutions into other tax types, such as international VAT, additional excise taxes, or additional lodging taxes, we will need to continue making significant capital equipment expenditures and also invest in additional software and infrastructure development. If we experience increasing demand in subscriptions, we may not be able to augment our infrastructure quickly enough to accommodate such increasing demand. In the event of decreases in subscription sales, certain of our fixed costs, such as for capital equipment, may make it difficult for us to adjust our expenses downward quickly. Additionally, we are continually updating our software and content, creating expenses for us. We may also need to review and or revise our software architecture as we grow, which may require significant resources and investments.

If economic conditions worsen, it may negatively affect our business and financial performance.

Our financial performance depends, in part, on the state of the economy. Declining levels of economic activity may lead to declines in spending and fewer transactions for which transaction tax is due, which may result in decreased revenue for us. Concern about the strength of the economy may slow the rate at which businesses of all sizes are willing to hire an outside vendor to perform the determination and remittance of their transaction taxes and filing of related returns. If our customers and potential customers experience financial hardship as a result of a weak economy, industry consolidation, or other factors, the overall demand for our solutions could decrease. If economic conditions worsen, our business, results of operations, and financial condition could be harmed.

Sales to customers or operations outside the United States may expose us to risks inherent in international sales.

Historically, transactions occurring outside of the United States have represented a very small portion of our transactions processed. However, we intend to continue to expand our international sales efforts, and have recently acquired or developed sales operations in Europe, India, and Brazil. Operating in international markets requires significant resources and management attention and will subject us to regulatory, economic, and political risks that are different from those in the United States. Because of our limited experience with international operations, our international expansion efforts may not be successful. We may rely heavily on third parties outside of the United States, in which event we may be harmed if we invest time and resources into such business relationships but do not see significant sales from such efforts. Potential risks and challenges associated with sales to customers and operations outside the United States include:

Any of these factors could negatively impact our business and results of operations.

Our ability to protect our intellectual property is limited and our solutions may be subject to claims of infringement by third parties.

Our success depends, in part, upon our proprietary technology, processes, trade secrets, and other proprietary information and our ability to protect this information from unauthorized disclosure and use. We primarily rely upon a combination of confidentiality procedures, contractual provisions, copyright, trademark, and trade secret laws, and other similar measures to protect our proprietary information and intellectual property. Our trademarks and service marks include Avalara, the Avalara logo, AvaTax, the Avalara Compliance Cloud, “Tax compliance done right,” marks for our acquired businesses, and various marketing slogans. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our solutions or to obtain and use information that we regard as proprietary, and third parties may attempt to develop similar technology independently. Our means of protecting our proprietary rights may not be adequate.

In addition, third parties may claim infringement by us with respect to current or future solutions or other intellectual property rights. The software and Internet industries are characterized by the existence of a large number of patents, trademarks, and copyrights and by frequent litigation based on allegations of infringement or other violations of intellectual property rights. The outcome of any claims or litigation, regardless of the merits, is inherently uncertain. Any claims and lawsuits, and the disposition of such claims and lawsuits, whether through settlement or licensing discussions, or litigation, could be time-consuming and expensive to resolve, divert management attention from executing our strategies, result in efforts to enjoin our activities, lead to attempts on the part of other parties to pursue similar claims, and, in the case of intellectual property claims, require us to change our technology, change our business practices, pay monetary damages, or enter into short- or long-term royalty or licensing agreements. Any adverse determination related to intellectual property claims or other litigation could prevent us from offering our solutions to others, could be material to our financial condition or cash flows, or both, or could otherwise harm our results of operations.

Indemnity provisions in our subscription agreements potentially expose us to substantial liability for intellectual property infringement and other losses.

In many of our subscription agreements with our customers, we agree to indemnify our customers against any losses or costs incurred in connection with claims by a third party alleging that a customer’s use of our solutions infringes on the intellectual property rights of the third party. Customers facing infringement claims may in the future seek indemnification from us under the terms of our contracts. If such claims are successful, or if we are required to indemnify or defend our customers from these or other claims, these matters could be disruptive to our business and management and harm our business, results of operations, and financial condition.

We use open source software in our platform and solutions, which may subject us to litigation or other actions that could harm our business.

We use open source software in our platform and solutions, and we may use more open source software in the future. In the past, companies that have incorporated open source software into their products have faced claims challenging the ownership of open source software or compliance with

open source license terms. Accordingly, we could be subject to suits by parties claiming ownership of what we believe to be open source software or claiming noncompliance with open source licensing terms. Some open source software licenses require users who distribute open source software as part of their software to publicly disclose all or part of the source code to such software or make available any derivative works of the open source code on unfavorable terms or at no cost. If we were to use open source software subject to such licenses, we could be required to release our proprietary source code, pay damages, re-engineer our applications, discontinue sales, or take other remedial action, any of which could harm our business. In addition, if the license terms for updated or enhanced versions of the open source software we utilize change, we may be forced to re-engineer our platform or solutions or incur additional costs.

There has been no prior market for our common stock. An active market may not develop or be sustainable, and investors may not be able to resell their shares at or above the initial public offering price.

Prior to this offering, there has been no public market for our common stock. The initial public offering price for our common stock will be determined through negotiations between the representatives of the underwriters and us and may vary from the market price of our common stock following the closing of this offering. An active or liquid market in our common stock may not develop following the closing of this offering or, if it does develop, it may not be sustainable. In the absence of an active trading market for our common stock, you may not be able to resell those shares at or above the initial public offering price or at the time you would like to sell. We cannot predict the prices at which our common stock will trade.

Our stock price may be volatile or may decline regardless of our operating performance, resulting in substantial losses for investors purchasing shares in this offering.

The market price and trading volume of our common stock may fluctuate significantly regardless of our operating performance, in response to numerous factors, many of which are beyond our control, including:

In addition, stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many technology companies. Stock prices of many technology companies have fluctuated in a manner unrelated or disproportionate to the operating performance of those companies. In the past, shareholders have instituted securities class action litigation following periods of market volatility. If we were to become involved in securities litigation, it could subject us to substantial costs, divert resources and the attention of management from our business, and harm our business, financial condition, and results of operations.

We may not be able to determine in the future that our internal control over financial reporting is effective, and we may not receive an auditor attestation regarding our internal controls in the foreseeable future.

When we become a public company following this initial public offering, we will be required to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting for the first fiscal year beginning after the effective date of this offering. Any failure to implement and maintain effective internal control over financial reporting could adversely affect the results of management evaluations. Whether or not our management concludes that our internal control over financial reporting is effective, our independent registered public accounting firm may issue a report that is qualified if it is not satisfied with our controls or the level at which our controls are documented, designed, operated, or reviewed. However, our independent registered public accounting firm will not be required to attest formally to the effectiveness of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act until the later of the year following our first annual report required to be filed with the SEC or the date we are no longer an “emerging growth company” as defined in the JOBS Act. Accordingly, you will not be able to depend on any attestation concerning our internal control over financial reporting from our independent registered public accountants for the foreseeable future.

Substantial future sales of shares of our common stock could cause the market price of our common stock to decline.

Sales of a substantial number of shares of our common stock following the closing of this offering, particularly sales by our directors, executive officers, and significant shareholders, or the perception that these sales might occur, could depress the market price of our common stock and could impair our ability to raise capital through the sale of additional equity securities. We are unable to predict the effect that such sales may have on the prevailing market price of our common stock.

All of our executive officers, directors, and the holders of substantially all of our capital stock are subject to lock-up agreements or other contractual limitations that restrict their ability to transfer shares of our capital stock for 180 days from the date of this prospectus. Subject to certain exceptions, the lock-up agreements or other contractual limitations limit the number of shares of capital stock that may

be sold immediately following this offering. We will have outstanding shares of our common stock upon the closing of this offering, based on the number of shares outstanding as of March 31, 2017 and assuming the issuance of shares of common stock upon the net exercise of warrants that will terminate if not exercised in connection with this offering. This includes the shares included in this offering, which may be sold in the public market immediately without restriction or further registration under the Securities Act of 1933, as amended, or the Securities Act, except for any shares held by our affiliates as defined in Rule 144 under the Securities Act. Subject to certain limitations, as of , 2017, approximately shares of our common stock will become eligible for sale upon expiration of the 180-day lock-up period. Goldman Sachs & Co. LLC and J.P. Morgan Securities LLC may, in their sole discretion, permit our shareholders who are subject to these lock-up agreements or other contractual limitations to sell shares prior to the expiration of the lock-up agreements or other contractual limitations.

In addition, as of March 31, 2017, there were 20,702,517 shares of common stock issuable upon exercise of outstanding options and 408,525 shares of common stock issuable upon exercise of an outstanding warrant. Following the closing of this offering, we intend to file a registration statement on Form S-8 under the Securities Act to register shares of our common stock issued or reserved for issuance under our equity compensation plans and agreements. Accordingly, these shares will be able to be freely sold in the public market upon issuance as permitted by any applicable securities laws, applicable vesting requirements, and the lock-up agreements described above. See the section of this prospectus titled “Shares Eligible for Future Sale” for a more detailed description of sales that may occur in the future.

After the closing of this offering, the holders of an aggregate of shares of our common stock, including shares of common stock issuable upon the conversion of our preferred stock and shares of common stock issuable upon the net exercise of warrants that will terminate if not exercised in connection with this offering, or their permitted transferees, will be entitled to rights, subject to some conditions, to require us to file registration statements covering their shares, or to include their shares in registration statements that we may file for ourselves or our shareholders.

Our directors, officers, and principal shareholders beneficially own a majority of our outstanding voting stock and will be able to control shareholder decisions on very important matters.

Upon completion of this offering, the members of our Board of Directors, our executive officers, our 5% or greater shareholders, and their respective affiliates will beneficially own, in the aggregate, approximately % of our outstanding voting stock. As a result, such shareholders will collectively have the power to control our management policy, fundamental corporate actions, including mergers, substantial acquisitions and dispositions, and election of directors to our Board of Directors. The concentrated voting power of these shareholders could have the effect of delaying or preventing a significant corporate transaction such as a sale, merger, or public offering of our capital stock. This influence over our affairs could, under some circumstances, be adverse to the interests of the other shareholders.

If securities or industry analysts do not publish research or reports about our business, or publish inaccurate or negative reports about our business, our share price and trading volume could decline.

The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business, our market, and our competitors. We do not have any control over these analysts. If one or more of the analysts who cover us downgrade our shares or publish inaccurate or negative reports about our business, our share price would likely

decline. If few securities analysts commence coverage of us, or if one or more of these analysts cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which could cause our share price or trading volume to decline.

We may invest or spend the proceeds of this offering in ways with which you may not agree or in ways that may not yield a return.

Our management will have broad discretion to use our net proceeds from this offering, and you will be relying on the judgment of our management regarding the application of these proceeds. Our management might not apply our net proceeds of this offering in ways that increase the value of your investment. We expect to use the net proceeds we receive for working capital and other general corporate purposes. In addition to other investments in our growth strategies, we may also use a portion of the net proceeds that we receive to acquire or invest in complementary businesses, products, services, technologies, or other assets. As of the date of this prospectus, we have not entered into any agreements or commitments with respect to any specific acquisitions or investments at this time. We cannot specify with certainty all of the particular uses of the net proceeds that we will receive from this offering. Accordingly, we will have broad discretion in using these proceeds, and you will not have the opportunity, as part of your investment decision, to assess whether the proceeds are being used appropriately. Furthermore, the amount and timing of our actual expenditures will depend on numerous factors, including the cash used in or generated by our operations, the status of our development, the level of our sales and marketing activities, the pace of our international expansion plans, and our investments and acquisitions. The net proceeds may be used for purposes that do not increase the value of our business or increase the risks to you, which could cause the price of our stock to decline. Until net proceeds are used, they may be placed in investments that do not produce significant income or that may lose value.

We are an “emerging growth company” and intend to comply with the reduced disclosure and regulatory requirements, which may make our common stock less attractive to investors.

We qualify as an “emerging growth company” as defined in the JOBS Act, and we intend to take advantage of reduced disclosure and regulatory requirements that are otherwise generally applicable to public companies. As an emerging growth company:

We may take advantage of these reduced requirements until we are no longer an “emerging growth company,” which will occur upon the earlier of (1) the last day of the fiscal year following the fifth anniversary of this offering, (2) the last day of the first fiscal year in which our annual gross revenue is $1.07 billion or more, (3) the date on which we have, during the previous rolling three-year period, issued more than $1.0 billion in non-convertible debt securities, and (4) the date on which we are deemed to be a “large accelerated filer” as defined in the Securities Exchange Act of 1934, as amended, or the Exchange Act. Investors may find our common stock less attractive or our company less comparable to certain other public companies because we will rely on these reduced requirements.

In addition, pursuant to the JOBS Act, as an “emerging growth company” we have elected to take advantage of an extended transition period for complying with new or revised accounting standards.

This effectively permits us to delay adoption of certain accounting standards until those standards would otherwise apply to private companies. As a result, our consolidated financial statements may not be comparable to the financial statements of issuers who are required to comply with the effective dates for new or revised accounting standards that are applicable to public companies, which may make our common stock less attractive to investors.

The requirements of being a public company may strain our resources, divert management’s attention, affect our ability to attract and retain additional executive management and qualified board members, and result in litigation.

As a public company, we will be subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the listing requirements of the , and other applicable securities rules and regulations. Compliance with these rules and regulations will increase our legal and financial compliance costs, make some activities more difficult, time-consuming, or costly, and increase demand on our systems and resources, particularly after we are no longer an “emerging growth company.” The Exchange Act requires, among other things, that we timely file annual, quarterly, and current reports with respect to our business and results of operations. The Sarbanes-Oxley Act also requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. Significant resources and management oversight will be required to improve and maintain our disclosure controls and procedures and internal control over financial reporting. As a result, management’s attention may be diverted from other business concerns, which could harm our business and results of operations. We will likely need to hire additional employees or engage outside consultants to comply with these requirements, increasing our costs and expenses.

In addition, changing laws, regulations, and standards relating to corporate governance and public disclosure are creating uncertainty for public companies, increasing legal and financial compliance costs, and making some activities more time-consuming. These laws, regulations, and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to invest resources to comply with evolving laws, regulations, and standards, and this investment may result in increased general and administrative expenses and a diversion of management’s time and attention from other business concerns. If our efforts to comply with new laws, regulations, and standards do not meet the standards intended by regulatory or governing bodies, regulatory authorities may initiate legal proceedings against us, and our business may suffer.

We also expect that being a public company will make it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified executive officers and qualified members of our Board of Directors, particularly to serve on our Audit Committee and our Compensation and Leadership Development Committee.

As a result of disclosure of information in this prospectus and in filings required of a public company, our business and financial condition will become more visible, which we believe may result in threatened or actual litigation, including by competitors and other third parties. If such claims are successful, our business and results of operations could suffer, and even if the claims do not result in litigation or are resolved in our favor, these claims, and the time and resources necessary to resolve them, could divert the resources of our management and harm our business, financial condition, and results of operations.

We have identified significant deficiencies in our internal control over financial reporting, and if we fail to remediate these deficiencies and develop and maintain effective financial reporting systems and processes, we may be unable to accurately and timely report our financial results or comply with the requirements of being a public company, which could cause the price of our common stock to decline and harm our business.

To date, we have not been required to complete our annual or quarterly financial reporting on the timeline that we will be required to meet to comply with our Exchange Act reporting obligations after this offering, and we have not completed periodic financial reports on a timeline that would satisfy these obligations. In connection with preparing our financial statements as of and for the year ended December 31, 2016 and the quarter ended March 31, 2017, we identified significant deficiencies in our internal control over financial reporting, which have not been remediated as of March 31, 2017. A significant deficiency is a deficiency, or combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of the registrant’s financial reporting. A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected by a company’s internal controls. While we are implementing procedures designed to remediate the significant deficiencies we have identified, we cannot be certain that we will not in the future have additional significant deficiencies or that we will not have one or more material weaknesses in our internal control over financial reporting, or that we will successfully remediate any that we find. Future deficiencies or weaknesses in our internal controls could result in a material misstatement in our annual or interim consolidated financial statements or cause us to fail to meet our obligations to file periodic financial reports with the SEC. Any of these failures could result in adverse consequences that could materially and adversely affect our business, including potential action by the SEC against us, possible defaults under our debt agreements, shareholder lawsuits, delisting of our stock, and general damage to our reputation.

We have invested, and intend to continue to invest, in expansion of personnel and in developing and maintaining processes and systems to ensure our ability to complete our financial reporting accurately and on the required timeline. The management team of our accounting and financial reporting functions, some of whom have joined us only in the last two years, as well as other Company personnel, will need to devote substantial time to compliance with our financial reporting obligations, and may not successfully manage our transition to a publicly reporting company. Moreover, because we are not yet subject to Exchange Act reporting obligations, the processes and systems we have developed to date have not been fully tested, and they may not be adequate. If we are unable to comply with these reporting obligations, and file our annual, quarterly, and current reports on a timely basis, the price of our common stock may decline and we may be subject to investigation or sanctions by the SEC, which could harm our business.

Provisions in our charter documents and under Washington law could make an acquisition of our company more difficult and limit attempts by our shareholders to replace or remove our current management.

Upon the closing of this offering, our amended and restated articles of incorporation, in the form to be effective upon the closing of this offering, or our Articles, and our amended and restated bylaws, in the form to become effective upon the closing of this offering, or our Bylaws, will include a number of provisions that may have the effect of deterring takeovers or delaying or preventing changes in control or changes in our management that a shareholder might deem to be in his or her best interest. These provisions include the following:

Additionally, unless approved by a majority of our “continuing directors,” as that term is defined in our Articles, specified provisions of our Articles may not be amended or repealed without the affirmative vote of the holders of at least two-thirds of the outstanding voting power of our capital stock entitled to vote on the action, voting together as a single group, including the following provisions:

The provisions described above may frustrate or prevent any attempts by our shareholders to replace or remove our current management by making it more difficult for shareholders to replace members of our Board of Directors, which is responsible for appointing our management. In addition, because we are incorporated in the State of Washington, we are governed by the provisions of Chapter 23B.19 of the Washington Business Corporation Act, which prohibits certain business combinations between us and certain significant shareholders unless specified conditions are met. These provisions may also have the effect of delaying or preventing a change in control of our company, even if this change in control would benefit our shareholders. See the section of this prospectus titled “Description of Capital Stock.”

We have never paid cash dividends and do not anticipate paying any cash dividends on our capital stock.

We have never declared or paid cash dividends on our capital stock. We currently intend to retain all available funds and any future earnings for use in the operation of our business and do not anticipate paying any dividends on our capital stock in the foreseeable future. In addition, our ability to pay dividends on our capital stock is restricted by the 2016 Credit Facilities and may be prohibited or limited by the terms of our current and future debt financing arrangements.

This prospectus contains forward-looking statements that involve substantial risks and uncertainties. All statements other than statements of historical facts contained in this prospectus, including statements regarding future events or our future results of operations, financial condition, business, strategies, financial needs, and the plans and objectives of management, are forward-looking statements. In some cases you can identify forward-looking statements because they contain words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “likely,” “plan,” “potential,” “predict,” “project,” “seek,” “should,” “target,” “will,” “would,” or similar expressions and the negatives of those terms. We have based these forward-looking statements largely on our current plans, expectations, and projections about future events and financial trends that we believe may affect our results of operations, financial condition, business, strategies, financial needs, and the plans and objectives of management. You should read this prospectus and the documents that we have filed as exhibits to the registration statement of which this prospectus forms a part completely and with an understanding that our actual future results may be materially different from what we expect. Forward-looking statements are based on information available to our management as of the date of this prospectus and our management’s good faith belief as of such date with respect to future events and are subject to a number of risks, uncertainties, and assumptions that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. Important factors that could cause such differences include, but are not limited to:

We caution you that the foregoing list of important factors may not contain all of the material factors that are important to you. New risk factors emerge from time to time, and it is not possible for our management to predict all risk factors nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in, or implied by, any forward-looking statements. Further, our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures, or investments we may make.

In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this

prospectus, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements.

You should not place undue reliance on our forward-looking statements and you should not rely on forward-looking statements as predictions of future events. The results, events, and circumstances reflected in the forward-looking statements may not be achieved or occur, and actual results, events, or circumstances could differ materially from those described in the forward-looking statements. The forward-looking statements made in this prospectus speak only as of the date of this prospectus. We undertake no obligation to update any forward-looking statements made in this prospectus to reflect events or circumstances after the date of this prospectus or to reflect new information or the occurrence of unanticipated events, except as required by law. If we update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements.

Unless otherwise indicated, information contained in this prospectus concerning our industry and the market in which we operate, including our market position, market opportunity, and market size, is based on information from various sources, on assumptions that we have made based on such data and other similar sources, and on our knowledge of the markets for our solutions. This information involves a number of assumptions and limitations, and you are cautioned not to give undue weight to such information. In addition, projections, assumptions, and estimates of our future performance and the future performance of the industry in which we operate is necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in the section of this prospectus titled “Risk Factors” and elsewhere in this prospectus. These and other factors could cause results to differ materially from those expressed in the estimates, projections, and assumptions made by third parties and by us.

The following reports present data, research opinions, or viewpoints published by each of the respective publishers thereof and are not representations of fact. Such reports speak as of their respective original publication dates (and not as of the date of this prospectus), and the opinions expressed in such reports are subject to change without notice. We believe the information from the industry publication and other third-party sources included in this prospectus is reliable. The industry publications, reports, surveys, and forecasts containing the market and industry data cited in this prospectus are provided below:

We estimate that the net proceeds to us from the sale of shares of our common stock that we are selling in this offering will be approximately $ million, based upon the assumed initial public offering price of $ per share, which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting the underwriting discount and estimated offering expenses payable by us. If the underwriters exercise their option to purchase additional shares in full, we estimate that the net proceeds to us will be approximately $ million, after deducting the underwriting discount and estimated offering expenses payable by us.

Each $1.00 increase (decrease) in the assumed initial public offering price of $ per share would increase (decrease) the net proceeds to us from this offering by approximately $ million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting the underwriting discount and estimated offering expenses payable by us. Similarly, each increase (decrease) of 1,000,000 shares of common stock offered by us would increase (decrease) the net proceeds to us from this offering by approximately $ million, assuming that the assumed initial public offering price remains the same, and after deducting the underwriting discount and estimated offering expenses payable by us.

The principal purposes of this offering are to increase our financial flexibility, improve brand awareness, create a public market for our common stock, and facilitate our future access to the public capital markets. As of the date of this prospectus, we have no specific plans for the use of the net proceeds we receive from this offering. However, we currently intend to use the net proceeds that we receive for working capital and other general corporate purposes. In addition to other investments in our growth strategies, we may also use a portion of the net proceeds that we receive to acquire or invest in complementary businesses, products, services, technologies, or other assets. However, we have not entered into any agreements or commitments with respect to any specific acquisitions or investments at this time.

We cannot specify with certainty all of the particular uses of the net proceeds that we will receive from this offering. Accordingly, we will have broad discretion in using these proceeds. Furthermore, the amount and timing of our actual expenditures will depend on numerous factors, including the cash used in or generated by our operations, the status of our development, the level of our sales and marketing activities, the pace of our international expansion plans, and our investments and acquisitions. Pending the use of proceeds as described above, we plan to invest the net proceeds that we receive in short-term and intermediate-term interest-bearing obligations, investment-grade investments, certificates of deposit, or direct or guaranteed obligations of the U.S. government. We cannot predict whether the invested proceeds will yield a favorable return.

We have never declared or paid cash dividends on our common stock. We currently intend to retain all available funds and any future earnings for use in the operation of our business and do not anticipate paying any dividends on our common stock in the foreseeable future. Our ability to pay dividends on our common stock is restricted by our 2016 Credit Facilities. Any future determination to declare dividends will be made at the discretion of our Board of Directors and will depend on our financial condition, results of operations, capital requirements, general business conditions, and other factors that our Board of Directors may deem relevant.

The following table sets forth our cash and cash equivalents and capitalization as of March 31, 2017:

You should read the following table in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Description of Capital Stock,” and our consolidated financial statements and related notes included elsewhere in this prospectus.

Each $1.00 increase (decrease) in the assumed initial public offering price of $ per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) the amount of cash and cash equivalents, additional paid-in capital, total shareholders’ equity (deficit), and total capitalization by approximately $ million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the underwriting discount and estimated offering expenses payable by us. Similarly, each increase (decrease) of 1,000,000 shares of our common stock offered by us would increase (decrease) the amount of cash and cash equivalents, total shareholders’ equity (deficit), and total capitalization by approximately $ million, assuming that the assumed initial public offering price remains the same, after deducting the underwriting discount and estimated offering expenses payable by us. The pro forma as adjusted information discussed above is illustrative only and will be adjusted based on the actual initial public offering price and the other terms of this offering determined at pricing.

Except as otherwise indicated, the above discussion and table are based on 112,648,738 shares of our common stock outstanding as of March 31, 2017, do not reflect any other issuance of our securities after that date, and exclude the following:

If you invest in our common stock in this offering, your ownership interest will be diluted immediately to the extent of the difference between the initial public offering price per share of our common stock and the pro forma as adjusted net tangible book value per share of our common stock immediately after this offering. Net tangible book value dilution per share to new investors represents the difference between the amount per share paid by purchasers of shares of our common stock in this offering and the pro forma as adjusted net tangible book value per share of our common stock immediately after the closing of this offering.

Our pro forma net tangible book value as of March 31, 2017 was $(83.7) million, or $ per share, based on the number of shares of our common stock outstanding as of March 31, 2017, after giving effect to (1) the conversion of our preferred stock into 101,786,205 shares of common stock upon the effectiveness of the registration statement of which this prospectus forms a part and (2) the issuance of shares of common stock issuable upon the automatic net exercise of warrants outstanding as of March 31, 2017, with a weighted average exercise price of $4.55 per share, immediately prior to the closing of this offering, assuming an initial public offering price of $ per share, which is the midpoint of the price range set forth on the cover page of this prospectus.

After giving effect to the sale by us of shares of common stock offered by in this offering at the assumed initial public offering price of $ per share, which is the midpoint of the price range set forth on the cover page of this prospectus, and after deducting the underwriting discount and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of March 31, 2017 would have been $ million, or $ per share. This represents an immediate increase in pro forma net tangible book value of $ per share to existing shareholders and an immediate dilution in pro forma net tangible book value of $ per share to investors in purchasing shares of our common stock in this offering at the assumed initial public offering price. The following table illustrates this dilution on a per share basis:

If the underwriters exercise their option to purchase additional shares of our common stock in full, our pro forma as adjusted net tangible book value will be $ million, or $ per share, and the dilution per share of common stock to new investors will be $ per share.

Each $1.00 increase (decrease) in the assumed initial public offering price of $ per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) our pro forma as adjusted net tangible book value by $ per share and the dilution to new investors by $ per share, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, after deducting the underwriting discount and estimated offering expenses payable by us. Similarly, each increase (decrease) of 1,000,000 shares of our common stock offered by us would increase (decrease) our pro forma as adjusted net tangible book value by approximately $ per share and the dilution to new investors by $ per share, assuming the assumed initial public offering price remains the same and after deducting the

underwriting discount and estimated offering expenses payable by us. The pro forma as adjusted information discussed above is illustrative only and will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing.

The following table presents, as of March 31, 2017, after giving effect to (1) the conversion of our preferred stock into 101,786,205 shares of common stock upon the effectiveness of the registration statement of which this prospectus forms a part and (2) the issuance of shares of common stock issuable upon the automatic net exercise of warrants outstanding as of March 31, 2017, with a weighted average exercise price of $4.55 per share, immediately prior to the closing of this offering, assuming an initial public offering price of $ per share, which is the midpoint of the price range set forth on the cover page of this prospectus, the differences between existing shareholders and new investors purchasing shares of our common stock in this offering with respect to the number of shares of common stock purchased from us, the total consideration paid to us, and the average price per share paid to us, which includes net proceeds received from the issuance of our common stock and preferred stock, cash received from the exercise of stock options and warrants, or to be paid to us at the assumed initial public offering price of $ per share, which is the midpoint of the price range set forth on the cover page of this prospectus, before deducting the underwriting discount and estimated offering expenses payable by us:

Each $1.00 increase (decrease) in the assumed initial public offering price of $ per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) the total consideration paid to us by new investors and total consideration paid to us by all shareholders by $ million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, before deducting the underwriting discount and estimated offering expenses payable by us.

Except as otherwise indicated, the above discussion and tables assume no exercise of the underwriters’ option to purchase additional shares of our common stock from us. If the underwriters exercise their option to purchase additional shares of our common stock in full, the number of shares held by existing shareholders would be , or % of the total number of shares of our common stock outstanding after this offering, and the number of shares held by new investors would increase to , or % of the total number of shares of our common stock outstanding after this offering.

Except as otherwise indicated, the above discussion and tables are based on 112,648,738 shares of common stock outstanding as of March 31, 2017, do not reflect any other issuance of our securities after that date, and exclude the following:

The shares reserved for future issuance under our 2017 Plan and our ESPP will be subject to automatic annual increases in accordance with the terms of the plans. To the extent that options are exercised, new options or restricted stock units are issued under our equity incentive plans, or we issue additional shares of common stock in the future, there will be further dilution to investors participating in this offering. In addition, we may choose to raise additional capital because of market conditions or strategic considerations, even if we believe that we have sufficient funds for our current or future operating plans. If we raise additional capital through the sale of equity or convertible debt securities, the issuance of these securities could result in further dilution to our shareholders.

We derived the following selected consolidated statements of operations data for the years ended December 31, 2015 and 2016 and the selected consolidated balance sheet data as of December 31, 2015 and 2016 from audited consolidated financial statements appearing elsewhere in this prospectus. We derived the following selected consolidated statements of operations data for the three months ended March 31, 2016 and 2017 and the summary consolidated balance sheet data as of March 31, 2017 from unaudited consolidated financial statements appearing elsewhere in this prospectus. In the opinion of management, the unaudited consolidated financial statements reflect all adjustments, which include normal recurring adjustments, necessary for a fair presentation of the financial statements. Historical results are not necessarily indicative of the results that may be expected in the future and the results for the three months ended March 31, 2017 are not necessarily indicative of the results that may be expected for the full year or any other period. The selected financial data set forth below should be read together with the financial statements and the related notes to those statements, as well as the sections of this prospectus titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

In addition to our results determined in accordance with GAAP, we have disclosed non-GAAP operating loss and free cash flow, which are non-GAAP financial measures. We have provided a reconciliation of each non-GAAP financial measure used in this prospectus to its most directly comparable GAAP financial measure.

Management uses these non-GAAP financial measures to understand and compare operating results across accounting periods, for internal budgeting and forecasting purposes, and to evaluate financial performance and liquidity. We believe that non-GAAP financial measures provide useful information to investors and others in understanding and evaluating our results, prospects, and liquidity and in comparing our financial results to those of other companies.

Our definitions of non-GAAP operating loss and free cash flow may differ from the definitions used by other companies and therefore comparability may be limited. In addition, other companies may not publish these or similar metrics. Thus, our non-GAAP operating loss and free cash flow should be considered in addition to, not as a substitute for, or in isolation from, measures prepared in accordance with GAAP.

We provide investors and other users of our financial information reconciliations of non-GAAP operating loss and free cash flow to the related GAAP financial measures, operating loss and net cash used in operating activities. We encourage investors and others to review our financial information in its entirety, not to rely on any single financial measure and to view non-GAAP operating loss and free cash flow in conjunction with the related GAAP financial measure.

The following schedule reflects our non-GAAP financial measures and reconciles our non-GAAP financial measures to the related GAAP financial measures:

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the consolidated financial statements and the notes thereto included elsewhere in this prospectus. In addition to historical financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, beliefs and expectations that involve risks and uncertainties. Our actual results and the timing of events could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this prospectus, particularly in the sections of this prospectus titled “Risk Factors” and “Special Note Regarding Forward-Looking Statements.”

We provide a leading suite of cloud-based solutions that help businesses of all types and sizes comply with tax requirements for transactions worldwide. Our Avalara Compliance Cloud offers a broad and growing suite of compliance solutions that enable businesses to address the complexity of transaction tax compliance, process transactions in real time, produce detailed records of transaction tax determinations, and reduce errors, audit exposure, and total transaction tax compliance costs. Businesses that use our solutions can allocate fewer personnel to manage transaction tax compliance and focus their efforts on core business operations. Businesses across industries and of all sizes, ranging from small businesses to Fortune 100 companies, use our solutions.

We generated revenue of $122.7 million, $167.2 million, and $49.0 million in 2015, 2016, and the three months ended March 31, 2017, respectively. We derive most of our revenue from subscriptions to our solutions. Subscription and returns revenue accounted for 92%, 93%, and 94% of our total revenue during 2015, 2016, and the three months ended March 31, 2017, respectively. We also derive revenue from providing professional services, which accounted for 8%, 7%, and 6% of our total revenue during 2015, 2016, and the three months ended March 31, 2017, respectively. In 2016, we generated approximately 97% of our revenue in North America, but we are expanding our international presence and support transaction tax compliance in Europe, South America, and Asia.

We sell our solutions primarily through our sales force, which focuses on selling to qualified leads provided by our marketing efforts and network of referral partners. The majority of these sales, to new and existing customers, are direct and are conducted via telephone, requiring minimal in-person interactions with customer prospects. In addition, our marketing investments and activities generate interest from large numbers of small businesses that also are burdened by transaction tax compliance requirements. Because these customers typically purchase smaller plans at lower price points, we have established an online marketplace through which these customers purchase and configure their solutions without the involvement of our primary selling or customer onboarding teams.

We launched our first solution, AvaTax, in 2004, and have continued investing organically and through acquisitions to provide best-in-class solutions and to expand our market opportunity. We devote substantial resources to continuously improve the Avalara Compliance Cloud, add innovative new features and functionalities, build technology to support new content types, and improve the user experience for our solutions. We have also made, and expect to continue to make, significant investments to acquire accurate, relevant content and expertise to best serve the transaction tax compliance needs of customers. We have achieved the following significant milestones:

We focus on expanding and maintaining our partner ecosystem, which has been an essential part of our growth. As transactions are executed in our customers’ business applications, the Avalara Compliance Cloud performs a series of functions to deliver tax compliance functionality in real time. We enable this through our more than 580 pre-built integrations that are designed to link our platform to business applications including accounting, ERP, ecommerce, POS, recurring billing, and CRM systems. Most of our integration partners are the actual publishers of the business applications, who work with us to provide transaction tax functionality to their customers through those business applications. Other integration partners are independent software developers or resellers who we engage to build and maintain the integrations. In either case, the integration partners are paid a commission based on a percentage of the sales of our solutions that use the integration. In general, integration partners are paid a higher commission for the initial sale to a new customer and lower recurring commissions for renewal subscription terms. We also work with referral partners who refer new customers to us and receive a commission based on a percentage of the first-year sales of our solutions to those new customers. Many referral partners are software resellers, or other participants in the marketplace who have access to high quality new customer leads. In 2016, commissions earned by partners amounted to approximately 6% of total revenue, which was recorded as a component of sales and marketing expense.

The growth of our business and our future success depends on many factors, including our ability to continue to expand our customer base and the solutions used by existing customers, innovate and broaden our solutions, integrate acquisitions, and expand our content types and geographic scope. While these areas represent significant opportunities for us, we also face significant risks and

challenges that we must successfully address in order to sustain the growth of our business and improve our operating results. We anticipate that we will continue to expand our operations and headcount. The expected addition of new personnel and the investments that we anticipate will be necessary to manage our anticipated growth will make it more difficult for us to achieve or maintain profitability. Many of these investments will occur in advance of experiencing any direct benefit and will make it difficult to determine if we are allocating our resources efficiently.

We regularly review a number of metrics to evaluate growth trends, measure our performance, formulate financial projections, and make strategic decisions. We discuss revenue and the components of operating results below under “Key Components of Consolidated Statements of Operations,” and we discuss other key business metrics below.

We believe core customers is a key indicator of our market penetration, growth, and potential future revenue. The mid-market has been and remains our primary target market segment for marketing and selling our solutions. We use core customers as a metric to focus our customer count reporting on our primary target market segment. As of December 31, 2016 and March 31, 2017, we had approximately 6,250 and 6,650 core customers, respectively, representing less than half of our total number of customers. In 2016, our core customers represented more than 85% of our total revenue.

Currently, our core customer count includes only customers with unique account identifiers in our primary U.S. billing systems and does not include customers who subscribe to our solutions through our international subsidiaries or certain legacy billing systems, primarily related to past acquisitions. As we increase our international operations and sales in future periods, we may add customers billed from our international subsidiaries to the core customer metric.

We believe that our net revenue retention rate provides insight into our ability to retain and grow revenue from our customers, as well as their potential long-term value to us. We also believe it reflects the stability of our revenue base, which is one of our core competitive strengths. We calculate our net revenue retention rate by dividing (a) total revenue in the current quarter from any billing accounts that generated revenue during the corresponding quarter of the prior year by (b) total revenue in such corresponding quarter from those same billing accounts. This calculation includes changes during the

period for such billing accounts, such as additional solutions purchased, changes in pricing and transaction volume, and terminations, but does not reflect revenue for new billing accounts added during the one year period. Currently, our net revenue retention rate calculation includes only customers with unique account identifiers in our primary U.S. billing systems and does not include customers who subscribe to our solutions through our international subsidiaries or certain legacy billing systems, primarily related to past acquisitions. Our net revenue retention rate was 109% in the first quarter of 2017 and was 107% on average for the four quarters ended March 31, 2017.

We generate revenue from two sources: (1) subscriptions and returns; and (2) professional services. Subscription and returns revenue is driven primarily by the acquisition of customers, customer renewals, and additional services offerings purchased by existing customers. Revenues from subscriptions and returns comprised approximately 92%, 93%, and 94% of our revenues for the years ended December 31, 2015 and 2016 and the quarter ended March 31, 2017, respectively.

Subscription and Returns Revenue. Subscription and returns revenue primarily consists of fees paid by customers to use our solutions. Subscription plan customers select a price plan that includes an allotted maximum number of transactions or returns over the subscription term. Unused transactions or returns are not carried over to the customer’s next subscription term, and our customers are not entitled to any refund of fees paid or relief from fees due if they do not use the allotted number of transactions. If a subscription plan customer exceeds the selected maximum transaction or returns level, we will generally upgrade the customer to a higher tier or, in some cases, charge overage fees on a per transaction or return basis. Customers who purchase returns preparation can also purchase on a per filing basis.

Our subscription contracts are generally non-cancelable after the first 60 days of the contract term. We reserve for estimated cancellations based on actual history. We generally invoice our subscription plan customers for the initial term at contract signing and in advance for renewals. Our initial terms generally range from twelve to eighteen months, and renewal periods are typically one year. Amounts that have been invoiced are initially recorded as deferred revenue. Subscription revenue is recognized on a straight-line basis over the service term of the arrangement beginning on the date that our solution is made available to the customer and ending at the expiration of the subscription term. We recognize revenue for the filing of returns purchased on a per filing basis when the return is filed.

Professional Services. We generate professional services revenue from providing tax analysis, returns management, configurations, data migrations, integration, training and other support services. We bill for service arrangements on a fixed fee or time and materials basis, and we recognize revenue as services are performed and are collectable under the terms of the associated contracts.

Cost of Revenue. Cost of revenue consists of costs related to providing the Avalara Compliance Cloud and supporting our customers and includes personnel and related expenses, including salaries, benefits, bonuses, and stock-based compensation. In addition, cost of revenue includes direct costs associated with information technology, tax content, and rent. Cost of revenue also includes allocated costs for certain information technology and facility expenses, along with depreciation of equipment and amortization of intangibles such as acquired technology from acquisitions. We plan to continue to significantly expand our infrastructure and personnel to support our future growth, including through acquisitions, which we expect to result in higher cost of revenue in absolute dollars.

Sales and Marketing. Sales and marketing expenses consist primarily of personnel and related expenses for our sales and marketing staff, including salaries, benefits, bonuses, commissions to our sales personnel and our partners, stock-based compensation, costs of marketing and promotional events, corporate communications, online marketing, solution marketing, and other brand-building activities. Sales and marketing expenses also include allocated costs for certain information technology and facility expenses, along with depreciation of equipment and amortization of intangibles such as customer databases from acquisitions.

Commissions with respect to integrations and customer referral sources are included in sales and marketing expenses. We expense commissions as incurred rather than recognizing them over the subscription period. For 2015, 2016, and the first quarter of 2017, we incurred $9.0 million, $9.9 million and $2.5 million in commission expense to partners, respectively.

We intend to continue to invest in sales and marketing and expect spending in these areas to increase in absolute dollars as we continue to expand our business. We expect sales and marketing expenses to continue to be among the most significant components of our operating expenses.

Research and Development. Research and development expenses consist primarily of personnel and related expenses for our research and development staff, including salaries, benefits, bonuses, and stock-based compensation, and the cost of third-party developers and other contractors. Research and development costs, other than software development expenses qualifying for capitalization, are expensed as incurred. To date, capitalized software costs have been less than $1 million annually. Research and development expenses also includes allocated costs for certain information technology and facility expenses.

We devote substantial resources to enhancing the Avalara Compliance Cloud, developing new and enhancing existing solutions, conducting quality assurance testing, and improving our core technology. We expect research and development expenses to increase in absolute dollars.

General and Administrative. General and administrative expenses consist primarily of personnel and related expenses for administrative, finance, information technology, legal, and human resources staff, including salaries, benefits, bonuses, and stock-based compensation, professional fees, insurance premiums, and other corporate expenses that are not allocated to the above expense categories.

We expect our general and administrative expenses to increase in absolute dollars as we continue to expand our operations, hire additional personnel, integrate acquisitions, and incur costs as a public company. We expect to incur increased expenses related to accounting, tax and auditing activities, legal, insurance, SEC compliance, and internal control compliance.

Total Other (Income) Expense, Net. Total other (income) expense, net consists of interest income, interest expense, fair value expense of common and preferred stock warrants, quarterly remeasurement of contingent consideration, realized foreign currency changes and other non-operating gains and losses. Interest expense results from interest payments on our borrowings, which are based on a floating per annum rate at specified percentages above the prime rate. Fair value expense of preferred stock warrants consisted of changes in the fair value during the period, which include preferred stock warrants and other similar instruments that contain down-round provisions. During 2016, all remaining preferred stock warrants were exercised.

The period-to-period comparison of financial results is not necessarily indicative of financial results to be achieved in future periods.

We have pursued and expect to continue to pursue acquisitions to increase the scope of our product offerings. The comparability of periods covered by our financial statements can be, and may be in the future, impacted by acquisitions. In February 2015, we acquired a U.S. business that provides comprehensive, cloud-based, automated software solutions for lodging tax compliance. In June 2015, we acquired a business in Belgium that was a developer of VAT compliance software and compliance services for the European market. Also in June 2015, we acquired a U.S. business that provides automated software solutions for telecommunications sales tax compliance. In September 2016, we acquired a business in Brazil that provides certain tax-related compliance solutions and content for the Brazilian market.

The following sets forth our results of operations as a percentage of our total revenue for the periods presented.

Total revenue for the three months ended March 31, 2017 increased by $10.5 million, or 27%, compared to the three months ended March 31, 2016. Subscription and returns revenue for the three months ended March 31, 2017 increased by $10.2 million, or 29%, compared to the three months ended March 31, 2016. Growth in total revenue was due primarily to increased demand for our products and services from new and existing customers. For the three months ended March 31, 2017, revenue from existing customers increased $3.3 million and from new customers by $7.1 million as compared to the same period of 2016.

Professional services and other revenue for the three months ended March 31, 2017 increased $0.3 million, or 10%, compared to the three months ended March 31, 2016. The increase in professional services revenue was due primarily to the expansion of our customer base.

In September 2016, we acquired a business in Brazil that provides transaction tax compliance solutions and content. Total revenue attributable to the Brazil business was $1.1 million for the three months ended March 31, 2017.

Cost of revenue for the three months ended March 31, 2017 increased by $1.9 million, or 17%, compared to the three months ended March 31, 2016. The increase in cost of revenue in absolute dollars was due primarily to an increase of employee-related payroll expenses driven by higher headcount. Our cost of revenue headcount increased approximately 33% from March 31, 2016 to March 31, 2017, due to our continued growth strategy to broaden our solutions and expand content, and due to our September 2016 acquisition in Brazil.

Gross profit for the three months ended March 31, 2017 increased $8.5 million, or 31%, compared to the three months ended March 31, 2016. Gross margin improved to 72% for the three

months ended March 31, 2017 compared to 70% for the same period of 2016 due primarily to increased automation of compliance processes and growing revenue relative to fixed costs of operations.

Research and development expenses for the three months ended March 31, 2017 increased $1.3 million, or 15%, compared to the three months ended March 31, 2016. The increase was due primarily to higher employee related costs driven by increased headcount. Research and development headcount increased approximately 14% from March 31, 2016 to March 31, 2017, primarily due to our September 2016 acquisition in Brazil.

Sales and marketing expenses for the three months ended March 31, 2017 increased $6.6 million, or 28%, compared to the three months ended March 31, 2016. The increase was due primarily to an increase of $3.9 million in employee related costs driven by increased headcount, and increased expenditures of $2.1 million period over period for U.S. marketing campaigns. During the latter half of 2016, we began to expand our sales force and marketing team as we continue to pursue an aggressive sales growth strategy. Sales and marketing headcount increased approximately 17% from March 31, 2016 to March 31, 2017. During the three months ended March 31, 2017, we increased sales and marketing spending, particularly in demand generation and customer base marketing activities, to generate future sales opportunities.

General and administrative expenses for the three months ended March 31, 2017 increased $1.9 million, or 22%, compared to the three months ended March 31, 2016. The increase was due primarily to higher employee related costs driven by increased headcount as we expand our support services to effectively handle growth. General and administrative headcount increased approximately 42% from March 31, 2016 to March 31, 2017.

Total other (income) expense, net for the three months ended March 31, 2017 increased $0.9 million compared to the three months ended March 31, 2016 due primarily to changes in fair value of $0.6 million in the current quarter for contingent consideration and an increase in interest expense by $0.2 million resulting from higher borrowing levels in the first three months of 2017. We estimate the fair value of contingent consideration (earnouts related to acquisition) quarterly.

Total revenue increased by $44.5 million, or 36%, from 2015 to 2016. Subscription and returns revenue increased by $42.4 million, or 38%, from 2015 to 2016. Professional services and other revenue increased $2.1 million, or 20%, from 2015 to 2016.

The increase was due primarily to higher revenue from existing customers, revenues from new customers, and acquisitions in 2015 and 2016. Revenue increased by $10.7 million, or 9%, from acquisitions that were made in 2015 and 2016. Excluding the impact of acquisitions made in 2015 and 2016, revenue increased by $33.9 million, or 30%, from 2015 to 2016. Of this increase, $21.4 million was attributable to existing customers and $12.5 million was attributable to new customers.

Total cost of revenue increased $7.8 million, or 19%, from 2015 to 2016. The increase in cost of revenue in absolute dollars was due primarily to an increase of $4.3 million in employee related payroll expenses, $0.9 million in higher allocated overhead costs, $0.8 million in higher data center and

software hosting costs, and $0.7 million in higher amortization expense. Our employee related payroll expenses increased due primarily to higher headcount due to supporting continued customer growth and recent acquisitions. Cost of revenue headcount increased approximately 32% from 2015 to 2016. Allocated overhead costs consists primarily of facility expenses and shared information technology expenses.

Gross profit improved $36.8 million, or 45%, from 2015 to 2016. Our total gross margin improved from 67% in 2015 to 71% in 2016. The increase in gross margin was due primarily to increased automation of compliance processes and growing revenue relative to fixed costs of operations.

Research and development expenses increased $3.1 million, or 10%, from 2015 to 2016. The increase was due primarily to higher employee related costs of $3.5 million driven by increased headcount, partially offset by lower third party software development costs of $0.3 million. Research and development headcount increased approximately 9% from 2015 to 2016.

Sales and marketing expenses increased $4.8 million, or 5%, from 2015 to 2016. The increase was due primarily to the expansion of our sales force and $0.7 million in higher allocated overhead costs. We added employees within our sales, business development, and marketing organizations, which contributed to $4.1 million of increased personnel and related expenses, including commissions and bonuses. Sales and marketing headcount increased approximately 9% from 2015 to 2016. Allocated overhead cost consists primarily of facility expenses and shared information technology.

General and administrative expenses increased $3.3 million, or 10%, from 2015 to 2016. The increase was due primarily to an increase of $1.5 million for development agreement termination costs, $1.2 million for employee related costs, and $1.0 million for professional services expense, partially offset by lower allocated overhead and depreciation expense of $0.8 million. The increase in employee related costs was driven by higher general and administrative headcount, which increased approximately 42% from 2015 to 2016. In 2016, we agreed to terminate a long-term software development agreement with a vendor for $1.5 million. Professional services expense increased from 2015 to 2016 due primarily to higher acquisition related costs.

Total other (income) expense, net increased by $1.3 million from 2015 to 2016 due primarily to higher interest expense on borrowings under our credit facility during 2016. As of December 31, 2016, we had borrowings of $25.0 million outstanding under the term loan facility bearing interest at an annual rate of 6.75%.

Provision for income taxes increased by $4.2 million from 2015 to 2016 due primarily to tax purchase accounting benefits of $3.5 million recorded in 2015. During 2015, we acquired the stock of two U.S. companies for which we recorded deferred tax liabilities through purchase accounting. These acquired deferred tax liabilities provided a future source of taxable income to support the realization of existing U.S. deferred tax assets, resulting in a discrete income tax benefit during 2015.

We have assessed our ability to realize our deferred tax assets and have recorded a valuation allowance against such assets to the extent that, based on the weight of all available evidence, it is more likely than not that all or a portion of the deferred tax assets will not be realized. In assessing the likelihood of future realization of our deferred tax assets, we placed significant weight on our history of generating U.S. tax losses, including in 2016. As a result, we have a full valuation allowance against our net deferred tax assets, including net operating loss carryforwards, and tax credits related primarily to research and development. We reported a net deferred tax liability as of December 31, 2015 and 2016 of $1.8 million and $3.2 million, respectively. We expect to maintain a full valuation allowance for the foreseeable future.

The following table sets forth our unaudited quarterly consolidated statements of operations data for each of the periods presented as well as the percentage of total revenue that each line item represented for each quarter. In management’s opinion, the data below have been prepared on the same basis as the audited consolidated financial statements included elsewhere in this prospectus and reflect all necessary adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of this data. The results of historical periods are not necessarily indicative of the results to be expected for a full year or any future period. Historical periods are also impacted by acquisitions. In February 2015, we acquired a U.S. business that provides comprehensive, cloud-based, automated software solutions for lodging tax compliance. In June 2015, we acquired a business in Belgium that was a developer of VAT compliance software and compliance services for the European market. Also in June 2015, we acquired a U.S. business that provides automated software solutions for telecommunications sales tax compliance. In September 2016, we acquired a business in Brazil that provides certain tax-related compliance solutions and content for the Brazilian market. The following quarterly financial data should be read in conjunction with our audited financial statements and related notes included elsewhere in this prospectus.

We have historically signed a higher percentage of agreements with new customers, as well as renewal and upgrade agreements with existing customers, in the fourth quarter of each year and usually during the last month of the quarter. This can be attributed to buying patterns typical in the software industry. Since the terms of most of our customer agreement terms are annual, agreements initially entered into the fourth quarter or last month of any quarter will generally come up for renewal at that same time in subsequent years. As a result, we have historically seen a higher percentage of customer agreement cancellations in the fourth quarter of each year. This seasonality is reflected in our revenues, though the impact to overall annual or quarterly revenues is minimal due to the fact that we recognize subscription revenue ratably over the term of the customer contract. Additionally, this seasonality is reflected in commission expenses to our sales personnel and our partners.

Our quarterly revenue has increased in each period presented primarily due to increased sales to new customers, as well as increased usage by our existing customers. We cannot assure you that this pattern of sequential growth in revenue will continue.

Our operating expenses generally have increased sequentially in every quarter primarily due to increases in headcount and other related expenses to support our growth. Quarterly fluctuations in our operating expenses overall primarily reflect changes in our headcount, timing of acquisitions, and other costs related to providing the Avalara Compliance Cloud. In particular, research and development expenses have fluctuated based on the timing of personnel additions and related spending on product development. The amount of quarterly increases in our sales and marketing expenses as a percent of revenue primarily reflects personnel additions and various sales and marketing initiatives that may fluctuate from quarter to quarter. We anticipate our operating expenses will continue to increase in absolute dollars in future periods as we invest in the long-term growth of our business. We also anticipate that gross profit and gross margin for professional services and other will fluctuate from quarter to quarter as a result of variability in our professional services projects and changes in headcount. Historical patterns should not be considered a reliable indicator of our future sales activity or performance.

We require cash to fund our operations, including outlays for infrastructure growth, acquisitions, geographic expansion, expanding our sales and marketing activities, and working capital for our growth. Since our inception, we have financed our operations primarily through cash received from customers for our solutions, private placements, and, to a lesser extent, our bank borrowings. As of December 31, 2015 and 2016, and March 31, 2017, we had $10.7 million, $20.2 million, and $13.9 million, respectively, of cash and cash equivalents, most of which was held in money market accounts.

In June 2016, we entered into a loan and security agreement, or the Senior Credit Facility, with Silicon Valley Bank and Ally Bank, or the Lenders. The credit arrangements include a senior secured $25.0 million term loan facility and a $25.0 million revolving credit facility. In June 2016, we also entered into a subordinated loan and security agreement, or the Subordinated Credit Facility, with Silicon Valley Bank, which together with the Senior Credit Facility we refer to as the 2016 Credit Facilities. This credit arrangement includes a $10.0 million subordinated term loan facility. The 2016 Credit Facilities paid off our 2015 Credit Facility. The $25.0 million term loan under the Senior Credit Facility matures in June 2019, with monthly principal payments beginning July 1, 2017. The $25.0 million revolver under the Senior Credit Facility is subject to a borrowing base limitation and matures in June 2018. The subordinated $10.0 million term loan under the Subordinated Credit Facility matures in October 2019.

Collectively, the 2016 Credit Facilities includes several affirmative and negative covenants, including a requirement that we maintain minimum net billings and minimum liquidity, and observe restrictions on dispositions of property, changes in our business, mergers or acquisitions, incurring indebtedness, and distributions or investments. As of December 31, 2016, we were not in compliance with the minimum net billings covenant pursuant to the Senior Credit Facility. In March 2017, we received a waiver from the Lenders of the Senior Credit Facility. In April 2017, we agreed with the Lenders of both 2016 Credit Facilities to amend the minimum net billings covenant such that we expect to maintain covenant compliance for the next twelve months.

Under the Senior Credit Facility, the interest rate on the term loan is the prime rate plus 3% and the interest rate on the revolver is the prime rate plus 2%. As of March 31, 2017, we had borrowings of $27.0 million outstanding under the term loan facility bearing interest at a weighted-average annual rate of 6.93%. As of December 31, 2016, we had borrowings of $25.0 million outstanding under the term loan facility bearing interest at a weighted-average annual rate of 6.75%. Following the waiver obtained in March 2017 and the amendment in April 2017, $23.0 million remained available for borrowing under the revolving credit facility as of March 31, 2017. No borrowings were outstanding under the subordinated term loan facility as of December 31, 2016 or March 31, 2017. The subordinated term loan was available to be drawn through June 6, 2017. No borrowings were drawn.

As of March 31, 2017, our cash and cash equivalents were held for working capital purposes. We intend to increase our operating expenses and our capital expenditures to support the growth in our business and operations. We believe that our existing cash and cash equivalents of $13.9 million as of March 31, 2017, together with cash generated from operations, cash available under our current borrowing arrangements, and the net proceeds of this offering, will be sufficient to meet our anticipated cash needs for at least the next 12 months. Our financial position and liquidity are, and will be, influenced by a variety of factors, including our growth rate, the timing and extent of spending to support research and development efforts, the continued expansion of sales and marketing activities, the introduction of new and enhanced solutions, the cost of any acquisitions, and the continued market acceptance of our solutions.

The following table shows our cash flows from operating activities, investing activities, and financing activities for the stated periods:

Cash used in operating activities consists primarily of net loss adjusted for certain non-cash items, including stock-based compensation, depreciation and amortization, and other non-cash charges, net. For the three months ended March 31, 2017, cash used in operating activities was $7.0 million compared to $9.7 million for the three months ended March 31, 2016. This reduction in cash used of $2.7 million was due primarily to a positive working capital change for the first three months of 2017.

For 2015, cash used in operating activities was $39.8 million compared to cash used in operating activities of $20.7 million for 2016. This reduction in cash used of $19.1 million was due primarily to a lower net loss in 2016. Working capital sources of cash in 2016 included a $15.8 million increase in deferred revenue and a $8.2 million net increase in trade payables, accrued expenses and other current liabilities. These sources of cash were offset by a $10.4 million increase in accounts receivable in 2016.

Our investing activities primarily include cash outflows related to purchases of property and equipment, changes in customer fund assets, and, from time-to-time, the cash paid for business acquisitions. For the three months ended March 31, 2017, cash provided by investing activities was $2.4 million compared to $4.3 million of cash used in investing activities for the three months ended March 31, 2016. This improvement (reduction in cash used) of $6.7 million was due primarily to changes in customer funds held from customers.

For 2015, cash used in investing activities was $53.8 million compared to cash used in investing activities of $29.7 million for 2016. During 2015, cash paid for acquisitions was $43.3 million compared to $17.2 million during 2016.

Our financing activities primarily include cash inflows and outflows from our 2016 Credit Facilities, issuance and repurchases of common and convertible preferred stock, changes in customer fund obligations, and cash flows related to stock option exercises. For the three months ended March 31, 2017, cash used in financing activities was $1.6 million compared to $10.2 million of cash provided by financing activities for the three months ended March 31, 2016. This decrease of $11.8 million was due primarily to reduced borrowings during the three months ended March 31, 2017 compared to the first three months of 2016 and due to changes in customer fund obligations.

For 2015, cash provided by financing activities was $15.3 million compared to cash provided by financing activities of $60.0 million for 2016. In September 2016, we raised gross proceeds of

$96.2 million from the sale of our Series D-2 preferred stock. In conjunction with this financing, we repurchased with cash $45.0 million of preferred and common stock from our shareholders through a limited time tender offer. See “Borrowings” above for a discussion of our 2016 Credit Facilities.

We maintain trust accounts with financial institutions, which allows our customers to outsource their tax remittance functions to us. Funds held from customers represents cash and cash equivalents that, based upon our intent, are restricted solely for satisfying the obligations to remit funds relating to our tax remittance services. Funds held from customers are not commingled with our operating funds, but typically are deposited with funds also held on behalf of our other customers.

Customer funds obligations represent our contractual obligations to remit collected funds to satisfy customer tax payments. Customer funds obligations are reported as a current liability on the consolidated balance sheets, as the obligations are expected to be settled within one year. Cash flows related to the cash received from and paid on behalf of customers are reported as follows:

The following table summarizes our contractual obligations as of December 31, 2016:

There were no material changes to our contractual obligations as of March 31, 2017. In May 2017, we entered into a non-cancellable agreement for software hosting services. Under the agreement, we are obligated to make minimum service payments totaling $11.0 million through April 30, 2021.

We did not have any off-balance sheet arrangements in 2015, 2016, or the three months ended March 31, 2017.

We had cash and cash equivalents of $20.2 million and $13.9 million as of December 31, 2016 and March 31, 2017, respectively. We maintain our cash and cash equivalents in deposit accounts and money market funds with financial institutions. Due to the short-term nature of these instruments, we believe that we do not have any material exposure to changes in the fair value of our investment portfolio as a result of changes in interest rates. Declines in interest rates, however, would reduce future interest income.

We are exposed to risk related to changes in interest rates. Borrowings under the 2016 Credit Facilities bear interest at rates that are variable. Increases in the prime rate would increase the interest rate on these borrowings.

At December 31, 2016, we had borrowings under the 2016 Credit Facilities of $25.0 million. As a result, each change of one percentage point in interest rates would result in an approximate $0.25 million increase in our annual interest expense.

At March 31, 2017, we had borrowings under the 2016 Credit Facilities of $27.0 million. As a result, each change of one percentage point in interest rates would result in an approximate $0.27 million increase in our annual interest expense. Any debt we incur in the future may also bear interest at variable rates.

Our revenue and expenses are primarily denominated in U.S. dollars. For our foreign operations, the majority of our revenues and expenses are denominated in other currencies, such as the Euro, British Pound, and Brazilian Real. Decreases in the relative value of the U.S. dollar as compared to these currencies may negatively affect our revenue and other operating results as expressed in U.S. dollars. For 2016 and the three months ended March 31, 2017, approximately 3% and 5%, respectively, of our revenues were generated in currencies other than U.S. dollars.

We have experienced and will continue to experience fluctuations in our net loss as a result of transaction gains or losses related to revaluing certain current asset and current liability balances that are denominated in currencies other than the functional currency of the entities in which they are recorded. We recognized immaterial amounts of foreign currency gains and losses in each of the periods presented. We have not engaged in the hedging of our foreign currency transactions to date. We may in the future hedge selected significant transactions denominated in currencies other than the U.S. dollar as we expand our international operation and our risk grows.

We do not believe that inflation had a material effect on our business, financial condition, or results of operations in the last two fiscal years or the first quarter of 2017. If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, financial condition, and results of operations.

Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements. The preparation of these financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liability at the date of the consolidated financial statements, as well as the reported amounts of revenue and expenses during the reporting periods. These estimates, assumptions, and judgments are necessary because future events and their effects on our consolidated financial statements cannot be determined with certainty, and are made based on our historical experience and on other assumptions that we believe to be reasonable under the circumstances. These estimates may change as new events occur or additional information is obtained, and we may periodically be faced with uncertainties, the outcomes of which are not within our control and may not be known for a prolonged period of time. Because the use of estimates is inherent in the financial reporting process, actual results could materially differ from those estimates

We believe the following critical accounting policies affect our most significant judgments and estimates used in preparation of our consolidated financial statements.

Our consolidated statement of operations includes two major revenue categories; subscriptions and returns, and professional services and other. We primarily generate revenue from subscriptions and returns, which consists primarily of (1) fees paid for subscriptions to our solutions; (2) nonrefundable upfront fees; and (3) fees paid for services performed in preparing and filing tax returns on behalf of our customers. Revenue generated from our professional services is reported under professional services and other. Amounts that have been invoiced are recorded in accounts receivable and deferred revenue or revenue, depending upon whether the revenue recognition criteria have been met.

In most instances, the initial arrangement with customers includes multiple elements, comprised of subscription and/or professional services, along with non-refundable upfront fees associated with new customers. We evaluate each element in a multiple-element arrangement to determine whether it represents a separate unit of accounting. An element constitutes a separate unit of accounting when the delivered item has standalone value and delivery of the undelivered element is probable and within our control. Other than nonrefundable upfront fees, our services typically have standalone value because they are routinely sold separately. Professional services also have standalone value because we sell professional services separately and there are third-party vendors that provide similar professional services to customers on a standalone basis. If one or more of the deliverables does not have standalone value upon delivery, the deliverables that do not have standalone value are generally combined with the final deliverable within the arrangement and treated as a single unit of accounting. Revenue for arrangements treated as a single unit of accounting is generally recognized over the period commencing upon delivery of the final deliverable and over the remaining term of the subscription contract.

We allocate revenue to each element in an arrangement based on the selling price hierarchy. The selling price for a deliverable is based on its vendor-specific objective evidence (VSOE), if available,

third-party evidence (TPE), or best estimate of selling price (BESP), if neither VSOE nor TPE is available. As we have been unable to establish VSOE or TPE for the elements of our arrangements, we establish the BESP for each element. The determination of BESP requires significant estimates and judgments. BESP is determined primarily by considering the weighted average of actual sales prices of professional services sold on a standalone basis and subscription and support when sold without professional services or setup fees. Other factors considered include existing pricing practices, historical comparisons of contract prices to list prices, the impact on customers, and gross margin objectives. We may modify our pricing practices in the future, which could result in changes in relative selling prices and BESP.

Subscription and returns revenue primarily consists of contractually agreed upon fees paid to use our cloud-based solutions, as well as fees paid to us for preparing and filing sales tax returns on behalf of our customers. Our subscription arrangements do not provide the customer with the right to take possession of the software supporting the cloud-based application services.

We generally invoice our subscription customers for the initial term at contract signing and at each renewal. Our initial terms generally range from twelve to eighteen months, and renewal periods are typically one year. Amounts that are contractually billable and have been invoiced, or which have been collected as cash are initially recorded as deferred revenue. While most of our customers are invoiced once at the beginning of the term, a portion of our customers are invoiced quarterly or monthly. As a result, at any point in time our current deferred revenue balance may not necessarily represent revenue to be recognized by us over the next twelve months.

Our subscription contracts are generally non-cancelable except for where contract terms provide rights to cancel in the first 60 days of the contract term. We reserve for estimated cancellations based on actual history. To date, customer cancellations have not had a significant impact on revenue recognized.

Tax returns processing services include collection of tax data and amounts, preparation of all compliance forms, and submission to taxing authorities. Returns processing services are charged per return filing or on a subscription basis for an allotted number of returns to process within a given time period. The consideration allocated to a returns subscription is recognized as revenue over the contract period commencing when the subscription services are made available to the customer.

Included in the total subscription fee for our cloud-based solutions are non-refundable upfront fees that are typically charged to each new customer. These fees are associated with work performed by us to set up a customer with our services, and do not have standalone value. We recognize revenue for these fees over the expected term of the customer relationship, beginning when services commence. For 2015 and 2016 and solely for revenue recognition purposes, we estimated an expected customer relationship term of six years. We continue to evaluate the expected customer life and it is possible that the expected term of customer relationships may change in future periods. If such a change does occur, the periods over which any remaining deferred revenue will be recognized will be increased or decreased, as appropriate. As of December 31, 2015 and 2016, a one-year increase in the estimated term of customer relationships would reduce annual revenue by $0.4 million and $0.6 million, respectively.

We bill for service arrangements on a fixed fee or time and materials basis. Professional services and other revenue include fees from providing tax analysis, returns management, configurations, data migrations, integration, training, and other support services. The consideration allocated to professional services is recognized as revenue when services are performed and are collectable under the terms of the associated contracts.

Stock-based compensation expense is measured and recognized in our consolidated financial statements based on the fair value of our common stock underlying our stock-based awards. These awards include stock options and warrants that function substantially as stock options granted to employees and non-employee directors. The fair value of each award is estimated on the grant date using the Black-Scholes option-pricing model. The stock-based compensation expense, net of forfeitures, is recognized using a straight-line basis over the requisite service period, which is generally four years. Beginning January 1, 2017, we have elected to account for forfeitures upon occurrence.

Determining the fair value of stock-based awards at the grant date requires significant judgment. The determination of the grant date fair value of stock-based awards using the Black-Scholes option-pricing model is affected by our estimated common stock fair value as well as highly subjective assumptions including, the expected term of the awards, our expected volatility over the expected term of the awards, expected dividend yield, and risk-free interest rates. The assumptions used in our option-pricing model represent management’s best estimates. These assumptions and estimates are as follows:

In addition to these assumptions, we estimate forfeitures based upon our historical experience. We review the estimated forfeiture rate and make changes as factors affecting the forfeiture rate calculations and assumptions change, as necessary.

If any assumptions used in the Black-Scholes option-pricing model change significantly, stock-based compensation for future awards may differ materially compared with the awards granted previously. For 2015, 2016, and the three months ended March 31, 2016 and 2017, stock-based compensation expense was $7.0 million, $8.1 million, $2.1 million, and $3.0 million, respectively. As of

December 31, 2016, we had approximately $14.7 million of total unrecognized stock-based compensation expense, net of estimated forfeitures related to stock options, which we expect to recognize over a period of approximately four years.

Based upon the assumed initial public offering price of $ per share, which is the midpoint of the price range set forth on the cover of this prospectus, the aggregate intrinsic value of stock-based awards outstanding as of December 31, 2016 was approximately $ million, of which approximately $ million related to vested awards and approximately $ million related to unvested awards.

The fair value of the common stock underlying our stock options and common stock warrants was estimated by our Board of Directors, with input from management. Our Board of Directors intends all options granted to be exercisable at a price per share not less than the per share fair value of our common stock underlying those options on the date of grant. The estimated fair value of our common stock was determined at each valuation date in accordance with the guidelines outlined in the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation. Each valuation of our common stock was done using significant judgment and taking into account a variety of factors, including the following:

The enterprise value utilized in determining the fair value of common stock for financial reporting purposes was estimated using the market approach and the income approach. Under the market approach, we used the guideline public company method, which estimates the fair value of the business enterprise based on market prices of stock of guideline public companies and an option pricing method (OPM) that considered our September 12, 2016 Series D-2 preferred stock financing. Indications of value were estimated by utilizing revenue multiples to measure enterprise value. The guideline merged and acquired company method was not utilized in our valuation, as we regarded the method as less reliable as we believe it does not directly reflect our future prospects. The income approach estimates the enterprise value based on the present value of our future estimated cash flows and our residual value beyond the forecast period. The residual value was based on an exit (or terminal) multiple observed in the comparable company method analysis. The future cash flows and residual value are discounted to their present value to reflect the risks inherent in us achieving these estimated cash flows. The discount rate is based on venture capital rates of return for companies nearing an initial public offering. The discount rate is applied using the mid-year convention. Mid-year convention assumes that cash flows are generated evenly throughout the year, as opposed to in a lump sum at the end of the year.

Our indicated enterprise value at each valuation date was allocated to the shares of our convertible preferred stock, common stock, warrants, and options using either an OPM or a probability-weighted expected return method, or PWERM. An OPM treats common stock and convertible preferred stock as call options on a business, with exercise prices based on the liquidation preference of the convertible preferred stock. Therefore, the common stock has value only if the funds available for distribution to shareholders exceed the value of the liquidation preference at the time of a liquidity event, such as a merger, sale, or initial public offering, assuming the business has funds available to make a liquidation preference meaningful and collectible by shareholders. The common stock is modeled as a call option with a claim on the business at an exercise price equal to the remaining value immediately after the convertible preferred stock is liquidated. The OPM uses the Black-Scholes option-pricing model to price the call option. Under a PWERM approach, the value ascribed to each share is based upon the probability-weighted present value of expected future investment returns, considering each of the possible future scenarios available to the business enterprise, as well as the rights of each class of stock. Finally, because we are a privately held company, we also applied a non-marketability discount in determining the fair value of our common stock based on the protective put model, which we deemed appropriate because it typically results in a low discount, to derive a fair value of our common stock on a non-marketable basis.

Following the closing of this initial public offering the fair value per share of our common stock for purposes of determining stock-based compensation will be the closing price of our common stock as reported on the applicable grant date.

The results of a business acquired in a business combination are included in our consolidated financial statements from the date of the acquisition. Purchase accounting results in assets and liabilities of an acquired business being recorded at their estimated fair values on the acquisition date. Any excess consideration over the fair value of assets acquired and liabilities assumed is recognized as goodwill.

We perform valuations of assets acquired and liabilities assumed and allocate the purchase price to the respective assets and liabilities. Determining the fair value of assets acquired and liabilities assumed requires significant judgment and estimates, including the selection of valuation methodologies, estimates of future revenue, costs and cash flows, discount rates, and selection of comparable companies. We engage the assistance of third-party valuation specialists in concluding on fair value measurements in connection with determining fair values of assets acquired and liabilities assumed in a business combination.

These estimates are inherently uncertain and unpredictable, and if different estimates were used the purchase price for the acquisition could be allocated to the acquired assets and liabilities differently from the allocation that we have made. In addition, unanticipated events and circumstances may occur which may affect the accuracy or validity of such estimates, and if such events occur we may be required to record a charge against the value ascribed to an acquired asset or an increase in the amounts recorded for assumed liabilities. Under the current accounting guidance, we are allowed a one-year measurement period from the date of the acquisition to finalize our preliminary valuation of the tangible and intangibles assets and liabilities acquired and make necessary adjustments to goodwill.

Contingent consideration payable in cash arising from business combinations is recorded as a liability and measured at fair value each subsequent period. Changes in fair value are recorded in Other (income) expense, net in the consolidated statements of operations. Determining the fair value of contingent consideration requires us to make assumptions and judgments. These estimates involve

inherent uncertainties and if different assumptions had been used, the fair value of contingent consideration could have been materially different from the amounts recorded. As of December 31, 2016, our total liability related to contingent consideration was $6.2 million. For 2015 and 2016, expense charged for subsequent period fair value measurements was $0.6 million and $0.3 million, respectively.

Goodwill is assessed for impairment at least annually on October 31 at the reporting unit level, or in the event of certain occurrences. We have determined that we have three reporting units for purposes of analyzing goodwill, consisting of our U.S., European, and Brazilian operations. In assessing goodwill for impairment, we first assess the qualitative factors to determine whether events or circumstances indicate that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The next step in our assessment is to perform a quantitative analysis, if necessary. This involves determining the fair value of the reporting unit, which involves significant estimates and assumptions. The fair value of the reporting unit is estimated using both an income approach and a market approach. The income approach uses discounted future cash flows derived from internal forecasts and assumptions for long-term growth rates and the weighted average cost of capital. The market approach identifies similar publicly traded companies to the reporting unit being evaluated.

These estimates involve inherent uncertainties and if different assumptions had been used, the fair value of a reporting unit could have been materially different from the amount we computed. Based on the results of our most recent annual assessment performed on October 31, 2016, there were no impairments of goodwill for any of our reporting units. From our most recent annual assessment, we determined that the fair values for our U.S. and European reporting units were sustainably in excess of their respective carrying values. For our Brazilian reporting unit, which we acquired in September 2016, we finalized our allocation of purchase price prior to our issuance of the December 31, 2016 financial statements. Due to our limited operating experience and economic and political risks in Brazil that are different from our U.S. and European operations, our future cash flow forecasts used to assess goodwill are inherently less certain for this reporting unit and may change materially as we gain operating experience. As a result, we currently believe this reporting unit carries more risk of future impairment when compared to our other reporting units and we will continue to monitor operating performance.

We are an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. We have elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date we (1) are no longer an emerging growth company or (2) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates.

In August 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) ASU 2014-15 related to disclosures as a going concern. The new guidance requires that management assess an entity’s ability to continue as a going concern and may require additional detailed disclosures. ASU 2014-15 is effective for annual periods ending after December 15, 2016 and interim periods within those annual periods. We adopted this standard in 2016 and no additional disclosures were required.

In April 2015, the FASB issued ASU 2015-05 related to guidance on how to account for cloud computing arrangements that include a software license. The guidance requires customers to account for the software license element of the arrangement consistent with the acquisition of other software licenses. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015, and may be applied retrospectively or prospectively to arrangements entered into, or materially modified, after the effective date. We adopted the new standard prospectively in 2016 and the adoption did not have a material impact on our consolidated financial statements.

In September 2015, the FASB issued ASU 2015-16 related to guidance on the recognition of adjustments to preliminary amounts recognized in a business combination, which removes the requirement to retrospectively account for these adjustments. This guidance also requires the acquirer to disclose in the same reporting period the effect on earnings as a result of the change as if the adjustment were made at the acquisition date. This guidance is effective for annual periods beginning after December 15, 2015. We adopted the new guidance in 2016 and the adoption did not have a material impact on our consolidated financial statements.

In November 2015, the FASB issued ASU 2015-17 related to guidance to simplify the balance sheet disclosure of deferred income taxes. This guidance requires deferred tax liabilities and assets to be classified as non-current in the Consolidated Balance Sheet. The guidance is effective for annual periods beginning after December 15, 2016, including interim periods within that reporting period. The amendment may be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. We prospectively adopted the new guidance in 2016 and the adoption did not have a material impact on our consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-09, related to Compensation—Stock Compensation, or Topic 718. This standard makes several modifications to Topic 718 related to the accounting for forfeitures, employer tax withholding on share-based compensation and the financial statement presentation of excess tax benefits or deficiencies. ASU No. 2016-09 also clarifies the statement of cash flows presentation for certain components of share-based awards. The standard is effective for interim and annual reporting periods beginning after December 15, 2017, for business entities that are not public, although early adoption is permitted. We adopted ASU No. 2016-09 on January 1, 2017. We elected to account for forfeitures upon occurrence and the net cumulative-effect was recognized as a $0.1 million increase to additional paid-in capital and a $0.1 million increase to accumulated deficit upon adoption. Also upon adoption, we recorded a $12.3 million cumulative-effect adjustment decrease in accumulated deficit and an offsetting increase in deferred tax assets for previously unrecognized excess tax benefits that existed as of January 1, 2017. Since the realization of these deferred tax assets is not more likely than not to be achieved, we recorded a $12.3 million valuation allowance against these deferred tax assets with an offsetting increase in accumulated deficit.

In January 2017, the FASB issued ASU No. 2017-04, which eliminates step two from the goodwill impairment test. Under the amendments in ASU 2017-04, an entity should recognize an impairment charge for the amount by which the carrying amount of a reporting unit exceeds its fair value. However, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. ASU 2017-04 is effective for us in the first quarter of fiscal 2021 on a prospective basis, however earlier adoption is permitted for goodwill impairment tests performed after January 1, 2017. We adopted ASU No. 2017-04 on January 1, 2017.

In May 2014, the FASB issued ASU 2014-09 which, along with subsequent ASUs, amends the existing accounting standards for revenue recognition. This guidance is based on principles that

govern the recognition of revenue at an amount an entity expects to be entitled to receive when products are transferred to customers. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period for public business entities, and for annual reporting periods beginning after December 15, 2018 for business entities that are not public. This guidance may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of adoption. Additionally, the new guidance requires enhanced disclosures, including revenue recognition policies to identify performance obligations to customers and significant judgments in measurement and recognition. We are currently in the process of assessing our adoption methodology and have not yet selected a method. We are also evaluating the impact of the adoption on our consolidated financial statements. While we believe that adoption will require capitalization of certain selling costs that are currently expensed, such as sales commissions, we have not yet determined whether the effect of these, or other adjustments will be material to revenue or results of operations. We are continuing to assess the impact of adoption, which may identify other impacts on our financial statements.

In February 2016, the FASB issued ASU No. 2016-02, which requires lessees to generally recognize most operating leases on the balance sheets but record expenses on the income statements in a manner similar to current accounting. The guidance is effective in 2019 for business entities that are not public with early adoption permitted. We are currently evaluating the impact this guidance will have on our consolidated financial statements. We currently expect that most operating lease commitments will be subject to the new standard and will be recognized as operating lease liabilities and right-of-use assets upon adoption. While we have not yet quantified the impact, these adjustments will increase total assets and total liabilities relative to such amounts reported prior to adoption.

In August 2016, the FASB issued ASU No. 2016-15, related to classification of certain cash receipts and payments. ASU 2016-15 is intended to add or clarify guidance on the classification of certain cash receipts and payments in the statement of cash flows and to eliminate the diversity in practice related to such classifications. The guidance in ASU 2016-15 is required for annual reporting periods beginning after December 15, 2018 for business entities that are not public, with early adoption permitted. We are currently evaluating the impact this guidance will have on our consolidated financial statements.

In November 2016, the FASB issued ASU, No. 2016-18, related to restricted cash, which is intended to add or clarify guidance on the classification and presentation of changes in restricted cash on the statement of cash flows and to eliminate the diversity in practice related to such classifications. The guidance in ASU 2016-18 is required for annual reporting periods ending after December 15, 2018, for business entities that are not public, with early adoption permitted. We are currently evaluating the impact this guidance will have on our consolidated financial statements.

Today, many businesses attempt to handle transaction tax compliance processes manually, often through the use of static tax tables in spreadsheet software and reliance on internal staff to track relevant transaction tax requirements and changes. Businesses relying on manual processes for transaction tax compliance risk miscalculations and incorrect collections, which can result in customer dissatisfaction and financial penalties. Many businesses conduct transactions using business applications such as accounting, enterprise resource planning (ERP), ecommerce, point of sale (POS), recurring billing, and customer relationship management (CRM) systems. Although these systems may include rudimentary tax calculation capabilities, they are not sufficiently robust or current to provide accurate tax determinations for many businesses.

exposure, and total transaction tax compliance costs. Businesses that use our solutions can allocate fewer personnel to manage transaction tax compliance and focus their efforts on core business operations.

The Avalara Compliance Cloud is designed to integrate seamlessly with our customers’ business applications and be easy to administer and maintain. As transactions are executed in our customers’ business applications, the Avalara Compliance Cloud performs a series of operations to deliver tax compliance functionality in real time. We enable this through our more than 580 pre-built integrations that are designed to link the Avalara Compliance Cloud to business applications used for accounting, ERP, ecommerce, POS, recurring billing, and CRM systems. These integrations typically require little customer configuration or ongoing oversight. Our cloud architecture ensures that our tax content updates are automatically applied to our customers’ transactions. Our powerful and intuitive web-based console simplifies configuration and unifies administration, reporting, and returns processing across a customer’s multiple business applications.

We have acquired and integrated multiple businesses, primarily to augment the tax content of the Avalara Compliance Cloud, to serve the needs of businesses in different geographies or industries, or to improve our ability to serve all aspects of transaction tax compliance. Substantial portions of our business, including our tax return preparation and filing, and our compliance document management solutions, are based on acquired content and technology. Since 2014 we have acquired our fuel excise tax, lodging tax, communications tax, portions of our European VAT, and Brazil tax solutions. We intend to continue pursuing opportunities to broaden our suite of solutions and international presence, and integrating new content and solutions.

We generated revenue of $122.7 million, $167.2 million, and $49.0 million in 2015, 2016, and the three months ended March 31, 2017, respectively. We had net losses of $78.3 million, $58.2 million,

and $15.9 million in 2015, 2016, and the three months ended March 31, 2017, respectively, primarily due to our investments in growth.

Transaction taxes are ubiquitous and complex, and compliance is increasingly difficult for businesses of all sizes

Businesses, regardless of size, industry, or location, are subject to transaction tax compliance requirements, including recording sales, determining and collecting accurate amounts of tax, remitting tax to applicable taxing authorities with detailed tax returns, and managing related compliance documents. These requirements are burdensome even for a business transacting only in a single location, and become exponentially more complex for the increasing number of companies doing business in multiple taxing jurisdictions and offering numerous products and services that are taxed in myriad ways.

These steps involve complexities that are often prone to error and difficult to manage when conducted manually. Varying dynamics in local, regional, state, and national legislative processes in the United States and internationally have resulted in a patchwork of transaction tax rules that are not intuitive, often confusing, and inconsistent across jurisdictions. For example, digital music downloads are currently taxable in New Jersey but tax exempt in Iowa. Even within states, tax rules applied to similar products can vary widely. In New York, nuts are currently tax exempt, unless those nuts are honey-roasted, candy-coated, or chocolate-covered. Further complications arise from the thousands of changes enacted every year as taxing authorities amend their tax rates and taxability rules, modify taxing jurisdictions, and implement other regulatory changes.

Adding to the complexity is the fact that businesses face a variety of transaction tax types that vary based on industry and location. Businesses that sell goods and services in the United States must collect and remit applicable sales and use taxes. Businesses in other countries must collect applicable VAT for sales of goods and services. Businesses in certain industries, both in the United States and internationally, must collect excise taxes, which differ from sales taxes or VAT in that they are imposed based on units being sold (for example, number of items, weight, or volume) instead of as a percentage of the sales price. Internet service providers, telecommunications companies, and internet streaming service providers sell services that are subject to communications taxes, which is a rapidly evolving area of tax law with new and complex taxes. Owners of hotels or rental properties are often subject to lodging taxes. Each of these tax types has different methods for calculating and applying the applicable rate, requiring different processes for compliance.

Commerce across multiple jurisdictions increases the burden of transaction tax compliance

These compliance requirements are evolving. For example, some state governments have recently passed laws that require more sellers to collect taxes on goods sold via ecommerce, and many local and state governments have added new taxes for digital services and goods, but approaches and interpretations have varied. Additionally, federal legislation in the United States is under consideration that would allow states to compel many businesses to collect sales taxes on transactions involving remote sales to their residents, regardless of where the seller is located. These trends expose businesses conducting commerce in multiple jurisdictions to a more complex compliance environment and place them at higher compliance risk, increasing the need for an automated compliance solution.

Businesses have historically taken one or more of several approaches to transaction tax compliance. A common approach employed by mid-market businesses includes manual compliance processes. For businesses adopting a do-it-yourself approach, transaction tax compliance is overseen by internal staff who often rely on transaction-specific research, manual determination, static tax tables, spreadsheet software, or rate calculator services. Filing and remittance activities are often performed manually as well. These processes can be costly and challenging because they pose a high risk of inaccurate and late filings and payments, leading to financial penalties. These risks are exacerbated by frequent changes in tax rates, taxability rules, and jurisdictional boundaries.

Some businesses supplement their internal manual efforts with outsourced professional service firms to perform tax compliance functions. This approach comes at an additional cost, which can be prohibitive for many businesses, and is often not adequate for transactions that require immediate tax determination and collection.

Many businesses conduct transactions using business applications such as accounting, ERP, ecommerce, POS, recurring billing, and CRM systems. Although these systems may include rudimentary tax calculation capabilities, they are not sufficiently robust or current to provide accurate tax determinations for many businesses.

Other businesses employ tax-specific software products from providers other than Avalara. These products often automate only part of the tax compliance process, offer limited pre-built integrations with critical business applications, or require manual updates and the purchase of dedicated, on-premises hardware as well as support. Limitations of tax-specific software products from other providers include:

We believe that the total addressable market for transaction tax compliance solutions is large and underpenetrated. We estimate that the annual addressable market in the United States alone for the solutions we offer today is approximately $4 billion. We calculate this figure by identifying the number of U.S. companies across all industries using certain data from S&P Global Market Intelligence. We then segment these companies into three separate cohorts based on the number of employees: companies that have between 20 and 100 employees, companies that have between 101 and 500 employees, and companies that have 501 employees or more. We then multiply the number of U.S. companies in each cohort by our estimated 2016 average annual revenue per customer within each cohort.

We believe that the total addressable market for our solutions is also driven in part by transaction taxes collected, which, for 2015, the Organisation for Economic Co-operation and Development

(OECD) estimates includes $366 billion of sales taxes in the United States. We estimate that our AvaTax solution determined approximately $5.8 billion of remitted sales and use taxes in the United States in 2016. In addition, the OECD estimates that in 2015 $433 billion of other transaction taxes were collected in the United States, including excise taxes, customs and import duties, and taxes on specific services, such as transportation, communications, insurance, advertising, hotels and lodging, restaurants, entertainments, gambling, and sporting events.

While most of our revenue is currently generated from customers located in the United States, we support transaction tax compliance in Europe, South America, and Asia and believe we have a significant growth opportunity in these markets. For example, the OECD estimates that in 2015, over $1.0 trillion of VAT was collected in Europe. Although we are in the early stages of developing our international presence and therefore have less historical data with which to assess the size of our market opportunities, we believe that Europe and other jurisdictions throughout the world represent a significant additional addressable market for our transaction tax compliance solutions.

We offer a comprehensive suite of solutions for transaction tax compliance. These solutions can be purchased individually or as an integrated transaction tax compliance solution.

Integrated Solutions. We offer our tax return preparation, filing, and remittance solutions as an add-on to AvaTax. These combined solutions automate and streamline the process of transaction tax return preparation, filing, and remittance. These solutions are fully integrated with AvaTax determination and leverage stored transaction data to populate tax return forms that we provide to the customer to file or that we file on their behalf. For some of our returns types we also offer to execute the remittance of tax collections to the taxing authorities.

Standalone Managed Solutions. We also offer our returns preparation, filing, and remittance solutions on a standalone basis for customers who use other tax decision processes but entrust the return preparation, filing, and remittance process to us. We work with customers to ensure that determination data is properly formatted and entered into our returns engine, which then populates the appropriate tax return forms. As with our integrated solution, the tax return forms are either provided to the customer to file or can be filed by us on their behalf. Although we provide this solution to numerous U.S. customers, it is one of the primary offerings in our European VAT business. While the VAT regime in Europe reduces the complexity of tax determination, businesses in Europe continue to face significant challenges in registering to collect VAT, preparing returns, filing returns, and remitting payments because each country has its own specific rules and regulations governing these processes. Our European returns preparation and filing solution helps customers manage these challenges in an efficient and cost effective manner.

Self-Serve Solutions. We offer two self-serve solutions for customers who have less complex filing requirements. TrustFile is a standalone self-serve web solution that customers use to populate sales and use tax return forms. Customers upload their tax collection data via a web interface, which our solution then formats for the appropriate tax returns. We then can either provide the customer with a signature-ready return form or complete the entire submission and payment process for them. Our MyLodgeTax solution prepares and files returns on a self-serve basis for our lodging tax customers. Like

TrustFile, MyLodgeTax is a web-based solution into which customers upload transaction data, and that data is then formatted onto the appropriate tax return forms for filing.

MatrixMaster is our large-scale product taxability database for retail operations. This database contains classification rules for over 14 million products organized by UPC codes.

Avalara CloudConnect is a hardware device that we offer to a small number of U.S. customers who have specifically requested an on-premises solution. Avalara CloudConnect is linked to our core AvaTax solution and kept up to date via that connection. It processes and stores transactions on-site for regularly scheduled uploads to AvaTax. This configuration enables Avalara CloudConnect to process tax determinations at all times, even in the event of service downtime or communication network slowdowns or outages.

VAT Expert is a web-based solution that checks the validity of customer and supplier VAT numbers and provides VAT determinations in the form of invoices that comply with relevant return forms across the European market.

Brazilian tax compliance solutions were recently added to our suite of solutions through technology, content, and personnel acquisitions. Our Brazilian tax compliance suite includes a variety of highly specialized solutions that address the Brazilian transaction tax regimes. These solutions include electronic compliance report validation, electronic invoice authentication and preparation, tax determination, and returns preparation.

Powerful technology. Our proprietary platform powers a comprehensive and integrated set of transaction tax compliance solutions that enable our customers to automate and accurately manage their transaction tax compliance processes. Our platform combines an extensive proprietary database containing tax jurisdiction boundaries, tax rates, product- and date-specific taxability rules, and return preparation and filing requirements, with advanced algorithms for precise real-time address validation via geolocation technology, application of taxability rules, tax determination, tax return preparation and filing, tax remittance, and tax forms and records management. Our platform processes billions of tax determinations per year, with the speed, reliability, and security capabilities designed to serve the

needs of even the largest of enterprise customers. In 2016, we processed an average of over 8.5 million tax determinations per day, including over 39.5 million on Cyber Monday 2016, the most significant day for online sales in U.S. history.

Extensive integrations. We have invested in developing and maintaining more than 580 pre-built integrations that are designed to embed our solutions seamlessly into leading business applications, including accounting, ERP, ecommerce, POS, recurring billing, and CRM systems. We believe that maintaining pre-built integrations with a broad range of business applications provides a competitive advantage, to which we refer as a moat, as these integrations dramatically reduce implementation time, effort, and cost; enable our solutions to function seamlessly with the core applications our customers use to process and manage their transactions; and allow customers to easily and efficiently manage tax compliance across multiple business applications. We offer far more pre-built integrations with these applications than other tax software providers and we plan to continue to add more. While we develop some integrations ourselves, most are built by business application publishers that recognize the value of integrating our solutions into their own. Our solutions are integrated with leading business application providers such as Netsuite, Sage, Epicor, Oracle, SAP, Microsoft, Magento, Shopify, Stripe, and many others.

Extensive content. We have amassed, expanded, and integrated an extensive database of statutory tax content, including product classifications and taxability rules, exemption conditions, tax holidays, jurisdiction boundaries, tax rates, thresholds, registration, and return preparation and filing requirements, as well as more than 14 million UPC codes, linked to taxability rules. We employ a large group of tax research analysts who continually update this library, which is processed by our determination engine and delivered to our customers via our cloud connection. In addition to internal development, we have acquired multiple transaction tax related businesses and acquired or licensed databases containing deep stores of knowledge to augment the tax content that supports the Avalara Compliance Cloud. We also have built and maintain a library of thousands of local, regional, state, and national tax return forms, tax exemption certificate forms, VAT invoice templates, and other compliance documents. Our extensive tax content and forms databases have enabled us to serve the compliance needs of an ever-expanding list of businesses in different geographies and industries such as fuels, communications, and lodging.

Comprehensive, easy-to-use, scalable solutions. We provide solutions to a full range of transaction tax compliance burdens. All of our solutions can be configured and managed using our intuitive administrative console, which we regard as a significant differentiator from other transaction tax services because it facilitates fast and easy company-specific configuration, detailed transaction analysis, and access to detailed reports, worksheets, calendars, and other management functions. The console also provides a single point of management for various compliance solutions, scales as a customer’s needs grow or change, and automatically aggregates transactions from multiple business applications. We believe our comprehensive solutions enable us to provide added value to our customers, increase their loyalty and satisfaction, and raise their potential long-term value to us.

Broad ecosystem. We have strategically built a broad range of relationships with our network of business application publishers and their reseller channels, integration developers, implementation specialists, and accounting and financial advisors. These relationships provide us with an effective distribution channel, the majority of our pre-built integrations, a source of referral business, occasions for cross-selling, new opportunities for compliance automation, and early access to developing technologies.

our net revenue retention rate, which was 109% in the first quarter of 2017 and was 107% on average for the four quarters ended March 31, 2017.

We plan to continue investing to provide our customers with best-in-class solutions and to expand our market opportunity. Our primary growth strategies include:

Our customers include businesses across industries and of all sizes, ranging from small businesses to Fortune 100 companies.

The mid-market has been and remains our primary target market segment for marketing and selling our solutions. We use core customers as a metric to focus our customer count reporting on our

primary target market segment. As of December 31, 2016 and March 31, 2017, we had approximately 6,250 and 6,650 core customers, respectively, representing less than half of our total number of customers. In 2016, our core customers represented more than 85% of our total revenue.

Currently, our core customer count includes only customers with unique account identifiers in our primary U.S. billing systems and does not include customers who subscribe to our solutions through our international subsidiaries or certain legacy billing systems primarily related to past acquisitions. As we increase our international operations and sales in future periods, we may add customers billed from our international subsidiaries to the core customer metric.

We also have a substantial number of customers of various sizes who do not meet the revenue threshold to be considered a core customer. These customers provide us with market share and awareness, and we anticipate that some may grow into core customers. We believe there is strategic value to addressing the small business and self-serve segment of the marketplace.

No single customer represented more than 1% of our total revenue in 2015 or 2016.

We sell our solutions primarily on a subscription basis. Most of our customers purchase pre-built or custom integrations into their business applications and choose from various subscription plans that are priced according to the volume of transactions, tax returns, or tax documents they require. Our solutions are equally capable of addressing the transaction tax compliance needs of businesses of all sizes, from the smallest sole proprietors to Fortune 100 enterprises. While the mid-market has been and remains our primary target market segment for marketing and selling our solutions, we also maintain distinct teams and processes for pursuing enterprise and small businesses.

While we generally identify, and engage directly with our customer prospects, we leverage the sales and referral resources of a broad ecosystem of partners across all market segments. These partners include our network of business application publishers, integration developers, technology developers and implementation specialists, and value added resellers. These networks provide us with pre-sold customers as well as qualified leads through a variety of incentive programs. Additionally, we actively conduct programs to engage with state regulators, tax and accounting firms, payroll vendors, and financial services providers.

The majority of our mid-market sales are conducted via telephone, requiring few to no in-person interactions with customer prospects. We target prospects via an array of marketing automation strategies and tactics, including paid and unpaid digital advertising, content marketing, prospect database nurturing, and other automated outbound marketing activities.

We also maintain a specialized sales force that sells into the enterprise market predominantly via telephone, but in some cases through in-person sales. These prospects have historically been

concentrated in our fuel excise and compliance document management businesses, but we believe we have a significant and growing opportunity to sell our sales tax, use tax, and VAT determination and returns solutions into this market.

In addition to reaching highly targeted enterprise and mid-market prospects, our marketing investments and activities generate interest from large numbers of small businesses that also are burdened by transaction tax compliance requirements. Because these customers typically purchase smaller plans at lower price points, we have established an online marketplace through which customers purchase and configure their solutions without the involvement of our primary selling or customer onboarding teams. We believe this is an important area because it establishes a customer relationship that may become more valuable to us over time as the customer grows or more fully embraces an automated compliance solution and provides a potential barrier to entry from competitors that may seek to build market share by targeting the small business segment.

Expanding and maintaining our partner ecosystem has been an essential part of our growth. Enabling easy, quick, and low-cost integration into customers’ business applications, gathering high-quality new customer leads, and participating with professional service providers to help manage transaction tax compliance are all important to our continued success, and we work hard to maintain and grow an ecosystem that we believe is unmatched in the industry.

Our partner ecosystem consists of multiple different types of partners that provide us access to their customers and clients:

Integration Partners. Our integration partners build integrations for business applications, including accounting, ERP, ecommerce, POS, recurring billing, and CRM systems. These integrations are designed to link the Avalara Compliance Cloud to business applications and share data relevant to transaction tax determination and compliance. Most of our integration partners are the actual publishers of the business applications, who work with us to provide transaction tax functionality to their customers through those business applications. Other integration partners are independent software developers or resellers who we engage to build and maintain the integrations. In either case, the integration partners are paid a commission based on a percentage of the sales of our solutions that use the integration. In general, integration partners are paid a higher commission for the initial sale to a new customer and lower recurring commissions for renewal subscription terms. We currently have over 580 pre-built integrations and we added over 170 integrations since the beginning of 2016.

Referral Partners. Our referral partners refer new customers to us, and receive a commission based on a percentage of the first-year sales of our solutions to those new customers. Many referral partners are software resellers, or other participants in the marketplace who have access to high quality new customer leads. Many of our integration partners also refer customers who have purchased the partner’s business application and who need additional assistance with transaction taxes. Some professional service partners, as discussed below, can be an additional source of new customer referrals.

Avalara Included Partners. Some of the publishers who build integrations to connect our solutions to their business applications also purchase our solutions from us to distribute to their customers, either as part of their offering or as an add-on to their application. For example, certain ecommerce platform providers purchase an AvaTax subscription so that they can include sales tax determination as part of their offering to their retailer customers. We refer to these partners as Avalara Included Partners, and they provide our solutions to their customers either on a white label basis or as

“powered by Avalara.” In either case, most Avalara Included Partners are also referral partners who refer their customers to us to purchase additional solutions, such as our returns solutions or CertCapture.

Professional Service Partners. We also have partners who are professional service providers who work directly with the customers for transaction tax related services. These partners may implement and/or configure our solutions for customers, either alone or as part of a larger enterprise software implementation. Other professional service partners are accountants or other advisors who assist customers with transaction tax issues. Payments to these partners vary, depending on the specific relationship, with some partners billing customers directly, some subcontracting with us, and some participating in the referral program.

Our research and development organization is responsible for the design, development, and testing of the Avalara Compliance Cloud. We devote substantial resources to continuously improve our platform, add innovative new features and functionalities, build technology to support new content types, and improve the user experience for our platform and solutions. As of March 31, 2017, we had 310 employees in our research and development organization. Our research and development expense was $29.8 million, $32.8 million, and $9.7 million in 2015, 2016, and the three months ended March 31, 2017, respectively.

Our content team works to improve and support our solutions by adding new tax content and maintaining existing content on our platform. This large team continually monitors, tests, and updates our tax content to incorporate new tax rates, rules, taxing jurisdiction boundaries, and exemption conditions. Costs related to our tax content team are recorded in cost of revenue.

Our industry is highly competitive and fragmented. Businesses employ a mix of approaches to address transaction tax compliance, including:

We believe customers consider the following factors when selecting a transaction tax compliance solution:

We believe our cloud-based solutions compare favorably across these factors, but different customers will weigh each of these factors in different ways, and we may not be competitive for some customers, depending on specific customer needs. For example, our longer established competitors may have better name recognition or more established relationships. Some customers may have less complex tax determination and compliance needs or require transaction tax types, such as alcohol excise tax, for which we do not currently have extensive content. We are aware of these competitive factors, and we will continue to consider and develop functionalities, service offerings, pricing structures, and additional content to further strengthen our competitive position.

We primarily rely upon a combination of confidentiality procedures, contractual provisions, copyright, trademark, and trade secret laws, and other similar measures to protect our proprietary information and intellectual property. Our trademarks and service marks include Avalara, the Avalara logo, AvaTax, the Avalara Compliance Cloud, “Tax compliance done right,” marks for our acquired businesses, and various marketing slogans. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our solutions or to obtain and use information that we regard as proprietary, and may also attempt to develop similar technology independently. Our means of protecting our proprietary rights may not be adequate.

The software and Internet industries are characterized by the existence of a large number of patents, trademarks, and copyrights and by frequent litigation based on allegations of infringement or other violations of intellectual property rights. Third parties may claim that our current or future solutions infringe their intellectual property rights. We may have to defend ourselves against claims of intellectual property infringement, which could be expensive for us and harm our business and financial condition.

Our business is subject to a range of complex laws and regulations, mostly relating to our involvement in our customers’ financial transactions. To be successful, we must promote and monitor compliance with these legal and regulatory requirements.

We perform critical business functions for our customers, including tax determination, returns preparation and filing, and tax remittance. The federal Bank Secrecy Act requires that financial institutions, of which money transmitters are a subset, register with the U.S. Department of Treasury’s Financial Crimes Enforcement Network and maintain policies and procedures reasonably designed to monitor, identify, report and, where possible, avoid money laundering and criminal or terrorist financing by customers. Most U.S. states also have laws that apply to money transmitters, and impose various licensure, examination, and bonding requirements on them. We believe these federal and state laws and regulations were not intended to cover the business activity of remitting transaction taxes that taxpayers owe to the various states. However, if federal or state regulators were to apply these laws and regulations to this business activity, whether through expansion of enforcement activities, new interpretations of the scope of certain of these laws and regulations or of available exemptions, or otherwise, or if our activities were held by a court to be covered by such laws or regulations, we could be required to expend time, money, and other resources to deal with enforcement actions and any

penalties that might be asserted, to institute and maintain a compliance program specific to money transmission laws, and possibly to change aspects of how we conduct business to achieve compliance or minimize regulation. We have contractually agreed with certain states collecting sales tax that in determining and remitting taxes on behalf of certain customers, we will comply with various technical, filing, privacy, confidentiality, bonding, and trust account requirements.

In the course of selling products and services, retailers and other businesses often come into possession of credit card numbers and other personal information of consumers. Determining the transaction taxes owed by our customers involves providing our platform with the types and prices of products they sell, as well as information regarding addresses that products are shipped from and delivered to. Our tax exemption certificate management solution also requires input of certain information regarding the purchasers who are entitled to tax exemptions. Numerous local, regional, state, and national laws and regulations govern the collection, dissemination, use, and safeguarding of certain information that could be used to commit identity theft or fraud. Although most of the data that is provided to our solutions by our customers cannot be used to identify individual consumers, we may be subject to these laws in certain circumstances. Most states have also adopted data security breach laws that require notice to affected consumers of any security breach as to their personal information. In the event of a security breach, our compliance with these laws may subject us, depending on the personal information in question, to costs associated with notice and remediation, as well as potential investigations from federal regulatory agencies and state attorneys general. Failures to safeguard data adequately or to destroy data securely could subject us to regulatory investigations or enforcement actions under federal or state data security, unfair practices, or consumer protection laws. The scope and interpretation of these laws, and the burdens and costs of complying with them, could increase in the future.

As of March 31, 2017, we had 1,293 full-time employees. Of these employees, 913 are based in the United States, 3 are based in Canada, 85 are in the United Kingdom and continental Europe, 170 are based in India, and 122 are based in Brazil. None of our employees are covered by collective bargaining agreements. We believe our employee relations are good and we have not experienced any work stoppages.

We believe our corporate culture provides an advantage in recruiting new employees and retaining our best talent, as well as driving behaviors across our entire organization that help us succeed in the marketplace. This culture is characterized in the many employees who embody our nine success traits: Optimism, Passion, Adaptability, Humility, Fun, Ownership, Curiosity, Urgency, and Simplicity. The rallying point of our culture is the color orange. Our employees wear this color with pride every day in all of our locations and we have trademarked the slogan “The Power of Orange.” Our culture permeates our sales and marketing outreach and the significance of the color orange has been featured in multiple news articles. As a result, we believe our customers, partners, and many prospects readily identify and appreciate our culture in their interactions with the Avalara team.

Our corporate headquarters are located in Seattle, Washington, where we occupy approximately 36,420 square feet of office space under a lease that expires on June 30, 2022. In addition, we have signed a lease for a new headquarters location in Seattle for approximately 114,264 square feet of office space that will allow us consolidate all employees that are currently in our Seattle and Bainbridge Island offices in one location when we begin occupying that new headquarters in 2018. The lease for the new headquarters expires 120 months after we occupy the premises. We maintain additional offices in the United States, UK, Belgium, Brazil, and India. Our primary third-party data center is located in Seattle, Washington.

We lease all of our facilities, and we do not own any real property. We believe that, with the addition of the new headquarters space, our existing facilities are adequate for our current needs and that suitable additional or alternative space would be available to us to lease on commercially reasonable terms if and when we need it.

From time to time, we may become involved in legal proceedings or be subject to claims arising in the ordinary course of our business. We are not presently a party to any legal proceedings that in the opinion of our management, if determined adversely to us, would have a material adverse effect on our business, financial condition, operating results, or cash flows. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources, and other factors.

The following table sets forth information regarding our executive officers and directors:

Each of our executive officers serves at the discretion of our Board of Directors. Each of our directors holds office until his or her successor is duly elected and qualified or until his or her earlier death, disqualification, resignation, or removal. There are no family relationships among any of our executive officers or directors.

Scott M. McFarlane has served as a member of our Board of Directors since May 2004. He has also served as our Chief Executive Officer since February 2007 and as the Chairman of our Board of Directors and President since March 2014. Mr. McFarlane served as our Chief Operations Officer from May 2004 to October 2010 and as our Secretary from May 2004 to September 2013. Mr. McFarlane holds a B.A. in Economics from Claremont McKenna College. Mr. McFarlane was selected to serve on our Board of Directors because of the perspective and experience he brings as one of our founders and as our Chief Executive Officer.

William D. Ingram has served as our Chief Financial Officer and Treasurer since December 2015. Mr. Ingram previously served as Interim Chief Financial Officer of Khan Academy, a provider of online learning resources, from April 2015 to December 2015. Mr. Ingram also held various executive roles at Leap Wireless International, Inc., the parent company of Cricket Wireless, a wireless telecommunications provider, including Executive Vice President and Chief of Strategy from August 2007 to March 2014, and with the acquiring company, AT&T, from March 2014 to January 2015. Mr. Ingram holds a B.A. in Economics from Stanford University and an M.B.A. from Harvard Business School.

Alesia L. Pinney has served as our General Counsel since April 2013, our Secretary since September 2013, and an Executive Vice President since March 2014. Ms. Pinney served as Senior

Vice President, General Counsel, and Secretary at Radiant Logistics, Inc., a logistics services provider, from May 2012 to April 2013. Ms. Pinney served as a business and legal consultant from June 2011 to May 2012. Ms. Pinney served as General Counsel and Secretary at InfoSpace, Inc., an Internet search company, from July 2009 to June 2011. Ms. Pinney holds a B.A. in Business Administration in Accounting from Seattle University, a Master of Taxation from the University of Denver, College of Law, and a J.D. from Seattle University School of Law.

Pascal Van Dooren has served as our Chief Revenue Officer since June 2014 and Executive Vice President since June 2017. Mr. Van Dooren also served as our General Manager, AvaTax from June 2014 to June 2017 and as our Executive Vice President, Sales & Marketing from October 2011 to May 2014. Mr. Van Dooren served as Vice President of Sales, North America at Sage Software, Inc., a business management software company, from July 2007 to September 2011. Previously, Mr. Van Dooren served as Vice President of Sales and Director of International Sales at Epicor Software, a business software company, and as Senior Director of Sales & Marketing at CapitalStream, Inc., a commercial loan origination software company. Mr. Van Dooren holds a B.S. in Computer Science from Florida State University and an M.S. in Computer Science Information Systems from the University of Miami School of Business.

Marion R. Foote has served as a member of our Board of Directors since May 2011. Ms. Foote has served as an independent business advisor since January 2012. She served as a partner at Novantas, LLC, a management consulting firm focused on the financial industry, from January 2005 to December 2011, following the merger of her firm (Randolph Partners) with Novantas. Prior to establishing Randolph Partners in November 1998, Ms. Foote served as Group Executive Vice President and Chief Marketing Officer for Bank of America’s Retail Bank. Ms. Foote currently serves as a director of multiple private companies in the financial services, life sciences, and technology sectors. Ms. Foote previously served as a director of DLJdirect (now part of E*Trade) and Cascade Financial Corporation/Cascade Bank. Ms. Foote holds a B.A. in Economics from Smith College and an M.B.A. from Harvard Business School. Ms. Foote was selected to serve on our Board of Directors because of her significant experience as a director including service on public company boards, her marketing and financial expertise, her work in customer analytics, and her over four decades of executive experience in financial services and consulting.

Edward A. Gilhuly has served as a member of our Board of Directors since March 2011. Mr. Gilhuly has served as a managing partner at Sageview Capital, a private investment firm, since May 2006. Mr. Gilhuly worked for Kohlberg Kravis Roberts & Co. L.P., where he served as a partner from 1994 to 2005 and as a member of its investment committee from 2000 to 2005. Mr. Gilhuly currently serves as a director for a number of private companies and also serves on the Board of Trustees of Duke University. Mr. Gilhuly previously served on the boards of directors of GoPro, Inc., Cinedigm Corp., and Envivio, Inc. Mr. Gilhuly holds a B.A. in Economics and History from Duke University and an M.B.A. from Stanford University. Mr. Gilhuly was selected to serve on our Board of Directors because of his significant experience as a director of public companies, in corporate management, and in private equity and finance.

Benjamin J. Goux has served as a member of our Board of Directors since January 2008. Mr. Goux served as our Chief Financial Officer from August 2007 to June 2008. Mr. Goux has served as Chief Financial Officer of Pioneer Venture Partners, a venture capital firm, since March 2006. Mr. Goux has served as Executive Vice President of Stellar Holdings, a real estate firm and investment vehicle, since March 2009. Mr. Goux serves as a director or as an observer on the boards of directors of multiple private companies. Mr. Goux holds a B.A. in Business Administration from the Foster School of Business at the University of Washington. Mr. Goux was selected to serve on our Board of Directors because of his significant finance and other business experience.

Tami L. Reller has served as a member of our Board of Directors since July 2014. Ms. Reller has served as Executive Vice President of Optum, Inc., a health-services company, since September 2014, including Chief Marketing Officer from September 2014 to June 2016 and Chief Financial Officer from June 2016 to April 2017. From April 2001 to September 2014, Ms. Reller served in several executive roles with Microsoft Corporation, including Executive Vice President of Marketing, Windows Chief Financial Officer and Chief Marketing Officer, Divisional Chief Financial Officer, and Corporate Vice President of Dynamics. Ms. Reller served as Chief Financial Officer of Great Plains Software Inc. prior to its acquisition by Microsoft Corporation in 2001. Ms. Reller serves as a director of SPS Commerce, Inc. Ms. Reller holds an M.B.A. from St. Mary’s College and a B.S. in Mathematics from Minnesota State University Moorhead. Ms. Reller was selected to serve on our Board of Directors because of her significant experience with software companies and corporate finance.

Justin L. Sadrian has served as a member of our Board of Directors since November 2014. Mr. Sadrian, who joined Warburg Pincus LLC, or Warburg Pincus, in 2000 and is a Partner of Warburg Pincus & Co. and Managing Director of Warburg Pincus, focuses on media, Internet, and information investments. Prior to joining Warburg Pincus, Mr. Sadrian worked at J.P. Morgan in its investment banking and private equity groups. He serves as a director of Endurance International Group Holdings, Inc. and a number of private companies. Mr. Sadrian previously served as a director of GrubHub, Inc. Mr. Sadrian holds a B.A. in Economics from Dartmouth College and an M.B.A. from Harvard Business School. Mr. Sadrian was selected to serve on our Board of Directors because of his industry knowledge, corporate finance experience, and public company experience.

Rajeev Singh has served as a member of our Board of Directors since March 2017. Since November 2015, Mr. Singh has served as the Chief Executive Officer and a member of the board of directors of Accolade, Inc., an on-demand healthcare concierge for employers, health plans, and health systems. Prior to Accolade, Mr. Singh co-founded Concur Technologies, Inc., a global leader in travel and expense management, and held roles over a period of 20 years, including President, Chief Operating Officer, and member of the board of directors. Prior to Concur, Mr. Singh held positions at Ford Motor Company and General Motors Corporation. Mr. Singh serves as a director of Apptio, Inc. Mr. Singh holds a B.S. in Manufacturing Administration from Western Michigan University. Mr. Singh was selected to serve on our Board of Directors because of his extensive experience in building and leading companies, as well as his background in technology innovation and significant operational and strategic expertise.

Chelsea R. Stoner has served as a member of our Board of Directors since June 2012. Ms. Stoner has served as a general partner at Battery Ventures, a venture capital firm, since February 2014. Ms. Stoner also served as a partner at Battery Ventures from June 2012 to February 2014 and as a principal from June 2006 to June 2012. Ms. Stoner serves as a director of multiple private companies. Ms. Stoner holds a B.S. in Chemical Engineering from Northwestern University and an M.B.A. from The University of Chicago. Ms. Stoner was selected to serve on our Board of Directors because of her extensive experience with cloud-based software companies and corporate finance.

Jared R. Vogt has served as a member of our Board of Directors since May 2004, and he served as the Chairman of our Board of Directors from May 2004 to March 2014. He has also served as our Founder—Special Projects since October 2013. Mr. Vogt served as our Chief Technology Officer from February 2007 to October 2013 and as our Chief Executive Officer from May 2004 to February 2007. Mr. Vogt holds a B.S. in Psychology from the University of Washington. Mr. Vogt was selected to serve on our Board of Directors because of the unique perspective and experience he brings as one of our founders and prior executive officers.

Gary L. Waterman has served as a member of our Board of Directors since August 2007. Mr. Waterman has served as founder and President at Waterman Limited, a real estate investment and development company, since March 1989. Previously, Mr. Waterman served as a Managing Director of

the Property Finance Group at LaSalle Partners, Inc., a corporate real estate investment company. Mr. Waterman served on the board of directors of Equity LifeStyle Properties, Inc. until May 2016. Mr. Waterman holds a B.A. and an M.A. in Economics from the University of Washington. Mr. Waterman was selected to serve on our Board of Directors because of his significant finance and other business experience, private company leadership, and experience as a director of a public company.

Our business and affairs are managed under the direction of our Board of Directors. Certain members of our Board of Directors were elected pursuant to the provisions of our amended and restated voting agreement, or the Voting Agreement. Under the Voting Agreement, our shareholders that are party to the Voting Agreement agreed to vote their shares to elect to our Board of Directors: (1) one director designated by The Benaroya Company, L.L.C. (Rajeev Singh); (2) one director designated by Pioneer Venture Partners LLC (Benjamin Goux); (3) one director designated by Sageview Capital Master, L.P. (Edward Gilhuly); (4) one director designated by Battery Ventures IX, L.P. (Chelsea Stoner); (5) one director designated by Warburg Pincus Private Equity XI, L.P. (Justin Sadrian); (6) one director designated by the holders of a majority in interest of the shares of our common stock held by certain of our key shareholders (Jared Vogt); (7) the person serving as our Chief Executive Officer (Scott McFarlane); and (8) three directors mutually designated by (a) the holders of a majority in interest of the shares of our common stock held by certain of our key shareholders that are currently providing services to us as officers, employees, or consultants and (b) the holders of a majority in interest of the shares of our capital stock held by our investors that are party to the Voting Agreement (Gary Waterman, Marion Foote, and Tami Reller).

The director designated by Sageview Capital Master, L.P. and the director designated by Warburg Pincus Private Equity XI, L.P. shall have the right, but not the obligation, to be appointed to each and every currently existing committee of our Board of Directors, as well as any committees our Board of Directors may create in the future, subject to applicable law and the requirements of any national securities exchange in which our capital stock is listed. The Voting Agreement will terminate upon the closing of this offering, and none of our shareholders will have any special rights regarding the election or designation of members of our Board of Directors, except for the committee appointment rights described in the prior sentence and as provided in the following sentence. From the date we close this offering, and for as long as Warburg Pincus and its affiliates continue to own beneficially at least 1,500,000 voting securities, we have agreed to nominate and use all reasonable efforts to have one individual designated by Warburg Pincus elected to our Board of Directors.

Our Board of Directors may establish the authorized number of directors from time to time by resolution, subject to the terms of our Articles and our Bylaws. The authorized number of directors is currently ten, and our Board of Directors currently consists of ten members. In accordance with our Articles, our Board of Directors will be divided into three classes with staggered three-year terms. At each annual meeting of our shareholders, the successors to directors whose terms then expire will be elected to serve from the time of election and qualification until the third annual meeting following election. Our directors will be divided among the three classes as follows:

Generally, under the listing requirements and rules of the , independent directors must comprise a majority of a listed company’s board of directors within one year of the closing of an initial public offering.

Our Board of Directors has reviewed its composition, the composition of its committees, and the independence of each director. Our Board of Directors has determined that none of our directors has a relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director and that each is “independent” as that term is defined under the applicable rules and regulations of the SEC and the listing requirements and rules of the , except for Scott McFarlane and Jared Vogt by virtue of their positions as our Chief Executive Officer and President and our Founder—Special Projects, respectively. Accordingly, a majority of our directors are independent, as required under applicable rules. In making this determination, our Board of Directors considered the current and prior relationships that each director has with us and all other facts and circumstances our Board of Directors deemed relevant in determining their independence, including the beneficial ownership of our capital stock and service to other entities who purchase our solutions.

Our independent directors have appointed Gary Waterman to serve as our lead independent director contingent on the closing of this offering. As lead independent director, Mr. Waterman will preside over periodic meetings of our independent directors, will serve as a liaison between our Chairperson and the independent directors, and will perform such additional duties as our Board of Directors may otherwise determine and delegate.

Our Board of Directors has established an Audit Committee, a Compensation and Leadership Development Committee, and a Nominating and Corporate Governance committee. Our Board of Directors may establish other committees to facilitate the management of our business from time to time.

Our Board of Directors has adopted a written charter for each of the Audit Committee, the Compensation and Leadership Development Committee, and the Nominating and Corporate Governance Committee that satisfies applicable rules of the SEC and the listing standards of the . Following the closing of this offering, the full text of these charters will be available on our corporate website at www.avalara.com. Information contained on, or that can be accessed through, our website is not a part of this prospectus and the inclusion of our website address in this prospectus is an inactive textual reference only. The composition and responsibilities of each of the committees of our Board of Directors are described below. Members serve on these committees until their resignation or until otherwise determined by our Board of Directors.

Our Audit Committee consists of Marion Foote, Benjamin Goux, Tami Reller, and Chelsea Stoner, each of whom our Board of Directors has determined to be independent under listing standards and Rule 10A-3(b)(1) of the Exchange Act. The chair of our Audit Committee is Ms. Reller. Our Board of Directors has determined that each of Ms. Foote, Mr. Goux, Ms. Reller, and Ms. Stoner is an “audit committee financial expert” within the meaning of SEC regulations. Our Board of Directors

has also determined that each member of our Audit Committee has the requisite financial expertise under the applicable requirements of the . In arriving at this determination, our Board of Directors has examined each Audit Committee member’s scope of experience and the nature of their employment in the corporate finance sector. Upon the closing of this offering, the primary functions of this committee will include, among other things:

Our Compensation and Leadership Development Committee consists of Edward Gilhuly, Benjamin Goux, Justin Sadrian, Rajeev Singh, and Chelsea Stoner, each of whom our Board of Directors has determined to be independent under listing standards and the rules and regulations of the SEC and a “non-employee director” as defined in Rule 16b-3 under the Exchange Act. Our Board of Directors has determined that each of these directors, other than Mr. Goux, is an “outside director” as that term is defined in Section 162(m) of the Internal Revenue Code of 1986, as amended, or the Code. The chair of our Compensation and Leadership Development Committee is Mr. Singh. Upon the closing of this offering, the primary functions of this committee will include:

Our Nominating and Corporate Governance Committee consists of Edward Gilhuly, Justin Sadrian, and Gary Waterman, each of whom our Board of Directors has determined to be independent under listing standards. The chair of our Nominating and Corporate Governance Committee is Mr. Waterman. Upon the closing of this offering, the primary functions of this committee will include:

No member of our Compensation and Leadership Development Committee is currently or has ever been at any time an officer or employee of ours, except that Mr. Goux, a member of our Compensation and Leadership Development Committee, served as our Chief Financial Officer from August 2007 to June 2008. None of our executive officers currently serve, or have served during the last completed year, as a member of the board of directors or compensation committee of any entity that has one or more executive officers who served as a member of our Board of Directors or Compensation and Leadership Development Committee during the last completed year.

Our Board of Directors has adopted a code of business conduct and ethics that applies to all of our employees, executive officers, consultants, and directors, including those officers responsible for financial reporting. Upon the closing of this offering, our code of business conduct and ethics will be available on our website at www.avalara.com. We intend to disclose any amendments to the code, or any waivers of its requirements, on our website to the extent required by the applicable rules and exchange requirements. Information contained on, or that can be accessed through, our website is not a part of this prospectus and the inclusion of our website address in this prospectus is an inactive textual reference only.

We did not provide any cash compensation to our non-employee directors during the year ended December 31, 2016 for their service on our Board of Directors or its committees. Although we do not have a written policy, we generally reimburse our directors for their reasonable out-of-pocket expenses incurred in attending meetings of our Board of Directors and its committees, and have annually granted to each of our non-employee directors a warrant to purchase 20,000 shares of our common stock at an exercise price equal to the fair market value of our common stock as of the date of grant, as determined by our Board of Directors. The warrants we granted to non-employee directors for 2016 service have a ten-year term.

The following table provides information regarding total compensation paid to non-employee directors during the year ended December 31, 2016. Directors who are also our employees, such as Mr. McFarlane, our Chairman, Chief Executive Officer, and President, and Mr. Vogt, our Founder—Special Projects, receive no additional compensation for their service as directors. Mr. McFarlane’s compensation is discussed in the section of this prospectus titled “Executive Compensation,” and Mr. Vogt’s compensation for services as an employee is presented in footnote (1) following the table.

Our Board of Directors has adopted our non-employee director compensation policy, or the policy, which will be effective as of the effective date of the registration statement of which this prospectus forms a part. Under the policy, each non-employee director will be eligible to receive compensation for his or her service consisting of annual cash retainers and equity awards as described below. Our Board of Directors may revise the policy as it deems necessary or appropriate.

Cash Compensation. Under the policy, all non-employee directors will be entitled to receive the following cash compensation:

Equity Compensation. Under the outside director compensation policy, on the date of each annual meeting of shareholders beginning with the first annual meeting following the completion of this offering, each non-employee director who is a continuing director following the meeting automatically will be granted an equity award having a value of $150,000, or the annual award. The annual award will be comprised of stock options and restricted stock units, or RSUs, granted under our 2017 Plan, each having a grant date fair value of approximately 50% of the aggregate value of the annual award. Each annual award will fully vest and become exercisable or payable, as applicable, upon the earlier of the one-year anniversary of the grant date or the day prior to our next annual meeting occurring after the grant date, in each case subject to the individual’s continued service through the vesting date. The grant date fair value of the options and the RSUs will be calculated in accordance with ASC Topic 718. The annual award will fully vest and become exercisable and payable upon a change in control, as defined in the 2017 Plan.

Effective following the completion of this offering, in the event that a non-employee director is initially elected or appointed on any date other than the date of an annual meeting of shareholders, the director will, instead, automatically receive the annual award on the date of initial election or appointment, except that the value of the award will be prorated to reflect the number of days that the director will serve based on a period of time commencing on the date of initial election or appointment and ending on the one-year anniversary of the previous annual meeting (the “prorated annual award”). In all other respects, the terms and conditions of the prorated annual award, including the vesting schedule, will be the same as the annual award granted on the previous year annual meeting date.

Non-employee directors also are eligible to receive all types of equity awards (except incentive stock options) under our 2017 Plan, including discretionary awards not covered under the policy.

For further information regarding the equity compensation of our non-employee directors, see the section of this prospectus titled “Executive Compensation—Employee Benefit and Stock Plans—2017 Equity Incentive Plan.”

This section describes the material elements of compensation awarded to, earned by, or paid to our Chief Executive Officer and the two other most highly compensated individuals who served as our executive officers during the year ended December 31, 2016. Throughout this prospectus, these three officers are referred to as our named executive officers:

The following table provides information regarding the compensation of our named executive officers during the year ended December 31, 2016:

Our 2016 Management Bonus Plan provides an opportunity for eligible employees to earn annual bonuses based on the achievement of both pre-established annual company performance objectives and individual performance objectives. For 2016, 70% of the target bonus was based on the following three company performance objectives (with each objective approximately equally weighted): company total bookings, the cost of acquiring new annual recurring revenue as a measure of sales efficiency, and adjusted EBITDA (earnings before interest, taxes, depreciation and amortization, excluding stock based compensation and other non-operating income and/or expense). For 2016, 30% of the target bonus was based on individual performance objectives that were established based on department and individual goals. Bonuses could be increased or decreased from the target bonus amount based on actual achievement of performance objectives. Based on achievement of company and individual

performance objectives for 2016, Messrs. McFarlane, Ingram, and Van Dooren received bonuses in the amounts of $218,592, $120,160, and $90,370, respectively, which amounts were approved by our Compensation and Leadership Development Committee in January 2017.

Pursuant to his employment agreement, Mr. Van Dooren was provided an opportunity to earn a target sales commission based on the achievement of a pre-established total revenue goal measured and paid quarterly. If the revenue target is not met, the quarterly payment is based on the percentage that actual revenues comprise in relation to the target. Based on achievement of the revenue goal, Mr. Van Dooren received a sales commission of $62,315 for 2016.

The following table sets forth information regarding equity awards held by our named executive officers at December 31, 2016, all of which were granted under the 2006 Plan.

We have written employment agreements with each of our named executive officers. Each employment agreement has a four-year term and provides that employment with us is “at will.” Each of our named executive officers also has executed our standard form of proprietary information and inventions agreement. The employment agreements and the employment of the named executive officer terminate automatically upon the death or total disability of the named executive officer.

We do not provide any tax gross-ups to cover personal income taxes that may apply to any severance or change in control benefits. If any payments or benefits payable under the employment agreements will be subject to an excise tax under Code Section 4999, we will pay to the named executive officer either (1) the full amount of such payments or benefits or (2) the full amount, reduced by the minimum amount necessary to prevent any portion from being an excess parachute payment within the meaning of Code Section 280G, whichever results, on an after-tax basis, in the greater amount payable to the named executive officer.

Additional details specific to individual employment agreements with the named executive officers are set forth below.

Scott McFarlane. Under Mr. McFarlane’s employment agreement as Chief Executive Officer and President dated June 19, 2017, his base salary is $410,000, subject to periodic review. Mr. McFarlane is also eligible to receive an annual target performance-based bonus of 100% of his base salary and to participate in our employee benefit programs. Mr. McFarlane is eligible to receive full payment of premiums for coverage under our group health plans for himself and covered family members, coverage under a “key man” life insurance policy under which both we and Mr. McFarlane’s designee are beneficiaries, and reimbursement of travel costs to our corporate headquarters. In the event Mr. McFarlane’s employment is terminated by us without “cause” or by Mr. McFarlane for “good reason,” including a termination without “cause” or for “good reason” within 12 months following a “change in control,” which we refer to as a “change in control termination,” Mr. McFarlane will be eligible to receive the following severance payments and benefits, subject to execution, and non-revocation, of a general release and waiver of claims against us in a form satisfactory to us and his continued compliance with our proprietary information and inventions agreement:

In the event of a “corporate transaction,” all of Mr. McFarlane’s options granted prior to March 27, 2014 will become fully vested under the terms of his stock option agreements for such options.

This employment agreement superseded and replaced the executive employment agreement dated March 27, 2014 between us and Mr. McFarlane, which had substantially the same terms.

William Ingram. Under Mr. Ingram’s employment agreement as Chief Financial Officer dated June 19, 2017, his base salary is $330,000, subject to periodic review. Mr. Ingram is also eligible to receive an annual target performance-based bonus of 60% of his base salary and to participate in our employee benefit programs.

In the event Mr. Ingram’s employment is terminated by us without “cause” or by Mr. Ingram for “good reason,” including pursuant to a change in control termination, Mr. Ingram will be eligible to receive the following severance payments and benefits, subject to execution, and non-revocation, of a

general release and waiver of claims against us in a form satisfactory to us and his continued compliance with our proprietary information and inventions agreement:

This employment agreement superseded and replaced the executive employment agreement dated December 14, 2015 between us and Mr. Ingram, which had substantially the same terms.

Pascal Van Dooren. Under Mr. Van Dooren’s employment agreement as Executive Vice President and Chief Revenue Officer dated June 19, 2017, his base salary is $301,232, subject to periodic review. Mr. Van Dooren is also eligible to receive an annual target performance-based bonus of 60% of his base salary and a commission with a target amount to be determined by the Board of Directors or the Compensation and Leadership Development Committee. He is also eligible to participate in our employee benefit programs.

In the event Mr. Van Dooren’s employment is terminated by us without “cause” or by Mr. Van Dooren for “good reason,” including pursuant to a change in control termination, Mr. Van Dooren will be eligible to receive the same severance payments and benefits set forth above for Mr. Ingram, except that full acceleration in the event of a change in control termination shall apply to equity awards granted on or after September 1, 2014, subject to Mr. Van Dooren’s execution, and non-revocation, of a general release and waiver of claims against us in a form satisfactory to us and his continued compliance with our proprietary information and inventions agreement. In the event of a “corporate transaction” all of Mr. Van Dooren’s options granted prior to September 1, 2014 will become fully vested under the terms of his stock option agreements for such options.

This employment agreement superseded and replaced the executive employment agreement dated September 1, 2014 between us and Mr. Van Dooren, which had substantially the same terms except that his annual target bonus was 75% of base salary and the agreement did not specify eligibility for a commission.

Definitions. For purposes of each of the employment agreements summarized above:

The principal features of our equity incentive plans and our 401(k) plan are summarized below. These summaries are qualified in their entirety by reference to the actual text of the plans, which, other than the 401(k) plan, are filed as exhibits to the registration statement of which this prospectus forms a part. In addition to these plans, we also maintain various employee benefits that are generally available to our employees, such as medical, dental and vision insurance, term life insurance, and short- and long-term disability. We intend to file with the SEC a registration statement on Form S-8 for shares that will be issuable under the equity plans described below.

Our Board of Directors approved our 2017 Equity Incentive Plan, or the 2017 Plan, in June 2017, and our shareholders approved the 2017 Plan in 2017. The 2017 Plan will become effective upon the date of this prospectus. The purpose of the 2017 Plan is to provide eligible persons with the opportunity to acquire a proprietary interest in the Company and to align their interests with the long-term interests of our shareholders.

Authorized Shares. The 2017 Plan will initially authorize the issuance of 8% of the total number of shares of common stock outstanding on the closing of this offering. This share reserve will automatically increase on January 1st of each calendar year following the effective date of the 2017 Plan through 2027, by an amount equal to (1) 5% of the aggregate number of shares of common stock

outstanding on December 31st of the immediately preceding calendar year (excluding for this purpose any shares that are unvested and subject to forfeiture under the 2017 Plan) or (2) such lesser number of shares of common stock as determined by the administrator (as defined below). In addition, any shares of common stock that remain available for issuance under our 2006 Equity Incentive Plan, or the 2006 Plan, that are not issued or subject to awards under that plan on the date of this prospectus and any shares covered by awards under the 2006 Plan on the date of this prospectus that cease to be subject to such awards (other than by reason of exercise or settlement of the awards to the extent they are exercised for or settled in vested or nonforfeitable shares) will become available for issuance under the 2017 Plan, with the maximum number of shares to be added to our 2017 Plan from the 2006 Plan equal to 22,613,987 shares. If any award lapses, expires, terminates, or is canceled prior to the issuance of shares or if shares are issued under the 2017 Plan and thereafter are forfeited to the Company, the shares subject to such awards and the forfeited shares will again be available for issuance under the 2017 Plan. Shares withheld by, or otherwise tendered to, the Company to satisfy the purchase price or a participant’s tax withholding obligations with respect to the grant, vesting, or exercise of an award, or shares subject to an award that is settled in cash or in a manner that that some or all share covered by the award are not issued, will also become available for issuance under the 2017 Plan. No more than 10,000,000 shares of our common stock may be issued pursuant to the exercise of incentive stock options.

Certain Adjustments. If any change in our stock occurs by reason of a stock dividend, stock split, spin-off, recapitalization, merger, consolidation, statutory share exchange, combination or exchange of shares, distribution to shareholders other than a normal cash dividend or other change in our corporate or capital structure, the administrator will make proportional adjustments to the maximum number and kind of securities (a) available for issuance under the 2017 Plan, (b) issuable as incentive stock options, (c) issuable to any individual in any calendar year, and (d) subject to any outstanding award, including the per share price of such securities. The administrator may also make such adjustments in the event of a distribution of assets or cash to shareholders other than a normal cash dividend, with any adjustments to outstanding awards made in a manner that precludes the enlargement of rights and benefits under such awards.

Administration. The 2017 Plan generally will be administered by our Board of Directors or the Compensation and Leadership Development Committee of the Board of Directors (or a subcommittee thereof). Our Board of Directors may delegate concurrent administration of the 2017 Plan to different committees consisting of two or more members of our Board of Directors or, to the extent permitted by applicable state law, to one or more senior executive officers. References to the “administrator” below are, as applicable, to our Board or the Compensation and Leadership Development Committee, or other committee or officers that may be authorized to administer the 2017 Plan. Subject to the provisions of the 2017 Plan, the administrator will determine in its discretion the eligible persons to whom and the times at which awards are granted, the types and sizes of awards granted, and the terms, limitations, restrictions, and conditions of such awards. The administrator will have the authority to construe and interpret the terms of the 2017 Plan and awards granted under it. The 2017 Plan provides, subject to certain limitations, for indemnification by us of the administrator in respect of all activities under the 2017 Plan.

Under the 2017 Plan, the administrator, without shareholder approval, may not (1) reduce the exercise or base price of an option or stock appreciation right, or SAR, after it is granted, (2) cancel an option or SAR at a time when its exercise or base price exceeds the fair market value of the underlying stock, in exchange for cash, another option or SAR, restricted stock, or other equity award, or (3) take any other action that is treated as a repricing under GAAP or under guidance issued by the primary securities market or exchange on which the common stock is listed or admitted for trading.

Eligibility. Awards may be granted under the 2017 Plan to our employees, officers, directors, consultants, agents, advisors and independent contractors of the Company and related companies.

Types of Awards. The 2017 Plan permits the grant of the following types of awards:

Stock Options. The administrator may from time to time grant to eligible participants incentive stock options as that term is defined in Section 422 of the Code or nonstatutory stock options, except that incentive stock options are limited to our employees and any other individuals who are eligible to receive incentive stock options under the provisions of Section 422 of the Code. Stock options must have an exercise price at least equal to the fair market value of our stock on the date of grant, except in the case of options granted in connection with substituting or exchanging options in acquisition transactions.

Stock Appreciation Rights. The administrator may from time to time grant to eligible participants SARs as a right in tandem with the number of shares underlying stock options granted under the 2017 Plan or on a stand-alone basis. Upon exercise, SARs are the right to receive payment per share in stock or cash, or in a combination of stock and cash, equal to the excess of the share’s fair market value on the date of exercise over its fair market value on the date the SAR was granted. Exercise of an SAR issued in tandem with a stock option will reduce the number of shares underlying the related stock option to the extent of the SAR exercised. The term of a stand-alone SAR cannot be more than ten years, and the term of a tandem SAR cannot exceed the term of the related option.

Stock Awards, Restricted Stock and Stock Units. The administrator may from time to time grant awards of shares of common stock or awards designated in units of common stock. These awards may be made subject to restrictions as determined by the administrator. The restrictions may be based on continuous service with the Company or the achievement of specified performance criteria, as determined by the administrator. Stock units may be paid in stock or cash or a combination of stock and cash, as determined by the administrator.

Performance Awards. The administrator may from time to time grant performance awards in the form of performance shares or performance units. Performance shares are units valued by reference to a designated number of shares of common stock. Performance units are units valued by reference to a designated amount of property other than shares of common stock. Performance shares and performance units may be payable upon the attainment of performance criteria and other terms and conditions as established by the administrator. Performance awards may be payable in stock, cash or other property, or a combination thereof.

Other Stock-Based or Cash-Based Awards. The administrator may from time to time grant other incentives denominated in shares of common stock or in cash, which may be payable in shares of common stock or cash, subject to the terms of the 2017 Plan and any other terms and conditions determined by the administrator.

Non-Employee Directors. The 2017 Plan provides that all non-employee directors will be eligible to receive all types of awards (except for incentive stock options) under the 2017 Plan. In order to provide a maximum limit on the awards that can be made to our non-employee directors, the 2017 Plan provides that in any given calendar year, a non-employee director will not be granted equity awards or cash compensation that exceed in the aggregate $1,000,000, with the value for equity awards based on their grant date fair value determined according to applicable financial accounting standards. The maximum limits do not reflect the intended size of any potential grants or a commitment to make grants to our non-employee directors under the 2017 Plan in the future.

Change in Control. In the event of a change in control as described in the 2017 Plan, the acquiring or successor entity or parent thereof may continue or assume awards outstanding under the

2017 Plan or substitute equivalent awards. Unless provided otherwise in the instrument evidencing an award or in a written employment, services or other agreement between a participant and the Company, any awards that are not so continued, assumed, or substituted (or that are not exercised or settled prior to the change in control) will terminate upon the effective time of the change in control. Time-vested awards that will terminate will become fully vested and exercisable or payable immediately before the effective time of the change in control, and the holders of the awards will be permitted, immediately before the change in control, to exercise or convert all portions of such awards. Performance-vested awards will be prorated at target and paid in accordance with the payout schedule for the award. The administrator may in its discretion instead provide that a participant’s outstanding awards will terminate in exchange for a cash payment.

Performance-Based Compensation under Section 162(m). To the extent the Company determines that Section 162(m) of the Code shall apply to a performance award granted under the 2017 Plan, it is the intent of the Company that such performance awards constitute “performance-based compensation” within the meaning of Section 162(m) of the Code and the regulations thereunder. Further, no participant may receive such performance awards in any calendar year with respect to more than 1,500,000 shares of common stock, except that additional one-time grants of such awards may be granted for up to 1,500,000 shares to newly hired or newly promoted individuals. The maximum dollar value payable to any participant with respect to performance units or any other awards payable in cash that are intended to qualify as “performance-based” compensation cannot exceed $3,000,000 in any calendar year.

Performance Criteria. For awards intended to qualify as “performance-based” compensation under Section 162(m) of the Code, the performance goals must be set by the Compensation and Leadership Development Committee at the start of each performance period and must be based on one or a combination of two or more of the following objective “performance criteria” for the Company as a whole or any affiliate or business unit of the Company, as reported or calculated by the Company: cash flows (including, but not limited to, operating cash flow, free cash flow or cash flow return on capital); working capital; earnings per share; book value per share; operating income (including or excluding depreciation, amortization, unusual, infrequently occurring and/or nonrecurring items of gain or loss, restructuring charges, or other expenses); revenues; operating margins; return on assets; return on equity; debt; debt plus equity; market or economic value added; stock price appreciation; total stockholder return; cost control; strategic initiatives; market share; net income; return on invested capital; improvements in capital structure; or customer satisfaction, employee satisfaction, services performance, subscriber, cash management, or asset management metrics. The performance goals may be based on the achievement of specified levels of performance for the Company as a whole (or of any affiliate or business unit) under one or more of the performance criteria described above relative to the performance of other companies. The committee may provide in any such award that any evaluation of performance may include or exclude any of the following events that occur during a performance period: asset write-downs; litigation or claim judgments or settlements; the effect of changes in tax laws, accounting principles, or other laws or provisions affecting reported results; any reorganization and restructuring programs (including related charges); any unusual, infrequently occurring and/or nonrecurring items of gain or loss, that in all of the foregoing the Company identifies in its audited financial statements, including notes to the financial statements, or the Management’s Discussion and Analysis section of our periodic reports; acquisitions or divestitures or discontinued operations; foreign exchange gains and losses; gains and losses on asset sales; and impairments.

Transferability. Except as otherwise permitted by the administrator, awards are not transferable otherwise than by will or the laws of descent and distribution and may only be exercised during the lifetime of the grantee or, if the grantee is under a legal disability, by the grantee’s guardian or legal representative.

Amendment and Termination. Our Board of Directors or Compensation and Leadership Development Committee will be permitted to terminate or amend the 2017 Plan or any portion thereof at any time, but in such event, outstanding awards generally will remain outstanding in accordance with their terms and conditions. Unless the 2017 Plan is sooner terminated by our Board of Directors or Compensation and Leadership Development Committee, no awards may be granted under the 2017 Plan after the day immediately preceding the tenth anniversary of the earlier of the date the 2017 Plan was adopted by our Board of Directors and the date the 2017 Plan was approved by our shareholders.

Our Board of Directors adopted our 2017 Employee Stock Purchase Plan, or the ESPP, in April 2017, and our shareholders approved the ESPP in 2017. The ESPP will become effective on the date of this prospectus. The purposes of the ESPP are to provide our employees with an opportunity to acquire an equity ownership in us and to encourage employees to remain in our employ. The ESPP has two portions, one portion for U.S. employees and another portion for international employees. The portion of the ESPP for U.S. employees is intended to qualify as an “employee stock purchase plan” under Section 423 of the Code, although we make no representation of such status or undertaking to maintain such status.

Authorized Shares. The ESPP will initially authorize the issuance of 1.5% of the total number of shares of common stock outstanding as of the effective date of this offering, up to 3,000,000 shares. This reserve will automatically increase on January 1st of each calendar year beginning in 2018 through 2027, by an amount equal to the least of (1) 2,000,000 shares, (2) 1% of the aggregate number of shares of common stock outstanding on December 31st of the immediately preceding calendar year, or (3) a lesser number of shares of common stock as determined by the administrator.

Certain Adjustments. The number of shares of common stock that may be granted under the ESPP and the number of shares that may be issued with respect to any purchase period, as well as the purchase price per share of common stock and the number of shares of common stock covered by each purchase right, will be proportionately adjusted as a result of any increase or decrease in the number of shares of common stock resulting from a stock split, reverse stock split, stock dividend, or similar capitalization event.

Administration. The ESPP will be administered by our Board of Directors, the Compensation and Leadership Development Committee, or any other committee appointed by our Board of Directors or the Compensation and Leadership Development Committee to administer the ESPP. The administrator will have the authority to delegate duties to our officers, directors, or employees as it deems advisable. References to the “committee” below in this subsection are, as applicable, to our Board of Directors, the Compensation and Leadership Development Committee or other committee or individual authorized to administer the ESPP or take certain actions thereunder, to the extent permitted by the ESPP.

The committee will have the full and exclusive discretionary authority to construe and interpret the ESPP and the rights granted under it, to establish rules for the administration of the ESPP, to designate from time to time which of our subsidiaries will be eligible to participate in the ESPP.

Eligibility. Generally, all of our employees who are employed by us or a participating subsidiary for at least 20 hours per week will be eligible to participate in the ESPP. However, an employee may not participate in the ESPP if, immediately after the grant of a right to purchase shares of our common stock under the ESPP, the employee would own capital stock possessing 5% or more of the total combined voting power or value of all classes of our capital stock.

Purchase of Shares of Common Stock. Eligible employees generally will be able to elect to have a portion of their compensation withheld each pay period to purchase shares of our common stock at the end of pre-established offering periods, each of which is called a purchase date. The first offering period under the ESPP is anticipated to begin on August 1, 2018 and end on January 31, 2019, subject to the closing of this offering. Thereafter six-month offering periods will begin on each February 1st and August 1st, unless the committee determines otherwise for a future offering period. On each purchase date, amounts withheld from an employee’s compensation during the applicable offering period will be used to purchase whole shares of our common stock. Unless the committee establishes higher percentages, the purchase price for a share of common stock will be the lesser of (1) 85% of the fair market value of a share of common stock on the first day of the offering period and (2) 85% of the fair market value of a share of common stock on the purchase date for such offering period. Fair market value generally means the closing price of our common stock on the applicable day. The Code limits the aggregate fair market value of common stock (determined as of the beginning of an offering period) that an employee may purchase under the ESPP during any calendar year to $25,000. In addition, unless the committee establishes otherwise for a purchase period, a participant may purchase a maximum of 5,000 shares of our common stock during a single purchase period.

An employee’s participation in the ESPP will end automatically upon the employee’s termination of employment with us for any reason and all accumulated payroll deductions that have not been used to purchase shares will be returned to the individual. A participant may withdraw from the ESPP during a purchase period and any amounts withheld during the purchase period will be returned to the employee. In such event, the employee will not be eligible to resume withholding of compensation for the purchase of shares of common stock until the following offering period.

Effect of Certain Corporate Events. In the event of certain corporate transactions, such as a dissolution, liquidation, merger, consolidation, sale of all or substantially all our outstanding securities, or sale, lease, or other transfer of all or substantially all our assets, or similar transaction, the committee may make such adjustment as it deems appropriate in the number, class of or price of shares of common stock available for purchase under the ESPP and in the number of shares of common stock that an employee is eligible to purchase and any other adjustments it deems appropriate. In the event of such transaction, the committee may elect to have options under the ESPP assumed or substituted by a successor entity, set an earlier purchase date, terminate all outstanding options either prior to their expiration or upon completion of the then-current purchase period, or take such other action deemed appropriate by the committee.

Amendment and Termination. Our Board of Directors or the Compensation and Leadership Development Committee may amend the ESPP at any time, provided that such amendment does not cause rights issued under the ESPP to fail to meet the requirements of Section 423 of the Code. Moreover, any amendment for which shareholder approval is required under Section 423 of the Code or by any securities exchange on which the shares are traded must be submitted to shareholders for approval. Our Board of Directors or the Compensation and Leadership Development Committee may suspend or terminate the ESPP at any time. Unless sooner terminated by our Board of Directors or the Compensation and Leadership Development Committee, the ESPP will terminate on the tenth anniversary of the date our Board of Directors adopted the ESPP.

Our Board of Directors adopted our 2006 Equity Incentive Plan, or the 2006 Plan, in March 2006 and our shareholders approved the 2006 Plan in June 2006. The 2006 Plan permits the grant of awards to our employees, directors, and other individuals providing bona fide services to us and our affiliates. The 2006 Plan will be terminated in connection with this offering and, accordingly, no shares of our common stock will be available for issuance under the 2006 Plan following the closing of this

offering. The 2006 Plan will continue to govern outstanding awards granted thereunder. As of March 31, 2017, 22,804,115 shares of common stock were reserved for issuance under the 2006 Plan, of which 20,651,688 shares of common stock are covered by options outstanding under the 2006 Plan and 2,152,427 shares of common stock remained available for future issuance.

Certain Adjustments. In the event of certain changes in our capitalization, the exercise prices of options and the number of shares subject to awards will be appropriately adjusted.

Administration. Our Board of Directors currently administers the 2006 Plan. Subject to the provisions of the 2006 Plan, the administrator has the power to determine the eligible persons to whom and the times at which awards are granted, the types and sizes of awards granted, and the provisions of each award granted. The administrator has the power to construe and interpret the 2006 Plan and awards granted under it and, subject to the terms of the 2006 Plan, to generally exercise such powers and perform such acts as the administrator deems necessary or expedient to promote our best interests.

Types of Awards. The 2006 Plan permits the grant of ISOs, NSOs, stock bonuses, and rights to acquire restricted stock. Stock options granted under the 2006 Plan generally vest over four years, with 25% vesting after one year and the remainder vesting in equal monthly installments thereafter, subject to a holder’s continuous service with us through each vesting date. The exercise price per share of options granted under the 2006 Plan must not be less than 100% of the fair market value per share of our common stock on the date of grant. Permitted methods of payment of the exercise price of an option include cash, a broker-assisted cashless exercise, or exchange of shares, subject to the terms of the stock option grant notice evidencing an option. After a holder’s termination of service, the holder generally may exercise his or her options, to the extent vested as of such date of termination, for three months after termination. If termination is due to death, the vested portion of the option generally will remain exercisable until 18 months following the date of such termination, and in the event of termination by disability, until the one-year anniversary of such termination. However, in no event may an option be exercised after the expiration of its term.

Asset Sale, Merger, Consolidation, or Reverse Merger. In the event of (1) a sale, lease, or other disposition of all or substantially all our assets, (2) a merger or consolidation in which we are not the surviving corporation, or (3) a reverse merger in which we are the surviving corporation but shares of our common stock outstanding immediately prior to such merger are converted into other property, vesting of outstanding awards will be accelerated by an amount of time equal to the vesting period that has elapsed prior to such transaction, whether or not such options are assumed or substituted in the transaction. If the surviving or acquiring corporation does not assume such awards, they will terminate at or prior to the transaction.

Transferability. Except as otherwise permitted by the administrator or in the applicable award agreement, awards are not transferable otherwise than by will or the laws of descent and distribution and options may be exercised only by the grantee during the lifetime of the grantee.

Amendment or Termination. Our Board of Directors may amend the 2006 Plan at any time, provided that shareholder approval must be obtained of such amendment to the extent required under the 2006 Plan and provided further that any such action may not, without the written consent of a participant, impair any of the participant’s rights under any award previously granted.

In connection with our acquisition of Taxcient in January 2010, we assumed all outstanding options granted under the Taxcient (f/k/a vAudit Group, Inc.) 2005 Stock Option Plan, or the Taxcient

Plan, and converted them into options to purchase shares of our common stock. The Taxcient Plan was terminated in 2010 with respect to the granting of new awards but continues to govern the terms of options we assumed in the acquisition.

Our Board of Directors currently administers the Taxcient Plan. In the event of certain changes in our capitalization, the exercise prices of and the number of shares subject to options will be proportionately adjusted, subject to any required shareholder action. In the event of (1) a sale or exchange of all or substantially all of our assets, (2) a merger or consolidation in which we are not the surviving corporation, (3) a merger, reorganization, or consolidation in which we are the surviving corporation and our shareholders exchange their stock for securities or property, or (4) our liquidation or completion of a similar transaction, as determined by our Board of Directors, options granted under the Taxcient Plan may be exercised during the 30-day period prior to such transaction and will terminate to the extent not exercised immediately prior to the transaction, unless the options are assumed by the successor corporation. A participant may not transfer options outstanding under the Taxcient Plan other than by will or the laws of intestate succession.

We maintain a tax-qualified retirement plan that provides eligible U.S. employees with an opportunity to save for retirement on a tax advantaged basis. Eligible employees are able to defer eligible compensation subject to applicable annual Code limits. We have the ability to make discretionary contributions to the 401(k) plan, and for 2016 made a discretionary matching contribution to each eligible employee’s 401(k) plan account of an amount equal to 50% of the first 2% of eligible compensation deferred by the employee in 2016. This contribution was determined and paid in 2017. Employees’ pre-tax contributions are allocated to each participant’s individual account and are then invested in selected investment alternatives according to the participants’ directions. Employees are immediately and fully vested in their contributions. The 401(k) plan is intended to be qualified under Section 401(a) of the Code with the 401(k) plan’s related trust intended to be tax exempt under Section 501(a) of the Code. As a tax-qualified retirement plan, contributions to the 401(k) plan and earnings on those contributions are not taxable to the employees until distributed from the 401(k) plan.

Upon the closing of this offering, our Articles and our Bylaws will provide that we will indemnify our directors and officers to the fullest extent permitted by the Washington Business Corporation Act, including instances in which indemnification is otherwise discretionary under the law. Our Bylaws will provide that we will indemnify our directors and officers against liability incurred as a result of their performance of services requested by us, and will advance to them reasonable expenses toward the defense of any such proceeding brought against them, except in any case in which liability results from:

Our Articles will limit our directors’ liability to us and our shareholders for monetary damages incurred in their capacity as a director to liability resulting from the same acts or omissions or transactions described above.

Our Bylaws will provide that we may purchase and maintain liability insurance on behalf of our directors, officers, employees, and agents. We currently maintain a liability insurance policy pursuant to

which our directors and officers may be indemnified against liability incurred as a result of serving in their capacities as directors and officers, subject to certain exclusions.

In addition to the indemnification required by our Articles and our Bylaws, we have entered into indemnification agreements with each of our current directors and officers, and certain of our employees. These agreements provide for the indemnification of such persons for all reasonable expenses and liabilities incurred in connection with any action or proceeding brought against them by reason of the fact that they are or were serving in such capacity. We believe that these provisions of our Articles and Bylaws and these indemnification agreements are necessary to attract and retain qualified persons as directors, officers, and employees.

The limitation of liability and indemnification provisions in our Articles and Bylaws may discourage shareholders from bringing a lawsuit against directors for breach of their fiduciary duties. These provisions may also reduce the likelihood of derivative litigation against directors and officers, even though an action, if successful, might benefit us and our shareholders. A shareholder’s investment may be harmed to the extent we pay the costs of settlement and damage awards against directors and officers pursuant to these indemnification provisions. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers, and controlling persons pursuant to the foregoing provisions, or otherwise, we have been advised that, in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act, and is, therefore, unenforceable. There is no pending litigation or proceeding naming any of our directors or officers as to which indemnification is being sought, nor are we aware of any pending or threatened litigation that may result in claims for indemnification by any director or officer.

Other than compensation arrangements for our directors and named executive officers, which are described in the sections of this prospectus titled “Management” and “Executive Compensation,” below we describe transactions since January 1, 2014 to which we were a participant or will be a participant, in which:

In February 2014, we sold an aggregate of 5,714,280 shares of Series D preferred stock to accredited investors at a purchase price of $5.25 per share pursuant to a stock purchase agreement, for an aggregate purchase price of $30.0 million. The following table summarizes purchases of shares of Series D preferred stock by our directors, executive officers, and holders of more than 5% of our capital stock:

In November 2014, we sold an aggregate of 15,822,784 shares of Series D-1 preferred stock to accredited investors at a purchase price of $6.32 per share pursuant to a stock purchase agreement, for an aggregate purchase price of $100.0 million. The following table summarizes purchases of shares of Series D-1 preferred stock by our directors, executive officers, and holders of more than 5% of our capital stock:

In January 2015, we sold an aggregate of 6,698,370 shares of Series D-1 preferred stock to accredited investors at a purchase price of $6.32 per share pursuant to a stock purchase agreement,

for an aggregate purchase price of $42.3 million. The following table summarizes purchases of shares of Series D-1 preferred stock by our directors, executive officers, and holders of more than 5% of our capital stock:

In September 2016, we sold an aggregate of 14,244,640 shares of Series D-2 preferred stock to accredited investors at a purchase price of $6.75 per share pursuant to a stock purchase agreement, for an aggregate purchase price of $96.2 million. The following table summarizes purchases of shares of Series D-2 preferred stock by our directors, executive officers, and holders of more than 5% of our capital stock:

In November 2015, and January and April 2016, entities affiliated with Warburg Pincus, which beneficially owns more than 5% of our capital stock, purchased an aggregate of 2,303,807 shares of our common stock from certain existing shareholders at purchase prices ranging from $5.60 to $6.67 per share for an aggregate purchase price of $14.4 million. The selling shareholders included Scott McFarlane, our President and Chief Executive Officer and Chairman of our Board; Benjamin Goux, one of our directors, and David E. Rostov, our former Chief Financial Officer, who sold 217,872, 20,000, and 535,416 shares of common stock, respectively, for aggregate purchase prices of $1.5 million, $0.1 million, and $3.4 million, respectively. We were party to the stock purchase agreements solely for the purpose of waiving our rights of first refusal and other applicable restrictions with respect to the transfer of the shares, and we agreed to indemnify Warburg Pincus with respect to certain matters.

In connection with the sale of Series D-1 preferred stock, in January 2015, we repurchased an aggregate of 5,872,067 shares of capital stock from certain of our shareholders at a purchase price of

$5.86 per share of common stock and a purchase price of $6.15 per share of preferred stock for an aggregate purchase price of $35.6 million. The following table summarizes the January 2015 repurchases of shares of common stock held by our directors, executive officers, and holders of more than 5% of our capital stock:

In February 2015, we repurchased an aggregate of 80,000 shares of common stock from Mr. Van Dooren, at a purchase price of $5.86 per share for an aggregate purchase price of $468,800.

In connection with the sale of Series D-2 preferred stock, in September 2016, we repurchased an aggregate of 7,026,823 shares of capital stock from certain of our shareholders at a purchase price of $6.46 per share of common stock and a purchase price of $6.655 per share of preferred stock for an aggregate purchase price of $46.2 million. The following table summarizes the September 2016 repurchases of shares of common stock held by our directors, executive officers, and holders of more than 5% of our capital stock:

In September 2016, we entered into an Amended and Restated Investors’ Rights Agreement, or the Rights Agreement, with the holders of our outstanding preferred stock and certain holders of our outstanding common stock, including certain of our directors, executive officers, and persons then holding at least five percent of our capital stock, as follows: Scott McFarlane, Marion Foote, Jared Vogt, Gary Waterman, entities affiliated with Battery Ventures IX, L.P. (with which Chelsea Stoner is associated), Sageview Capital Master, L.P (with which Edward Gilhuly is associated), Pioneer Venture Partners LLC (with which Benjamin Goux is associated), and entities affiliated with Warburg Pincus Private Equity XI, L.P. (with which Justin Sadrian is associated). As of March 31, 2017, the holders of shares of the common stock, including shares of common stock issuable upon the conversion of our preferred stock and shares of common stock issuable upon the net exercise of warrants that will terminate if not exercised in connection with this offering, were entitled to rights with respect to the registration of their shares following the closing of this offering. For a more detailed description of these registration rights, see the section of this prospectus titled “Description of Capital

Stock—Registration Rights.” In addition, the Rights Agreement gives certain shareholders that are parties thereto the right to participate in new issuances of equity securities by us, subject to certain exceptions, which rights will terminate immediately before the closing of this offering.

In September 2016, we entered into the Voting Agreement with the holders of our outstanding preferred stock and certain holders of our outstanding common stock, including certain of our directors, executive officers, and persons then holding at least five percent of our capital stock, as follows: Scott McFarlane, Marion Foote, Jared Vogt, Gary Waterman, entities affiliated with Battery Ventures IX, L.P. (with which Chelsea Stoner is associated), Sageview Capital Master, L.P (with which Edward Gilhuly is associated), Pioneer Venture Partners LLC (with which Benjamin Goux is associated), and entities affiliated with Warburg Pincus Private Equity XI, L.P. (with which Justin Sadrian is associated). Under the Voting Agreement, our shareholders that are party to the Voting Agreement agreed to vote their shares to elect to our Board of Directors: (1) one director designated by The Benaroya Company, L.L.C. (Rajeev Singh); (2) one director designated by Pioneer Venture Partners LLC (currently Benjamin Goux); (3) one director designated by Sageview Capital Master, L.P. (currently Edward Gilhuly); (4) one director designated by Battery Ventures IX, L.P. (currently Chelsea Stoner); (5) one director designated by Warburg Pincus Private Equity XI, L.P. (currently Justin Sadrian); (6) one director designated by the holders of a majority in interest of the shares of our common stock held by certain of our key shareholders (currently Jared Vogt); (7) the person serving as our Chief Executive Officer (currently Scott McFarlane); and (8) three directors mutually acceptable to (a) the holders of a majority in interest of the shares of our common stock held by certain of our key shareholders that are currently providing services to us as officers, employees, or consultants and (b) the holders of a majority in interest of the shares of our capital stock held by our investors that are party to the Voting Agreement (currently Gary Waterman, Marion Foote, and Tami Reller).

The director designated by Sageview Capital Master, L.P. and the director designated by Warburg Pincus Private Equity XI, L.P. shall have the right, but not the obligation, to be appointed to each and every currently existing committee of our Board of Directors, as well as any committees our Board of Directors may create in the future, subject to applicable law and the requirements of any national securities exchange in which our capital stock is listed. The Voting Agreement will terminate upon the closing of this offering, and none of our shareholders will have any special rights regarding the election or designation of members of our Board of Directors, except for the committee appointment rights described in the prior sentence and as provided in the following two sentences. From the date we close this offering, and for as long as Warburg Pincus and its affiliates continue to own beneficially at least 1,500,000 voting securities, we have agreed to nominate and use all reasonable efforts to have one individual designated by Warburg Pincus elected to our Board of Directors. Following this offering, for as long as Warburg Pincus is entitled to appoint a person to our Board of Directors, our Board of Directors (or a committee thereof consisting of non-employee directors) shall, if requested by Warburg Pincus, and to the extent then permitted under applicable law, use reasonable efforts to cause any acquisition from us of securities or disposition of securities to us to be exempt under Rule 16b-3 under the Exchange Act.

Our Articles and Bylaws will provide that we will indemnify each of our directors and officers to the fullest extent permitted by the Washington Business Corporation Act, including instances in which indemnification is otherwise discretionary under the law. We have entered into indemnification agreements with each of our directors and executive officers. We also maintain directors’ and officers’ liability insurance. For further information, see the section of this prospectus titled “Executive Compensation—Limitation on Liability; Indemnification of Directors and Officers.”

Our Audit Committee must review and approve any related person transactions. Pursuant to our written related person transactions policy to be effective upon the closing of this offering, all related persons are required to report to our Audit Committee any related person transaction prior to its completion. For purposes of this policy, a related person transaction means any transaction between us and a related person in which the aggregate amount involved exceeds $120,000 and in which a related person had, has, or will have a direct or indirect material interest. For purposes of this policy, a related person is a director, executive officer, nominee for director, or greater than 5% beneficial owner of our common stock, in each case since the beginning of the most recently completed fiscal year, and his or her immediate family members.

The following table sets forth information known to us regarding the beneficial ownership of our common stock as of April 30, 2017, as adjusted to reflect the shares of common stock to be issued and sold by us in this offering, for:

We have determined beneficial ownership in accordance with the rules of the SEC. Unless otherwise indicated below, to our knowledge, the persons and entities named in the table have sole voting and sole investment power with respect to all shares that they beneficially own, subject to community property laws where applicable. In computing the number of shares of our common stock beneficially owned by a person and the percentage ownership of that person, we deemed outstanding shares of our common stock subject to options held by that person that are currently exercisable or exercisable within 60 days of April 30, 2017, or the measurement date. We did not deem these shares outstanding, however, for the purpose of computing the percentage ownership of any other person.

We have based percentage ownership of our common stock prior to this offering on 112,685,160 shares of our common stock outstanding as of the measurement date, which includes 101,786,205 shares of common stock resulting from the conversion of all outstanding shares of our preferred stock upon the effectiveness of the registration statement of which this prospectus forms a part. Percentage ownership of our common stock after this offering assumes our sale of shares of common stock in this offering and the issuance of shares of common stock upon the net exercise of warrants outstanding as of March 31, 2017, but no other transactions in our securities after the measurement date.

Unless otherwise indicated below, the address of each beneficial owner listed in the table below is c/o Avalara, Inc., 1100 2nd Avenue, Suite 300, Seattle, Washington 98101.

The following description summarizes certain terms of our capital stock, as they are expected to be in effect upon the closing of this offering. This summary does not purport to be complete and is qualified by reference to the provisions of our Articles, Bylaws, and Rights Agreement, which are filed as exhibits to the registration statement of which this prospectus forms a part, and to the applicable provisions of Washington law.

Immediately following the closing of this offering, our authorized capital stock will consist of shares of common stock, $0.0001 par value per share, and shares of undesignated preferred stock, $0.0001 par value per share.

Assuming (1) the conversion of all outstanding shares of our preferred stock on a one-to-one basis into 101,786,205 shares of our common stock upon the effectiveness of the registration statement of which this prospectus forms a part, as of March 31, 2017, and (2) the issuance of shares of our common stock upon the net exercise of warrants that will terminate if not exercised in connection with this offering, there were 112,648,738 shares of our common stock outstanding, held by 345 shareholders of record, and no shares of our preferred stock outstanding as of March 31, 2017. Our Board of Directors is authorized to issue additional shares of our capital stock without shareholder approval. As of March 31, 2017, we also had outstanding options to acquire 20,702,517 shares of our common stock held by employees, directors, and consultants, with a weighted average exercise price of $4.55 per share.

Subject to the prior or preferential rights of holders of our preferred stock outstanding at the time, holders of our common stock are entitled to receive dividends, if any, as may be declared from time to time by our Board of Directors out of legally available funds. We have never declared or paid cash dividends on any of our capital stock and currently do not anticipate paying any cash dividends in the foreseeable future. See the section of this prospectus titled “Dividend Policy” for additional information.

Each share of our common stock entitles its holder to one vote on all matters voted on by the shareholders, including the election of directors. We have not provided for cumulative voting for the election of directors in our Articles. Our Articles establish a classified Board of Directors that is divided into three classes with staggered three-year terms. Only the directors in one class will be subject to election at each annual meeting of shareholders, with the directors in other classes continuing for the remainder of their three-year terms.

Subject to the prior or preferential rights of holders of our preferred stock outstanding at the time, in the event of our liquidation, dissolution, or winding up, holders of our common stock will be entitled to share ratably in the net assets legally available for distribution to shareholders.

Holders of our common stock have no preemptive or conversion rights, and there are no redemption or sinking fund provisions applicable to our common stock.

As of March 31, 2017, there were 101,786,205 shares of our preferred stock outstanding held by 123 shareholders of record. Subject to compliance with our Restated Fifteenth Amended and Restated Articles of Incorporation filed May 10, 2017, all outstanding shares of our preferred stock will convert on a one-to-one basis into shares of our common stock upon the effectiveness of the registration statement of which this prospectus forms a part, pursuant to either (A) the conversion of such shares based on the size of this offering or (B) the written consent by the holders of a majority of the then-outstanding shares of our preferred stock, voting together as a single class, provided, that (1) the conversion of the Series B and Series B-1 preferred stock shall require the written consent or agreement of the holders of a majority of the then-outstanding shares of Series B and Series B-1 preferred stock, voting together as a single class, which majority shall include the approval of Sageview Capital Master, L.P. if Sageview holds at least 9,090,909 shares of Series B-1 Preferred Stock; (2) the conversion of the Series C and Series C-1 preferred stock shall require the written consent or agreement of the holders of a majority of the then-outstanding shares of Series C and Series C-1 preferred stock, voting together as a single class; (3) the conversion of the Series D-1 preferred stock shall require the written consent or agreement of the holders of a majority of the then-outstanding shares of Series D-1 preferred stock, voting together as a separate class; and (4) the conversion of the Series D-2 preferred stock shall require the written consent or agreement of the holders of a majority of the then-outstanding shares of Series D-2 preferred stock, voting together as a separate class.

Upon the closing of this offering, our Board of Directors will have the authority, without further action by our shareholders, to issue up to shares of preferred stock in one or more series and to fix the rights, preferences, privileges, and restrictions thereof. These rights, preferences, and privileges could include dividend rights, conversion rights, voting rights, terms of redemption, liquidation preferences, sinking fund terms, and the number of shares constituting any series or the designation of such series, any or all of which may be greater than the rights of common stock. The issuance of preferred stock by us could adversely affect the voting power of holders of common stock and the likelihood that such holders will receive dividend payments and payments upon liquidation. In addition, the issuance of preferred stock by us could have the effect of delaying, deferring, or preventing a change in control of our company or other corporate action. Upon the closing of this offering, no shares of preferred stock will be outstanding, and we have no present plan to issue any shares of preferred stock.

As of March 31, 2017, there were 20,702,517 shares of our common stock issuable upon exercise of outstanding stock options pursuant to the 2006 Plan, and the Taxcient Plan with a weighted average exercise price of $4.55 per share.

As of March 31, 2017, there were 980,000 shares of our common stock issuable upon the exercise of warrants with a weighted average exercise price of $4.55 per share. These warrants will be automatically net exercised in connection with this offering if not previously exercised. In addition, as of March 31, 2017, there were 408,525 shares of our common stock issuable upon the exercise of a warrant, with an exercise price of $0.48 per share.

Immediately upon the closing of this offering, the holders of an aggregate of shares of our common stock, including shares of common stock issuable upon the conversion of our preferred stock and shares of common stock issuable upon the net exercise of warrants that will terminate if not exercised in connection with this offering, or their permitted transferees, will be entitled to rights, subject to some conditions, to require us to file registration statements covering their shares or to include their shares in registration statements that we may file for ourselves or our shareholders. We refer to these shares as “registrable securities.” These rights are provided under the terms of the Rights Agreement and include demand registration rights, short form registration rights and piggyback registration rights.

We will pay the registration expenses (other than underwriting discounts, selling commissions, and stock transfer taxes) in connection with the registrations described below, including the reasonable fees and disbursements of one counsel for participating holders of registrable securities. In an underwritten offering, the underwriters have the right to limit the number of shares registered by these holders for marketing reasons, subject to certain limitations. In connection with the closing of this offering, substantially all holders of registrable securities have agreed or will agree not to sell or otherwise dispose (or are otherwise subject to contractual limitations that they will not sell or otherwise dispose) of any securities without the prior written consent of the underwriters for a period of 180 days after the date of this prospectus, subject to certain terms and conditions. For additional information, see the section of this prospectus titled “Shares Eligible for Future Sale—Lock-Up Agreements.”

On the earlier of January 1, 2018 and the date that is 180 days after the effective date of the registration statement of which this prospectus forms a part, either the holders of at least 25% of the

then outstanding registrable securities or Warburg Pincus Private Equity XI, L.P. can request that we register the offer and sale of at least 25% of the then outstanding registrable securities (or a lesser percentage if the anticipated aggregate offering price of such shares, net of any underwriters’ discounts, selling commissions, stock transfer taxes, and certain selling holder legal fees, is greater than $15 million). We are not required to effect more than four demand registrations. If we determine that it would be materially detrimental to us and our shareholders to effect a demand registration, we have the right to defer such registration, not more than once in any 12-month period, for a period of up to 90 days, provided that we do not register any of our securities or those of any other shareholder during such 90-day period, other than with respect to a registration related to a company stock plan, a registration related to a corporate reorganization or transaction under Rule 145 of the Securities Act, a registration on any form that does not include substantially the same information as would be required to be included in a registration statement covering the sale of registrable securities or a registration in which the only common stock being registered is common stock issuable upon conversion of debt securities that are also being registered. Additionally, we are not required to effect a demand registration during the period beginning with the date 60 days prior to our good faith estimate of the date of filing, and ending 180 days following the effectiveness of a registration statement relating to the initial public offering of our securities, provided that we are actively employing in good faith commercially reasonable efforts to cause such registration statement to become effective.

After the closing of this offering, if we propose to register the offer and sale of any of our securities under the Securities Act in connection with the public offering of such securities, the holders of registrable securities will be entitled to certain “piggyback” registration rights allowing such holders to include their shares in such registration, subject to certain limitations. As a result, whenever we propose to file a registration statement under the Securities Act, other than with respect to a registration related to a company stock plan, a registration related to a corporate reorganization or transaction under Rule 145 of the Securities Act, a registration on any form that does not include substantially the same information as would be required to be included in a registration statement covering the sale of registrable securities or a registration in which the only common stock being registered is common stock issuable upon conversion of debt securities that are also being registered, the holders of these shares are entitled to notice of the registration and have the right to include their shares in the registration.

The holders of our registrable securities may make a written request that we register the offer and sale of their shares on Form S-3 if we are eligible to file a registration statement on Form S-3, so long as the sale of securities registered pursuant to such request would result in an aggregate price to the public (net of any underwriters’ discounts, selling commissions, stock transfer taxes, and certain selling holder legal fees) of at least $1.0 million. If we determine that it would be materially detrimental to us and our shareholders to effect a demand registration, we have the right to defer such registration, not more than once in any 12-month period, for a period of up to 90 days, provided that we do not register any of our securities or those of any other shareholder during such 90-day period, other than with respect to a registration related to a company stock plan, a registration related to a corporate reorganization, or transaction under Rule 145 of the Securities Act, a registration on any form that does not include substantially the same information as would be required to be included in a registration statement covering the sale of registrable securities or a registration in which the only common stock being registered is common stock issuable upon conversion of debt securities that are also being registered.

Washington law imposes restrictions on some transactions between a corporation and significant shareholders. Chapter 23B.19 of the Washington Business Corporation Act generally prohibits a target corporation from engaging in specified “significant business transactions” with an “acquiring person.” This statute could prohibit or delay the accomplishment of mergers or other takeover or change in control attempts with respect to us and, accordingly, may discourage unsolicited attempts to acquire us. An “acquiring person” is generally defined as a person or group of persons that beneficially owns the voting shares entitled to cast votes comprising 10% or more of the voting power of the target corporation. The target corporation may not engage in “significant business transactions,” as defined in Chapter 23B.19, for a period of five years after the date of the transaction in which the person became an acquiring person, unless (1) the significant business transaction or the acquiring person’s purchase of shares was approved by a majority of the members of the target corporation’s board of directors prior to the share acquisition causing the person to become an “acquiring person,” or (2) the significant business transaction was both approved by the majority of the members of the target corporation’s board and authorized at a shareholder meeting by at least two-thirds of the votes entitled to be cast by the outstanding voting shares (excluding the acquiring person’s shares or shares over which the acquiring person has voting control) at or subsequent to the acquiring person’s share acquisition. “Significant business transactions” include, among other things:

After the five-year period, a “significant business transaction” may occur, as long as it complies with “fair price” provisions specified in the statute or is approved at a meeting of shareholders by a majority of the votes entitled to be counted within each voting group entitled to vote separately on the transaction, not counting the votes of shares as to which the acquiring person has beneficial ownership or voting control. A corporation may not “opt out” of this statute.

Amended and Restated Articles of Incorporation and Amended and Restated Bylaws

Upon the closing of this offering, our Articles and Bylaws will include a number of provisions that may have the effect of deterring takeovers or delaying or preventing changes in control or changes in our management that a shareholder might deem to be in the shareholder’s best interest. These provisions include the following:

The transfer agent and registrar for our common stock is . The transfer agent and registrar’s address is and its telephone number is . Our shares of common stock will be issued in uncertificated form only, subject to limited exceptions.

Prior to this offering, there has not been a public market for shares of our common stock. Future sales of substantial amounts of shares of our common stock, including shares issued upon the exercise or settlement of options and warrants or the vesting of restricted stock units, in the public market after this offering, or the possibility of these sales occurring, could cause the prevailing market price for our common stock to fall or impair our ability to raise equity capital in the future. As described below, only a limited number of shares of our common stock will be available for sale shortly after this offering due to contractual and legal restrictions on resale. Nevertheless, sales of our common stock in the public market after such restrictions lapse, or the perception that those sales may occur, could adversely affect the prevailing market price at such time and our ability to raise equity capital in the future.

Following the closing of this offering, based on the number of shares of our capital stock outstanding as of March 31, 2017, and assuming the issuance of shares of common stock upon the net exercise of warrants that will terminate if not exercised in connection with this offering, but assuming no other exercise or settlement of outstanding options or warrants, we will have an aggregate of shares of common stock outstanding. Of these outstanding shares, all shares of common stock to be sold in this offering, plus up to an additional shares if the underwriters exercise their option to purchase additional shares in full, will be freely tradable in the public market without restriction or further registration under the Securities Act, unless the shares are held by any of our “affiliates,” as that term is defined in Rule 144 of the Securities Act.

The remaining shares of our common stock outstanding after this offering are “restricted securities,” as such term is defined in Rule 144 under the Securities Act. These shares were issued and sold by us in private transactions and are eligible for public sale only if registered under the Securities Act or sold in accordance with an exemption from registration, such as Rule 144 or Rule 701 under the Securities Act, each of which is discussed below. Holders of substantially all of our equity securities have entered into lock-up agreements or other contractual limitations with the underwriters or with us under which they have agreed, subject to specific exceptions, not to sell any of our stock for a period of time following the date of this prospectus, as described below. Subject to these agreements, the provisions of our Rights Agreement described under section of this prospectus titled “Description of Capital Stock—Registration Rights,” the applicable conditions of Rule 144 or Rule 701, and our insider trading policy, these restricted securities will be eligible for sale in the public market from time to time beginning 181 days after the date of this prospectus.

We and all of our directors, executive officers, and the holders of substantially all shares of our common stock have agreed that, without the prior written consent of the representatives of the underwriters, we and they will not sell or otherwise transfer shares of our common stock for a period of 180 days after the date of this prospectus, subject to certain exceptions. As a result of these contractual restrictions, shares of our common stock subject to lock-up agreements will not be eligible for future sale until these agreements expire or the underwriters waive or release the shares of our common stock from these restrictions.

In addition, we have entered into agreements with substantially all of our security holders that contain market stand-off provisions imposing restrictions on the ability of such security holders to offer, sell, or transfer our equity securities for a period of 180 days following the date of this prospectus.

Following the lock-up period, all of the shares of our common stock that are restricted securities or are held by our affiliates as of the date of this prospectus will be eligible for resale in the United States only if they are registered for resale under the Securities Act or an exemption from registration, such as Rule 144, is available.

In general, under Rule 144 as currently in effect, once we have been subject to the public company reporting requirements of Section 13 or Section 15(d) of the Exchange Act for at least 90 days, a person who is not deemed to have been one of our affiliates for purposes of the Securities Act at any time during the three months preceding a sale and who has beneficially owned the shares proposed to be sold for at least six months, including the holding period of any prior owner other than our affiliates, is entitled to sell those shares without complying with the manner of sale, volume limitation, or notice provisions of Rule 144, subject to compliance with the public information requirements of Rule 144. If such a person has beneficially owned the shares proposed to be sold for at least one year, including the holding period of any prior owner other than our affiliates, then that person would be entitled to sell those shares without complying with any of the requirements of Rule 144.

In general, under Rule 144, as currently in effect, and upon expiration of the lock-up agreements described above, our affiliates or persons selling shares on behalf of our affiliates are entitled to sell within any three-month period, a number of shares that does not exceed the greater of:

provided, in each case, that we have been subject to the Exchange Act periodic reporting requirements for at least 90 days before the sale. Sales under Rule 144 by our affiliates or persons selling shares on behalf of our affiliates are also subject to certain manner of sale provisions and notice requirements and to the availability of current public information about us.

Rule 701 generally allows a shareholder who purchased shares of our common stock pursuant to a written compensatory plan or contract and who is not deemed to have been an affiliate of our company during the immediately preceding 90 days to sell these shares in reliance upon Rule 144, but without being required to comply with the public information, holding period, volume limitation, or notice provisions of Rule 144. Rule 701 also permits our affiliates to sell shares of our common stock under Rule 144 without complying with the holding period requirements of Rule 144. Most of our employees, executive officers, directors, or consultants who purchased shares under a written compensatory plan or contract may be entitled to rely on the resale provisions of Rule 701, but all holders of shares of our common stock are required to wait until 90 days after the date of this prospectus before selling their shares pursuant to Rule 701. However, substantially all of our shares of our common stock that may be resold under Rule 701 are subject to lock-up agreements as described in the section of this prospectus titled “Underwriting” and will not become eligible for sale until the expiration of those agreements.

On the date beginning 180 days after the date of this prospectus, the holders of approximately shares of our common stock (which includes shares of common stock issuable upon the conversion of our preferred stock and shares of common stock issuable upon the net exercise of warrants that will terminate if not exercised in connection with this offering), or their transferees, will be

entitled to certain rights with respect to the registration of those shares under the Securities Act. Registration of these shares under the Securities Act would result in these shares becoming fully tradable without restriction under the Securities Act immediately upon the effectiveness of the registration, except for shares purchased by affiliates. For additional information, see the section of this prospectus titled “Description of Capital Stock—Registration Rights.”

Following the closing of this offering, we intend to file a registration statement on Form S-8 under the Securities Act to register shares of our common stock issued or reserved for issuance under our under our equity compensation plans and agreements. The registration statement on Form S-8 will become effective immediately upon filing, and shares covered by such registration statement will thereupon be eligible for sale in the public markets, subject to vesting restrictions, the lock-up agreements described above and Rule 144 limitations applicable to affiliates. For additional information, see the section of this prospectus titled “Executive Compensation—Employee Benefit and Stock Plans.”

The following summary describes the material U.S. federal income and estate tax consequences of the acquisition, ownership, and disposition of our common stock acquired in this offering by Non-U.S. Holders (as defined below). This discussion does not address all aspects of U.S. federal income and estate taxes and does not deal with state, local, or non-U.S. tax consequences that may be relevant to Non-U.S. Holders in light of their particular circumstances, nor does it address U.S. federal tax consequences other than income and estate taxes. Special rules different from those described below may apply to certain Non-U.S. Holders that are subject to special treatment under the Code such as financial institutions, insurance companies, tax-exempt organizations, broker-dealers and traders in securities, U.S. expatriates, “controlled foreign corporations,” “passive foreign investment companies,” corporations that accumulate earnings to avoid U.S. federal income tax, persons that hold our common stock as part of a “straddle,” “hedge,” “conversion transaction,” “synthetic security,” or integrated investment or other risk reduction strategy, partnerships and other pass-through entities and investors in such pass-through entities, or entities that are treated as disregarded entities for U.S. federal income tax purposes (regardless of their places of organization or formation). Such Non-U.S. Holders are urged to consult their own tax advisors to determine the U.S. federal, state, local, and other tax consequences that may be relevant to them. Furthermore, the discussion below is based upon the provisions of the Code, and U.S. Treasury regulations, rulings, and judicial decisions thereunder as of the date hereof, and such authorities may be repealed, revoked, or modified, perhaps retroactively, so as to result in U.S. federal income and estate tax consequences different from those discussed below. We have not requested a ruling from the U.S. Internal Revenue Service, or IRS, with respect to the statements made and the conclusions reached in the following summary, and there can be no assurance that the IRS will agree with such statements and conclusions. This discussion assumes that the Non-U.S. Holder holds our common stock as a “capital asset” within the meaning of Section 1221 of the Code (generally, property held for investment).

The following discussion is for general information only and is not tax advice. Persons considering the purchase of our common stock pursuant to this offering should consult their own tax advisors concerning the U.S. federal income and estate tax consequences of acquiring, owning, and disposing of our common stock in light of their particular situations as well as any consequences arising under the laws of any other taxing jurisdiction, including any state, local, or non-U.S. tax consequences or any U.S. federal tax consequences other than income and estate taxes.

For the purposes of this discussion, a “Non-U.S. Holder” is, for U.S. federal income tax purposes, a beneficial owner of common stock that is not a U.S. Holder. A “U.S. Holder” means a beneficial owner of our common stock that is for U.S. federal income tax purposes (1) an individual who is a citizen or resident of the United States, (2) a corporation or other entity treated as a corporation created or organized in or under the laws of the United States, any state thereof or the District of Columbia, (3) an estate the income of which is subject to U.S. federal income taxation regardless of its source, or (4) a trust if it (a) is subject to the primary supervision of a court within the United States and one or more U.S. persons have the authority to control all substantial decisions of the trust or (b) has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person. If you are an individual, you may be deemed to be a resident alien, as opposed to a nonresident alien, by virtue of being present in the United States for at least 31 days in the calendar year and for an aggregate of at least 183 days during a three-year period ending in the current calendar year. For these purposes, all the days present in the current year, one-third of the days present in the immediately preceding year, and one-sixth of the days present in the second preceding year are counted. Also, partnerships or other entities that are treated as partnerships for U.S. federal income tax purposes (regardless of their place of organization or formation) and entities that are treated as

disregarded entities for U.S. federal income tax purposes (regardless of their place of organization or formation) are not addressed by this discussion and are, therefore, not considered to be Non-U.S. Holders for the purposes of this discussion.

Subject to the discussion below, distributions, if any, made on our common stock to a Non-U.S. Holder of our common stock to the extent made out of our current or accumulated earnings and profits (as determined under U.S. federal income tax principles) generally will constitute dividends for U.S. tax purposes and will be subject to withholding tax at a 30% rate or such lower rate as may be specified by an applicable income tax treaty. To obtain a reduced rate of withholding under an income tax treaty, a Non-U.S. Holder generally will be required to provide us with a properly executed IRS Form W-8BEN, Form W-8BEN-E, or other appropriate form, certifying the Non-U.S. Holder’s entitlement to benefits under that treaty. In the case of a Non-U.S. Holder that is an entity, U.S. Treasury regulations and the relevant tax treaty provide rules to determine whether, for purposes of determining the applicability of a tax treaty, dividends will be treated as paid to the entity or to those holding an interest in that entity. If a Non-U.S. Holder holds stock through a financial institution or other agent acting on the holder’s behalf, the holder will be required to provide appropriate documentation to such agent. The holder’s agent will then be required to provide certification to us or our paying agent, either directly or through other intermediaries. If you are eligible for a reduced rate of U.S. federal withholding tax under an income tax treaty, you should consult with your own tax advisor to determine if you are able to obtain a refund or credit of any excess amounts withheld by timely filing an appropriate claim for a refund with the IRS.

We generally are not required to withhold tax on dividends paid to a Non-U.S. Holder that are effectively connected with the Non-U.S. Holder’s conduct of a trade or business within the United States (and, if required by an applicable income tax treaty, are attributable to a permanent establishment that such holder maintains in the United States) if a properly executed IRS Form W-8ECI, stating that the dividends are so connected, is furnished to us (or, if stock is held through a financial institution or other agent, to such agent). In general, such effectively connected dividends will be subject to U.S. federal income tax, on a net income basis at the regular graduated rates, unless a specific income tax treaty exemption applies. A corporate Non-U.S. Holder receiving effectively connected dividends may also be subject to an additional “branch profits tax,” which is imposed, under certain circumstances, at a rate of 30% (or such lower rate as may be specified by an applicable income tax treaty) on the corporate Non-U.S. Holder’s effectively connected earnings and profits, subject to certain adjustments.

To the extent distributions on our common stock, if any, exceed our current and accumulated earnings and profits, they will first reduce your adjusted basis in our common stock as a non-taxable return of capital, but not below zero, and then any excess will be treated as gain and taxed in the same manner as gain realized from a sale or other disposition of common stock as described under the heading “Gain on Disposition of Our Common Stock,” below.

Subject to the discussion below regarding backup withholding and foreign accounts, a Non-U.S. Holder generally will not be subject to U.S. federal income tax with respect to gain realized on a sale or other disposition of our common stock unless (1) the gain is effectively connected with a trade or business of such holder in the United States (and, if required by an applicable income tax treaty, is attributable to a permanent establishment that such holder maintains in the United States), (2) the Non-U.S. Holder is a nonresident alien individual and is present in the United States for 183 or more days in the taxable year of the disposition and certain other conditions are met, or (3) we are or have

been a “United States real property holding corporation” within the meaning of Section 897(c)(2) of the Code at any time within the shorter of the five-year period preceding such disposition or such holder’s holding period.

If you are a Non-U.S. Holder described in (1) above, you will be required to pay tax on the net gain derived from the sale at regular graduated U.S. federal income tax rates, unless a specific income tax treaty exemption applies, and corporate Non-U.S. Holders described in (1) above may be subject to the additional branch profits tax at a 30% rate or such lower rate as may be specified by an applicable income tax treaty. If you are an individual Non-U.S. Holder described in (2) above, you will be required to pay a flat 30% tax on the gain derived from the sale, or such reduced rate as is specified by an applicable income tax treaty, which gain may be offset by U.S. source capital losses (even though you are not considered a resident of the United States). With respect to (3) above, in general, we would be a United States real property holding corporation if interests in U.S. real estate comprised (by fair market value) at least half of our assets. We believe that we are not, and do not anticipate becoming, a United States real property holding corporation; however, there can be no assurance that we will not become a U.S. real property holding corporation in the future. Even if we are treated as a U.S. real property holding corporation, gain realized by a Non-U.S. Holder on a disposition of our common stock will not be subject to U.S. federal income tax so long as (1) the Non-U.S. Holder owned, directly, indirectly, and constructively, no more than 5% of our common stock at all times within the shorter of (a) the five-year period preceding the disposition or (b) the holder’s holding period and (2) our common stock is regularly traded on an established securities market. There can be no assurance that our common stock will continue to qualify as regularly traded on an established securities market.

Generally, we or certain financial middlemen must report information to the IRS with respect to any dividends we pay on our common stock including the amount of any such dividends, the name and address of the recipient, and the amount, if any, of tax withheld. A similar report is sent to the holder to whom any such dividends are paid. Pursuant to tax treaties or certain other agreements, the IRS may make its reports available to taxing authorities in the recipient’s country of residence.

Dividends paid by us (or our paying agents) to a Non-U.S. Holder may also be subject to U.S. backup withholding. U.S. backup withholding generally will not apply to a Non-U.S. Holder who provides a properly executed IRS Form W-8BEN or IRS Form W-8BEN-E, as applicable, or otherwise establishes an exemption.

Under current U.S. federal income tax law, U.S. information reporting and backup withholding requirements generally will apply to the proceeds of a disposition of our common stock effected by or through a U.S. office of any broker, U.S. or non-U.S., except that information reporting and such requirements may be avoided if the holder provides a properly executed IRS Form W-8BEN or IRS Form W-8BEN-E, as applicable, or otherwise meets documentary evidence requirements for establishing Non-U.S. Holder status or otherwise establishes an exemption. Generally, U.S. information reporting and backup withholding requirements will not apply to a payment of disposition proceeds to a Non-U.S. Holder where the transaction is effected outside the United States through a non-U.S. office of a non-U.S. broker. Information reporting and backup withholding requirements may, however, apply to a payment of disposition proceeds if the broker has actual knowledge, or reason to know, that the holder is, in fact, a U.S. person. For information reporting purposes, certain brokers with substantial U.S. ownership or operations generally will be treated in a manner similar to U.S. brokers.

Backup withholding is not an additional tax. Any amounts withheld from a payment to a holder of common stock under the backup withholding rules can be credited against any U.S. federal income tax liability of the holder and may entitle the holder to a refund, provided that the required information is furnished to the IRS in a timely manner.

A U.S. federal withholding tax of 30% may apply on dividends and, after December 31, 2018, the gross proceeds of a disposition of our common stock paid to a foreign financial institution (as specifically defined by applicable rules) unless such institution enters into an agreement with the U.S. government to withhold on certain payments and to collect and provide to the U.S. taxing authorities substantial information regarding U.S. account holders of such institution (which includes certain equity holders of such institution, as well as certain account holders that are foreign entities with U.S. owners). This U.S. federal withholding tax of 30% will also apply on dividends and, after December 31, 2018, the gross proceeds of a disposition of our common stock paid to a non-financial foreign entity unless such entity provides the withholding agent with either a certification that it does not have any substantial direct or indirect U.S. owners or provides information regarding direct and indirect U.S. owners of the entity. The withholding tax described above will not apply if the foreign financial institution or non-financial foreign entity otherwise qualifies for an exemption from the rules. Under certain circumstances, a Non-U.S. Holder might be eligible for refunds or credits of such taxes. Holders are encouraged to consult with their own tax advisors regarding the possible implications of the legislation on their investment in our common stock.

An individual Non-U.S. Holder who is treated as the owner of, or has made certain lifetime transfers of, an interest in our common stock will be required to include the value thereof in his or her gross estate for U.S. federal estate tax purposes, and may be subject to U.S. federal estate tax unless an applicable estate tax treaty provides otherwise, even though such individual was not a citizen or resident of the United States at the time of his or her death.

THE PRECEDING DISCUSSION OF MATERIAL U.S. FEDERAL INCOME AND ESTATE TAX CONSEQUENCES IS FOR GENERAL INFORMATION ONLY. IT IS NOT TAX ADVICE. EACH PROSPECTIVE INVESTOR SHOULD CONSULT ITS OWN TAX ADVISOR REGARDING THE TAX CONSEQUENCES OF PURCHASING, HOLDING, AND DISPOSING OF OUR COMMON STOCK, INCLUDING THE CONSEQUENCES OF ANY PROPOSED CHANGE IN APPLICABLE LAW, AS WELL AS TAX CONSEQUENCES ARISING UNDER ANY STATE, LOCAL, OR NON-U.S. LAW, OR U.S. FEDERAL TAX LAW OTHER THAN INCOME AND ESTATE TAX LAW.

We and the underwriters named below will enter into an underwriting agreement with respect to the shares of our common stock being offered. Subject to certain conditions, each underwriter will severally agree to purchase the number of shares indicated in the following table. Goldman Sachs & Co. LLC and J.P. Morgan Securities LLC are the representatives of the underwriters.

The underwriters will be committed to take and pay for all of the shares of our common stock being offered, if any are taken, other than the shares of our common stock covered by the option described below unless and until this option is exercised.

The underwriters will have an option to buy up to an additional shares of our common stock from us. They may exercise this option for 30 days. If any shares of our common stock are purchased pursuant to this option, the underwriters will severally purchase shares of our common stock in approximately the same proportion as set forth in the table above.

The following table shows the per share and the total underwriting discount to be paid to the underwriters by us. Such amounts are shown assuming both no exercise and full exercise of the underwriters’ option to purchase additional shares of our common stock.

Shares of our common stock sold by the underwriters to the public will initially be offered at the initial public offering price set forth on the cover of this prospectus. Any shares of our common stock sold by the underwriters to securities dealers may be sold at a discount of up to $ per share from the initial public offering price. After the initial offering of the shares of our common stock, the representatives may change the offering price and the other selling terms. The offering of the shares of our common stock by the underwriters is subject to receipt and acceptance and subject to the underwriters’ right to reject any order in whole or in part.

We and our executive officers, directors, and holders of substantially all of our capital stock have agreed with the underwriters, subject to certain exceptions, not to dispose of or hedge (or are otherwise subject to contractual limitations that they will not otherwise transfer) any of our capital stock or securities convertible into or exchangeable for shares of our capital stock during the period from the date of this prospectus continuing through the date 180 days after the date of this prospectus without the prior written consent of Goldman Sachs & Co. LLC and J.P. Morgan Securities LLC.

See the section of this prospectus titled “Shares Eligible for Future Sale” for a discussion of certain transfer restrictions.

Prior to this offering, there has been no public market for the shares of our common stock. The initial public offering price will be negotiated between us and the representatives. Among the factors considered in determining the initial public offering price of the shares of our common stock, in addition to prevailing market conditions, were our historical performance, estimates of our business potential and earnings prospects, an assessment of our management and the consideration of the above factors in relation to market valuation of companies in related businesses.

In connection with this offering, the underwriters may purchase and sell shares of our common stock in the open market. These transactions may include short sales, stabilizing transactions and purchases to cover positions created by short sales. Short sales involve the sale by the underwriters of a greater number of shares than they are required to purchase in the offering, and a short position represents the amount of such shares that have not been covered by subsequent purchases. A “covered short position” is a short position that is not greater than the amount of additional shares for which the underwriters’ option described above may be exercised. The underwriters may close out any covered short position by either exercising their option to purchase additional shares of our common stock or purchasing shares in the open market. In determining the source of shares of our common stock to close out the covered short position, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which they may purchase additional shares pursuant to the option described above. “Naked” short sales are any short sales that create a short position greater than the amount of additional shares for which the option described above may be exercised. The underwriters must close out any naked short position by purchasing shares of our common stock in the open market. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of our common stock in the open market after pricing that could adversely affect investors who purchase in the offering. Stabilizing transactions consist of various bids for or purchases of our common stock made by the underwriters in the open market prior to the closing of this offering.

The underwriters may also impose a penalty bid. This occurs when a particular underwriter repays to the underwriters a portion of the underwriting discount received by it because the representatives have repurchased shares of our common stock sold by or for the account of such underwriter in stabilizing or short covering transactions.

Purchases to cover a short position and stabilizing transactions, as well as other purchases by the underwriters for their own accounts, may have the effect of preventing or retarding a decline in the market price of our common stock, and together with the imposition of the penalty bid, may stabilize, maintain or otherwise affect the market price of our common stock. As a result, the price of our common stock may be higher than the price that otherwise might exist in the open market. If these activities are commenced, they may be discontinued at any time. These transactions may be effected on the , in the over-the-counter market or otherwise.

The underwriters do not expect sales to discretionary accounts to exceed 5% of the total number of securities offered.

We estimate that our share of the total expenses of the offering, excluding the underwriting discount, will be approximately $ million, which includes up to $ of expenses payable to the underwriters for certain FINRA-related expenses.

We will agree to indemnify the several underwriters against certain liabilities, including liabilities under the Securities Act.

The underwriters and their respective affiliates are full service financial institutions engaged in various activities, which may include securities trading, commercial and investment banking, financial advisory, investment management, investment research, principal investment, hedging, financing, and brokerage activities. Certain of the underwriters and their respective affiliates have, from time to time, performed, and may in the future perform, various financial advisory and investment banking services for us and for other companies with which we have entered or may enter into transactions, for which such underwriters or their affiliates received or will receive customary fees and expenses.

In the ordinary course of their various business activities, the underwriters and their respective affiliates may make or hold a broad array of investments and actively trade debt and equity securities (or related derivative securities) and financial instruments (including bank loans) for their own account and for the accounts of their customers, and such investment and securities activities may involve securities and/or instruments of us. The underwriters and their respective affiliates may also make investment recommendations and/or publish or express independent research views in respect of such securities or instruments and may at any time hold, or recommend to clients that they acquire, long and/or short positions in such securities and instruments.

In relation to each Member State of the European Economic Area which has implemented the Prospectus Directive, each, a Relevant Member State, an offer to the public of our shares of our common stock may not be made in that Relevant Member State, except that an offer to the public in that Relevant Member State of our shares of our common stock may be made at any time under the following exemptions under the Prospectus Directive:

provided that no such offer of shares of our common stock shall result in a requirement for the publication by us or any underwriter of a prospectus pursuant to Article 3 of the Prospectus Directive.

For the purposes of this provision, the expression an “offer to the public” in relation to our shares of common stock in any Relevant Member State means the communication in any form and by any means of sufficient information on the terms of the offer and our shares of our common stock to be offered so as to enable an investor to decide to purchase our shares of our common stock, as the same may be varied in that Member State by any measure implementing the Prospectus Directive in that Member State, the expression “Prospectus Directive” means Directive 2003/71/EC, as amended, including by Directive 2010/73/EU, and includes any relevant implementing measure in the Relevant Member State.

This European Economic Area selling restriction is in addition to any other selling restrictions set out below.

In the United Kingdom, this prospectus is only addressed to and directed as qualified investors who are (a) investment professionals falling within Article 19(5) of the Financial Services and Markets

Act 2000 (Financial Promotion) Order 2005, or the Order; or (b) high net worth entities and other persons to whom it may lawfully be communicated, falling within Article 49(2)(a) to (d) of the Order (all such persons together being referred to as “relevant persons”). Any investment or investment activity to which this prospectus relates is available only to relevant persons and will only be engaged with relevant persons. Any person who is not a relevant person should not act or relay on this prospectus or any of its contents.

The securities may be sold in Canada only to purchasers purchasing, or deemed to be purchasing, as principal that are accredited investors, as defined in National Instrument 45-106 Prospectus Exemptions or subsection 73.3(1) of the Securities Act (Ontario), and are permitted clients, as defined in National Instrument 31-103 Registration Requirements, Exemptions, and Ongoing Registrant Obligations. Any resale of the securities must be made in accordance with an exemption form, or in a transaction not subject to, the prospectus requirements of applicable securities laws.

Securities legislation in certain provinces or territories of Canada may provide a purchaser with remedies for rescission or damages if this offering memorandum (including any amendment thereto) contains a misrepresentation, provided that the remedies for rescission or damages are exercised by the purchaser within the time limit prescribed by the securities legislation of the purchaser’s province or territory. The purchaser should refer to any applicable provisions of the securities legislation of the purchaser’s province or territory of these rights or consult with a legal advisor.

Pursuant to section 3A.3 of National Instrument 33-105 Underwriting Conflicts (NI 33-105), the underwriters are not required to comply with the disclosure requirements of NI 33-105 regarding underwriter conflicts of interest in connection with this offering.

The shares may not be offered or sold in Hong Kong by means of any document other than (a) in circumstances which do not constitute an offer to the public within the meaning of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32 of the Laws of Hong Kong, or the Companies (Winding Up and Miscellaneous Provisions) Ordinance, or which do not constitute an invitation to the public within the meaning of the Securities and Futures Ordinance (Cap. 571 of the Laws of Hong Kong), or the Securities and Futures Ordinance, or (b) to “professional investors” as defined in the Securities and Futures Ordinance and any rules made thereunder, or (c) in other circumstances which do not result in the document being a “prospectus” as defined in the Companies (Winding Up and Miscellaneous Provisions) Ordinance, and no advertisement, invitation, or document relating to the shares may be issued or may be in the possession of any person for the purpose of issue (in each case whether in Hong Kong or elsewhere), which is directed at, or the contents of which are likely to be accessed or read by, the public in Hong Kong (except if permitted to do so under the securities laws of Hong Kong) other than with respect to shares which are or are intended to be disposed of only to persons outside Hong Kong or only to “professional investors” in Hong Kong as defined in the Securities and Futures Ordinance and any rules made thereunder.

This prospectus has not been registered as a prospectus with the Monetary Authority of Singapore. Accordingly, this prospectus and any other document or material in connection with the offer or sale, or invitation for subscription or purchase, of the shares may not be circulated or

distributed, nor may the shares be offered or sold, or be made the subject of an invitation for subscription or purchase, whether directly or indirectly, to persons in Singapore other than (a) to an institutional investor (as defined under Section 4A of the Securities and Futures Act, Chapter 289 of Singapore, or the SFA) under Section 274 of the SFA, (b) to a relevant person (as defined in Section 275(2) of the SFA) pursuant to Section 275(1) of the SFA, or any person pursuant to Section 275(1A) of the SFA, and in accordance with the conditions specified in Section 275 of the SFA or (c) otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA, in each case subject to conditions set forth in the SFA.

Where the shares are subscribed or purchased under Section 275 of the SFA by a relevant person which is a corporation (which is not an accredited investor (as defined in Section 4A of the SFA)) the sole business of which is to hold investments and the entire share capital of which is owned by one or more individuals, each of whom is an accredited investor, the securities (as defined in Section 239(1) of the SFA) of that corporation shall not be transferable for six months after that corporation has acquired the shares under Section 275 of the SFA except: (i) to an institutional investor under Section 274 of the SFA or to a relevant person (as defined in Section 275(2) of the SFA), (ii) where such transfer arises from an offer in that corporation’s securities pursuant to Section 275(1A) of the SFA, (iii) where no consideration is or will be given for the transfer, (iv) where the transfer is by operation of law, (v) as specified in Section 276(7) of the SFA, or (vi) as specified in Regulation 32 of the Securities and Futures (Offers of Investments) (Shares and Debentures) Regulations 2005 of Singapore, or Regulation 32.

Where the shares are subscribed or purchased under Section 275 of the SFA by a relevant person which is a trust (where the trustee is not an accredited investor (as defined in Section 4A of the SFA)) whose sole purpose is to hold investments and each beneficiary of the trust is an accredited investor, the beneficiaries’ rights and interest (howsoever described) in that trust shall not be transferable for six months after that trust has acquired the shares under Section 275 of the SFA except: (1) to an institutional investor under Section 274 of the SFA or to a relevant person (as defined in Section 275(2) of the SFA), (2) where such transfer arises from an offer that is made on terms that such rights or interest are acquired at a consideration of not less than S$200,000 (or its equivalent in a foreign currency) for each transaction (whether such amount is to be paid for in cash or by exchange of securities or other assets), (3) where no consideration is or will be given for the transfer, (4) where the transfer is by operation of law, (5) as specified in Section 276(7) of the SFA, or (6) as specified in Regulation 32.

The securities have not been and will not be registered under the Financial Instruments and Exchange Act of Japan (Act No. 25 of 1948, as amended), or the FIEA. The securities may not be offered or sold, directly or indirectly, in Japan or to or for the benefit of any resident of Japan (including any person resident in Japan or any corporation or other entity organized under the laws of Japan) or to others for reoffering or resale, directly or indirectly, in Japan or to or for the benefit of any resident of Japan, except pursuant to an exemption from the registration requirements of the FIEA and otherwise in compliance with any relevant laws and regulations of Japan.

The validity of the shares of common stock offered hereby will be passed upon for us by Perkins Coie LLP, Seattle, Washington. The underwriters are being represented by Cooley LLP, Seattle, Washington.

The consolidated financial statements of Avalara, Inc. as of December 31, 2015 and 2016 and for each of the two years in the period ended December 31, 2016 included in this prospectus have been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report appearing herein. Such consolidated financial statements have been so included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing.

We have filed with the SEC a registration statement on Form S-1 under the Securities Act with respect to the shares of common stock offered by this prospectus. This prospectus, which constitutes a part of the registration statement, does not contain all of the information set forth in the registration statement, some of which is contained in exhibits to the registration statement as permitted by the rules and regulations of the SEC. For further information with respect to us and our common stock, we refer you to the registration statement, including the exhibits filed as a part of the registration statement. Statements contained in this prospectus concerning the contents of any contract or any other document are not necessarily complete. If a contract or document has been filed as an exhibit to the registration statement, please see the copy of the contract or document that has been filed. Each statement in this prospectus relating to a contract or document filed as an exhibit is qualified by reference to the filed exhibit. You may read and copy the registration statement and any other materials we file with the SEC at the SEC’s Public Reference Room, at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Rooms by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet website that contains reports, proxy statements, and other information about issuers, like us, that file electronically with the SEC. The address of that website is www.sec.gov.

As a result of this offering, we will be subject to the information and reporting requirements of the Exchange Act and, in accordance with this law, will be required to file annual, quarterly, and current reports, proxy statements, and other information with the SEC. These periodic reports, proxy statements, and other information will be available for inspection and copying at the SEC’s public reference facilities and the website of the SEC referred to above. We also maintain a website at www.avalara.com. Following the closing of this offering, you may access these materials free of charge as soon as reasonably practicable after they are electronically filed with, or furnished to, the SEC. Information contained on, or that can be accessed through, our website is not a part of this prospectus and the inclusion of our website address in this prospectus is an inactive textual reference only.

We have audited the accompanying consolidated balance sheets of Avalara, Inc. and its subsidiaries (the “Company”) as of December 31, 2015 and 2016, and the related consolidated statements of operations, comprehensive loss, convertible preferred stock and shareholders’ deficit, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States) and in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Avalara, Inc. and its subsidiaries as of December 31, 2015 and 2016, and the results of their operations and their cash flows for each of the years then ended, in conformity with accounting principles generally accepted in the United States of America.

The accompanying notes are an integral part of these consolidated financial statements.

Consolidated Statements of Convertible Preferred Stock and Shareholders’ Deficit

The accompanying notes are an integral part of these consolidated financial statements.

Avalara, Inc. (the “Company”) provides software solutions that help businesses of all types and sizes comply with tax requirements for transactions worldwide. The Company offers a broad and growing suite of compliance solutions for transaction taxes, such as sales and use tax, value-added tax (VAT), excise tax, lodging tax, and communications tax. These solutions enable customers to automate the process of determining taxability, identifying applicable tax rates, determining and collecting taxes, preparing and filing returns, remitting taxes, maintaining tax records, and managing compliance documents. The Company, a Washington corporation, was originally incorporated in 1999 and is headquartered in Seattle, Washington.

The Company has wholly owned subsidiaries in the United Kingdom, Belgium, India, and Brazil that provide business development, software development, and support services.

The consolidated financial statements and accompanying notes were prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”).

The accompanying consolidated financial statements include those of the Company and its subsidiaries after elimination of all intercompany accounts and transactions.

Prior to the closing of the Company’s initial public offering, or IPO, all currently outstanding shares convertible preferred stock will automatically convert into shares of the Company’s common stock. The unaudited pro forma balance sheet information shows the effect of the conversion of convertible preferred stock as of March 31, 2017. The effect of this conversion on the pro forma balance sheet will reduce shareholders’ deficit by $370.9 million (unaudited). Additionally, the Company has calculated unaudited pro forma basic and diluted net loss per share to give effect to the convertible preferred stock impact as though such preferred shares had been converted to common stock as of the beginning of the period.

The accompanying interim consolidated balance sheet as of March 31, 2017 and the consolidated interim statements of operations, of comprehensive loss and of cash flows during the three months ended March 31, 2016 and 2017 are unaudited. The unaudited interim consolidated financial statements have been prepared on a basis consistent with the annual audited consolidated and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly the Company’s financial position as of March 31, 2017 and its results of operations, comprehensive loss and cash flows for the three months ended March 31, 2016 and 2017. The results of operations for the three months ended March 31, 2017 are not necessarily indicative of the results to be expected for the full fiscal year or for any other future annual or interim periods.

The Company operates its business as one operating segment. Operating segments are defined as components of an enterprise about which separate financial information is evaluated regularly by the chief operating decision maker, the Company’s Chief Executive Officer, in deciding how to allocate resources and assess performance. The Company’s chief operating decision maker allocates resources and assesses performance based upon discrete financial information at the consolidated level. Since the Company operates in one operating segment, all required financial segment information can be found in the consolidated financial statements. For the years ended December 31, 2015 and 2016, and the three months ended March 31, 2017 approximately 1%, 3% and 5% (unaudited) of the Company’s revenues were generated outside of the United States, respectively. As of December 31, 2015 and 2016, and the three months ended March 31, 2017 approximately 6%, 15% and 17% (unaudited) of the Company’s long-lived assets were held outside of the United States.

The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Significant estimates include: the expected term of the customer relationship for activation, integration, and setup fee activity (collectively, the “setup fee”); the standalone value of each element in multiple-element arrangements for revenue recognition; the allowance for doubtful accounts; the measurement of fair values of stock-based compensation award grants; the valuation of preferred stock warrant liabilities; the expected earn out obligations in connection with acquisitions; and the valuation of acquired intangible assets. Actual results could materially differ from those estimates.

The Company has incurred significant operating losses since its inception, including net losses of $78.3 million and $58.2 million for the years ended December 31, 2015 and 2016, and $15.9 million (unaudited) for the three months ended March 31, 2017. The Company had an accumulated deficit of $270.0 million and $348.7 million as of December 31, 2015 and 2016 and $364.7 million as of March 31, 2017. The Company believes that its cash and cash equivalents of $13.9 million as of March 31, 2017, and the availability under its credit facilities, as is further outlined in Note 8, are adequate to satisfy its current obligations. However, the Company has been incurring operating expenses and making capital expenditures at a level that reflects its belief that additional debt or equity financing will be available to fund continued growth of the Company. If the Company is unable to obtain, or is delayed in obtaining additional debt or equity financing, it would need to scale back its growth initiatives and could find it necessary to reduce its operating expenses and capital expenditures.

The Company applies the fair value measurement and disclosure provisions of Accounting Standards Codification. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A three-level fair value hierarchy prioritizes the inputs used to measure fair value. The hierarchy requires

entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:

The Company’s assessment of the significance of an input to the fair value measurement requires judgment, which may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels. The carrying amounts reported in the consolidated financial statements approximate the fair value for cash equivalents, trade accounts receivable, trade payables, and accrued expenses, due to their short-term nature.

Cash and cash equivalents include highly liquid securities with original maturities of three months or less and are carried at cost, which approximates market value given their short-term nature.

Funds Held from Customers: The Company maintains trust accounts with financial institutions, which allows customers to outsource their tax remittance functions to the Company. Funds held from customers represents cash and cash equivalents that, based upon the Company’s intent, are restricted solely for satisfying the obligations to remit funds relating to the Company’s tax remittance services. Funds held from customers are not commingled with the Company’s operating funds, but typically are deposited with funds also held on behalf of other customers of the Company. Funds held from customers are deposited in accounts at FDIC insured institutions, and are currently insured up to $250,000 by the FDIC.

Funds held from customers were $5.0 million, $10.7 million, and $7.4 million (unaudited) as of December 31, 2015 and 2016 and March 31, 2017, respectively.

Receivables from Customers: Occasionally, the Company will pay a tax obligation to taxing authorities on behalf of its customer, prior to receiving funds from the customer or prior to receiving the refund due to the customer from the taxing authority. Accounts receivable from customers represent amounts the customer is contractually obligated to repay to the Company. The future economic benefit to the Company is restricted solely for the repayment of customer funds and taxing authority obligations.

Receivables from customers deemed uncollectable are charged against a separate allowance for doubtful accounts. The allowance against receivables from customers is a result of the Company

assuming credit risk associated with its customers’ tax remittance obligations. The table below details the allowance against receivables from customers and taxing authorities receivable (in thousands):

Customer Funds Obligations: Customer funds obligations represent the Company’s contractual obligations to remit collected funds to satisfy customer tax payments. Customer funds obligations are reported as a current liability on the consolidated balance sheets, as the obligations are expected to be settled within one year.

Customer Funds Assets and Obligations in Consolidated Statement of Cash Flows: Cash flows related to the cash received from and paid on behalf of customers are reported as follows:

(1) changes in customer funds obligations liability are presented as cash flows from financing activities,

(2) changes in customer funds asset (e.g., customer funds held in cash and cash equivalents and receivable from customers and taxing authorities) are presented as net cash flows from investing activities, and

(3) changes in customer funds asset account that relate to paying for the trust operations, such as banking fees, are presented as cash flows from operating activities.

Trade accounts receivable represent amounts due from customers when the Company has invoiced and the customer is contractually obligated to pay for software subscriptions and/or services and the Company has not yet received payment. The Company presents trade accounts receivable net of an allowance for doubtful accounts. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing trade accounts receivable. The allowance for doubtful accounts is based on the Company’s assessment of collectability. The Company regularly reviews the adequacy of the allowance for doubtful accounts by considering the age of each outstanding invoice and the collection history of each customer to determine the appropriate amount of the Company’s allowance. Trade accounts receivable are recorded to bad debt expense when deemed uncollectible based on either a specific identification or the age of the receivable.

Financial instruments that potentially subject the Company to concentrations of credit risk are primarily cash, cash equivalents, accounts receivable, and funds held from customers, which are held in financial institutions management believes have a high credit standing. To manage credit risk related to accounts receivable, the Company evaluates customers’ financial condition and generally collateral is not required.

As of December 31, 2015 and 2016 and March 31, 2017 (unaudited), there were no customers that represented more than 10% of the Company’s net trade accounts receivable or more than 10% of the Company’s revenue in any of the periods presented.

Property and equipment are stated at cost less accumulated depreciation. Depreciation on property and equipment is computed on the straight-line method over the estimated useful life of the asset or the lease term (for leasehold improvements), whichever is shorter.

Upon retirement or sale, the cost of an asset disposed of and the related accumulated depreciation is removed and any resulting gain or loss is recorded in the consolidated statements of operations. Maintenance and repairs that do not improve or extend the lives of the respective assets are charged to expense in the period incurred.

Research and development expenses consist primarily of personnel and related expenses for the Company’s research and development staff, including salaries, benefits, bonuses and stock-based compensation, and allocated overhead. Expenditures for research and development are expensed as incurred.

Software development costs for hosting customer transactions (i.e., cloud software solutions) are capitalized once the project is in the application development stage in accordance with the accounting guidance for internal-use software. These capitalized costs include external direct costs of services consumed in developing or obtaining the software and personnel and related expenses for employees who are directly associated with the development. Capitalization of these costs ceases once the

project is substantially complete and the software is ready for its intended purpose. Post-configuration training and maintenance costs are expensed as incurred. For the years ended December 31, 2015 and 2016, and the three months ended March 31, 2017, $0.7 million, $0.8 million and $0.2 million (unaudited) software development costs were capitalized, respectively. Capitalized software development costs are amortized on a straight-line basis over the estimated useful life, generally 6 years.

In circumstances where software is developed for both cloud software solutions and for the purpose of being sold, leased or otherwise marketed (i.e., customer hosted transactions), capitalization of development costs occurs after technological feasibility of the software is established and until the product is available for general release to customers. Since the software is available for general release concurrent with the establishment of technological feasibility, development costs are not capitalized in these circumstances.

The Company’s identifiable assets acquired and liabilities assumed in a business combination are recorded at their acquisition date fair values. The valuation requires management to make significant estimates and assumptions, especially with respect to long-lived and intangible assets. Critical estimates in valuing intangible assets include, but are not limited to:

The Company’s estimates of fair value are based upon assumptions it believes to be reasonable, but that are inherently uncertain and unpredictable. Assumptions may be incomplete or inaccurate, and unanticipated events and circumstances may occur.

Goodwill is calculated as the excess of the purchase price over the fair value of net assets, including the amount assigned to identifiable intangible assets. Acquisition-related costs, including advisory, legal, accounting, valuation, and other costs, are expensed in the periods in which these costs are incurred. The results of operations of acquired business are included in the consolidated financial statements beginning at the acquisition date. Goodwill is tested for impairment annually on October 31, or in the event of certain occurrences. There were no goodwill impairments recorded for the years ended December 31, 2015 and 2016.

The Company estimates the fair value of the acquisition-related earnout using various valuation approaches, as well as significant unobservable inputs, reflecting the Company’s assessment of the assumptions market participants would use to value these liabilities. The fair value of the earnout is remeasured each reporting period, with any change in the value recorded as other income or expense. As a result of remeasuring earnout liabilities based on current facts and circumstances, the Company recorded expense of $0.6 million, $0.3 million and $0.4 million (unaudited) in Other (income) expense, net for the years ended December 31, 2015 and 2016 and for the three months ended March 31, 2017, respectively. The Company recorded income of $0.2 million (unaudited) in Other (income) expenses, net for the three months ended March 31, 2016.

The Company evaluates long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of these assets may not be recoverable. An impairment is recognized in the event the carrying value of such assets exceeds their fair value. If the carrying value exceeds the fair value, then an impairment test is performed in to determine the implied fair value. No impairment of long-lived assets occurred in the periods presented.

The Company’s deferred tax assets are determined based on temporary differences between the financial reporting and income tax basis of assets and liabilities and are measured using the tax rates that will be in effect when the differences are expected to reverse. A valuation allowance is recorded when it is more likely than not that some of the deferred tax assets will not be realized. The Company assesses its income tax positions and records tax benefits based upon management’s evaluation of the facts, circumstances, and information available at the reporting date.

The Company determines whether its uncertain tax positions are more likely than not to be sustained upon examination based on the technical merits of the position. For tax positions not meeting the more likely than not threshold, the tax amount recognized in the consolidated financial statements is reduced by the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant taxing authority.

Deferred revenue consists of customer billings and payments in advance of revenue being recognized from the Company’s contracts. The Company typically invoices its customers annually in advance for its subscription based contracts. Deferred revenue and accounts receivable are recorded by the Company at the beginning of the new subscription term. For some customers, the Company invoices in monthly, quarterly, or multi-year installments. Accordingly, the deferred revenue balance does not always represent the total contract value of annual or multi-year, non-cancelable subscription agreements. Deferred revenue anticipated to be recognized during the succeeding 12-month period is recorded as current deferred revenue and the remaining portion is recorded as noncurrent deferred revenue.

The Company primarily generates revenue from (1) fees paid for subscriptions to the Company’s tax compliance solutions; (2) nonrefundable upfront fees; and (3) fees paid for services performed by the Company in preparing and filing tax returns on behalf of its customers. Amounts that have been invoiced are recorded in accounts receivable and deferred revenue or revenue, depending upon whether the revenue recognition criteria have been met.

probable and within the Company’s control. Other than nonrefundable upfront fees, the Company’s services typically have standalone value because they are routinely sold separately by the Company. Professional services also have standalone value because the Company sells professional services separately and there are third party vendors that provide similar professional services to customers on a standalone basis. If one or more of the deliverables does not have standalone value upon delivery, the deliverables that do not have standalone value are generally combined with the final deliverable within the arrangement and treated as a single unit of accounting. Revenue for arrangements treated as a single unit of accounting is generally recognized over the period commencing upon delivery of the final deliverable and over the remaining term of the subscription contract.

The Company allocates revenue to each element in an arrangement based on the selling price hierarchy. The selling price for a deliverable is based on its vendor-specific objective evidence (“VSOE”), if available, third-party evidence (“TPE”), or best estimate of selling price (“BESP”), if neither VSOE nor TPE is available. As the Company has been unable to establish VSOE or TPE for the elements of its arrangements, the Company establishes the BESP for each element. The determination of BESP requires significant estimates and judgments. BESP is determined primarily by considering the weighted average of actual sales prices of professional services sold on a standalone basis and subscription and support when sold without professional services or setup fees. Other factors considered include existing pricing practices, historical comparisons of contract prices to list prices, the impact on customers, and gross margin objectives.

Sales and other taxes collected from customers to be remitted to the taxing jurisdiction are excluded from revenues.

Subscription and returns revenue primarily consists of contractually agreed upon fees paid to the Company for using its cloud-based solutions, as well as fees paid to the Company for preparing and filing sales tax returns on behalf of its customers. Under the Company’s subscription agreements, customers select a price plan that includes an allotted number of maximum transactions over the subscription term. Unused transactions are not carried over to the customer’s next subscription term, and its customers are not entitled to any refund of fees paid or relief from fees due in the event they do not use the allotted number of transactions. If customers exceed the maximum transaction level within their price plan, the Company charges overage fees on a per transaction basis. The Company’s subscription arrangements do not provide the customer with the right to take possession of the software supporting the cloud-based application services.

The Company generally invoices its subscription customers for the initial term at contract signing and at each renewal. Our initial terms generally range from twelve to eighteen months, and renewal periods are typically one year. Amounts that are contractually billable and have been invoiced, or which

have been collected as cash are initially recorded as deferred revenue. While most of the Company’s customers are invoiced once at the beginning of the term, a portion of customers are invoiced quarterly or monthly.

The Company’s subscription contracts are generally non-cancelable except for where contract terms provide rights to cancel in the first 60 days of the contract term. The Company reserves for estimated cancellations based on actual history, and its history of customer cancellations has not had a significant impact on its revenue recognized.

Included in the total subscription fee for the Company’s cloud-based solutions are non-refundable upfront fees that are typically charged to each of the Company’s new customers. These fees are associated with work performed by the Company to set up a customer with the Company’s services, and do not have standalone value. The Company recognizes revenue for these fees over the expected term of the customer relationship, beginning when services commence. As of January 1, 2015, and through March 31, 2017 (unaudited), the Company estimated an expected customer relationships term of 6 years. The Company continues to evaluate the expected customer life and it is possible that the expected term of customer relationships may change in future periods. If such a change does occur, the periods over which any remaining deferred revenue will be recognized will be increased or decreased, as appropriate. As of December 31, 2015 and 2016, a one-year increase in the estimated term of customer relationships would reduce annual revenue by $0.4 million and $0.6 million, respectively.

The Company bills for service arrangements on a fixed fee or time and materials basis. Professional services and other revenue include fees from providing tax analysis, returns management, configurations, data migrations, integration, training, and other support services. The consideration allocated to professional services is recognized as revenue when services are performed and are collectable under the terms of the associated contracts.

A portion of the Company’s revenue is generated from sales made through customer referral sources. For these transactions, the Company evaluates whether revenue should be presented on a gross basis, which is the amount that a customer pays for the Company’s solution, or on a net basis, which is the customer payment less referral source commissions. The Company has determined that a gross presentation is appropriate for revenue generated through its customer referral sources, because the Company is the primary provider of services to the end customers of these sources and is the primary obligor in these relationships, the Company has customer credit risk for non-payment, and the Company has latitude in establishing and negotiating prices on transactions from these sources.

The Company recognizes commissions related to sales through the Company’s customer referral sources in sales and marketing costs at the point in which a binding customer order is agreed to by the

Company and the referral source. The Company expenses commissions as incurred. Commissions to referral sources totaled $9.0 million, $9.9 million, $2.2 million, and $2.5 million (unaudited) for the years ended December 31, 2015 and 2016 and for the three months ended March 31, 2016 and 2017, respectively.

Cost of revenue consists of personnel and related expenses for providing the Company’s solutions and supporting its customers, including salaries, benefits, bonuses, and stock-based compensation, direct costs and allocated costs associated with information technology, tax content, rent, and allocated overhead.

The Company expenses all advertising costs as incurred and classifies these costs as sales and marketing expenses. Advertising expenses were $21.2 million, $19.6 million, $3.9 million (unaudited), and $5.7 million (unaudited) for the years ended December 31, 2015 and 2016 and for the three months ended March 31, 2016 and 2017, respectively.

The Company is a lessee of facilities in the United States, United Kingdom, Belgium, Brazil, and India and certain other equipment under non-cancelable lease agreements. The Company categorizes leases at their inception as either operating or capital leases. For certain lease agreements, the Company may receive rent holidays and other incentives, including allowances for leasehold improvements. Future operating lease payments are recognized as rent expense on a straight-line basis without regard to deferred payment terms, such as rent holidays. Incentives received are treated as a reduction of rent expense over the term of the agreement. Leasehold improvements are capitalized at cost and amortized over the lesser of their estimated useful life or the term of the lease.

Assets and liabilities of each of the Company’s foreign subsidiaries are translated at the exchange rate in effect at each period-end. Consolidated statement of operations amounts are translated at the average rate of exchange prevailing during the period. Translation adjustments arising from differing exchange rates from period to period are included in accumulated other comprehensive loss within shareholders’ deficit.

The Company offers a salary deferral 401(k) plan for its U.S. employees. The plan allows employees to contribute a percentage of their pretax earnings annually, subject to limitations imposed by the Internal Revenue Service. The plan also allows the Company to make a matching contribution, subject to certain limitations. The Company made no contributions to the plan in 2015 and contributed $0.6 million to the plan in 2016 as a discretionary match related to 2015 employee contributions. As of March 31, 2017 (unaudited), the Company had not made a contribution to the plan.

The Company accounts for stock-based compensation by calculating the fair value of each option at the date of grant by applying the Black-Scholes option-pricing model. This model uses the estimated value of the Company’s underlying common stock at the measurement date, the expected or contractual term of the option, the expected volatility of its common stock, risk-free interest rates, and expected dividend yield of its common stock. The Company recognizes compensation expense for only the portion of options expected to vest. If the actual number of forfeitures differs from the estimates, adjustments to stock-based compensation expense may be required in future periods.

Prior to December 31, 2016, the Company had one class of preferred stock warrants. The Company issued Series A preferred stock warrants to participating investors in connection with the Company’s Series A-1 financing. Each of the warrants was exercisable into a respective share of the underlying named Series Preferred Stock. The Series Preferred Stock contained conversion price reset clauses that modified the originally agreed upon conversion rates of existing Series Preferred Stock in the case of future dilutive equity issuances. Further, the Series Preferred Stock was contingently redeemable upon a change in control. These features in the underlying Series Preferred Stock into which the warrants are exercisable required the Series A preferred stock warrants to be accounted for as liabilities that are carried at fair value. The change in the fair value of the preferred stock warrants was recorded on the consolidated statements of operations. During 2016, all remaining preferred stock warrants were exercised.

Recently Adopted Accounting Standards: In August 2014, the FASB issued ASU 2014-15 related to disclosures as a going concern. The new guidance requires that management assess an entity’s ability to continue as a going concern and may require additional detailed disclosures. ASU 2014-15 is effective for annual periods ending after December 15, 2016 and interim periods within those annual periods. The Company adopted this standard in 2016 and no additional disclosures were required.

In April 2015, the FASB issued ASU 2015-05 related to guidance on how to account for cloud computing arrangements that include a software license. The guidance requires customers to account for the software license element of the arrangement consistent with the acquisition of other software licenses. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015, and may be applied retrospectively or prospectively to arrangements entered into, or materially modified, after the effective date. The Company adopted the new standard prospectively in 2016 and the adoption did not have a material impact on its consolidated financial statements.

In September 2015, the FASB issued ASU 2015-16 related to guidance on the recognition of adjustments to preliminary amounts recognized in a business combination, which removes the requirement to retrospectively account for these adjustments. This guidance also requires the acquirer to disclose in the same reporting period the effect on earnings as a result of the change as if the adjustment were made at the acquisition date. This guidance is effective for annual periods beginning after December 15, 2015. The Company adopted the new guidance in 2016 and the adoption did not have a material impact on its consolidated financial statements.

In November 2015, the FASB issued ASU 2015-17 related to guidance to simplify the balance sheet disclosure of deferred income taxes. This guidance requires deferred tax liabilities and assets to be classified as non-current in the Consolidated Balance Sheet. The guidance is effective for annual periods beginning after December 15, 2016, including interim periods within that reporting period. The amendment may be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. The Company prospectively adopted the new guidance in 2016 and the adoption did not have a material impact on its consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-09, related to Compensation—Stock Compensation (“Topic 718”). This standard makes several modifications to Topic 718 related to the accounting for forfeitures, employer tax withholding on share-based compensation and the financial statement presentation of excess tax benefits or deficiencies. ASU No. 2016-09 also clarifies the statement of cash flows presentation for certain components of share-based awards. The standard is effective for interim and annual reporting periods beginning after December 15, 2017, for business entities that are not public, although early adoption is permitted. The Company adopted ASU No. 2016-09 on January 1, 2017. The Company elected to account for forfeitures upon occurrence and the net cumulative-effect was recognized as a $0.1 million (unaudited) increase to additional paid-in capital and a $0.1 million (unaudited) increase to accumulated deficit upon adoption. Also upon adoption, the Company recorded a $12.3 million (unaudited) cumulative-effect adjustment decrease in accumulated deficit and an offsetting increase in deferred tax assets for previously unrecognized excess tax benefits that existed as of January 1, 2017. Since the realization of these deferred tax assets is not more likely than not to be achieved, the Company recorded a $12.3 million (unaudited) valuation allowance against these deferred tax assets with an offsetting increase in accumulated deficit.

In January 2017, the FASB issued ASU No. 2017-04, which eliminates step two from the goodwill impairment test. Under the amendments in ASU 2017-04, an entity should recognize an impairment charge for the amount by which the carrying amount of a reporting unit exceeds its fair value. However, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. ASU 2017-04 is effective for the Company in the first quarter of fiscal 2021 on a prospective basis, and earlier adoption is permitted for goodwill impairment tests performed after January 1, 2017. The Company adopted ASU No. 2017-04 on January 1, 2017.

New Accounting Standards Not Yet Adopted: As an ‘‘emerging growth company,’’ the Jumpstart our Business Startups Act, or the JOBS Act, allows the Company to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. As a result, the Company’s financial statements may not be comparable to the financial statements of issuers who are required to comply with the effective date for new or revised accounting standards that are applicable to public companies.

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09 which, along with subsequent ASUs, amends the existing accounting standards for revenue recognition. This guidance is based on principles that govern the recognition of revenue at an amount an entity expects to be entitled to receive when products are transferred to customers. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period for public business entities, and for annual reporting periods beginning after December 15, 2018 for business entities that are not public. This guidance may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of adoption. Additionally, the new guidance requires

enhanced disclosures, including revenue recognition policies to identify performance obligations to customers and significant judgments in measurement and recognition. The Company is currently in the process of assessing its adoption methodology and has not yet selected a method. The Company is also evaluating the impact of the adoption on its consolidated financial statements. While the Company believes that adoption will require capitalization of certain selling costs that are currently expensed, such as sales commissions, it has not yet determined whether the effect of these, or other adjustments will be material to revenue or results of operations. The Company is continuing to assess the impact of adoption, which may identify other impacts on the Company’s financial statements.

In February 2016, the FASB issued ASU No. 2016-02 which requires lessees to generally recognize most operating leases on the balance sheets but record expenses on the income statements in a manner similar to current accounting. The guidance is effective in 2020 for business entities that are not public with early adoption permitted. The Company is currently evaluating the impact this guidance will have on the Company’s financial statements. The Company currently expects that most operating lease commitments will be subject to the new standard and will be recognized as operating lease liabilities and right-of-use assets upon adoption. While the Company has not yet quantified the impact, these adjustments will increase total assets and total liabilities relative to such amounts reported prior to adoption.

In August 2016, the FASB issued ASU No. 2016-15, related to classification of certain cash receipts and payments. ASU 2016-15 is intended to add or clarify guidance on the classification of certain cash receipts and payments in the statement of cash flows and to eliminate the diversity in practice related to such classifications. The guidance in ASU 2016-15 is required for annual reporting periods beginning after December 15, 2018 for business entities that are not public, with early adoption permitted. The Company is currently evaluating the impact this guidance will have on the Company’s financial statements.

In November 2016, the FASB issued ASU, No. 2016-18, related to restricted cash, which is intended to add or clarify guidance on the classification and presentation of changes in restricted cash on the statement of cash flows and to eliminate the diversity in practice related to such classifications. The guidance in ASU 2016-18 is required for annual reporting periods ending after December 15, 2018, for business entities that are not public, with early adoption permitted. The Company is currently evaluating the impact this guidance will have on the Company’s financial statements.

The fair value measurements of assets and liabilities recognized in the accompanying consolidated balance sheets measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall on dates presented as follows (in thousands):

The Company uses the fair value hierarchy for financial assets and liabilities. The Company’s non-financial assets and liabilities, which include goodwill, intangible assets, and long-lived assets, are not required to be carried at fair value on a recurring basis.

The Company’s Series A preferred stock warrants were recorded at fair value at December 31, 2015 which required the use of Level 3 inputs. There were no Series A preferred stock warrants outstanding at December 31, 2016 and March 31, 2017.

The Company used a PWERM to value the Series A preferred stock warrants as of December 31, 2015. PWERM is a scenario-based analysis that estimates the value per share based on the probability-weighted present value of expected future investment returns, considering each of the possible outcomes available to the Company, as well as the rights of each share class. PWERM allocates the equity value to each class of the Company’s equity including its Series A preferred stock warrants. In utilizing the PWERM, the Company assigned a 70% probability of an initial public offering; a 10% probability of a sale of the Company; and 20% probability of remaining a private company. Each of these probabilities and dates were then evaluated to determine an expected enterprise value at each date. These enterprise values were then placed into a participation payout model which allocates value to each respective equity instrument in the capital structure.

The Company estimates the fair value of earnout liabilities using the probability-weighted discounted cash flow and Monte Carlo simulations. The Company measured the fair value of the 2015 acquisition of VAT Applications earnout liability using a Monte Carlo simulation approach which utilized a discount rate of 15% and a risk-free rate is based on linear interpolated U.S. Treasury rates commensurate with the term. As of December 31, 2016 and March 31, 2017, the earnout liability was valued utilizing a discount rate of 16% and a risk-free rate based on linear interpolated U.S. Treasury rates commensurate with the term.

The Company measured the fair value of the 2016 acquisition of Gyori earnout liability using a Monte Carlo simulation approach which utilized a discount rate of 19% and a risk-free rate based on

linear interpolated U.S. Treasury rates commensurate with the term. As of December 31, 2016 and March 31, 2017, the earnout liability was valued utilizing a discount rate of 20% and a risk-free rate based on linear interpolated U.S. Treasury rates commensurate with the term.

Earnout liabilities are classified as Level 3 liabilities because the Company uses unobservable inputs to value them, reflecting its assessment of the assumptions market participants would use to value these liabilities. Changes in the fair value of earnout liability are recorded as other (income) expense, net in the consolidated statements of operations.

A reconciliation of the beginning and ending balances of recurring fair value measurements recognized in the accompanying consolidated balance sheets using significant unobservable (Level 3) inputs is as follows (in thousands):

Depreciation expense was $5.1 million, $5.2 million, $1.3 million (unaudited), and $1.2 million (unaudited) for the years ended December 31, 2015 and 2016 and for the three months ended March 31, 2016 and 2017, respectively.

On September 22, 2016, the Company completed a stock purchase agreement (the “Gyori Purchase”) to acquire Gyori Eto Empreendimentos e Particpacoes (“Gyori”), a business that provides certain tax-related compliance solutions and content for the Brazilian market. The business was previously conducted by five related companies and was combined into one holding company, Gyori, several months prior to the closing of the acquisition. The Company accounted for the Gyori Purchase as a business combination. As a result of the acquisition, the Company further expands its global reach and its ability to provide transaction tax solutions in one of the world’s most complicated transaction tax jurisdictions.

The Company has commenced integration of Gyori’s operations, including sales activities and general and administrative functions into the Company’s worldwide operations and is re-branding the product offerings to use the Avalara tradename. Acquisition-related costs of $1.2 million for the year ended December 31, 2016, were primarily for professional fees to perform due diligence and legal fees associated with the acquisition.

The total purchase price was $21.7 million, consisting of $17.2 million in cash, 571,429 shares of common stock valued at $3.8 million, and an earnout provision valued at $0.7 million with a maximum payout of $6.8 million based on the acquisition’s future financial performance. The earnout provides for three annual payouts based on achieving specified growth in base annual recurring revenue (“BARR”) for each year. The BARR, as defined in the stock purchase agreement, is based on such revenue from

July 1, 2015 to June 30, 2016. The maximum annual payments that can be earned in each of the next three year periods is as follows:

(1) For Year 1 (July 1, 2016 to June 30, 2017) achieving 25% growth over BARR earns $0.6 million;

(2) for Year 2 (July 1, 2017 to June 30, 2018), achieving 68.75% growth over BARR earns $2.5 million; and

(3) for Year 3 (July 1, 2018 to June 30, 2019), achieving 144.69% growth over BARR earns $3.7 million.

The earnout was originally recognized at fair value at the date of the business combination and is recorded as liability on the balance sheet.

The allocation of the fair value of the assets acquired and the liabilities assumed in the Gyori Purchase is provided in the following table (in thousands):

The Company utilizes different valuation approaches and methodologies to determine the fair value of the acquired assets. A summary of the valuation methodologies, significant assumptions, and estimated useful lives for acquired intangibles in the Gyori Purchase are provided in the below table (in thousands):

The excess of the purchase price over the net identifiable tangible and intangible assets of $19.4 million has been recorded as goodwill, which includes synergies expected from the combined service offerings and the value of the assembled workforce. The goodwill is expected to be non-deductible for tax purposes.

For the period from the date of the Gyori acquisition through December 31, 2016, revenue was $1.2 million and the pre-tax loss was $1.4 million from the Gyori business.

On June 10, 2015, the Company entered into a Share Purchase Agreement (the “iVAT Purchase”) with VAT Applications NV, VAT House Services NV and VAT Integrations BVBA, (collectively “iVAT”). iVAT is a developer of the iVAT suite of VAT compliance software and services for businesses compliance. The Company accounted for the iVAT Purchase as a business combination. As a result of the acquisition the Company expands its global reach and expands its ability to provide VAT content. Acquisition-related costs of approximately $0.1 million for the year ended December 31, 2015 were primarily for professional fees to perform due diligence and other procedures associated with the acquisition.

The total purchase price of this transaction was $16.5 million, consisting of $11.3 million paid in cash and earnout of $5.2 million.

Based on the terms of the iVAT purchase agreement, the earnout allows for three annual payouts equal to 55% of the amount above baseline bookings for each year. The baseline bookings, as defined in the purchase agreement, is equal to (1) the combined bookings from July 1, 2014 to June 30, 2015 for Year 1; (2) for Year 2, the baseline is equal to the combined bookings in Year 1 and; (3) for Year 3, the baseline is equal to the combined bookings in Year 2. The earnout was originally recognized at fair value at the date of the business combination and was recorded as liability on the balance sheet.

The allocation of the fair value of the assets acquired and the liabilities assumed in the iVAT Purchase is provided in the following table (in thousands):

The Company utilizes different valuation approaches and methodologies to determine the fair value of the acquired assets. A summary of the valuation methodologies, significant assumptions, and estimated useful lives for acquired intangibles in the iVAT Purchase are provided in the below table (in thousands):

The excess of the purchase price over the net identified tangible and intangible assets of $10.5 million has been recorded as goodwill, which includes expected synergies and the value of the assembled workforce. The goodwill is expected to be non-deductible for tax purposes.

For the period from the date of the iVAT Purchase through December 31, 2015, revenue from iVAT customers was $1.0 million and the pre-tax loss from the iVAT business was $2.3 million.

On June 1, 2015, the Company entered into a Stock Purchase Agreement (the “EZtax Purchase”) with BillSoft, Inc. (dba EZtax), (“EZtax”). EZtax is a provider of automated software solutions for telecom sales tax compliance. The Company accounted for the EZtax Purchase as a business combination. As a result of the acquisition, the Company enhanced its platform by expanding its content database and delivering a widely-distributed solution. Acquisition-related costs of approximately $0.2 million for the year ended December 31, 2015 were primarily for professional fees to perform due diligence and other procedures associated with the acquisition.

The total purchase price of this transaction was $28.1 million, consisting entirely of cash. The allocation of the fair value of the assets acquired and the liabilities assumed in the EZtax Purchase is provided in the following table (in thousands):

The Company utilizes different valuation approaches and methodologies to determine the fair value of the acquired assets. A summary of the valuation methodologies, significant assumptions, and estimated useful lives for acquired intangibles in the EZtax Purchase are provided in the below table (in thousands):

The excess of the purchase price over the net identified tangible and intangible assets of $23.0 million has been recorded as goodwill, which includes expected synergies and the value of the assembled workforce. The goodwill is expected to be non-deductible for tax purposes.

For the period from the date of the EZtax Purchase through December 31, 2015, revenue from EZtax customers was $6.3 million and the pre-tax loss from the EZtax business was $2.5 million.

On February 25, 2015, the Company entered into an Agreement and Plan to Merger (the “HotSpot Purchase”) with HotSpot Tax, Inc. (“HotSpot”). HotSpot is a provider of comprehensive, cloud-based, automated software solutions for vacation rental tax compliance for companies in the United States. The Company accounted for the HotSpot Purchase as a business combination. As a

result of the acquisition the Company enhanced its platform by expanding its content database and delivering a widely-distributed solution. Acquisition-related costs incurred, which primarily for professional fees to perform due diligence and other procedures associated with the acquisition, were expensed as incurred and were not material for the year ended December 31, 2015.

The total purchase price of this transaction was $9.1 million, consisting of $6.4 million paid in cash, 341,163 shares of Series D-1 preferred stock valued at $2.3 million, and earnout with an estimated fair value of $0.4 million at the acquisition date. The value of the Company’s Series D preferred stock was determined by using a PWERM, which assigned a 60% probability of an initial public offering in 2016; a 10% probability of a sale of the Company in 2017; and 30% probability of remaining a private company.

The earnout in the HotSpot Purchase provides for a one-time payment of $0.5 million if revenue attributable HotSpot customers for the period of January 1, 2016 through December 31, 2016 meets certain thresholds. The Company is not required to issue any earnout consideration if revenue during this period is less than $2.0 million. Factoring in a discount rate of 4% and probabilities of various scenarios, the fair value of the earnout was estimated to be $0.4 million at the date of acquisition on February 25, 2014. The earnout was recognized at fair value at the date of the business combination and was recorded as a liability on the balance sheet.

The allocation of the fair value of the assets acquired and the liabilities assumed in the HotSpot Purchase is provided in the following table (in thousands):

The Company utilizes different valuation approaches and methodologies to determine the fair value of the acquired assets. A summary of the valuation methodologies, significant assumptions, and estimated useful lives for acquired intangibles in the HotSpot Purchase are provided in the below table (in thousands):

The excess of the purchase price over the net identified tangible and intangible assets of $6.2 million has been recorded as goodwill, which includes expected synergies and the value of the assembled workforce. The goodwill is expected to be non-deductible for tax purposes.

For the period from the date of the HotSpot Purchase through December 31, 2015, revenue from HotSpot customers was $0.8 million and the pre-tax loss from the HotSpot business was $1.6 million.

The unaudited pro forma financial information in the table below summarizes the combined results of operations for Avalara, Gyori, VATapp, HotSpot, and EZtax (which were considered relevant for the purposes of unaudited pro forma financial information disclosure) as though the companies were combined as of January 1, 2015. The unaudited pro forma financial information for all periods presented also included the business combination accounting effects resulting from these acquisitions, including amortization charges from acquired intangible assets. The unaudited pro forma financial information as presented below is for informational purposes only and is not necessarily indicative of the results of operations that would have been achieved if the acquisitions had taken place as of January 1, 2015.

Intangible assets are generally amortized on a straight-line basis over the remaining estimated useful life as management believes that this reflects the expected benefit to be received from these assets. Intangible assets amortization expense was $4.1 million, $5.1 million, $1.2 million (unaudited), and $1.4 million (unaudited) for the years ended December 31, 2015 and 2016 and for the three months ended March 31, 2016 and 2017, respectively. Amortization expense related to these intangible assets is expected to be as follows (in thousands):

Changes in the carrying amount of goodwill through March 31, 2017, are summarized as follows (in thousands):

The Company has non-cancelable operating leases for office facilities in United States, United Kingdom, Belgium, Brazil and India that expire through 2026. Rent expense was $4.7 million and $4.8 million for the years ended December 31, 2015 and 2016, respectively. Rent expense was $1.0 million (unaudited) and $1.1 million (unaudited) for the three months ended March 31, 2016 and 2017, respectively.

The Company’s obligation for payments under these leases is as follows (in thousands):

In June 2016, the Company entered into an Office Lease Agreement (the “King Street Lease”), which the Company will use for its corporate headquarters replacing the Company’s current headquarters in Seattle, Washington. The Company’s lease for its current corporate headquarters is set to expire at the end of 2022.

The King Street Lease provides for a term of 120 full calendar months commencing when the Landlord delivers the premises to the Company, which is expected to be during the first quarter of 2018. Pursuant to the King Street Lease, base rent will be approximately $231,424 per month for the first ten months following the commencement of the Term, and will increase each twelve-month period thereafter and as additional floors are added to the lease term. Further, base rent will be approximately $506,043 per month for the final twelve months of the lease. The base rent payments do not include the Company’s proportionate share of any operating expenses for the location.

The Company has commitments related to network infrastructure, hosting services, and software licenses. The Company’s obligation for future payments under these contracts is $2.5 million, $2.4 million, $0.7 million, and $0.3 million for each of the years ended December 31, 2017 through 2020, respectively.

Loss contingencies may arise in connection with the ordinary conduct of the Company’s business activities. The Company considers all loss contingencies on a quarterly basis in accordance with GAAP and based on known facts assesses whether potential losses are considered reasonably possible, probable and estimable. The Company establishes an accrual for loss contingencies when the loss is both probable and reasonably estimable. These accruals represent management’s best estimate of probable losses and, in such cases, there may be an exposure to loss in excess of the amounts accrued. Significant judgment is required to determine both likelihood of there being a probable loss and the estimated amount of a loss. If a loss contingency is not both probable and reasonably estimable, the Company does not establish an accrual, but will evaluate other disclosure requirements and continue to monitor the matter for developments that will make the loss contingency both probable and reasonably estimable. The ultimate outcome of any litigation relating to a loss contingency is uncertain and, regardless of outcome, litigation can have an adverse impact on the Company because of defense costs, negative publicity, diversion of management resources and other factors.

Pursuant to the Company’s agreement with the Streamlined Sales Tax Governing Board, Inc., or SST, the Company calculates and remits sales taxes to certain states on behalf of its customers, and that agreement contains provisions detailing the circumstances under which the Company may become liable to member states in the event of delinquent payment of taxes. In a situation where the state is conducting a sales tax audit and the Company’s customer has declared bankruptcy or otherwise terminated operations before the appropriate documentation or tax liabilities have been remitted to the taxing jurisdiction, the Company could be held to be financially responsible for certain tax liabilities.

The Company accrues for estimated losses for SST sales tax audits at the time it recognizes revenue based on an evaluation of the history of loss in comparison to historical revenue. The Company adjusts this estimate as needed when actual experience differs from previously recorded amounts, or when a particularly significant or unusual claim or liability is deemed probable of payment by the Company. The reserve for estimated losses from SST sales tax audits is $0.2 million, $0.2 million, and $0.1 million (unaudited) as of December 31, 2015 and 2016 and March 31, 2017, respectively.

In its standard subscription agreements the Company has agreed to indemnification provisions with respect to certain matters. Further, from time to time, the Company has also assumed indemnification obligations through its acquisition activity. These indemnification provisions can create a liability to the Company if its services do not appropriately calculate taxes due to states, or if the Company is delinquent in filing of returns on behalf of its customers. Although the Company’s agreements have disclaimers of warranties and limit its liability (beyond the amounts the Company agrees to pay pursuant to its indemnification obligations and guarantees, as applicable), a court could determine that such disclaimers and limitations are unenforceable as a matter of law and hold the Company liable for certain errors. Further, in some instances the Company has negotiated agreements with specific customers or assumed agreements in connection with the Company’s acquisitions that do not limit this liability or disclaim these warranties. It is not possible to reasonably estimate the potential loss under these indemnification arrangements.

While the Company has never paid a material claim related to these indemnification provisions, the Company believes that, as of December 31, 2016 and March 31, 2017 (unaudited), there is a reasonable possibility that a loss may be incurred pursuant to certain of these arrangements and estimates a range of loss of up to $2.0 million. The Company has not record an accrual related to these arrangements as of December 31, 2016 or March 31, 2017 (unaudited), because it has not determined that a loss is probable. While no claim has been asserted against the Company, if such claim were made, the Company would vigorously defend itself. The ultimate outcome of these potential obligations is unknown, and it is possible that the actual losses could be higher than the estimated range.

In June 2016, the Company entered into a loan and security agreement, or the Senior Credit Facility, with Silicon Valley Bank and Ally Bank (the “Lenders”). The credit arrangements include a senior secured $25.0 million term loan facility and a $25.0 million revolving credit facility. In June 2016, the Company also entered into a subordinated loan and security agreement (the “Subordinated Credit Facility”), with Silicon Valley Bank (together with the Senior Credit Facility, the “2016 Credit Facilities”).

This credit arrangement includes a $10.0 million subordinated term loan facility. The 2016 Credit Facilities paid off the Company’s 2015 Credit Facility. The $25.0 million term loan under the Senior Credit Facility must be repaid in June 2019, with principal payments beginning July 1, 2017. The $25.0 million revolver under the Senior Credit Facility is subject to a borrowing base limitation and must be repaid in June 2018. The subordinated $10.0 million term loan under the Subordinated Credit Facility must be repaid by October 2019 and was available to be drawn through June 6, 2017. No borrowings were drawn under the subordinated term loan. The obligations under the 2016 Credit Facilities are collateralized by substantially all assets, including intellectual property, receivables and other tangible and intangible assets of the Company.

Collectively, the 2016 Credit Facilities includes several affirmative and negative covenants, including a requirement that the Company maintain minimum net billings, minimum liquidity and observe restrictions on dispositions of property, changes in its business, mergers or acquisitions, incurring indebtedness, and distributions or investments. Written consent of the requisite Lenders is required to pay dividends to shareholders, with the exception of dividends payable in common stock. At December 31, 2016, the Company was not in compliance with the minimum net billings covenant pursuant to the Senior Credit Facility. In March 2017, the Company received a waiver from the Lenders of the Senior Credit Facility for the December 31, 2016 non-compliance. In April 2017, the Company and the Lenders of both 2016 Credit Facilities amended the minimum net billings covenant such that the Company expects to maintain covenant compliance for the next twelve months.

Under the Senior Credit Facility, the interest rate on the term loan is the prime rate plus 3% and the interest rate on the revolver is the prime rate plus 2%. As of March 31, 2017, the Company had borrowings of $27 million (unaudited) outstanding under the term loan facility bearing interest at an annual rate of 6.75%. Following the waiver obtained in March 2017 and the amendment in April 2017, $23 million (unaudited) remained available for borrowing under the revolving credit facility. No borrowings were outstanding under the subordinated term loan facility as of March 31, 2017.

Upon acquisition of Gyori (a Brazilian entity), the Company assumed $0.6 million of several loans and credit lines with Itau Unibanco and Banco Santander (see Note 5). The debt obligations mature incrementally beginning in 2017 through 2019 and, in some cases, are secured by the trade receivables of Gyori. As of December 31, 2016 and March 31, 2017, the Company had borrowings in Brazil of $0.4 million and $0.3 million (unaudited) outstanding.

In December 2015, the Company amended and restated its existing loan and security agreement (the “2015 Credit Agreement”) with Silicon Valley Bank. The credit arrangements under the Credit Agreement included a senior secured $10.0 million term loan facility (the “2015 Term Loan”), and a $25.0 million revolving credit facility (the “2015 Revolver). The Company collectively referred to the 2015 Term Loan and the 2015 Revolver as the “2015 Credit Facility”.

In August 2008, the Company entered into a note payable for $0.4 million that bears interest at 2.54%. The note is currently payable and due upon demand with a remaining balance of $0.2 million as of December 31, 2015 and 2016, and March 31, 2017 (unaudited).

Deferred financing fees, net of amortization, related to the Credit Facility are reflected as a direct reduction in the carrying amount of long-term debt in the balance sheet and the table above. As of December 31, 2015 and 2016 and March 31, 2017, deferred financing fees, net of amortization, were $0.1 million, $0.3 million and $0.3 million (unaudited), respectively.

As of December 31, 2016, future annual principal payments due under outstanding borrowings were as follows (in thousands):

The Company is authorized to issue two classes of stock designated as common stock and preferred stock. As of December 31, 2015, the Company was authorized to issue up to 135,000,000 shares of common stock. As of December 31, 2016, and March 31, 2017, the Company is authorized to issue up to 153,944,895 shares of common stock with a par value of $0.0001 per share. The Company has a single class of common stock.

The following shares of common stock have been reserved for future issuance upon conversion of the preferred stock, upon exercise of outstanding warrants to acquire preferred stock and common stock and upon exercise of options to acquire common stock at (in thousands):

The Company had designated ten outstanding series of convertible redeemable preferred stock (collectively, the “Series Preferred Stock”, consisting of Series A, A-1, and A-2, Series B and B-1, Series C and C-1, Series D, D-1 and D-2 as of December 31, 2016). As of December 31, 2015, the Company was authorized to issue 98,078,343 shares of preferred stock. As of December 31, 2016, and March 31, 2017 (unaudited), the Company was authorized to issue 106,346,091 shares of preferred stock with a par value of $0.0001 per share.

In November 2014, to fund the repurchase of its common and preferred stock, the Company offered Series D-1 preferred stock for sale to a group of accredited investors at a per share purchase prices of $6.32. In January 2015, in conjunction with the closing of the common stock and preferred stock repurchase, the Company issued an aggregate of 6,698,370 shares of Series D-1 preferred stock, for aggregate cash proceeds of $42.3 million.

In February 2015, the Company issued 341,163 shares of Series D-1 preferred stock at $6.68 per share related to the acquisition of HotSpot Tax, Inc.

In August 2016, the Company initiated a limited time tender offer, pursuant to which it offered to repurchase its common stock at a per share price of $6.46 and shares of Series A preferred stock, Series A-1 preferred stock, Series A-2 preferred stock, Series B preferred stock, Series B-1 preferred stock, Series C preferred stock, Series C-1 preferred stock, Series D preferred stock and Series D-1 preferred stock at a per share purchase price of $6.65. The tender offer was provided to all existing shareholders. Employees holding vested and currently exercisable stock options could participate in the repurchase through exercise and tender of shares. The prices paid in this repurchase were equal

to the fair value of the Company’s shares on the offer date, as determined through comparison to a valuation completed as of June 30, 2016. To fund the repurchase of its common and preferred stock, the Company offered a new round of Series D-2 preferred stock for sale to a group of accredited investors at a per share purchase prices of $6.75. In September 2016, in conjunction with the closing of the common stock and preferred stock repurchase, the Company issued an aggregate of 14,244,640 shares of Series D-2 preferred stock, for aggregate cash proceeds of $96.2 million.

The Series Preferred Stock have conversion to common and liquidation values per share as follows:

The rights, preferences, privileges, and restrictions for the Series Preferred Stock are as follows:

The Series Preferred Stock shall be entitled to vote on all matters submitted to the shareholders for a vote together with the holders of common stock, in addition to being entitled to vote as a separate class, or classes, on certain other matters. Each share of common stock is entitled to one vote. Each share of Series Preferred Stock is entitled to a number of votes equal to the number of shares of common stock issuable upon conversion of such Series Preferred Stock as of the record date for such vote.

The Company shall not declare or pay or set apart any dividend on any shares of Series Preferred Stock unless the Company shall simultaneously declare and pay an equivalent dividend in respect of each of the other outstanding shares of Series Preferred Stock (on a converted to common basis). Dividends are payable when declared by the board of directors without cumulative preferences. No dividends were declared or paid during the years ended December 31, 2015 and 2016, or for the three months ended March 31, 2017 (unaudited).

In the event of any voluntary or involuntary liquidation, dissolution, or winding up of the Company, the holders of shares of Series Preferred Stock then outstanding shall be entitled to receive by reason of their ownership in preference to any distribution of assets of the Company to the holders of the

common stock or any other of the preferred stock that ranks junior in liquidation to the Series Preferred Stock, on a pari passu basis, an amount per share equal to the liquidation value plus all declared and unpaid dividends on such shares of Series Preferred Stock. The table above lists the liquidation value of the Series Preferred Stock before adjustment for stock dividends, stock splits, combinations, reorganizations, recapitalizations, reclassifications, or similar transactions affecting the number of outstanding shares.

The Series Preferred Stock contain provisions that, in the event of a change in the control of the Company, would give the holders of the Series Preferred Stock liquidation rights equal to the liquidation preference on the Series Preferred Stock. Due to these redemption characteristics, the Company’s convertible preferred stock has been presented separate and apart from permanent shareholders’ equity in the consolidated balance sheets.

The Series Preferred Stock is convertible to common stock. Any shares of Series Preferred Stock may, at the option of the holder, be converted at any time into fully-paid and non-assessable shares of common stock. The Series Preferred Stock also contain an anti-dilution conversion feature under which the respective conversion prices established at the time of each issuance of Series Preferred Stock will be reset to a lower conversion price, if and when, the Company is to issue additional shares of any class of stock at a price that is lower than the initial conversion price established in each respective issuance of Series Preferred Stock. This form of anti-dilution protection is commonly referred to as “down-round protection.”

All outstanding shares of Series Preferred Stock shall automatically be converted into common stock upon the earlier of (1) the effectiveness of a registration statement in connection with a Qualified IPO (a sale of common stock to the public that results in aggregate cash proceeds to the Company of not less than $50.0 million) or (2) the date specified by written consent or agreement of the holders of a majority of the then-outstanding shares of Series Preferred Stock, voting together as a single class; provided, that (A) the conversion of the Series B and Series B-1 preferred stock shall require the written consent or agreement of the holders of a majority of the then-outstanding shares of Series B and Series B-1 preferred stock, voting together as a single class, which majority shall include the approval of Sageview Capital Master, L.P. if Sageview holds at least 9,090,909 shares of Series B-1 preferred stock, (B) the conversion of the Series C and Series C-1 preferred stock shall require the written consent or agreement of the holders of a majority of the then-outstanding shares of Series C and Series C-1 preferred stock, voting together as a single class, (C) the conversion of the Series D-1 preferred stock shall require the written consent or agreement of the holders of a majority of the then-outstanding shares of Series D-1 preferred stock, voting together as a separate class, and (D) the conversion of the Series D-2 preferred stock shall require the written consent or agreement of the holders of a majority of the then-outstanding shares of Series D-2 preferred stock, voting together as a separate class. Additionally, a public offering at less than a per share price of one times the original purchase price for the Series D-1 preferred stock requires the holders of the then outstanding Series D-2 to provide written consent or agreement of a majority of the then-outstanding shares voting as a single class.

The Company shall not have the right to and the holders shall not have the right to require the Company to, redeem any shares of Series Preferred Stock, except as described in the Liquidation section above.

At March 31, 2017 (unaudited), the following warrants to purchase common stock were outstanding:

At December 31, 2016, the following warrants to purchase common stock were outstanding:

At December 31, 2015, the following warrants to purchase preferred stock and common stock were outstanding:

Common stock warrants have typically been granted to members of the Company’s board of directors for services provided and in connection with loan and security agreements. During each of 2015, 2016 and the three months ended March 31, 2017, the Company issued 160,000, 160,000 and 160,000 (unaudited) common stock warrants with weighted average exercise prices of $6.10, $6.30, and $6.92 per share (unaudited), respectively. The warrants granted to the Company’s board of directors were valued with a grant date fair value of $0.4 million and were expensed as general and administrative expenses for each of the years ended December 31, 2015 and 2016, and for the three months ended March 31, 2016 and 2017 (unaudited), respectively.

A summary of the Company’s accounting for the Series A preferred stock warrants is provided in the above disclosures in Notes 2 and 3. The Series A preferred stock warrants were fully exercised in 2016.

The Company has stock-based compensation plans that provide for the award of equity incentives, including stock options, stock bonuses, and restricted stock. As of December 31, 2016 and March 31, 2017, the Company had stock options outstanding under two stock-based compensation plans: the 2006 Plan and the Taxcient Plan.

Effective March 15, 2006, the Company adopted the 2006 Plan, which allows the Company to grant equity incentives to employees, non-employee directors, advisors, and consultants providing services to the Company. The 2006 Plan is administered by the Company’s board of directors, which has the discretion to grant options. The term of each option shall be no more than ten years, and the options typically vest monthly over a four-year period. The 2006 Plan provides that on the occurrence of certain strategic events, such as a change in control, the vesting of the options shall be accelerated unless such options are assumed by a successor corporation. As of December 31, 2015 and 2016 and March 31, 2017, there were 15,188,339, 17,972,333 and 20,651,688 shares (unaudited) subject to outstanding awards, respectively, and 7,621,645, 5,089,616 and 2,152,427 (unaudited) shares were available for issuance under the 2006 Plan, respectively.

In connection with the Company’s acquisition of Taxcient, Inc. (“Taxcient”) in 2010, the Company assumed the outstanding stock options issued by Taxcient under the Taxcient Plan. The Taxcient Plan provided for an option pool consisting of 656,119 shares of common stock of the Company, all of which options may be incentive stock options. At the time of the acquisition, the Company terminated the Taxcient Plan for purposes of future grants. If the Taxcient option holders elect to exercise their fully vested options, they are required to exercise into the Company’s shares at a ratio of 0.572667 shares to 1 share, as determined in the merger agreement. As of December 31, 2015 and 2016, and March 31, 2017, there were 58,829, 50,829 and 50,829 shares subject to outstanding Company awards under the Taxcient Plan, all of which were fully vested.

The following table summarizes stock option activity for the Company’s stock-based compensation plans:

A summary of options outstanding and vested as of December 31, 2016 is as follows:

The total intrinsic value of options exercised during 2015 and 2016 was $19.5 million and $8.6 million, respectively. The total intrinsic value of options exercised during the three months ended March 31, 2017 was $0.9 million (unaudited).

The aggregate intrinsic value disclosed in the table above is based on the difference between the exercise price of the options and the fair value of the Company’s common stock. The weighted average grant date fair value of options granted during the years ended December 31, 2015 and 2016 was $2.79 and $2.88 per share, respectively. The weighted average grant date fair value of options granted during the three months ended March 31, 2017 was $3.22 per share (unaudited). During the years ended December 31, 2015 and 2016, 1,998,174 and 4,462,740 options vested, respectively. During the three months ended March 31, 2017, 849,062 options vested (unaudited). There were 7,541,066 and 7,939,240 options unvested as of December 31, 2015 and 2016, respectively. There were 10,044,276 options unvested as of March 31, 2017 (unaudited).

Total stock-based compensation expense for stock options during the years ended December 31, 2015 and 2016 and the three months ended March 31, 2016 and 2017 was $5.5 million, $7.8 million, $1.7 million and $2.6 million (unaudited), respectively. Stock-based compensation expense is recorded on a straight-line basis over the vesting term of each option grant. As of December 31, 2015 and 2016 and March 31, 2016 and 2017, $9.9 million, $14.7 million, $11.9 million and $26.0 million (unaudited), respectively, of total unrecognized compensation expense related to stock options was expected to be recognized over a period of approximately four years.

All share-based payments to employees are measured based on the grant date fair value of the awards and recognized in the consolidated statements of operations over the period during which the employee is required to perform services in exchange for the award, generally the four-year, straight-line vesting period. The Company estimates the fair value of stock options granted using the Black-Scholes option-pricing model. For the periods presented, the fair value of options was estimated using the Black-Scholes option-pricing model with the following assumptions:

The fair value of the common stock underlying stock options and common stock warrants was estimated by the Board of Directors, with input from management. The Board of Directors intends all options granted to be exercisable at a price per share not less than the per share fair value of the Company’s common stock underlying those options on the date of grant. The enterprise value utilized in determining the fair value of common stock for financial reporting purposes was estimated using the market approach and the income approach. Under the market approach, the Company used the guideline public company method, which estimates the fair value of the business enterprise based on market prices of stock of guideline public companies and the option pricing method. Indications of value were estimated by utilizing revenue multiples to measure enterprise value. The guideline merged and acquired company method was not utilized in our valuation, as the Company regarded the method as less reliable as management believes it does not directly reflect the Company’s future prospects. The income approach estimates the enterprise value based on the present value of the Company’s future estimated cash flows and the residual value beyond the forecast period. The residual value was based on an exit (or terminal) multiple observed in the comparable company method analysis. The future cash flows and residual value are discounted to their present value to reflect the risks inherent in the Company achieving these estimated cash flows. The discount rate is based on venture capital rates of return for companies nearing an initial public offering. The discount rate is applied using the mid-year convention. Mid-year convention assumes that cash flows are generated evenly throughout the year, as opposed to in a lump sum at the end of the year.

The Company lacks sufficient historical volatility of its stock price. Selected volatility is representative of expected future volatility and was based on the historical and implied volatility of comparable publicly traded companies over a similar expected term.

The expected term represents the period that the Company’s stock-based awards are expected to be outstanding. Given the Company’s relative inexperience of significant exercise activity, the expected term assumptions were determined based on application of the simplified method of expected term calculation by averaging the vesting contractual life of option grants and the vesting period of such grants. This application, when coupled with the contractual life of 10 years and average vesting term of 4 years, creates an expected term of 6 years.

The risk-free interest rate is based on the rate for a U.S. Treasury zero-coupon issue with a term that closely approximates the expected life of the option grant at the date nearest the option grant date.

The compensation expense recorded for the Company’s fully vested stock compensation grants represents the grant date fair value of the total vested number of awards. Prior to the adoption of ASU 2016-09, the Company did not record compensation expense for awards that had been forfeit prior to vesting, and made estimates of current grants that ultimately are not expected to vest (i.e. expected forfeitures). Following the adoption of ASU 2016-09 on January 1, 2017, the Company accounts for forfeitures upon occurrence (see Note 2). The Company uses the straight-line attribution method for recognizing stock-based compensation expense.

In connection with the EZtax Purchase in 2015 (see Note 5), the Company issued 150,000 shares of restricted stock. These shares of restricted stock required the recipient to perform future services in order to vest in the shares two years from the date of grant. The fair value of the restricted shares was determined to be equal to $6.76 on the date of grant. On November 15, 2015, the restriction was released and the Company recognized all remaining stock based compensation of $1.0 million during the year ending December 31, 2015.

Domestic and foreign components of loss before income tax provision are as follows (in thousands):

Major differences between the deferral statutory rate and the effective tax rate are as follows (in thousands):

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities are as follows (in thousands):

As of December 31, 2015 and 2016, the Company had federal net operating loss carryforwards (“NOLs”) of approximately $208.4 million and $262.0 million, respectively, and state NOLs of

approximately $93.3 million and $139.5 million, respectively. If not utilized, the federal and state NOLs will expire in varying amounts beginning in 2024 for federal purposes and 2016 for state purposes. The Company performed a Section 382 study to determine whether the use of its organically generated NOLs was subject to limitation and concluded that no Section 382 limitation would apply. As of December 31, 2016, $1.1 million of the Company’s acquired federal NOLs were subject to Section 382 limitations. Future changes in the ownership of the Company could further limit the Company’s ability to utilize its NOLs. The Company has U.S. research and development credit carryforwards of $5.0 million as of December 31, 2016, which will begin to expire in 2030.

The Company has not recorded an NOL deferred tax asset related to windfall tax deductions generated by the exercise of stock options and stock warrants. Such amounts are prohibited from being recorded until they result in a reduction of taxes payable, at which time they will be credited to additional paid in capital. The tax affected NOL deferred tax asset that had not been recorded as of December 31, 2015 and 2016, was $9.1 million and $12.3 million, respectively.

The Company has assessed its ability to realize its deferred tax assets and has recorded a valuation allowance against such assets to the extent that, based on the weight of all available evidence, it is more likely than not that all or a portion of the deferred tax assets will not be realized. In assessing the likelihood of future realization of its deferred tax assets, the Company placed a significant amount of weight on its history of generating U.S. tax losses, including in the current year. During the years ended December 31, 2015 and 2016, the Company increased its valuation allowance by $27.4 million and $22.1 million, respectively. These increases were primarily related to U.S. federal and state tax losses incurred in each of the respective periods.

The Company does not adjust its deferred tax assets and liabilities that arise from temporary differences related to foreign investments that are considered permanent in duration. These temporary differences consist primarily of undistributed foreign earnings of $1.2 million and $2.2 million at December 31, 2015 and 2016, respectively. Given that there are many assumptions that must be made to calculate the hypothetical consequence of a repatriation of these earnings, the Company considers it currently impractical to compute an estimate of the impact.

The Company accounts for income tax uncertainties using a threshold of “more-likely-than-not”. In applying this threshold, the Company has established an accrual for uncertain tax positions related to its U.S. research and development credits and related to the deductibility of the Company’s bonus plan. As of December 31, 2015 and 2016 the Company had $3.8 million and $2.7 million of uncertain tax positions, of which the total amount of unrecognized tax benefits that if recognized would affect the effective tax rate is zero. During the year ending December 31, 2016, the Company filed an accounting method change with respect to its employee bonus plan which resulted in a $1.3 million reduction in the balance for uncertain tax positions. The Company has not recorded any interest or penalties related to uncertain tax positions. However, any such amounts recorded in the future will be classified as a component of income tax expense.

A reconciliation of the beginning and ending balances for uncertain tax positions is as follows (in thousands):

The $2.7 million research and development credit uncertain tax position reserve as of December 31, 2016 has been presented on the balance sheet and in the deferred tax inventory as a reduction to the related research and development tax credit deferred tax asset.

The Company files income tax returns in the U.S. federal jurisdiction, and various state and foreign jurisdictions. No U.S. federal or state income tax payments were made due to the Company’s NOL position. The Company made income tax payments of $0.1 million and $0.3 million related to the operations of its foreign subsidiaries for the years ended December 31, 2015 and 2016, respectively. With limited exceptions, all tax years for which the Company has filed a tax return remain open due to the existence of NOLs.

Pursuant to the EZtax Purchase in 2015 (see Note 5), the Company assumed responsibility of the existing operating lease agreement for the office facilities occupied by EZtax. The leased facilities are owned by an entity controlled by a member of the Company’s Advisory Board. In 2016, the operating lease was renewed for a term expected to expire on June 30, 2018. Under the terms of the agreement, lease payments were $0.3 million for the years ended December 31, 2015 and 2016. The Company’s obligation for payment under this lease is as following (in thousands):

The Company calculates basic and diluted net loss per share attributable to common shareholders in conformity with the two-class method required for companies with participating securities. The Company considers all series of convertible preferred stock to be participating securities. Under the two-class method, the net loss attributable to common shareholders is not allocated to the convertible preferred stock as the holders of convertible preferred stock do not have a contractual obligation to share in losses.

The diluted net loss per share attributable to common shareholders is computed by giving effect to all potential dilutive common stock equivalents outstanding for the period. For purposes of this calculation, convertible preferred stock, options to purchase common stock and warrants to purchase common stock are considered common stock equivalents but have been excluded from the calculation of diluted net loss per share attributable to common shareholders as their effect is antidilutive. Basic and diluted net loss per common share was the same for each period presented, as the inclusion of all potential common shares outstanding would have been antidilutive.

The following table sets forth the computation of basic and diluted net loss per common share (in thousands, except per share amounts):

The following weighted-average outstanding shares of common stock equivalents were excluded from the computation of diluted net loss per share attributable to common shareholders for the periods presented because the impact of including them would have been antidilutive (in thousands):

Unaudited Pro Forma Net Loss per Share Attributable to Common Shareholders

Upon closing of the proposed IPO, all shares of convertible preferred stock will automatically convert into 101,786,205 shares of common stock. The unaudited pro forma net loss per common share, basic and diluted, 2016 has been computed to give effect to the convertible preferred stock as if such shares had been converted to common stock as of the beginning of the period.

A reconciliation of the numerator and denominator used in the calculation of unaudited pro forma basic and diluted net loss per common share is as follows (in thousands, except per share amounts):

Subsequent events were evaluated from the balance sheet date of December 31, 2016 through June 26, 2017, the date at which the consolidated financial statements were available to be issued.

In May 2017, the Company entered into a non-cancellable agreement for software hosting services. Under the agreement, the Company is obligated to make minimum service payments totaling $11.0 million through April 30, 2021.

Subsequent events were evaluated from April 1, 2017 through June 26, 2017, which is the date the unaudited interim financial statements were available to be issued.

The expenses, other than underwriting discount that Avalara, Inc. (the “Registrant”) expects to incur in connection with the issuance and distribution of the securities being registered under this Registration Statement, are estimated to be as follows:

Each of the amounts set forth above, other than the Securities and Exchange Commission (the “SEC”) registration fee and the Financial Industry Regulatory Authority (“FINRA”) filing fee, is an estimate.

Section 510 of Chapter 23B.08 of the Washington Business Corporation Act provides, in general, that a corporation may indemnify an individual who was, is, or is threatened to be made a named defendant or respondent to a threatened, pending, or completed action, suit, or proceeding, whether civil, criminal, administrative, or investigative and whether formal or informal (for the purposes of this Item 14, a “proceeding”) because the individual is or was a director against the obligation to pay a judgment, settlement, penalty, fine (including an excise tax assessed with respect to an employee benefit plan), or reasonable expenses incurred with respect to a proceeding incurred in the proceeding if the individual acted in good faith and the individual believed, in the case of conduct in the individual’s official capacity with the corporation, that the individual’s conduct was in the corporation’s best interests, and, in all other cases, that the individual’s conduct was at least not opposed to the corporation’s best interests, and in the case of any criminal proceeding, the individual had no reasonable cause to believe the individual’s conduct was unlawful. A corporation may not indemnify a director under Section 510 of Chapter 23B.08 of the Washington Business Corporation Act in connection with a proceeding by or in the right of the corporation in which the director was adjudged liable to the corporation or in connection with any other proceeding charging improper benefit to the director, whether or not involving action in the director’s official capacity, in which the director was adjudged liable on the basis that personal benefit was improperly received by the director.

Section 520 of Chapter 23B.08 of the Washington Business Corporation Act provides that, unless limited by its articles of incorporation, a corporation shall indemnify a director who was wholly successful, on the merits or otherwise, in the defense of any proceeding to which the director was, is, or is threatened to be made a named defendant or respondent to a proceeding to which the director was party because of being a director of the corporation against reasonable expenses incurred by the director in connection with the proceeding.

Section 540 of Chapter 23B.08 of the Washington Business Corporation Act provides that, unless a corporation’s articles of incorporation provide otherwise, a director of a corporation who is party to a proceeding may apply for indemnification or advancement of expenses to the court conducting the proceeding or to another court of competent jurisdiction.

Section 570 of Chapter 23B.08 of the Washington Business Corporation Act provides that, unless a corporation’s articles of incorporation provide otherwise, an officer of a corporation who is not a director is entitled to mandatory indemnification under Section 520 of Chapter 23B.08 of the Washington Business Corporation Act, and is entitled to apply for court-ordered indemnification under Section 540 of Chapter 23B.08 of the Washington Business Corporation Act, in each case to the same extent as a director.

Upon the closing of the offering contemplated by this registration statement, the Registrant’s amended and restated articles of incorporation (the “Articles”), and its amended and restated bylaws (the “Bylaws”), will provide that the Registrant will indemnify its directors and officers to the fullest extent permitted by the Washington Business Corporation Act, including instances in which indemnification is otherwise discretionary under the law. The Bylaws will provide that the Registrant will indemnify its directors and officers against liability incurred as a result of their performance of services requested by the Registrant, and will advance to them reasonable expenses toward the defense of any such proceeding brought against them, except in any case in which liability results from:

The Articles also limit the liability of the Registrant’s directors to the Registrant and to its shareholders for monetary damages incurred in their capacity as a director to liability resulting from the same acts or omissions or transactions described above.

The Bylaws also provide that the Registrant may purchase and maintain liability insurance on behalf of its directors, officers, employees, and agents. The Registrant currently maintains a liability insurance policy pursuant to which its directors and officers may be indemnified against liability incurred as a result of serving in their capacities as directors and officers, subject to certain exclusions.

In addition, the Registrant has entered into indemnification agreements with each of its current directors and officers, and certain of its employees. These agreements provide for the indemnification of such persons for all reasonable expenses and liabilities incurred in connection with any action or proceeding brought against them by reason of the fact that they are or were serving in such capacity.

The Underwriting Agreement, to be filed as Exhibit 1.1 hereto, is expected to provide for indemnification by the underwriters named therein of the Registrant and its executive officers and directors, and by the Registrant of the underwriters, for certain liabilities, including liabilities arising under the Securities Act of 1933, as amended (the “Securities Act”).

The following sets forth information regarding unregistered securities sold by the Registrant from January 1, 2014 to June 19, 2017:

None of the foregoing transactions involved any underwriters, underwriting discounts or commissions, or any public offering. The Registrant believes the offers, sales and issuances of the above securities were exempt from registration under the Securities Act by virtue of Section 4(a)(2) of the Securities Act (or Regulation D promulgated thereunder) because the issuance of securities to the recipients did not involve a public offering, or in reliance on Rule 701 because the transactions were pursuant to compensatory benefit plans or contracts relating to compensation as provided under such rule. The recipients of the securities in each of these transactions represented their intentions to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof, and appropriate legends were placed upon the stock certificates issued in these transactions. All recipients had adequate access, through their relationships with us, to information about us. The sales of these securities were made without any general solicitation or advertising.

Financial statement schedules have been omitted, as the information required to be set forth therein is included in the Consolidated Financial Statements or Notes thereto appearing in the prospectus forming a part of this Registration Statement.

The undersigned Registrant hereby undertakes to provide to the underwriters at the closing specified in the Underwriting Agreement, certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser.

Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers, and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer, or controlling person of the Registrant in the successful defense of any action, suit, or proceeding) is asserted by such director, officer, or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.

(1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Seattle, State of Washington, on , 2017.

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Alesia L. Pinney and William D. Ingram, and each of them, his or her true and lawful agent, proxy, and attorney-in-fact, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to (1) act on, sign, and file with the Securities and Exchange Commission any and all amendments (including post-effective amendments) to this registration statement together with all schedules and exhibits thereto and any subsequent registration statement filed pursuant to Rule 462(b) under the Securities Act of 1933, as amended, together with all schedules and exhibits thereto, (2) act on, sign, and file such certificates, instruments, agreements, and other documents as may be necessary or appropriate in connection therewith, (3) act on and file any supplement to any prospectus included in this registration statement or any such amendment or any subsequent registration statement filed pursuant to Rule 462(b) under the Securities Act of 1933, as amended, and (4) take any and all actions that may be necessary or appropriate to be done, as fully for all intents and purposes as he or she might or could do in person, hereby approving, ratifying, and confirming all that such agent, proxy, and attorney-in-fact or any of his or her substitutes may lawfully do or cause to be done by virtue thereof.

Pursuant to the requirements of the Securities Act of 1933, as amended, this registration statement has been signed by the following persons in the capacities and on the dates indicated:


Large accelerated filer	☐		Accelerated filer	☐
Non-accelerated filer	☒	(do not check if a smaller reporting company)	Smaller reporting company	☐
Emerging growth company	☒



Title of Each Class of Securities to be Registered	Proposed Maximum Aggregate Offering Price(1)(2)	Amount of Registration Fee
Common Stock, par value $0.0001 per share	$	$


	Per Share	Total
Initial public offering price	$	$
Underwriting discount⁽¹⁾	$	$
Proceeds, before expenses, to Avalara	$	$


Assumed initial public offering price per share		$
Pro forma net tangible book value per share as of March 31, 2017, before giving effect to this offering	$
Increase in net tangible book value per share attributable to new investors

Pro forma as adjusted net tangible book value per share after giving effect to this offering

Dilution in pro forma as adjusted net tangible book value per share to new investors in this offering		$


	Shares Purchased				Total Consideration					Average Price Per Share
	Number	Percent			Amount		Percent			Average Price Per Share
Existing shareholders				%	$				%	$
New investors

Totals			100	%		$		100	%


Goldman Sachs & Co. LLC		J.P. Morgan		BofA Merrill Lynch


	Page
Prospectus Summary		1
Risk Factors		15
Special Note Regarding Forward-Looking Statements		40
Industry and Market Data		42
Use of Proceeds		43
Dividend Policy		44
Capitalization		45
Dilution		47
Selected Consolidated Financial Data		50
Management’s Discussion and Analysis of Financial Condition and Results of Operations		53
Business		80
Management		98
Executive Compensation		107
Certain Relationships and Related Person Transactions		120
Principal Shareholders		125
Description of Capital Stock		128
Shares Eligible for Future Sale		135
Material U.S. Federal Income and Estate Tax Consequences for Non-U.S. Holders		138
Underwriting		142
Legal Matters		147
Experts		147
Where You Can Find More Information		147
Index to Consolidated Financial Statements		F-1


	As of March 31, 2017
	Actual			Pro Forma			Pro Forma As Adjusted
	(in thousands, except per share data)
Cash and cash equivalents	$	13,876		$	13,876		$

2016 Credit Facilities (current and noncurrent)	$	26,732		$	26,732		$
Convertible preferred stock, $0.0001 par value—106,346,091 shares authorized and 101,786,205 shares issued and outstanding, actual; no shares authorized, issued, and outstanding, pro forma and pro forma as adjusted		370,921			—			—
Total shareholders’ equity (deficit):
Preferred stock, $0.0001 par value—no shares authorized, issued and outstanding, actual and pro forma; shares authorized, no shares issued and outstanding, pro forma as adjusted		—			—			—
Common stock, $0.0001 par value—153,944,895 shares authorized and 10,862,533 shares issued and outstanding, actual; shares authorized and shares issued and outstanding, pro forma; shares authorized and shares issued and outstanding, pro forma as adjusted		1
Additional paid-in capital		9,394
Accumulated other comprehensive loss		(458	)		(458	)
Accumulated deficit		(364,720	)		(364,720	)

Total shareholders’ equity (deficit)		(355,783	)

Total capitalization	$	41,870		$			$


	Year Ended December 31,						Three Months Ended March 31,
	2015			2016			2016			2017
							(unaudited)
	(in thousands, except per share data)
Consolidated Statements of Operations Data:
Revenue:
Subscription and returns	$	112,298		$	154,706		$	35,721		$	45,899
Professional services and other		10,354			12,459			2,843			3,117

Total revenue		122,652			167,165			38,564			49,016
Cost of revenue⁽¹⁾:
Subscription and returns		35,020			41,775			9,920			11,244
Professional services and other		5,725			6,738			1,674			2,319

Total cost of revenue		40,745			48,513			11,594			13,563

Gross profit		81,907			118,652			26,970			35,453

Operating expenses:
Research and development⁽¹⁾		29,787			32,848			8,422			9,682
Sales and marketing⁽¹⁾		98,686			103,483			23,665			30,300
General and administrative⁽¹⁾		33,683			36,955			8,668			10,613

Total operating expenses		162,156			173,286			40,755			50,595

Operating loss		(80,249	)		(54,634	)		(13,785	)		(15,142	)

Total other (income) expense, net		1,614			2,955			74			954

Loss before income taxes		(81,863	)		(57,589	)		(13,859	)		(16,096	)
Provision for (benefit from) income taxes		(3,593	)		640			101			(149	)

Net loss	$	(78,270	)	$	(58,229	)	$	(13,960	)	$	(15,947	)

Net loss attributable to common shareholders—basic and diluted⁽²⁾	$	(78,270	)	$	(58,229	)	$	(13,960	)	$	(15,947	)

Net loss per share attributable to common shareholders—basic and diluted⁽²⁾	$	(8.53	)	$	(5.10	)	$	(1.20	)	$	(1.48	)

Weighted average shares of common stock outstanding—basic and diluted⁽²⁾		9,173			11,412			11,592			10,779

Pro forma net loss attributable to common shareholders—basic and diluted (unaudited)⁽²⁾				$						$

Pro forma net loss per share attributable to common shareholders—basic and diluted (unaudited)⁽²⁾				$						$

Pro forma weighted average shares of common stock outstanding—basic and diluted (unaudited)⁽²⁾

Non-GAAP Financial Data (unaudited):
Non-GAAP operating loss⁽³⁾	$	(69,166	)	$	(41,448	)	$	(10,489	)	$	(10,687	)
Free cash flow⁽⁴⁾		(47,692	)		(27,383	)		(11,461	)		(8,070	)


	As of December 31,						As of March 31, 2017
	2015			2016			As of March 31, 2017
							(unaudited)
	(in thousands)
Consolidated Balance Sheet Data:
Cash and cash equivalents	$	10,677		$	20,230		$	13,876
Working capital (excluding deferred revenue)		6,574			9,400			3,298
Total assets		139,535			181,698			171,451
Deferred revenue (current and noncurrent)		56,758			72,511			77,433
Credit facility (current and noncurrent)		19,854			24,683			26,732
Total liabilities		119,665			154,785			156,313
Convertible preferred stock		283,640			370,921			370,921
Total shareholders’ equity (deficit)		(263,770	)		(344,008	)		(355,783	)


	Year Ended December 31,						Three Months Ended March 31,
	2015			2016			2016			2017
							(unaudited)
	(in thousands)
Revenue:
Subscription and returns	$	112,298		$	154,706		$	35,721		$	45,899
Professional services and other		10,354			12,459			2,843			3,117

Total revenue		122,652			167,165			38,564			49,016

Cost of revenue⁽¹⁾:
Subscription and returns		35,020			41,775			9,920			11,244
Professional services and other		5,725			6,738			1,674			2,319

Total cost of revenue		40,745			48,513			11,594			13,563

Gross profit		81,907			118,652			26,970			35,453

Operating expenses:
Research and development⁽¹⁾		29,787			32,848			8,422			9,682
Sales and marketing⁽¹⁾		98,686			103,483			23,665			30,300
General and administrative⁽¹⁾		33,683			36,955			8,668			10,613

Total operating expenses		162,156			173,286			40,755			50,595

Operating loss		(80,249	)		(54,634	)		(13,785	)		(15,142	)

Total other (income) expense, net		1,614			2,955			74			954

Loss before income taxes		(81,863	)		(57,589	)		(13,859	)		(16,096	)
Provision for (benefit from) income taxes		(3,593	)		640			101			(149	)

Net loss	$	(78,270	)	$	(58,229	)	$	(13,960	)	$	(15,947	)


	Three Months Ended March 31,				Change
	2016		2017		Amount		Percentage
	(dollars in thousands)
Revenue:
Subscription and returns	$	35,721	$	45,899	$	10,178		29	%
Professional services and other		2,843		3,117		274		10	%

Total revenue	$	38,564	$	49,016	$	10,452		27	%


	Three Months Ended
	Mar 31, 2015			Jun 30, 2015			Sep 30, 2015			Dec 31, 2015			Mar 31, 2016			Jun 30, 2016			Sep 30, 2016			Dec 31, 2016			Mar 31, 2017
	(unaudited)
	(in thousands)
Revenue:
Subscription and returns	$	23,242		$	26,228		$	30,211		$	32,617		$	35,721		$	35,948		$	39,029		$	44,008		$	45,899
Professional services and other		2,110			2,321			3,083			2,840			2,843			3,100			2,988			3,528			3,117

Total revenue		25,352			28,549			33,294			35,457			38,564			39,048			42,017			47,536			49,016

Cost of revenue:
Subscription and returns		7,407			8,592			9,005			10,016			9,920			10,305			10,215			11,335			11,244
Professional services and other		1,460			1,521			1,400			1,344			1,674			1,672			1,623			1,769			2,319

Total cost of revenue		8,867			10,113			10,405			11,360			11,594			11,977			11,838			13,104			13,563

Gross profit		16,485			18,436			22,889			24,097			26,970			27,071			30,179			34,432			35,453

Operating expenses:
Research and development⁽¹⁾		6,075			7,217			7,856			8,639			8,422			8,691			7,724			8,011			9,682
Sales and marketing⁽¹⁾		21,679			24,605			26,217			26,185			23,665			26,379			25,825			27,614			30,300
General and administrative⁽¹⁾		8,061			7,632			7,837			10,153			8,668			8,375			10,260			9,652			10,613

Total operating expenses		35,815			39,454			41,910			44,977			40,755			43,445			43,809			45,277			50,595

Operating loss		(19,330	)		(21,018	)		(19,021	)		(20,880	)		(13,785	)		(16,374	)		(13,630	)		(10,845	)		(15,142	)

Total other (income) expense, net		711			362			564			(23	)		74			1,081			1,033			767			954

Loss before income taxes		(20,041	)		(21,380	)		(19,585	)		(20,857	)		(13,859	)		(17,455	)		(14,663	)		(11,612	)		(16,096	)

Provision for (benefit from) income taxes		(326	)		(2,846	)		(62	)		(359	)		101			198			118			223			(149	)

Net loss	$	(19,715	)	$	(18,534	)	$	(19,523	)	$	(20,498	)	$	(13,960	)	$	(17,653	)	$	(14,781	)	$	(11,835	)	$	(15,947	)


⁽¹⁾ The stock-based compensation expense included above was as follows:

	Three Months Ended
	Mar 31, 2015			Jun 30, 2015			Sep 30, 2015			Dec 31, 2015			Mar 31, 2016			Jun 30, 2016			Sep 30, 2016			Dec 31, 2016			Mar 31, 2017
	(unaudited)
	(in thousands)
Cost of revenue	$	104		$	117		$	119		$	156		$	194		$	212		$	227		$	223		$	226
Research and development		242			277			272			329			320			335			299			311			491
Sales and marketing		404			445			460			396			470			556			519			664			837
General and administrative		852			659			775			1,413			1,088			753			859			1,082			1,468

Total stock-based compensation	$	1,602		$	1,498		$	1,626		$	2,294		$	2,072		$	1,856		$	1,904		$	2,280		$	3,022


	For the Year Ended December 31,						For the Three Months Ended March 31,
	2015			2016			2016			2017
							(unaudited)
	(in thousands)
Cash (used in) provided by:
Operating activities	$	(39,780	)	$	(20,723	)	$	(9,688	)	$	(7,033	)
Investing activities		(53,773	)		(29,694	)		(4,314	)		2,356
Financing activities		15,261			60,027			10,177			(1,623	)


	Total		1 year		1-3 years		3-5 years		5 years
	(unaudited)
	(in thousands)
Principal payments on debt obligations	$	25,649	$	6,818	$	18,831	$	—	$	—
Interest payments on debt obligations		2,708		1,586		1,122		—		—
Operating lease obligations		79,203		5,601		22,840		24,079		26,683
Purchase obligations⁽¹⁾		5,852		2,454		3,398		—		—
Customer funds obligations⁽²⁾		12,046		12,046		—		—		—
Other long-term liabilities⁽³⁾		—		—		—		—		—

Total	$	125,471	$	28,519	$	46,191	$	24,079	$	26,883


Name	Age		Position
*Executive Officers*
Scott M. McFarlane		60	Chairman, Chief Executive Officer, and President
William D. Ingram		60	Chief Financial Officer and Treasurer
Alesia L. Pinney		53	Executive Vice President, General Counsel, and Secretary
Pascal Van Dooren		51	Executive Vice President and Chief Revenue Officer

*Directors*
Scott M. McFarlane		60	Chairman, Chief Executive Officer, and President
Marion R. Foote⁽¹⁾		71	Director
Edward A. Gilhuly⁽²⁾⁽³⁾		57	Director
Benjamin J. Goux⁽¹⁾⁽²⁾		45	Director
Tami L. Reller⁽¹⁾		52	Director
Justin L. Sadrian⁽²⁾⁽³⁾		45	Director
Rajeev Singh⁽²⁾		49	Director
Chelsea R. Stoner⁽¹⁾⁽²⁾		43	Director
Jared R. Vogt		48	Director and Founder—Special Projects
Gary L. Waterman⁽³⁾⁽⁴⁾		75	Director


Name	Option Awards⁽²⁾		Total
Douglas Burgam⁽³⁾	$	46,508	$	46,508
Marion Foote		46,508		46,508
Edward Gilhuly		46,508		46,508
Benjamin Goux		46,508		46,508
Tami Reller		46,508		46,508
Justin Sadrian		46,508		46,508
Rajeev Singh		—		—
Chelsea Stoner		46,508		46,508
Gary Waterman		46,508		46,508


Retainer	Amount
Board of Directors	$	32,000
Chair of committee
Audit		20,000
Compensation and Leadership Development		11,000
Nominating and corporate governance		7,500
Committee member
Audit		7,500
Compensation and Leadership Development		5,000
Nominating and Corporate Governance		3,500
Lead independent director		15,000


Name and Principal Position	Year		Salary⁽¹⁾		Option Awards⁽²⁾		Non-Equity Incentive Plan Compensation⁽³⁾		All Other Compensation⁽⁴⁾		Total
Scott McFarlane		2016	$	380,160	$	1,482,000	$	218,592	$	5,365	$	2,086,117
Chairman, Chief Executive Officer, and President
William Ingram		2016		301,154		2,839,752		120,160		25,726		3,287,440
Chief Financial Officer
Pascal Van Dooren		2016		276,360		309,702		152,685		2,650		741,397
Executive Vice President and Chief Revenue Officer


	Option Awards
Name	Vesting Commencement Date		Number of Securities Underlying Unexercised Options (#) Exercisable		Number of Securities Underlying Unexercised Options (#) Unexercisable			Option Exercise Price		Option Expiration Date
Scott McFarlane		1/22/2008		375,000		—		$	0.48		1/22/2018
		12/17/2010		1,063,865		—			0.75		2/18/2021
		3/28/2011		175,000		—			0.75		3/28/2021
		1/1/2013		391,666		8,334	⁽¹⁾		2.25		2/13/2023
		9/20/2013		406,250		93,750	⁽¹⁾		3.20		10/3/2023
		1/1/2014		191,666		208,334	⁽¹⁾		4.02		2/25/2024
		5/5/2016		—		500,000	⁽¹⁾		6.17		6/16/2026
William Ingram		12/14/2015		270,000		810,000	⁽¹⁾		6.30		1/25/2026
Pascal Van Dooren		10/3/2011		54,629		—			0.95		12/13/2021
		1/1/2013		97,916		2,084	⁽¹⁾		2.25		2/13/2023
		1/1/2014		255,208		94,792	⁽¹⁾		4.02		2/25/2024
		1/1/2015		—		50,000	⁽¹⁾		6.10		1/28/2025
		5/5/2016		—		104,488	⁽¹⁾		6.17		6/16/2026


Purchaser	Shares of Series D Preferred Stock Purchased		Aggregate Purchase Price
Entities associated with Battery⁽¹⁾		2,420,511	$	12,707,683
Sageview Capital Master, L.P.⁽²⁾		2,420,511		12,707,683


Purchaser	Shares of Series D-1 Preferred Stock Purchased		Aggregate Purchase Price
Entities associated with Warburg Pincus⁽¹⁾		15,822,784	$	99,999,995


Purchaser	Shares of Series D-1 Preferred Stock Purchased		Aggregate Purchase Price
Entities associated with Warburg Pincus⁽¹⁾		2,373,417	$	14,999,995
Marion Foote		120,000		758,400
Gary Waterman		79,113		499,994


Purchaser	Shares of Series D-2 Preferred Stock Purchased		Aggregate Purchase Price
Entities associated with Warburg Pincus⁽¹⁾		6,803,169	$	45,921,391
Entities associated with Sageview⁽²⁾		5,185,185		34,999,999
Gary Waterman		148,148		999,999
Pioneer Venture Partners LLC⁽³⁾		120,000		810,000


Shareholder	Shares of Common Stock Repurchased		Aggregate Purchase Price
Kevin P. Riegelsberger⁽¹⁾		525,000	$	3,076,500
Pascal Van Dooren		122,000		714,920
Scott McFarlane		120,222		704,501
David E. Rostov⁽²⁾		100,000		586,000
Benjamin Goux		35,000		205,100


	Number of Shares Beneficially Owned Prior to and After this Offering		Percentage of Shares Beneficially Owned
Name of Beneficial Owner			Prior to the Offering			After the Offering
Named Executive Officers and Directors:
Scott McFarlane⁽¹⁾		4,610,459		4.0	%
William Ingram⁽²⁾		405,629		*
Pascal Van Dooren⁽³⁾		512,093		*
Marion Foote⁽⁴⁾		1,041,627		*
Edward Gilhuly⁽⁵⁾		30,953,734		27.4	%
Benjamin Goux⁽⁶⁾		3,308,786		2.9	%
Tami Reller⁽⁷⁾		80,000		*
Justin Sadrian⁽⁸⁾⁽⁹⁾		27,363,177		24.3	%
Rajeev Singh⁽¹⁰⁾		20,000		*
Chelsea Stoner⁽¹¹⁾		100,000		*
Jared Vogt⁽¹²⁾		2,551,929		2.3	%
Gary Waterman⁽¹³⁾		2,852,696		2.5	%
All executive officers and directors as a group (13 persons)^(5)(9)(14)		74,181,025		62.7	%
5% Shareholders:
Entities associated with Battery⁽¹⁵⁾		11,371,493		10.1	%
Entities associated with Sageview⁽⁵⁾		30,953,734		27.4	%
Entities associated with Warburg Pincus⁽⁹⁾		27,303,177		24.2	%


Name		Number of Shares
Goldman Sachs & Co. LLC
J.P. Morgan Securities LLC
Merrill Lynch, Pierce, Fenner & Smith Incorporated
JMP Securities LLC
Pacific Crest Securities, a division of KeyBanc Capital Markets Inc.
Stifel, Nicolaus & Company, Incorporated.

Total


	Page
Report of Independent Registered Public Accounting Firm		F-2
Consolidated Balance Sheets		F-3
Consolidated Statements of Operations		F-5
Consolidated Statements of Comprehensive Loss		F-6
Consolidated Statements of Convertible Preferred Stock and Shareholders’ Deficit		F-7
Consolidated Statements of Cash Flows		F-8
Notes to Consolidated Financial Statements		F-9


	December 31,				March 31, 2017		Pro Forma March 31, 2017
	2015		2016		March 31, 2017		Pro Forma March 31, 2017
					(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	10,677	$	20,230	$	13,876
Trade accounts receivable—net of allowance for doubtful accounts of $1,154, $1,404 and $1,034, respectively		17,518		25,835		25,510
Prepaid expenses and other current assets		4,096		4,385		5,101

Total current assets before customer fund assets		32,291		50,450		44,487
Funds held from customers		5,018		10,737		7,361
Receivable from customers—net allowance of $266, $754 and $638, respectively		795		376		474

Total current assets		38,104		61,563		52,322

PROPERTY AND EQUIPMENT—Net		13,690		14,782		14,376

OTHER ASSETS:
Goodwill		60,754		79,748		80,549
Intangible assets—net		24,680		24,100		22,931
Other noncurrent assets		2,307		1,505		1,273

Total other assets		87,741		105,353		104,753

TOTAL ASSETS	$	139,535	$	181,698	$	171,451

LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accrued expenses and trade payables	$	22,559	$	33,482	$	30,819
Deferred revenue		48,680		63,764		68,717
Credit facility and notes payable		451		6,621		9,609
Capital lease obligations		81		14		2
Preferred stock warrant liability		1,936		—		—

Total current liabilities before customer funds obligations		73,707		103,881		109,147
Customer funds obligations		6,503		12,046		8,594

Total current liabilities		80,210		115,927		117,741
NONCURRENT LIABILITIES:
Deferred revenue		8,078		8,747		8,716
Deferred tax liability		1,816		3,160		2,957
Credit facility		19,625		18,711		17,634
Capital lease obligations		14		—		—
Deferred rent		4,193		4,813		4,686
Other noncurrent liabilities		5,729		3,427		4,579

Total liabilities		119,665		154,785		156,313

CONVERTIBLE PREFERRED STOCK:
Series A convertible preferred stock, par value $0.0001 per share–13,498 shares issued and outstanding as of December 31, 2015, 12,309 shares issued and outstanding as of December 31, 2016 and March 31, 2017, 15,966 authorized as of December 31, 2015, 13,814 authorized as of December 31, 2016 and March 31, 2017 (aggregate liquidation preference of $10,930); pro forma: no shares issued and outstanding as of March 31, 2017 (unaudited)		11,863		12,715		12,715	$

Series A-1 convertible preferred stock, par value $0.0001 per share–5,012 shares issued and outstanding as of December 31, 2015, 4,688 shares issued and outstanding as of December 31, 2016 and March 31, 2017, 5,436 authorized as of December 31, 2015, 5,012 authorized as of December 31, 2016 and March 31, 2017 (aggregate liquidation preference of $2,081); pro forma: no shares issued and outstanding as of March 31, 2017 (unaudited)		2,225		2,081		2,081

Series A-2 convertible preferred stock, par value $0.0001 per share–279 shares issued and outstanding as of December 31, 2015, and 2016 and March 31, 2017, 888 authorized as of December 31, 2015, 279 authorized as of December 31, 2016 and March 31, 2017 (aggregate liquidation preference of $472); pro forma: no shares issued and outstanding as of March 31, 2017 (unaudited)		303		303		303


	Convertible Preferred Stock						Common Stock					Additional Paid-In Capital			Accumulated Other Comprehensive Loss			Accumulated Deficit			Total Shareholders’ Deficit
	Shares			Amount			Shares			Amount		Additional Paid-In Capital			Accumulated Other Comprehensive Loss			Accumulated Deficit			Total Shareholders’ Deficit
BALANCE—December 31, 2014		88,346,678		$	242,701			8,725,485		$	1	$	4,647		$	(169	)	$	(167,348	)	$	(162,869	)
Issuance of Series D-1 preferred stock—net of issuance costs of $64		6,698,370			42,270																	—
Issuance of Series D-1 preferred stock for acquisition		341,163			2,279																	—
Exercise of stock options								3,558,444					3,219									3,219
Exercise of warrants		22,523			152			675,292					524									524
Restricted stock issuance for acquisitions								150,000														—
Stock-based compensation expense													7,020									7,020
Repurchase of shares		(4,192,772	)		(3,762	)		(1,821,302	)				(8,397	)					(24,332	)		(32,729	)
Loss on translation adjustment																(665	)					(665	)
Net loss																			(78,270	)		(78,270	)

BALANCE—December 31, 2015		91,215,962			283,640			11,287,919			1		7,013			(834	)		(269,950	)		(263,770	)
Issuance of Series D-2 preferred stock—net of issuance costs of $133		14,244,640			96,019																	—
Exercise of stock options								1,756,035					2,645									2,645
Exercise of warrants		315,315			2,188			142,500					99									99
Stock-based compensation expense													8,139									8,139
Repurchase of shares		(3,989,712	)		(10,926	)		(3,162,215	)				(15,538	)					(20,484	)		(36,022	)
Issuance of common stock for acquisition								571,429					3,764									3,764
Loss on translation adjustment																(634	)					(634	)
Net loss																			(58,229	)		(58,229	)

BALANCE—December 31, 2016		101,786,205			370,921			10,595,668			1		6,122			(1,468	)		(348,663	)		(344,008	)
Shares tendered for cashless exercise (unaudited)								(118,469	)				(816	)								(816	)
Exercise of stock options (unaudited)								257,834					836									836
Exercise of warrants (unaudited)								127,500					112									112
Stock-based compensation expense (unaudited)													3,030									3,030
Cumulative adjustment ASU 2016-09 (unaudited)													110						(110	)		—
Gain on translation adjustment (unaudited)																1,010						1,010
Net loss (unaudited)																			(15,947	)		(15,947	)

BALANCE—March 31, 2017 (unaudited)		101,786,205		$	370,921			10,862,533		$	1	$	9,394		$	(458	)	$	(364,720	)	$	(355,783	)


	Year Ended December 31,						Three Months Ended March 31,
	2015			2016			2016			2017
							(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(78,270	)	$	(58,229	)	$	(13,960	)	$	(15,947	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		9,116			10,425			2,519			2,658
Stock-based compensation		7,020			8,112			2,072			3,022
Deferred tax expense		(3,720	)		134			(5	)		(203	)
Deferred rent		1,277			789			489			(74	)
Change in earnout liability		593			361			(243	)		368
Change in preferred stock warrant liability		82			(28	)		(28	)
Bad debt expense		3,269			2,987			791			409
Other		256			368			55			194
Changes in operating assets and liabilities:
Trade accounts receivable		2,899			(10,407	)		(4,347	)		(200	)
Prepaid expenses and other current assets		832			(29	)		(820	)		(716	)
Other long-term assets		(1,618	)		802			489			232
Trade payables		2,910			2,853			1,783			(1,498	)
Accrued expenses and other current liabilities		8,806			5,387			(1,376	)		(200	)
Deferred revenue		6,768			15,752			2,893			4,922

Net cash used in operating activities		(39,780	)		(20,723	)		(9,688	)		(7,033	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Net (decrease) increase in customer fund assets		(2,956	)		(5,816	)		(2,541	)		3,393
Cash paid for acquisitions- net of cash acquired		(43,323	)		(17,218	)
Cash proceeds from sale of building		418
Purchase of property and equipment		(7,912	)		(6,660	)		(1,773	)		(1,037	)

Net cash (used in) provided by investing activities		(53,773	)		(29,694	)		(4,314	)		2,356

CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on credit facility		(8,736	)		(52,000	)
Proceeds from credit facility		20,000			57,000			8,000			2,000
Payment related to business combination earnouts					(1,325	)		(308	)		(83	)
Payments on capital leases		(1,127	)		(81	)		(20	)		(12	)
Proceeds from issuance of convertible preferred stock		42,334			96,152
Repurchase of shares		(36,156	)		(44,960	)
Payment of loan fees		(146	)		(481	)
Convertible preferred stock issuance costs		(64	)		(133	)
Minimum tax withholdings on stock- based awards		(7,246	)		(974	)		(506	)		(288	)
Redemption of restricted securities		(173	)
Net increase (decrease) in customer fund obligations		2,956			5,816			2,541			(3,393	)
Proceeds from exercise of stock options and common stock warrants		3,619			1,013			470			153

Net cash (used in) provided by financing activities		15,261			60,027			10,177			(1,623	)

FOREIGN CURRENCY EFFECT ON CASH AND CASH EQUIVALENTS	$	(94	)	$	(57	)	$	44		$	(54	)

NET CHANGE IN CASH AND CASH EQUIVALENTS		(78,386	)		9,553			(3,781	)		(6,354	)
CASH AND CASH EQUIVALENTS—Beginning of year		89,063			10,677			10,677			20,230

CASH AND CASH EQUIVALENTS—End of year	$	10,677		$	20,230		$	6,896		$	13,876

SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for interest expense	$	963		$	2,044		$	287		$	326
Cash paid for income taxes		95			259
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Stock issued for acquisitions	$	2,279		$	3,764		$			$
Property and equipment purchased under tenant improvement allowance		2,074			181
Property and equipment additions in accounts payable		573			164			193			214
Accrued value of earnout related to acquisition		5,648			663
Cashless exercises of options and warrants		145			1,994			216			777
Cashless redemptions of options and warrants		162			1,989			207			816
Shares redeemed for payment of taxes on option exercises					1,775


	December 31						March 31, 2017
	2015			2016			March 31, 2017
							(unaudited)
Balance at the beginning of the period	$	219		$	266		$	754
Charged to expense		355			517			(116	)
Write-offs		(308	)		(29	)

Balance at the end of the period	$	266		$	754		$	638


			Fair Value Measurements Using
December 31, 2015	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)	Significant Unobservable Inputs (Level 3)
Money market funds	$	134	$	134	$	$
Earnout related to acquisitions		6,848					6,848
Preferred stock warrant liability		1,936					1,936


			Fair Value Measurements Using
December 31, 2016	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)	Significant Unobservable Inputs (Level 3)
Money market funds	$	15,788	$	15,788	$	$
Earnout related to acquisitions		6,235					6,235


			Fair Value Measurements Using
March 31, 2017 (unaudited)	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)	Significant Unobservable Inputs (Level 3)
Money market funds	$	9,633	$	9,633	$	$
Earnout related to acquisitions		6,080					6,080