Stock Plans

9 Months Ended

Sep. 30, 2012

Stock Plans [Abstract]

Stock Plans

8. Stock Plans

(a) 2003 Stock Plan

During 2003, the Board of Directors adopted the 2003 Stock Plan (the “2003 Plan”), which allows for the granting of both incentive stock options and non-qualified stock options and the direct award or sale of shares of the Company’s common stock (including restricted common stock) to officers, employees, directors, consultants and other key persons. Incentive stock options may be granted to employees with exercise prices of no less than the fair value of the common stock on the grant date, and non-statutory options may be granted to employees, directors, or consultants at exercise prices of no less than 85% of the fair value of the common stock on the grant date, as determined by the Board of Directors. If, at the time the Company grants an option, the optionee directly or by attribution owns stock possessing more than 10% of the total combined voting power of all classes of stock of the Company, the option price shall be at least 110% of the fair value. Options granted under the Plan generally expire no later than ten years and in general vest four years from the date of grant.

(b) 2011 Stock Option and Incentive Plan

On September 9, 2011, the Board of Directors adopted the 2011 Stock Option and Incentive Plan (the “2011 Plan”) which was subsequently approved by the Company’s stockholders. The 2011 Plan replaces the 2003 Plan as the Board has decided not to grant any additional awards under that plan. The Company has reserved a total of 1,000,000 shares of common stock for issuance under the 2011 Plan. In addition, any reserved but unissued shares under the 2003 Stock Plan will be added to the number of shares reserved for issuance under the 2011 Plan. The 2011 Plan also provides that the number of shares reserved and available for issuance under the plan will automatically increase each January 1, beginning in 2012 and ending in 2015, by 4% of the outstanding number of shares of common stock on the immediately preceding December 31. The Board of Directors or compensation committee may reduce the amount of the increase in any particular year. As of December 31, 2011, there were 1,886,296 shares available for grant under the 2011 Plan. On January 1, 2012, the share reserve under the 2011 Plan was automatically increased by 919,127 shares.

The 2011 Plan permits the granting of incentive stock options, non-qualified stock options, restricted stock units, stock appreciation rights, restricted shares of common stock and performance share awards. The exercise price of stock options may not be less than the 100% of the fair market value of the common stock on the date of grant. Options granted pursuant to the 2011 Plan generally expire no later than ten years.

(c) 2011 Employee Stock Purchase Plan

On September 9, 2011, the Board of Directors adopted the 2011 Employee Stock Purchase Plan (the “ESPP”) which was subsequently approved by the Company’s stockholders. The ESPP took effect on the effective date of the registration statement for the Company’s IPO. The ESPP permits eligible employees to acquire shares of the Company’s common stock by accumulating funds through periodic payroll deductions of up to 15% of base salary. Each offering period may run for no more than 24 months and consist of no more than five purchase periods. The purchase price for shares of the Company’s common stock purchased under the ESPP will be 85% of the lesser of the fair market value of the Company’s common stock on the first day of the offering period or the last trading day of the applicable purchase period within that offering period.

The Company has initially reserved a total of 500,000 shares of common stock for future issuance under the ESPP. The number of shares reserved for issuance under the ESPP will increase automatically on January 1 of each of the first eight years commencing in 2012 by the number of shares equal to 1% of the Company’s total outstanding shares as of the immediately preceding December 31. The Board of Directors or compensation committee may reduce the amount of the increase in any particular year. No more than 20,000,000 shares of common stock may be issued under the ESPP and no other shares may be added to the ESPP without the approval of the Company’s stockholders. On January 1, 2012, the share reserve under the 2011 Employee Stock Purchase Plan was automatically increased by 229,782 shares.

(d) Incapsula 2010 Share Incentive Plan

In March 2010, Incapsula’s board of directors adopted the Incapsula 2010 Share Incentive Plan (the “Incapsula Plan”), pursuant to which Incapsula may grant to its employees and service providers options to purchase shares of its common stock, restricted shares, or restricted share units. The total number of shares of common stock that may be granted under the Incapsula Plan shall not exceed 4,733,333 in the aggregate, subject to certain adjustments.

The following table summarizes option activity under the Incapsula Plan and related information for the nine months ended September 30, 2012:

	Shares Available for Grant			Number of Stock  Options Outstanding			Weighted Average Exercise Price
Outstanding - January 1, 2012		2,921,833			1,774,000		$	0.08
Granted		(232,500	)		232,500			0.25
Exercised		—			(90,000	)		0.15
Forfeited		50,000			(50,000	)		0.19
Outstanding - September 30, 2012		2,739,333			1,866,500		$	0.10

(e) Stock Compensation Expense

The Company recognized stock-based compensation expense under the 2011 Stock Option and Incentive Plan, 2003 Stock Plan, 2011 Employee Stock Purchase Plan, and the Incapsula 2010 Share Incentive Plan in the condensed consolidated statements of operations as follows (in thousands):

	For the three months ended September 30,				For the nine months  ended September 30,
	2012		2011		2012		2011
Cost of revenues	$	143	$	29	$	302	$	73
Research and development		372		35		759		83
Sales and marketing		665		102		1,365		245
General and administrative		582		412		1,170		753
Total stock-based compensation expense	$	1,762	$	578	$	3,596	$	1,154

The fair value of stock option and ESPP grants to employees for the three and nine months ended September 30, 2012 and 2011 was estimated using the following weighted average assumptions:

	For the three months ended September 30,						For the nine months  ended September 30,
	2012			2011			2012			2011
Stock option grants:
Dividend rate		0	%		0	%		0	%		0	%
Risk-free interest rate		0.8	%		1.1	%		1.0	%		0.9	%
Expected term (in years)		6.1			5.3			6.0			4.2
Expected volatility		46	%		49	%		48	%		59	%
ESPP grants:
Dividend rate		—			—			0	%		—
Risk-free interest rate		—			—			0.2	%		—
Expected term (in years)		—			—			0.5			—
Expected volatility		—			—			38	%		—

The fair value of the RSUs is determined using the closing price of the Company’s common stock on the date of the grant. Compensation is recognized on a straight-line basis over the requisite service period of each grant adjusted for estimated forfeitures.

The following table summarizes share-based award activity under the 2011 Plan:

	Shares Available for Grant			Number of Stock  Options Outstanding			Weighted Average Exercise Price		Number of Restricted  Stock Units Outstanding			Weighted Average  Grant Date Fair Value
Balances - January 1, 2012		1,886,296			2,871,005		$	4.15		—		$	—
Additional shares added to the pool		919,127			—					—			—
Granted		(965,952	)		580,184			31.79		385,768			31.14
Exercised or released		—			(1,059,806	)		2.00		—			—
Cancelled or forfeited		183,229			(177,854	)		9.91		(5,375	)		34.02
Balances - September 30, 2012		2,022,700			2,213,529		$	11.97		380,393		$	31.10

Supplemental disclosure information about our stock options outstanding as of September 30, 2012 is as follows:

	Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)		Aggregate Intrinsic  Value (in thousands)
Options exercisable		639,185	$	3.42		6.95	$	21,460
Options outstanding		2,213,529	$	11.97		8.18	$	55,431

The aggregate intrinsic value of options exercised under the Plan was $29.0 million for the nine months ended September 30, 2012. The aggregate intrinsic value is calculated as the difference between the per-share exercise price and the market value of the Company’s common stock for each share subject to an option multiplied by the number of shares subject to options. As reported in the Wall Street Journal, the market value as of September 30, 2012 was $36.99 per share. As of September 30, 2012, total compensation cost related to unvested stock-based awards granted to employees under the Plan, but not yet recognized, was $16.4 million, net of estimated forfeitures. As of September 30, 2012, this cost will be amortized to expense over a weighted-average remaining period of 2.4 years, and will be adjusted for subsequent changes in estimated forfeitures. Future stock-based award grants will increase the amount of compensation expense to be recorded in these periods.

There was no capitalized stock-based compensation cost and there were no recognized stock-based compensation tax benefits during the nine months ended September 30, 2012 and 2011.

(f) Common Stock Subject to Repurchase

Pursuant to restricted stock agreements with the Company’s CEO, the Company has the right, but not the obligation, to repurchase the unvested shares of common stock upon termination of employment at the original purchase price per share. The repurchase rights with respect to the common stock lapse over the vesting period, which ranges from 48 months to 60 months. The amounts received in exchange for these shares have been included in other liabilities in the accompanying condensed consolidated balance sheet and are reclassified to equity as the shares vest. The Company granted 843,819 shares of restricted common stock with a weighted-average grant date fair value per share of $1.94 during the year ended December 31, 2010. There were no grants of shares of restricted common stock during the nine months ended September 30, 2012 and the year ended December 31, 2011. As of September 30, 2012, 487,833 shares of restricted common stock held by the Company’s CEO were unvested and subject to repurchase by the Company.

(g) Early Exercise of Stock Options

In 2010 and 2011, the Company’s board of directors allowed for the early exercise of stock options granted to certain members of the Company’s board of directors. The amounts received in exchange for these shares have been included in other liabilities in the accompanying condensed consolidated balance sheet and are reclassified to equity as the shares vest. As of September 30, 2012, 91,875 shares were unvested.