12. Capital Stock

Common Stock Reserved for Issuance

The Company had reserved shares of common stock, on an as if converted basis, for issuance as follows:


	As of December 31,
	2014		2013
Issuance in connection with outstanding stock options		2,244,363		1,675,506
Issuance in connection with restricted stock units outstanding		2,279,081		1,044,651
Reserved for future stock option and restricted stock unit grants		1,166,742		1,847,752
Reserved for future issuance under the employee stock purchase plan		895,268		831,271

		6,585,454		5,399,180

Preferred Stock

Our board of directors is authorized, subject to any limitations prescribed by law, without stockholder approval, to issue from time to time up to an aggregate of 5,000,000 shares of preferred stock, in one or more series, each series to have such rights and preferences, including voting rights, dividend rights, conversion rights, redemption privileges and liquidation preferences as the Company’s board of directors determines. The rights of the holders of common stock will be subject to, and may be adversely affected by, the rights of holders of any preferred stock that may be issued in the future. The Company currently has no shares of preferred stock outstanding and the Company has no present plans to issue any shares of preferred stock.

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-qualified 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

In September 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. On January 1, 2015, the share reserve under the 2011 Plan was automatically increased by 1,075,819 shares. As of December 31, 2014, there were 1,166,742 shares available for grant under the 2011 Plan.

The 2011 Plan permits the granting of incentive stock options, non-qualified stock options, RSUs, 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. The Company began granting RSUs in February 2012, which generally vest either over a four-year period with 25% vesting at the end of one year and the remainder vesting quarterly thereafter or they completely vest at the end of a three-year period. Additionally, in conjunction with the Incapsula Acquisition, the Company granted performance-based RSUs to an employee of Incapsula for approximately 264,878 shares of Company common stock (Refer to Note 2).

In September 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, 2015, the share reserve under the 2011 Employee Stock Purchase Plan was automatically increased by 268,955 shares.

(d) Inducement Stock Option Plan and Agreement and Inducement Restricted Stock Unit Plan and Agreement

In August 2014, the Board of Directors adopted the Inducement Stock Option Plan and Agreement (the “Inducement Option Plan”) and the Inducement Restricted Stock Unit Plan and Agreement (the “Inducement RSU Plan”) which were both created in connection with the appointment of the Company’s new Chief Executive Officer. In accordance with the terms of the Inducement Option Plan, the Company can issue an option to purchase up to 265,000 shares of the Company’s common stock at an exercise price equal to the fair market value of a share of the Company’s common stock on the date of grant of the option. The option, which will have a ten-year term, will vest at the rate of 25% of the shares on the first anniversary of the vesting commencement date with an additional 6.25% of the shares subject to the option vesting each quarter thereafter so long as the participant has not been terminated. In accordance with the terms of the Inducement RSU Plan, the Company can issue RSUs representing a total of 265,000 shares of the Company’s common stock (the RSUs”). The RSUs, which will expire following settlement, will vest at the rate of 25% of the shares on the first anniversary of the vesting commencement date with an additional 6.25% of the shares subject to the RSU vesting each quarter thereafter so long as participant has not been terminated.

(e) 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 RSUs. 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.

In November 2013, the board of directors of Incapsula approved the grant of RSUs for 7,095,461 shares of Incapsula’s common stock (“Incapsula RSUs”). As part of the Incapsula Acquisition, the Incapsula RSUs were assumed and replaced by RSUs for Company Common Stock issued to continuing employees of Incapsula . The Incapsula RSU’s vest according to performance-based vesting terms tied to 2014 revenue for Incapsula and Incapsula-related products and services, which were converted into approximately 198,825 shares of Company Common Stock at the same exchange ratio applicable to the Incapsula Acquisition. In addition to performance conditions, the awards are dependent on future market price of Imperva’s common stock, which is deemed a market condition under ASC 718.

The following table summarizes option activity under the Incapsula Plan and related:


	Shares Available for Grant			Number of Performance- based Restricted Stock Units Outstanding			Number of Stock Options Outstanding			Weighted Average Exercise Price of Stock Options Outstanding
Outstanding—December 31, 2011		2,921,833			—			1,774,000		$	0.08
Granted		(232,500	)		—			232,500		$	0.25
Exercised		—			—			(105,625	)	$	0.15
Forfeited		64,375			—			(64,375	)	$	0.18

Outstanding—December 31, 2012		2,753,708			—			1,836,500		$	0.10
Additional shares authorized		5,529,878			—			—		$	—
Granted, performance RSUs		(7,095,461	)		7,095,461			—		$	—
Granted, stock options		(1,240,000	)		—			1,240,000		$	0.58
Exercised/Released		—			—			(1,128,438	)	$	0.02
Forfeited		141,562			—			(141,562	)	$	0.22

Outstanding—December 31, 2013		89,687			7,095,461			1,806,500		$	0.47
Granted		(95,000	)		—			95,000		$	1.25
Forfeited		15,213			(12,713	)		(2,500	)	$	1.25
Transferred to Imperva 2011 stock option plan		(9,900	)		(7,082,748	)		(1,899,000	)	$	0.16

Outstanding—December 31, 2014		—			—			—		$	—

The options outstanding and performance restricted share units under the Incapsula 2010 Share Incentive Plan were assumed as part of the Incapsula Acquisition and are equivalent to 247,184 shares of Company common stock on an as-converted basis. The Company does not intend to grant any additional shares under the Incapsula 2010 Share Incentive Plan.

The following table summarizes option activity under the Plans and related information:


	Options Outstanding					Weighted- Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value (in thousands) (1)
	Number of Shares			Weighted Average Exercise Price		Weighted- Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value (in thousands) (1)
Outstanding—December 31, 2011		2,871,005		$	4.15		7.86	$	88,012
Granted		698,240		$	31.80
Exercised or released		(1,272,941	)	$	2.41
Cancelled or forfeited		(307,067	)	$	9.98

Outstanding—December 31, 2012		1,989,237		$	14.08		8.09	$	35,513
Granted		631,775		$	36.55
Exercised or released		(687,719	)	$	6.94
Cancelled or forfeited		(257,787	)	$	25.11

Balances—December 31, 2013		1,675,506		$	23.78		8.01	$	40,813
Granted		1,256,559		$	41.39
Options assumed in acquisitions		72,607		$	13.30
Exercised or released		(496,297	)	$	14.85
Cancelled or forfeited		(264,012	)	$	35.85

Balances—December 31, 2014		2,244,363		$	33.83		8.27	$	38,457

Vested and expected to vest— December 31, 2014		2,006,285		$	33.07		8.20	$	35,688

Exercisable—December 31, 2014		590,308		$	21.66		6.56	$	16,425

(1)	The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the closing stock price of $49.43 of the Company’s common stock on December 31, 2014

Additional information regarding the Company’s stock options outstanding and exercisable as of December 31, 2014 is summarized below:


	Options Outstanding						Options Exercisable
Exercise Prices	Number of Stock Options Outstanding		Weighted Average Remaining Contractual Life (Years)		Weighted Average Exercise Price per Share		Shares Subject to Stock Options		Weighted Average Exercise Price per Share
$0.02 to $10.70		300,189		5.48	$	5.35		248,116	$	5.06
$10.71 to $29.10		398,274		8.54	$	24.96		72,112	$	26.78
$29.11 to $32.54		332,275		9.37	$	29.58		15,128	$	31.43
$32.55 to $34.55		453,985		8.03	$	33.80		174,008	$	33.77
$34.56 to $54.48		258,030		8.44	$	43.12		78,060	$	39.42
$54.49 to $65.00		501,610		9.10	$	55.99		2,884	$	60.06

		2,244,363		8.27	$	33.83		590,308	$	21.66

(f) RSU Activity

A summary of RSU activity for the year ended December 31, 2014, is as follows:


	Number of Restricted Stock Units Outstanding			Weighted- Average Grant Date Fair Value
Unvested—December 31, 2012		446,915		$	31
Granted		577,528		$	36.94
Granted, performance RSUs		264,878		$	20.76
Released		(149,531	)	$	30.64
Cancelled or expired		(95,139	)	$	34.30

Unvested—December 31, 2013		1,044,651		$	31.64
Granted		1,368,761		$	41.66
Granted, performance RSUs		131,143		$	31.42
PRSUs assumed in acquisitions		198,825		$	61.14
Released		(238,446	)	$	34.84
Cancelled or expired		(225,853	)	$	39.83

Unvested—December 31, 2014		2,279,081		$	39.07

(g) Stock-Based Compensation Expense

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


	Years Ended December 31,
	2014		2013		2012
Cost of revenue	$	2,058	$	1,440	$	469
Research and development		8,799		3,660		1,227
Sales and marketing		13,558		8,537		2,543
General and administrative		12,858		8,857		1,729

Total stock-based compensation expense	$	37,273	$	22,494	$	5,968

(h) Determining the Fair Value of RSUs, Performance RSUs, Stock Options, and ESPP

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

The fair value of RSUs granted to Incapsula employees which have multiple performance conditions and a market condition is determined by the Company using a Monte Carlo simulation model. The key inputs used were the Company’s stock price on the date of grant, the expected volatility, the risk free interest rate and a revenue forecast. The Company updates the estimated expense, net of forfeitures, at the end of each reporting period. The expense is recognized on an accelerated basis over the requisite service period, which is generally the vesting period of the respective awards.

The fair value of each stock option and ESPP grant to employees was determined by the Company and its board of directors using the Black-Scholes option-pricing model and assumptions discussed below. Each of these inputs is subjective and generally requires significant judgment to determine.

Expected Term—The expected term represents the period that the Company’s stock-based awards are expected to be outstanding. For option grants that are considered to be “plain vanilla,” the Company used the simplified method to determine the expected term as provided by the Securities and Exchange Commission. The simplified method is calculated as the average of the time-to-vesting and the contractual life of the options. For option grants that are not considered “plain vanilla”, the expected term is derived from historical data on employee exercises and post-vesting employment termination behavior taking into account the contractual life of the award. For ESPP grants, the expected term is based on the length of the offering period, which is six months.

Expected Volatility—The expected volatility was based on the average historical stock volatilities of several of the Company’s publicly listed peers over a period equal to the expected terms of the stock option grants and the offering period for employee stock purchase plan grants as the Company did not have a sufficient trading history to use the volatility of its own common stock.

Risk-Free Interest Rate—The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for zero coupon U.S. Treasury notes with maturities approximately equal to the grant’s expected term.

Expected Dividend—The Company has never paid dividends and does not expect to pay dividends.

Forfeiture Rate—The Company estimates its forfeiture rate based on an analysis of its actual forfeitures and will continue to evaluate the adequacy of the forfeiture rate based on actual forfeiture experience, analysis of employee turnover behavior, and other factors. The impact from a forfeiture rate adjustment will be recognized in full in the period of adjustment, and if the actual number of future forfeitures differs from that estimated by the Company, the Company may be required to record adjustments to stock-based compensation expense in future periods.

A summary of the weighted-average assumptions is as follows:


	Years Ended December 31
	2014			2013			2012
Stock option grants:
Dividend rate		0	%		0	%		0	%
Risk-free interest rate		1.8	%		1.2	%		1.0	%
Expected term (in years)		6.1			6.1			6.0
Expected volatility		46	%		46	%		48	%

ESPP grants:
Dividend rate		0	%		0	%		0	%
Risk-free interest rate		0.1	%		0.1	%		0.1	%
Expected term (in years)		0.5			0.5			0.5
Expected volatility		45	%		27	%		39	%

The weighted-average grant date fair value of the Company’s stock options granted during the years ended December 31, 2014, 2013 and 2012 was $19.36, $16.48, and $14.54 per share, respectively. The aggregate grant date fair value of the Company’s stock options granted to employees during the years ended December 31, 2014, 2013 and 2012 was $24.3 million, $7.3 million, and $10.1 million, respectively. The aggregate grant date fair value of the Company’s stock options vested during the years ended December 31, 2014, 2013, and 2012 was $7.2 million, $4.6 million, and $2.1 million, respectively. The fair value of the Company’s RSUs vested during the year ended December 31, 2014 and 2013 was $8.3 million and $6.0 million, respectively. There were no restricted units that vested for the year ended December 31, 2012.

The aggregate intrinsic value of options exercised under the Plans was $14.7 million, $23.2 million, and $34.6 million for the years ended December 31, 2014, 2013 and 2012, respectively. The aggregate intrinsic value of options exercised is calculated as the difference between the fair market value of the Company’s common stock on the date of the exercise and the exercise price of each option.

As of December 31, 2014, total compensation cost related to unvested stock-based awards granted to employees under the Plans, but not yet recognized, was $91.7 million, net of estimated forfeitures. As of December 31, 2014, this cost will be amortized to expense over a weighted-average remaining period of 2.9 years, and will be adjusted for subsequent changes in estimated forfeitures. Future option grants will increase the amount of compensation expense to be recorded in these periods.

Net cash proceeds from the exercise of stock options and the issuance of common stock in connection with the employee stock purchase plan were $8.5 million, $6.3 million, and $4.2 million for the years ended December 31, 2014, 2013 and 2012, respectively. There was no capitalized stock-based compensation cost during the years ended December 31, 2014, 2013 and 2012. Recognized stock-based compensation tax benefits during the year ended December 31, 2014 and 2012 was $385,000 and $19,000, respectively. There was no recognized stock-based compensation tax benefit during the year ended December 31, 2013.

(i) Common Stock Subject to Repurchase

Pursuant to restricted stock agreements with the Company’s former 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 years ended December 31, 2014 and 2013. As of December 31, 2014, 210,954 shares of restricted common stock held by the Company’s former CEO were unvested and subject to repurchase by the Company.

In connection with the acquisition of Skyfence in the first quarter of 2014, the Company issued 532,262 shares of the Company’s common stock with a fair value per share of $59.08 which are subject to forfeiture based upon time-based vesting and continuing employment over the term of the corresponding four-year service period. None of these shares were vested as of December 31, 2014.

(j) 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 accrued and other current liabilities and other liabilities in the accompanying condensed consolidated balance sheet and are reclassified to equity as the shares vest. As of December 31, 2014 and 2013, 6,667 shares and 45,000 shares were unvested amounting to $71,000 and $0.4 million, respectively.

(k) Equity Awards Issued in Acquisitions

In connection with the Skyfence and Incapsula acquisitions, the Company assumed stock options covering an aggregate of 72,607 shares of its common stock (in addition to the Incapsula RSUs discussed above). At the date of the acquisition, vested stock options and the associated fair value was recorded as part of the purchase consideration. The fair value related to the assumed unvested stock options are recognized as post-combination compensation costs and is being recorded as post-combination compensation expense ratably over the respective remaining service periods.