11. Stock-based Compensation Plans and Awards

Stock Incentive Plans

The 2010 Incentive Award Plan (the "2010 Plan") was adopted by the board of directors, and approved by the Company’s stockholders in August 2010. In connection with the adoption of the 2010 Plan on August 5, 2010, 0.06 million stock-based awards then available for grant under the 2006 Plan were canceled. Any stock-based awards outstanding under the 2006 Plan when the 2010 Plan was adopted that subsequently are forfeited, expire or lapse are available for future grants under the 2010 Plan. An amended and restated version of the 2010 Plan (the "2010 A&R Plan") was adopted by the board of directors on April 23, 2015 and approved by the Company’s stockholders on June 11, 2015. Following the Separation, up to 5.6 million stock options, restricted stock, restricted stock unit and other incentive awards were reserved for future grant to employees, officers, non-employee directors, and consultants, and such options or awards may be designated as incentive or non-qualified may be granted under the 2010 A&R Plan. In addition, awards available for grant under the 2010 A&R Plan shall be increased on an annual basis as of January 1st of each fiscal year through January 2020 by an amount equal to the lesser of (i) 1.2 million (ii) 5% of the total shares outstanding as of the end of the prior fiscal year and (iii) such lesser amount as determined by the Administrator of the 2010 Plan. As of December 31, 2015, 3.5 million stock-based awards were available for future grant under the 2010 Plan. Generally, stock option grants have 10-year terms and vest either annually or monthly over a 3 or 4-year period. Restricted stock unit awards generally vest either annually or quarterly over a 3 or 4-year period. Certain stock options and restricted stock unit awards have accelerated vesting provisions in the event of a change in control.

Valuation of Awards

The per share fair value of stock options granted with service conditions was determined on the date of grant using the Black-Scholes-Merton option pricing model with the following weighted average assumptions:


	Year ended December 31,
	2015		2014		2013
Expected life (in years)	5.94		5.89		5.50
Risk-free interest rate	1.69	%	1.82	%	0.83	%
Expected volatility range	53.4	%	54.1	%	51	%
Expected dividend yield	—		—		—

In addition, 1.3 million options were awarded to our chief executive officer during the quarter ended September 30, 2014. These options were determined on the date of grant using the Hull-White model with the following assumptions: volatility 61%, risk-free interest rate 2.43%, early exercise multiple 2.9 years, and dividend rate 0%.

The expected term of stock options granted represents the weighted average period that the stock options are expected to remain outstanding. We determine the expected term assumption based on our historical exercise behavior combined with estimates of the post-vesting holding period. Expected volatility is based on historical volatility of peer companies in our industry that have similar vesting and contractual terms. The risk free interest rate is based on the implied yield currently available on U.S. Treasury issues with terms approximately equal to the expected life of the option. We currently have no history or expectation of paying cash dividends on our common stock.

Award Activity

Stock Options

Stock option activity is as follows (in thousands, except per share data):

Stock option activity is as follows (in thousands, except per share data):
				Weighted
				average
			Weighted	remaining
	Number of		average	contractual	Aggregate
	options		exercise	term	intrinsic
	outstanding		price	(in years)	value
Outstanding at December 31, 2014	3,473	$	8.65	9.33	$	353
Options granted	1,056	$	5.37
Options exercised	(15)	$	4.39
Options forfeited or cancelled	(1,315)	$	7.40
Outstanding at December 31, 2015	3,199	$	8.10	8.67	$	409
Exercisable at December 31, 2015	861	$	9.21	7.71	$	39
Vested and expected to vest at December 31, 2015	2,895	$	8.38	8.62	$	313

The pre-tax aggregate intrinsic value of outstanding and exercisable stock options is based on the difference between the estimated fair value of our common stock at December 31, 2015 and 2014 and their exercise prices, respectively for all awards where the fair value of our common stock exceeds the exercise price. Options expected to vest reflect an estimated forfeiture rate.

Information related to stock-based compensation activity is as follows (in thousands, except per share data):


	Year ended December 31,
	2015		2014		2013
Weighted average fair value of options granted (per option)	$	2.74	$	4.21	$	3.92
Intrinsic value of options exercised	$	13	$	303	$	2,179

As of December 31, 2015, there was approximately $7.4 million of stock-based compensation expense related to the non-vested portion of stock options, which is expected to be recognized over a weighted average period of 2.5 years.

Restricted Stock Units


		Weighted
		average
	Number of	grant date
	Shares	fair value
Unvested at December 31, 2014	857	$	10.28
Granted	1,005	$	5.26
Vested	(278)	$	10.53
Forfeited	(607)	$	8.06
Unvested at December 31, 2015	977	$	6.42

The total fair value of restricted stock vested was $2.9 million, $18.3 million and $17.4 million for the years ended December 31, 2015, 2014 and 2013, respectively.

As of December 31, 2015, there was approximately $4.4 million of unrecognized stock-based compensation cost related to non-vested RSUs and restricted shares. The amount is expected to be recognized over a weighted average period of 2.4 years. To the extent that the forfeiture rate is different from that anticipated, stock-based compensation expense related to these awards will be different.

In January 2016, we issued 0.5 million restricted stock units to our chief executive officer in connection with an amended employment agreement. In February 2016, we issued 1.2 million restricted stock units in connection with our annual equity grants.

Employee Stock Purchase Plan

In May 2011, we commenced our first offering under the ESPP, which allows eligible employees to purchase, through payroll deductions, a limited amount of our common stock at a 15% discount to the lower of market price as of the beginning or ending of each six-month purchase period. Participants can authorize payroll deductions for amounts up to the lesser of 15% of their qualifying wages or the statutory limit under the U.S. Internal Revenue Code. The ESPP provides up to a 24-month offering period which is comprised of four consecutive six-month purchase periods commencing May and November. A maximum of 750 shares of common stock may be purchased by each participant at six-month intervals during the offering period. The fair value of the ESPP options granted is determined using a Black-Scholes-Merton model and is amortized over the remaining life of the 24-month offering period of the ESPP. The Black-Scholes-Merton model included an assumption for expected volatility of between 58% and 60% for each of the four purchase periods. In November 2015, we suspended the ESPP plan after the November 2015 purchase. During the years ended December 31, 2015 and 2013 we recognized $0.5 million and $1.8 million of expense, respectively, in relation to the ESPP. The expense related to the year ended December 31, 2014 was not material. There were 1.7 million shares of common stock remaining authorized for issuance under the ESPP at December 31, 2015.

Stock-based Compensation Expense

Stock-based compensation expense related to all employee and non-employee stock-based awards was as follows (in thousands):


	Year ended December 31,
	2015		2014		2013
Service costs	$	1,084	$	1,422	$	2,420
Sales and marketing		588		683		3,823
Product development		1,836		4,745		3,835
General and administrative		4,054		12,016		12,525
Discontinued operations		—		2,949		4,781
Total stock-based compensation		7,562		21,815		27,384
Income tax benefit related to stock-based compensation included in net income (loss)		—		(706)		(782)
	$	7,562	$	21,109	$	26,602

There was no income tax benefit related to stock-based compensation included in net income (loss) for the year-ended December 31, 2015 as the Company generated current year taxable losses without stock-based compensation.

During the years ended December 31, 2015, 2014 and 2013, $0.4 million, $1.0 million and $2.0 million respectively, of stock-based compensation expense related to stock options was capitalized, primarily as part of internally developed software projects.

Stock-based compensation expense for accelerations and modifications was immaterial for the year ended December 31, 2015. During the year ended December 31, 2014, we accelerated the vesting of certain outstanding equity instruments for three employees, resulting in the recognition of $3.5 million of expense.

In connection with the Separation completed in the year ended December 31, 2014, and subsequent 1-for-5 reverse stock split, all of our outstanding equity-based compensation awards were adjusted as follows:

Stock Options. Immediately prior to the Separation, each stock option that had an exercise price greater than 120% of the trading price of our common stock on the New York Stock Exchange on July 31, 2014, was adjusted by reducing the per share exercise price and making a corresponding reduction in the number of shares of common stock subject to the stock option, so that the value of the such stock option was approximately equal before and after such adjustment. Immediately prior to the Separation (but following the adjustment), each stock option that was vested, or was unvested and held by an individual who was employed or engaged by us following the Separation, was split into a Demand Media stock option and a Rightside stock option with a combined value that approximately equaled the value of the Demand Media stock option immediately prior to the Separation. Unvested Demand Media stock options held by a Rightside employee were accelerated then split equally between Demand Media and Rightside stock options.

Restricted Stock Units. Immediately prior to the Separation, each RSU award that was held by an individual who was employed or engaged by us following the Separation and was granted prior to March 1, 2014, was split into a Demand Media RSU award and a Rightside RSU award with a combined value that approximately equaled the value of the underlying Demand Media RSU award immediately prior to the Separation. Each RSU award held by an individual who was employed or engaged by Rightside or its affiliates following the Separation was converted into a Rightside RSU award covering a number of Rightside shares such that the pre-distribution value of the pre-Separation value of the Demand Media RSU award was approximately preserved.