Stock-based Compensation

12 Months Ended

Dec. 31, 2019

Share-based Payment Arrangement [Abstract]

Note 16—Stock-based Compensation

The Company’s 2015 Equity Incentive Plan (the “2015 Plan”) was adopted by its Board of Directors and approved by stockholders in March 2015. The 2015 Plan became effective immediately upon adoption although no awards were made under it until the effective date of the IPO. The 2015 Plan replaced the 2006 Stock Plan, and no further grants were made under the 2006 Stock Plan as of the effective date of the IPO.

Under the 2006 Stock Plan, incentive and nonqualified stock options or rights to purchase common stock were granted to eligible participants. Options were generally granted for a term of 10 years and generally vested 25% after the first year of service and ratably each month over the remaining 36-month period contingent on continued employment with the Company on each vesting date.

The 2015 Plan provides for the grant of incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock, restricted stock units (“RSUs”), and performance cash awards to employees, directors, and consultants. Beginning in 2016, the number of shares available for issuance under the 2015 Plan may be increased annually by an amount equal to the lesser of 7,050,000 shares of common stock, 5% of the outstanding shares of common stock as of the last day of the immediately preceding fiscal year, or such other amount as determined by the Company’s Board of Directors. The Board of Directors approved an increase of 5,917,139, 2,395,434, and 6,088,461 shares available for issuance under the 2015 Plan as of January 2, 2020, January 2, 2019, and January 2, 2018, respectively. Any awards issued under the 2015 Plan that are forfeited by the participant will become available for future grant under the 2015 Plan. The number of shares of the Company’s common stock initially reserved for issuance under the 2015 Plan equaled the sum of 14,100,000 shares plus up to 12,653,075 shares

reserved for issuance or subject to outstanding awards under the 2006 Stock Plan. At December 31, 2019, 31,831,808 shares were authorized under the 2015 Plan and 20,494,369 shares were available for future grant.

In the year ended December 31, 2019, the Company granted nonqualified stock options and RSUs to eligible participants. Options were generally granted for a term of 10 years. For both options and RSUs, vesting is typically over a four-year period and is contingent upon continued employment with the Company on each vesting date. In general, options granted to newly-hired employees prior to July 2018 vest 25% after the first year of service and ratably each month over the remaining 36-month period. In general, RSUs granted to newly-hired employees prior to July 2018 vest 25% after the first year following the vesting commencement date, which is the first day of the fiscal quarter closest to the date of grant, and then vest ratably each quarter over the remaining 12-quarter period. In general, for current employees who received an additional grant prior to March 2018, options vest ratably each month over a 48-month period. In general, for current employees who received an additional grant prior to March 2018, RSUs vest ratably each quarter over a 16-quarter period following the vesting commencement date, which is the first day of the fiscal quarter closest to the date of grant. The Company recognizes forfeitures as they occur.

Beginning in July 2018, in general, for newly-hired employees, both options and RSUs vest 25% after the first year of service and ratably each six-month period over a four-year period following the vesting commencement date, which is the first day of the month following the date of grant. Beginning in March 2018, in general, for current employees who receive an additional grant, both options and RSUs vest ratably each six-month period over a four-year period following the vesting commencement date.

The fair value of each option award is estimated on the date of grant using the Black-Scholes option-pricing model using the inputs below. Prior to the IPO, the Company utilized equity valuations based on comparable publicly-traded companies, discounted free cash flows, an analysis of the Company’s enterprise value, and other factors deemed relevant in estimating the fair value of its common stock. Subsequent to the IPO, the Company has used the closing price of its common stock on Nasdaq as the fair value of its common stock. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant for time periods that approximate the expected life of the option awards. Expected volatilities are based on implied volatilities from Etsy and market comparisons of certain publicly traded companies and other factors. The expected term of stock options granted has been determined using the simplified method, which uses the midpoint between the vesting date and the contractual term. The fair value of RSUs is determined based on the closing price of the Company’s common stock on Nasdaq (rounded to the nearest hundredth) for the 30 trading days immediately prior to and including the date of grant. The requisite service period for stock options and RSUs is generally four years from the date of grant.

The fair value of options granted in each year using the Black-Scholes pricing model has been based on the following assumptions:



	Year Ended December 31,
	2019	2018	2017
Volatility	39.1% - 39.5%	38.6% - 47.8%	41.7% - 44.2%
Risk-free interest rate	1.6% - 2.5%	2.6% - 2.9%	1.9% - 2.2%
Expected term (in years)	5.5 - 6.2	5.5 - 6.3	5.5 - 6.3
Dividend rate	—%	—%	—%

The following table summarizes the activity for the Company’s options (in thousands, except share and per share amounts):



	Shares		Weighted-Average Exercise Price		Weighted-Average Remaining Contract Term (in years)	Aggregate Intrinsic Value
Outstanding at December 31, 2016	9,339,567		$	7.89	6.64	$	43,613
Granted	5,887,183		11.04
Exercised	(5,760,263	)	5.87
Forfeited/Canceled	(1,518,548	)	11.36
Outstanding at December 31, 2017	7,947,939		11.02		7.93	74,996
Granted	797,201		29.87
Exercised	(1,588,779	)	11.49
Forfeited/Canceled	(265,367	)	15.68
Outstanding at December 31, 2018	6,890,994		12.91		7.94	239,177
Granted	462,563		64.29
Exercised	(840,835	)	11.64
Forfeited/Canceled	(217,803	)	30.11
Outstanding at December 31, 2019	6,294,919		16.26		7.24	185,900
Total exercisable at December 31, 2019	3,835,279		12.30		6.88	123,671

The following table summarizes the weighted-average grant date fair value of options granted, intrinsic value of options exercised and fair value of awards vested in periods indicated (in thousands, except per share amounts):



	Year Ended December 31,
	2019		2018		2017
Weighted average grant date fair value of options granted	$	26.75	$	13.33	$	4.85
Intrinsic value of options exercised	42,758		34,268		52,693
Fair value of awards vested	41,997		32,717		19,826

The total unrecognized compensation expense at December 31, 2019 was $22.6 million, which will be recognized over a weighted-average period of 2.47 years.

The following table summarizes the activity for the Company’s unvested RSUs:



	Shares		Weighted-Average Fair Value
Unvested at December 31, 2016	3,135,181		$	10.70
Granted	2,360,315		12.17
Vested	(1,072,321	)	10.44
Forfeited/Canceled	(1,348,928	)	10.56
Unvested at December 31, 2017	3,074,247		11.98
Granted	2,448,169		28.22
Vested	(1,496,906	)	13.80
Forfeited/Canceled	(545,142	)	18.47
Unvested at December 31, 2018	3,480,368		22.87
Granted	1,464,785		61.92
Vested	(1,392,295	)	22.67
Forfeited/Canceled	(592,445	)	31.25
Unvested at December 31, 2019	2,960,413		40.61

The total unrecognized compensation at December 31, 2019 was $107.4 million, which will be recognized over a weighted-average period of 2.98 years.

Total stock-based compensation expense included in the Consolidated Statements of Operations is as follows (in thousands):



	Year Ended December 31,
	2019		2018		2017
Cost of revenue	$	5,787	$	3,357	$	1,739
Marketing	3,774		2,507		1,933
Product development	21,085		21,234		8,274
General and administrative	13,749		11,133		14,613
Total stock-based compensation expense	$	44,395	$	38,231	$	26,559

The total stock-based compensation expense in the years ended December 31, 2019, 2018, and 2017 includes $1.3 million, $3.8 million, and $3.9 million, in acquisition-related stock-based compensation expense, respectively.

During the year ended December 31, 2018, the Company incurred non-cash stock-based compensation expense of $7.0 million resulting from the modification of stock options and RSUs to accelerate vesting of certain stock-based compensation in connection with the departure of two employees. See “Note 17—Restructuring and Other Exit Costs (Income)” for information on stock modifications incurred in 2017 related to restructuring.