Note 7. Common Stock and Stockholders’ Equity

Common Stock

Each share of common stock has the right to one vote. The holders of the common stock are also entitled to receive dividends whenever funds are legally available and when declared by the board of directors of the Company (the “Board of Directors”), subject to the prior rights of holders of all classes of stock outstanding having priority rights as to dividends. No dividends have been declared or paid since inception.

Preferred Stock

As of October 31, 2017, the Company had authorized 25,000,000 shares of preferred stock, par value $0.0001, of which no shares were issued and outstanding.

2016 Equity Incentive Plan

The 2016 Equity Incentive Plan (the “2016 Plan”) was approved by the Company’s stockholders in September 2016. The 2016 Plan provides for the grant of incentive stock options, nonstatutory stock options, restricted stock, restricted stock units, stock appreciation rights and performance cash awards. Awards could be granted under the 2016 Plan beginning on the effective date of the registration statement, October 5, 2016. The 2016 Plan replaced the Company’s 2006 Stock Plan; however, awards outstanding under the 2006 Stock Plan will continue to be governed by their existing terms.

As of October 31, 2017, the Company had 5,257,646 shares of its common stock available for future issuance under the 2016 Plan. The number of shares reserved for issuance under the 2016 Plan will automatically increase on the first day of each fiscal year during the term of the 2016 Plan by a number of shares equal to 5% of its outstanding shares of common stock on the last day of the prior fiscal year. The number and class of shares reserved under the Company’s 2016 Plan will be adjusted in the event of a stock split, stock dividend or other changes in its capitalization.

The following table summarizes stock option activity under the Company’s 2006 Stock Plan and the 2016 Plan during the nine months ended October 31, 2017 (aggregate intrinsic value in thousands):

	Options Outstanding
	Outstanding Stock Options			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Life (in Years)		Aggregate Intrinsic Value
Balance at January 31, 2017		13,016,402		$	5.60		7.92	$	265,542
Option grants		443,182		$	24.35
Options exercised		(2,734,127	)	$	3.70
Options forfeited		(691,959	)	$	6.68
Balance at October 31, 2017		10,033,498		$	6.88		7.44	$	279,670
Exercisable at October 31, 2017		5,839,757		$	4.80		6.81	$	174,902

The options exercisable as of October 31, 2017 include options that are exercisable prior to vesting. The aggregate intrinsic value of options vested and exercisable as of October 31, 2017 is calculated based on the difference between the exercise price and the fair value of the Company’s common stock as of October 31, 2017. The aggregate intrinsic value of exercised options was $24.9 million and $5.8 million for the three months ended October 31, 2017 and 2016, respectively, and $69.4 million and $8.0 million for the nine months ended October 31, 2017 and 2016, respectively, and is calculated based on the difference between the exercise price and the fair value of the Company’s common stock as of the exercise date.

The weighted-average grant date fair value of options granted was $13.76 and $6.16 per share for the three months ended October 31, 2017 and 2016, respectively. The weighted-average grant date fair value of options granted was $11.26 and $4.48 per share for the nine months ended October 31, 2017 and 2016, respectively.

During the three months ended October 31, 2017 and 2016, zero and 31,250 options were granted to non-employees. During the nine months ended October 31, 2017 and 2016, zero and 83,500 options were granted to non-employees, respectively.

Early Exercises of Stock Options

Certain option grants under the 2006 Stock Plan are allowed to be exercised prior to vesting. The unvested shares of common stock exercised are subject to the Company’s right to repurchase at the lower of the original exercise price or the fair market value of the share at the time the repurchase right is exercised. Early exercises of options are not deemed to be substantive exercises for accounting purposes and accordingly, amounts received for early exercises are initially recorded in accrued expenses and other current liabilities and reclassified to additional paid-in capital as the underlying shares vest. At October 31, 2017, the Company had $425,000 recorded in accrued expenses and other current liabilities related to early exercises of stock options, and the related number of unvested shares subject to repurchase was 66,830.

Restricted Stock Units (“RSUs”)

The following table summarizes the activity related to the Company’s RSUs:

	Number of RSUs Outstanding			Weighted-Average Grant Date Fair Value
Awarded and unvested at January 31, 2017		77,883		$	18.38
Awards granted		2,187,046		$	26.21
Awards vested		(171,734	)	$	23.29
Awards forfeited		(130,180	)	$	22.03
Awarded and unvested at October 31, 2017		1,963,015		$	26.43

2016 Employee Stock Purchase Plan

The Board of Directors adopted the 2016 Employee Stock Purchase Plan (the “ESPP”) in September 2016 and it has been approved by our stockholders. The ESPP allows eligible employees to purchase shares of common stock through payroll deductions and is intended to qualify under Section 423 of the Internal Revenue Code.

As of Ocober 31, 2017, the Company had 880,441 shares of its common stock available for future issuance under the ESPP. The number of shares reserved for issuance under the ESPP will automatically increase on the first day of each fiscal year during the term of the ESPP by a number of shares equal to the least of (i) 1% of its outstanding shares of common stock on the last day of the prior fiscal year, (ii) 1,250,000 shares or (iii) a lesser number of shares determined by the Board of Directors. The number and class of shares reserved under the ESPP will be adjusted in the event of a stock split, stock dividend or other changes in its capitalization.

Each offering period will last a number of months determined by the administrator, up to a maximum of 27 months. The initial offering period began on the effective date of the Company’s initial public offering, October 5, 2016, and ends on September 15, 2018, and new 24 month offering periods will begin on each March 16 and September 16 thereafter. Currently each offering period consists of four consecutive purchase periods, of approximately six months duration, at the end of which payroll contributions are used to purchase shares of the Company’s common stock. Participants may purchase the Company’s common stock through payroll deductions, up to a maximum of 15% of their eligible compensation. Participants may withdraw from the ESPP and receive a refund of their accumulated payroll contributions at any time prior to a purchase date. Unless changed by the administrator, the purchase price for each share of common stock purchased under the ESPP will be the lower of (i) 85% of the fair market value per share on the first day of the applicable offering period (or, in the case of the initial offering period, the price at which one share of common stock is offered to the public in its initial public offering) or (ii) 85% of the fair market value per share on the applicable purchase date.

As of October 31, 2017, 441,124 shares of common stock were purchased under the ESPP. The Company selected the Black-Scholes option-pricing model as the method for determining the estimated fair value for the Company’s ESPP. As of October 31, 2017, total unrecognized compensation cost related to the ESPP was $6.4 million which will be amortized over a weighted-average period of 1.07 years.

Market-based Options

In September 2016, the Board of Directors granted 544,127 stock options to the Chief Executive Officer (the “2016 CEO Grant”) under the 2006 Equity Plan with an exercise price of $13.04 per share. The 2016 CEO Grant is eligible to vest based on the achievement of stock price appreciation targets after the consummation of the initial public offering, as well as continuous service over a four-year period following the grant date. The fair value of the 2016 CEO Grant was determined using a Monte Carlo simulation approach. The Company amortizes the fair value of the option award using the graded-vesting method.

Stock-based compensation expense recognized for market-based awards was approximately $356,000 and $158,000 for the three months ended October 31, 2017 and 2016, respectively, and $1.3 million and $158,000 for the nine months ended October 31, 2017 and 2016, respectively. As of October 31, 2017, two of the three performance-based milestones were achieved, resulting in 103,157 shares being vested and exercisable.

Stock-based Compensation

The Company’s total stock-based compensation expense as of the dates indicated was as follows (in thousands):

	Three Months Ended				Nine Months Ended
	October 31,				October 31,
	2017		2016		2017		2016
Cost of revenue:
Subscription services	$	585	$	150	$	1,469	$	415
Professional services and other		685		155		1,965		399
Research and development		1,999		357		4,798		982
Sales and marketing		2,212		937		6,152		1,848
General and administrative		2,386		785		6,399		2,005
Total	$	7,867	$	2,384	$	20,783	$	5,649

Stock-based compensation capitalized in capitalized software development costs was approximately $340,000 at October 31, 2017.

Of the total stock-based compensation expense, costs recognized for options granted to non-employees were immaterial for all periods presented.

As of October 31, 2017 there was approximately $21.8 million of total unrecognized compensation cost related to unvested stock options granted to employees and non-employee service providers under the 2006 Stock Plan and 2016 Equity Incentive Plan. This unrecognized compensation cost is expected to be recognized over an estimated weighted-average amortization period of approximately 2.21 years.

As of October 31, 2017 there was approximately $48.3 million of total unrecognized compensation cost related to unvested restricted stock units granted to employees under the 2016 Equity Incentive Plan. This unrecognized compensation cost is expected to be recognized over an estimated weighted-average amortization period of approximately 3.43 years.

The fair values of the Company’s stock options granted during the three and nine months ended October 31, 2017 and 2016 were estimated using the following assumptions:

	Three Months Ended		Nine Months Ended
	October 31,		October 31,
	2017	2016	2017	2016
Employee Stock Options:
Expected term (in years)	6	6	6	6
Volatility	46%	48%	46%	48%
Risk-free interest rate	1.88%	1.27% - 1.33%	1.88% - 2.20%	1.27% - 1.55%
Dividend yield	-	-	-	-
Employee Stock Purchase Plan:
Expected term (in years)	0.5 - 2.0	0.4 - 1.9	0.5 - 2.0	0.4 - 1.9
Volatility	37.30% - 40.88%	48%	37.30% - 42.61%	48%
Risk-free interest rate	1.17% - 1.39%	0.48% - 0.81%	0.89% - 1.39%	0.48% - 0.81%
Dividend yield	-	-	-	-
Market Based Award
Expected term (in years)	-	10	-	10
Volatility	-	48%	-	48%
Risk-free interest rate	-	1.61%	-	1.61%
Dividend yield	-	-	-	-

These assumptions and estimates are as follows:

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Fair Value of Common Stock. Prior to the initial public offering in October 2016, the fair value of the shares of common stock underlying stock options was established by the Board of Directors, which was responsible for these estimates, and was based in part upon a valuation provided by a third-party valuation firm. Because there had been no public market for the Company’s common stock prior to the initial public offering, the Board of Directors considered this independent valuation and other factors, including, but not limited to, revenue growth, the current status of the technical and commercial success of its operations, its financial condition, the stage of development and competition to establish the fair value of the Company’s common stock at the time of grant of the option. After the initial public offering, the Company used the publicly quoted price as reported on the Nasdaq Global Select Market as the fair value of its common stock.

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Expected Term. The expected term represents the weighted-average period that the stock options are expected to remain outstanding. To determine the expected term, the Company generally applies the simplified approach in which the expected term of an award is presumed to be the mid-point between the vesting date and the expiration date of the award as the Company does not have sufficient historical exercise data to provide a reasonable basis for an estimate of expected term.

•

Risk-Free Interest Rate. The Company bases the risk-free interest rate on the yields of U.S. Treasury securities with maturities approximately equal to the term of employee stock option awards.

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Expected Volatility. As the Company does not have an extensive trading history for its common stock, the expected volatility for its common stock has been estimated by taking the historic price volatility for industry peers based on daily price observations over a period equivalent to the expected term of the stock option awards. Industry peers consist of several public companies in its industry.