5. Stockholders’ Equity

Stock-Based Compensation

Stock-based compensation expense includes charges related to stock option grants and employee stock purchases under the Company’s employee stock purchase plan. The Company measures stock-based compensation expense based on the grant-date fair value of any awards granted to its employees. Such expense is recognized over the period of time that employees provide service and earn rights to the awards.

The estimated fair value of each stock option award granted was determined on the date of grant using the Black-Scholes option-pricing valuation model with the following weighted-average assumptions for option grants during the three and nine months ended September 30, 2014.

	Three Months Ended			Nine Months Ended
	September 30,			September 30,
	2014	2013		2014		2013
Common Stock Options
Risk free interest rate	—		1.75%	1.66-1.77%			1.75%
Expected option term	—	6 years		5.5-6.0 years		6 years
Expected volatility of common stock	—		70.8%	71.06-73.21%			70.8%
Expected dividend yield	—		0.00%		0.00%		0.00%

The estimated fair value of each employee stock purchase plan award was determined on the date of grant using the Black-Scholes option-pricing valuation model with the following weighted-average assumptions for the employee stock purchase plan during the three and nine months ended September 30, 2014. The employee stock purchase plan did not become active until March 2014.

	Three Months Ended			Nine Months Ended
	September 30,			September 30,
	2014		2013	2014		2013
Employee Stock Purchase Plan
Risk free interest rate		0.05%	—	0.05-0.08%		—
Expected option term	6 months		—	6 months		—
Expected volatility of common stock		69.32%	—	69.32-73.21%		—
Expected dividend yield		0.00%	—		0.00%	—

The risk-free interest rate assumption was based on the yield of an applicable rate for U.S. Treasury instruments with maturities similar to those of the expected term of the award being valued. The assumed dividend yield was based on the Company never paying cash dividends and having no expectation of paying cash dividends in the foreseeable future. The weighted average expected term of options and employee stock purchases was calculated using the simplified method as prescribed by accounting guidance for stock-based compensation. This decision was based on the lack of relevant historical data due to the Company’s limited historical experience. In addition, due to the Company’s limited historical data, the estimated volatility was calculated based upon the Company’s historical volatility, supplemented with historical volatility of comparable companies in the biotechnology industry whose share prices are publicly available for a sufficient period of time.

The Company recognized non-cash stock-based compensation expense to employees and directors in its research and development and its general and administrative functions as follows:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2014		2013		2014		2013
Research and development	$	105,145	$	313		302,569	$	4,377
General and administrative		198,816		7,316		489,912		9,504
Total stock-based compensation expense	$	303,961	$	7,629		792,481	$	13,881

As of September 30, 2014, there was approximately $2.6 million of unrecognized compensation costs related to outstanding employee and board of director options, which is expected to be recognized over a weighted average period of 1.4 years.