18. Equity Award Plans

Stock Options

Under the Company’s 2012 Equity Incentive Plan, the Company may grant incentive stock options and non-statutory stock options for common stock to employees, directors and consultants. Stock options may be granted at an exercise price per share not less than 100% of the fair market value per share on the grant date. If an incentive stock option is granted to a 10% or greater stockholder, then the exercise price per share shall not be less than 110% of the fair market value per share on the grant date. Stock options granted are exercisable over a maximum term of 10 years from the date of grant and generally vest over a period of four years.

In September 2012, the Company adopted a director compensation plan for future non-employee directors. Under the director compensation plan, each individual who joins the board of directors as a non-employee director following the adoption of the plan receives an initial stock option grant to purchase 30,000 shares of common stock at the time of initial election or appointment and additional triennial stock option grants to purchase 15,000 shares of common stock, as well as an annual cash retainer of $15,000, all of which are subject to continued service on the board of directors. Such non-employee directors who serve on committees of the board of directors receive various specified additional equity awards and cash retainers.

Effective as of June 2015, the Company revised the director compensation plan, pursuant to which non-employee directors receive an initial stock option grant to purchase 33,333 shares of common stock at the time of initial election or appointment and additional triennial stock option grants to purchase 30,000 shares of common stock, as well as an annual cash retainer of $20,000, all of which are subject to continued service on the board of directors. Such non-employee directors who serve on committees of the board of directors receive various specified additional equity awards and cash retainers.

Pursuant to the acquisition of Zep Solar, the Company assumed the Zep Solar, Inc. 2010 Equity Incentive Plan, or Zep Solar Plan, and issued fully vested stock options to purchase 303,151 shares of the Company’s common stock to replace certain fully vested stock options originally issued by Zep Solar. No additional equity awards were or will be granted under the Zep Solar Plan.

On September 15, 2015, the Chief Executive Officer and the Chief Technology Officer, the Company founders, were granted non-statutory stock option awards, or Founder Awards, with both market and performance vesting conditions. The exercise price per share of the Founder Awards is $48.97. The Chief Executive Officer’s Founder Award covers up to 3.0 million shares of the Company’s common stock, and the Chief Technology Officer’s Founder Award covers up to 2.0 million shares of the Company’s common stock. The Founder Awards have a maximum term of 10 years from the date of grant and vest in 10 equal tranches based on the achievement of specified operational goals and the 90-trading day average price of the Company’s common stock achieving certain targets on specified measurement dates. In the event of a change in control or a termination of employment, all vesting under the related Founder Award would cease, and any unvested portion would be cancelled.

A summary of stock option activity is as follows (in thousands, except per share amounts):

						Weighted-
				Weighted-		Average
				Average		Remaining		Aggregate
	Stock			Exercise		Contractual		Intrinsic
	Options			Price		Term (Years)		Value
Outstanding - January 1, 2013		14,903		$	4.80		7.67	$	107,653
Granted (weighted-average fair value of $27.55)		4,364			39.02
Issued in connection with a business acquisition (weighted-average fair value of $49.13)		303			1.97
Exercised		(4,260	)		3.65				149,653
Canceled		(1,361	)		15.30
Outstanding - December 31, 2013		13,949			14.77		7.52		586,740
Granted (weighted-average fair value of $47.45)		5,544			65.69
Exercised		(3,176	)		6.38				185,822
Canceled		(2,367	)		38.51
Outstanding - December 31, 2014		13,950			32.89		7.64		342,293
Granted (weighted-average fair value of $31.24)		6,448			49.67
Exercised		(951	)		12.25				37,929
Canceled		(1,132	)		56.07
Outstanding - December 31, 2015		18,315		$	38.43		7.74	$	293,855
Options vested and exercisable - December 31, 2013		6,696		$	4.62		6.54	$	349,523
Options vested and exercisable - December 31, 2014		6,537		$	12.72		6.30	$	272,140
Options vested and exercisable - December 31, 2015		8,029		$	21.53		5.88	$	258,310
Options vested and expected to vest - December 31, 2013		12,828		$	13.53		7.41	$	555,412
Options vested and expected to vest - December 31, 2014		12,423		$	30.15		7.46	$	333,813
Options vested and expected to vest - December 31, 2015		15,184		$	35.94		7.37	$	287,673

As of December 31, 2015, 67.7% of the non-vested stock options outstanding had a performance feature that is required to be satisfied before they become vested and exercisable, including 5.0 million non-vested stock options outstanding under the Founder Awards. The grant date fair market value of the stock options that vested in 2015, 2014 and 2013 was $109.7 million, $54.9 million and $28.3 million, respectively.

As of December 31, 2015 and 2014, there was $265.3 million and $242.9 million, respectively, of total unrecognized stock-based compensation expense, net of estimated forfeitures, related to non-vested stock options, which are expected to be recognized over the weighted-average period of 5.56 years and 2.76 years, respectively; including $118.8 million as of December 31, 2015 from the Founder Awards.

Under ASC 718, the Company estimates the fair value of stock options granted on each grant date using the Black-Scholes option valuation model, except for the Founder Awards for which the Company uses a Monte Carlo simulation, and applies the straight-line method of expense attribution. The fair values were estimated on each grant date with the following weighted-average assumptions:

	Year Ended December 31,
	2015			2014			2013
Dividend yield		0	%		0	%		0	%
Annual risk-free rate of return		2.14	%		1.95	%		1.45	%
Expected volatility		65.76	%		83.66	%		92.86	%
Expected term (years)		7.02			6.25			6.06

The expected volatility was calculated based on the average historical volatilities of the Company and publicly traded peer companies determined by the Company. The risk-free interest rate used was based on the U.S. Treasury yield curve in effect at the time of grant for the expected term of the stock options to be valued. The expected dividend yield was zero, as the Company does not anticipate paying a dividend within the relevant time frame. The expected term has been estimated using the simplified method allowed under ASC 718.

Restricted Stock Units

The Company began granting restricted stock units, or RSUs, to employees, directors and consultants in 2012 under the Company’s 2012 Equity Incentive Plan. A summary of RSU activity is as follows (in thousands, except per share amounts):

				Weighted-
	Restricted			Average
	Stock			Fair
	Units			Value
Outstanding - January 1, 2013		17		$	18.48
Granted		17			35.00
Released		(14	)		50.18
Outstanding - December 31, 2013		20			25.46
Granted		1,097			61.92
Released		(52	)		60.81
Cancelled		(36	)		64.79
Outstanding - December 31, 2014		1,029			61.16
Granted		3,332			47.99
Vested		(392	)		60.19
Cancelled		(392	)		56.29
Outstanding - December 31, 2015		3,577		$	49.53
Expected to vest - December 31, 2015		2,741		$	50.67

The grant date fair value of RSUs vested was $23.5 million, $3.2 million and $0.4 million for the years ended December 31, 2015, 2014 and 2013, respectively. Under ASC 718, the Company determines the fair value of RSUs granted on each grant date based on the fair value of the Company’s common stock on the grant date and applies the straight-line method of expense attribution. As of December 31, 2015 and 2014, there was $121.5 million and $55.2 million, respectively, of total unrecognized stock-based compensation expense, net of estimated forfeitures, from RSUs, which are expected to be recognized over the weighted-average period of 3.31 years and 3.30 years, respectively.

Stock-Based Compensation Expense

As part of the requirements of ASC 718, the Company is required to estimate potential forfeitures of equity awards and adjust stock-based compensation expense accordingly. The estimate of forfeitures will be adjusted over the requisite service period to the extent that actual forfeitures differ, or are expected to differ, from such estimates. Changes in estimated forfeitures will be recognized in the period of change and will also impact the amount of stock-based compensation expense to be recognized in future periods.

The amount of stock-based compensation expense recognized during the years ended December 31, 2015, 2014 and 2013 was $116.8 million, $88.9 million and $27.9 million, respectively. The amount of stock-based compensation expense that was capitalized is as follows (in thousands):

	Year Ended December 31,
	2015		2014		2013
Capitalized under:
Inventories	$	226	$	192	$	433
Other assets	$	3,136	$	142	$	—
Property, plant and equipment - net	$	2,997	$	5,340	$	—
Solar energy systems, leased and to be leased - net	$	24,075	$	17,700	$	6,576

Stock-based compensation expense was included in cost of revenue and operating expenses as follows (in thousands):

	Year Ended December 31,
	2015		2014		2013
Total cost of revenue	$	2,855	$	2,251	$	741
Sales and marketing	$	24,176	$	16,391	$	4,003
General and administrative	$	45,135	$	40,897	$	15,914
Research and development	$	14,203	$	6,023	$	269