In December 2018, Forte Subsidiary adopted the 2018 Equity Incentive Plan (the “2018 Incentive Plan”). The terms and conditions of stock-based awards were defined at the sole discretion of the Forte Subsidiary’s Board of Directors. Service-based awards vesting over a defined period of service and performance-based awards that vest upon the achievement of defined conditions have been issued under the 2018 Incentive Plan. Service-based awards generally vest over a four-year period, with the first 25% of such awards vesting following twelve months of continued employment or service with the remaining awards vesting monthly in equal installments over the following thirty-six months. Stock options granted under the 2018 Incentive Plan expire ten years from the date of grant and the exercise price must be at least equal to the fair market value of common stock on the grant date. In connection with the Merger, all outstanding options under the 2018 Incentive Plan were exchanged into options to purchase common stock of Tocagen, which changed its name to Forte Biosciences Inc. upon the closing of the Merger. Subsequent to the Merger, the 2018 Incentive Plan was frozen and no more stock-based awards will be granted from that plan.

In connection with the Merger, the Company assumed Tocagen’s 2017 Equity Incentive Plan, which was effective on April 12, 2017, was subsequently amended on September 30, 2018 and further amended on February 12, 2019 (the “2017 Plan”). Immediately upon closing of the Merger, 61,406 restricted stock awards and stock options to purchase 26,968 shares of common stock granted under the 2017 Plan prior to the Merger became fully vested in consideration for pre-merger services provided to Tocagen.

On July 26, 2020, the Company adopted the 2020 Inducement Equity Incentive Plan (the “2020 Inducement Plan”) and reserved 500,000 shares for future grants under the 2020 Inducement Plan. As of September 30, 2021, there were 135,000 options available for issuance under the 2020 Inducement Plan.

In May 2021, the 2017 Plan was terminated and replaced by the 2021 Equity Incentive Plan (the “2021 Plan”). The 2017 Plan will continue to govern outstanding award issued under the 2017 Plan. The 2021 Plan had an initial reserve of 1,000,000 shares available for grant. The 2021 Plan provides for the grant of incentive stock options (“ISOs”), non-statutory stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards, performance-based stock awards, other forms of equity compensation and performance cash awards. ISOs may be granted only to employees. All other awards may be granted to employees, including officers, and to non-employee directors and consultants of the Company and its affiliates. Subsequent to the Merger, service-based awards generally vested over a four-year period, with the first 25% of such awards vesting following twelve months of continued employment or service with the remaining awards vesting monthly in equal installments over the following thirty-six months. For certain service-

based awards to the board of directors, vesting occurs in thirty-six equal monthly installments over a three-year period for initial grants and in twelve equal monthly installments over a twelve-month period for subsequent grants. As of September 30, 2021, there were 915,455 options available for issuance under the 2021 Plan.

The risk-free interest rate valuation assumption for options is based on the U.S. Treasury yield curve rate at the date of grant with a maturity approximating the expected term of the option.

The expected term assumption for options granted to employees is determined using the simplified method that represents the average of the contractual term of the option and the weighted average vesting period of the option. The Company uses the simplified method because it does not have sufficient historical option exercise data to provide a reasonable basis upon which to estimate expected term.

Due to the Company’s limited trading of its common stock and lack of company-specific historical or implied volatility data, the Company has based its estimate of expected volatility on the historical volatility of a group of similar companies in the life sciences industry whose shares are publicly traded. The Company selects the peer group based on comparable characteristics, including development stage, product pipeline, and enterprise value. The Company computes historical volatility data using the daily closing prices for the selected companies’ shares during the equivalent period of the calculated expected term of the stock-based awards. The Company will continue to apply this process until sufficient amount of historical information regarding the volatility of its own stock price become available.

The assumed dividend yield is based upon the Company’s expectation of not paying dividends in the foreseeable future. Prior to the Merger, the fair value per share was determined by the Company’s Board of Directors, as of the date of each grant based on independent third-party valuations, taking into consideration various objective and subjective factors. Subsequent to the Merger, the fair value per share is the closing stock price on the option grant date.

The weighted average grant-date fair value of stock options granted in the three and nine months ended September 30, 2021 was $18.49 and $21.89, and $13.34 and $10.30 in the three and nine months ended September 30, 2020, respectively.

The weighted-average assumptions used to value these stock options using the Black-Scholes option-pricing model were as follows.

	Three Months Ended September 30,						Nine Months Ended September 30,
	2021			2020			2021			2020
Fair value of common stock	$	30.63		$	21.64		$	35.78		$	16.79
Risk-free interest rate		0.91	%		0.36	%		0.94	%		0.49	%
Dividend yield		0.0	%		0.0	%		0.0	%		0.0	%
Expected term of options (years)		6.08			6.08			5.95			6.01
Expected Volatility		67.2	%		70.0	%		69.0	%		70.0	%

As of September 30, 2021, there was unrecognized stock-based compensation expense related to stock options with service conditions of $14.3 million, which is expected to be recognized over a weighted-average period of 3.05 years. Total unrecognized stock-based compensation related to stock options with performance conditions were approximately $233,000 and are not expected to meet performance conditions. The table below summarizes the stock option activity during the nine months ended September 30, 2021:

	Number of Shares Outstanding			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (Years)		Aggregate Intrinsic Value (in thousands)
Outstanding at December 31, 2020		1,123,496		$	11.72	8.85			27,800
Granted		566,500			35.78		—		—
Exercised		(29,575	)		2.07		—		366
Forfeited/Cancelled		(151,165	)		24.09		—		—
Outstanding at September 30, 2021		1,509,256		$	19.70		8.58		1,036
Exercisable at September 30, 2021		200,181		$	18.13		8.58		53

The aggregate intrinsic value of options at September 30, 2021 is based on the Company’s fair value of its stock price on that date of $2.96 per share.

There were no restricted stock units granted during the three and nine months ended September 30, 2021. As of September 30, 2021, there were 15,000 unvested restricted stock units outstanding with an unrecognized stock-based compensation expense of approximately $289,000 to be recognized over 2.71 years.

In May 2021, the Company’s board of directors reactivated the Company’s 2017 Employee Stock Purchase Plan (“ESPP”) which had previously been suspended. The ESPP allows eligible employees to withhold up to 15% of their earnings to purchase shares of the Company’s common stock at a price per share equal to the lower of (i) 85% of the fair market value of a share of the Company’s common stock on the first date of an offering or (ii) 85% of the fair market value of a share of the Company’s common stock on the date of purchase. The Company had 176,694 shares available for future issuance under the ESPP as of September 30, 2021. The number of shares of common stock reserved for issuance will automatically increase on January 1 of each calendar year through January 1, 2027, by the lesser of (a) 1% of the total number of shares of the Company’s common stock outstanding on December 31 of the preceding calendar year, (b) 300,000 shares, or (c) a number determined by the Company’s board of directors that is less than (a) and (b). No shares had been issued under the ESPP as of September 30, 2021 as the first six month offering period since the reactivation ends on January 2, 2022. The ESPP is considered a compensatory plan and the Company recorded stock-based compensation expense of $20 thousand for the three and nine months ended September 30, 2021. No stock-based compensation expense related to the ESPP was recorded in 2020.

Stock-based compensation expenses included in the Company’s condensed consolidated statements of operations for the three and nine months ended September 30, 2021 and 2020 were (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Research and development	$	522	$	200	$	1,191	$	206
General and administrative		951		175		1,785		195
Total	$	1,473	$	375	$	2,976	$	401