6. STOCKHOLDERS’ DEFICIT

Convertible Preferred Stock— As of September 30, 2017 and December 31, 2016 convertible preferred stock consisted of the following (in thousands, except share and per share data):

	September 30, 2017 and December 31,2016
Series	Price		Shares Authorized		Shares Outstanding		Liquidation Preference
A	$	0.36312		23,020,000		23,019,997	$	8,359
B		0.93808		6,396,071		6,396,068		6,000
C-1		0.54109		9,240,560		9,240,558		5,000
C-2		0.64931		8,950,467		7,700,466		5,000
D		2.37840		4,685,755		4,204,505		10,000
E		4.35679		11,160,733		11,074,655		48,250
F		5.43396		11,041,671		11,041,667		60,000
G		7.79730		3,206,239		3,206,234		25,000
H		9.17340		6,666,667		4,959,988		45,500
Total				84,368,163		80,844,138	$	213,109

Upon the closing of the Company’s IPO, all outstanding shares of its convertible preferred stock automatically converted into 80,844,138 shares of Class B common stock on a one-to-one basis. (Note 12)

Common Stock — At September 30, 2017 there were 1,000,000,000 shares of Class A common stock and 150,000,000 shares of Class B common stock, par value $0.0001, authorized. There were no shares of Class A common stock and 5,637,785 shares of Class B common stock issued and outstanding at September 30, 2017. At December 31, 2016 there were 122,000,000 shares of common stock, par $0.0001, authorized and 4,818,812 shares issued and outstanding.

The Company had reserved shares of common stock for issuance as follows:

	September 30, 2017		December 31, 2016
Conversion of:
Series A convertible preferred stock		23,019,997		23,019,997
Series B convertible preferred stock		6,396,068		6,396,068
Series C-1 convertible preferred stock		9,240,558		9,240,558
Series C-2 convertible preferred stock		7,700,466		7,700,466
Series C-2 convertible preferred stock warrants		1,250,000		1,250,000
Series D convertible preferred stock		4,204,505		4,204,505
Series D convertible preferred stock warrants		481,246		481,246
Series E convertible preferred stock		11,074,655		11,074,655
Series E convertible preferred stock warrants		86,072		86,072
Series F convertible preferred stock		11,041,667		11,041,667
Series G convertible preferred stock		3,206,234		3,206,234
Series H convertible preferred stock		4,959,988		4,959,988
Series H convertible preferred stock warrants		408,648		—
Conversion of common stock warrants		—		375,000
Common stock options issued under stock option plan		27,326,277		22,334,508
Common stock options available for grant under stock option plan		1,221,824		409,582
Total		111,618,205		105,780,546

Stock Option Plan—As of September 30, 2017 and December 31, 2016 the Company had reserved for issuance 28,548,101 and 22,744,090 shares of common stock, respectively, under the Company’s 2008 Equity Incentive Plan (the “2008 Plan”). Options granted under the 2008 Plan must be granted at a price per share equivalent to the fair market value on the date of grant. Recipients of option grants under the 2008 Plan who possess more than 10% of the combined voting power of the Company (a “10% Shareholder”) are subject to certain limitations, and incentive stock options granted to such recipients must be at a price no less than 110% of the fair market value at the date of grant. Options under the 2008 Plan generally vest over four years and have a term of 10 years.

Upon the closing of the Company’s IPO, the Company’s Board of Directors adopted the 2017 Equity Incentive Plan (the “2017 Plan”). (Note 12). No further shares would be issued under the 2008 Plan at the time the 2017 Plan became effective.

Activity under the Company’s equity incentive plans is as follows:

	Shares Available for Grant			Number of Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)		Weighted Average Grant Date Fair Value Per Share
Balance, December 31, 2016		409,582			22,334,508			3.66		6.6		—
Increase authorization		6,250,000			—					—		—
Granted		(6,013,312	)		6,013,312			7.47		—	$	3.48
Exercised		—			(445,995	)		3.91		—		—
Forfeited and expired		575,554			(575,554	)		5.49		—		—
Balance, September 30, 2017		1,221,824			27,326,271			4.46		6.7		—

The aggregate intrinsic value of the shares vested and exercisable at September 30, 2017 was $354,849,000.

Stock-Based Compensation—The fair value of options granted under the 2008 Plan is estimated on the grant date using the Black-Scholes option-valuation model. This valuation model for stock-based compensation expense requires the Company to make certain assumptions and judgments about the variables used in the calculation, including the expected term, the expected volatility of the Company’s common stock, an assumed risk-free interest rate, and expected dividends. In addition to these assumptions, the Company also estimated a forfeiture rate of unvested stock options to calculate the stock-based compensation expense prior to January 1, 2017. Beginning January 1, 2017, the Company began recognizing forfeitures as they occur with the adoption of the new guidance related to accounting for stock-based payment award transactions.

Expected Term—The Company’s expected term represents the period that the Company’s stock-based awards are expected to be outstanding and is determined based on the simplified method as described in ASC Topic 718-10-S99-1, SEC Materials SAB Topic 14, Share-Based Payment.

Expected Volatility—The Company’s volatility factor is estimated using several comparable public company volatilities for similar option terms.

Expected Dividends—The Company has never paid cash dividends and has no present intention to pay cash dividends in the future, and as a result, the expected dividends are $0.

Risk-Free Interest Rate—The Company bases the risk-free interest rate on the implied yield currently available on U.S. Treasury zero coupon issues with a remaining term equivalent to the estimated life of the stock-based awards. Where the expected term of the Company’s stock-based awards does not correspond with the term for which an interest rate is quoted, the Company performs a straight-line interpolation to determine the rate from the available term maturities.

Fair Value of Common Stock—Given the absence of a public trading market at the date of the grant, the Company’s board of directors consider numerous objective and subjective factors to determine the fair value of the common stock at each grant date. These factors include, but are not limited to (i) independent contemporaneous third-party valuations of the common stock; (ii) the prices for the preferred stock sold to outside investors; (iii) the rights and preferences of convertible preferred stock relative to the common stock; (iv) the lack of marketability of the common stock; (v) developments in the business; and (vi) the likelihood of achieving a liquidity event, such as an IPO or sale of the Company, given prevailing market conditions.

The Company uses the straight-line method for expense recognition.

The assumptions used to value stock-based awards granted are as follows:

	Three Months Ended				Nine Months Ended
	September 30, 2017		October 1, 2016		September 30, 2017		October 1, 2016
Dividend rate	$	—		—		—		—
Expected term (in years)	5.3 - 6.5			—	5.3 - 6.5		5.3 - 6.5
Risk-free interest rate	1.84 - 2.03%			—	1.84% - 2.25%		1.32% - 1.50%
Expected volatility	39% - 43%			—	39% - 44%		44% - 46%
Fair value of common stock	$	8.82		—	$5.70 - $8.82		$	6.60

The total intrinsic value of options exercised during the nine months ended September 30, 2017 and October 1, 2016, was $1,510,000 and $350,000, respectively. As of September 30, 2017, the Company had $33,750,000 of unrecognized stock compensation expense related to unvested stock options that is expected to be recognized over a weighted-average period of approximately 2.8 years.

As a result of the Company’s Black-Scholes option-valuation fair value calculations and the Company’s use of the straight-line vesting attribution method, the Company recognized employee stock-based compensation expense as follows (in thousands):

	Three Months Ended				Nine Months Ended
	September 30, 2017		October 1, 2016		September 30, 2017		October 1, 2016
Cost of player revenue	$	25	$	30	$	99	$	88
Cost of platform revenue		18		63		58		165
Research and development		1,197		651		3,078		1,924
Sales and marketing		808		580		2,099		1,737
General and administrative		876		687		2,183		2,102
Total	$	2,924	$	2,011	$	7,517	$	6,016

Common Stock Warrants—In July 2017 the Company issued 357,283 shares of common stock upon expiration of 375,000 common stock warrants issued in 2009. There were no common stock warrants outstanding at September 30, 2017.

Preferred Stock Warrants—

Outstanding preferred stock warrants were as follows:

Series	Number Outstanding September 30, 2017		Number Outstanding December 31, 2016		Issuance Date	Exercise Price		Original Term
C-2		1,250,000		1,250,000	July 13, 2011	$	0.64931	10 years
D		249,999		249,999	October 17, 2011		2.37840	10 years
D		168,180		168,180	March 12, 2012		2.37840	10 years
D		63,067		63,067	April 27, 2012		2.37840	10 years
E		86,072		86,072	April 27, 2012		3.48546	10 years
H		408,648		—	June 9, 2017		9.17340	10 years
Total		2,225,966		1,817,318

Upon the closing of the Company’s IPO, all outstanding convertible preferred stock warrants automatically converted to Class B common stock warrants. (Note 12)

The fair value of the preferred stock warrants has been recorded as a liability as of September 30, 2017 and December 31, 2016. The fair value of the preferred stock warrants is remeasured as of each balance sheet date using the Black-Scholes option-pricing model. Changes in the fair value of the preferred stock warrants during the year are recognized in the consolidated statements of operations.

The assumptions used to value the preferred stock warrants using the Black-Scholes model are as follows:

	September 30, 2017		December 31, 2016
Dividends	$	—	$	—
Expected term (in years)	3.0-9.7		3.2-3.9
Risk-free interest rate	1.5%—2.3%		0.7%—1.6%
Volatility	43.5%—50.7%		46.2%—47.8%