9. Share-Based Payments

Stock Incentive Plans

The Company maintains the 2007 Stock Incentive Plan (the “2007 Plan”) for employees, directors, consultants, and advisors to the Company. The 2007 Plan provides for the grant of incentive and non-qualified stock options and restricted stock grants as determined by the Board of Directors. The Company reserved 5,079,462 shares of common stock under the Plan, and at December 31, 2013 and December 31, 2012, the Company had no shares and 684,124 shares available for future issuance under the 2007 Plan, respectively. Shares of common stock issued upon exercise of stock options are generally issued from new shares of the Company. The 2007 Plan provides that the exercise price of incentive stock options cannot be less than 100% of the fair market value of the common stock on the date of the award for participants who own less than 10% of the total combined voting power of stock of the Company, and not less than 110% for participants who own more than 10% of the Company’s voting power. Stock options and restricted stock granted under the 2007 Plan vest over periods as determined by the Board of Directors, which is generally 25% on the first year anniversary of the grant date and then ratably monthly thereafter. Stock options generally expire ten years from the date of grant. Restricted stock issuances and early exercise of stock options are subject to the Company’s right of repurchase at the original issuance price, which right lapses over the vesting period of the stock.

In June 2013, the Company’s Board of Directors adopted, and in July 2013, the Company’s stockholders approved, the 2013 Stock Incentive Plan (the “2013 Plan”). The 2013 Plan became effective upon the closing of the IPO and provides for the grant of incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock awards, restricted stock units and other stock-based awards. The Company will grant no further stock options or other awards under the 2007 Plan. Any options or awards outstanding under the 2007 Plan at the time of adoption of the 2013 Plan remain outstanding and effective. As of December 31, 2013, the total number of shares reserved under all equity plans is 5,988,732, and the Company had 655,036 shares available for future issuance under such plans. The 2013 Plan provides for an annual increase, to be added on the first day of each fiscal year, beginning with the fiscal year ending December 31, 2014 and continuing until the expiration of the 2013 Plan, equal to the lesser of (i) 2,000,000 shares of Common Stock, (ii) 4% of the outstanding shares of Common Stock on such date or (iii) an amount determined by the Company’s Board of Directors. On January 1, 2014, the annual increase for the 2013 Plan resulted in an additional 1,242,966 shares authorized for issuance.

During the years ended December 31, 2013 and 2012, the Company granted 27,272 and 16,363 stock options, respectively, to consultants and advisors of the Company. These awards are included within the following table which summarizes the activity of the 2007 Plan and the 2013 Plan for the year ended December 31, 2013. Also included in the following table are 313,634 of options subject to performance conditions deemed not probable of achievement as of December 31, 2013:


	Number of Stock Options			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value (in thousands)
Outstanding at December 31, 2012		3,145,544		$	0.88		7.72	$	15,402
Granted		986,294			13.59
Exercised		(237,565	)		0.63
Forfeited/Expired		(48,105	)		1.99

Outstanding at December 31, 2013		3,846,168		$	4.14		7.43	$	76,189

Exercisable at December 31, 2013		2,161,333		$	0.61		6.34	$	50,443

Vested and expected to vest at December 31, 2013		3,278,066		$	3.33		7.15	$	67,604

The weighted-average grant date fair value of options granted was $9.96, $2.09 and $0.44 during the years ended December 31, 2013, 2012 and 2011, respectively. The total intrinsic value of options exercised was $4.2 million, $0.8 million, and $0.1 million during the years ended December 31, 2013, 2012 and 2011, respectively.

At December 31, 2013, the total unrecognized compensation expense related to unvested stock option awards, including estimated forfeitures, was $6.3 million, which the Company expects to recognize over a weighted-average period of approximately 3.3 years. The Company also has unrecognized stock-based compensation expense of $2.2 million related to stock options with performance-based vesting criteria that are not considered probable of achievement as of December 31, 2013; therefore the Company has not yet begun to recognize the expense on these awards.

Restricted Stock and Early Exercise of Stock Options

From time to time, upon approval by the Company’s Board, certain employee have been granted restricted stock and certain directors have been permitted to early exercise their stock options, at which time the awards became subject to restricted stock agreements. These shares of restricted stock granted upon early exercise of the options are subject to the same vesting provisions as the original stock option awards. Accordingly, the Company has recorded the exercise proceeds from early exercises as a restricted stock liability in the consolidated balance sheets. The restricted stock liability is reclassified into stockholders’ equity (deficit) as the restricted stock and options vest.

Restricted stock activity for the year ended December 31, 2013 is summarized as follows:


Unvested shares at December 31, 2012	160,053
Granted	—
Vested	(136,758	)
Forfeited	—

Unvested shares at December 31, 2013	23,295

There were no shares of restricted stock granted during years ended December 31, 2013 and 2011. The weighted-average exercise price of restricted stock granted during the year ended December 31, 2012 was $0.91. The fair value of awards vested during the years ended December 31, 2013, 2012 and 2011 was $1.7 million, $0.5 million and $0.2 million, respectively.

Performance-Based Stock Option Grants

During the years ended December 31, 2013 and 2012, the Company granted options to purchase 355,454 and 375,636 shares of common stock, respectively, to employees, including executive officers, which contain both performance-based and service-based vesting criteria. Milestone events are specific to the Company’s corporate goals, including but not limited to certain preclinical and clinical development milestones related to the Company’s product candidates. Stock-based compensation expense associated with these performance-based stock options is recognized if the performance condition is considered probable of achievement using management’s best estimates. Management concluded that the performance-based milestones were not probable of achievement at December 31, 2012. As such, no stock-based compensation expense was recorded as of December 31, 2012 related to these options. During the year ended December 31, 2013 management assessed the probability of achieving the milestones and determined that certain performance-based milestones had become probable of achievement as of December 31, 2013. The Company recorded stock-based compensation expense of $0.9 million during the year ended December 31, 2013, accordingly. The remaining milestones were not deemed to be probable of achievement as of December 31, 2013.

During 2010, the Company granted stock options to consultants of the Company which contained performance-based vesting criteria and no underlying service period. Stock-based compensation expense associated with these performance-based stock options is recognized if the performance condition is considered probable of achievement using management’s best estimates. During the year ended December 31, 2012 management concluded that the milestones associated with 27,272 performance-based stock options were probable of achievement and the Company began to record stock-based compensation expense, accordingly. The Company recorded $150,000 of stock-based compensation expense for non-employee performance-based stock options in the year ended December 31, 2012. There was no stock-based compensation expense for non-employee performance-based stock options recorded in the year ended December 31, 2013 as there are no remaining milestones as of December 31, 2012.

Stock-Based Compensation Expense

The fair value of each stock option granted to employees is estimated on the date of grant and for non-employees on each reporting date and upon vesting using the Black-Scholes option-pricing model. The following table summarizes the weighted average assumptions used in calculating the fair value of the awards:


	Years Ending December 31,
	2013			2012			2011
Risk-free interest rate		1.31	%		1.09	%		1.97	%
Expected dividend yield		—			—			—
Expected term (in years)		6.42			6.08			6.09
Expected volatility		92.49	%		97.75	%		98.60	%

Risk-Free Rate

The risk-free rate is based on the yield curve of U.S. Treasury securities with periods commensurate with the expected term of the options being valued.

Dividends

The Company has never paid, and does not anticipate paying, any cash dividends in the foreseeable future, and therefore uses an expected dividend yield of zero in the option-pricing model.

Volatility

Since the Company was privately held through July 2013, it does not have the relevant company-specific historical data to support its expected volatility. As such, the Company has used a weighted-average of expected volatility based on the volatilities of a representative group of publicly-traded biopharmaceutical companies. Subsequent to the initial public offering, the Company began to consider the Company’s own historic volatility. For purposes of identifying representative companies, the Company considered characteristics such as number of product candidates in earlier stages of product development, area of therapeutic focus, length of trading history, similar vesting provisions and a similar percentage of stock options that are in-the-money. The expected volatility has been determined using a weighted-average of the historical volatilities of the representative group of companies for a period equal to the expected term of the option grant. The Company intends to continue to consistently apply this process using the same similar entities until a sufficient amount of historical information regarding the volatility of the Company’s own share price becomes available or until circumstances change, such that the identified entities are no longer representative companies. In the latter case, more suitable, similar entities whose share prices are publicly available would be utilized in the calculation.

Expected Term

The Company uses the “simplified method” as prescribed by the Securities and Exchange Commission Staff Accounting Bulletin No. 107, Share Based Payments, to estimate the expected term of stock option grants. Under this approach, the weighted-average expected life is presumed to be the average of the contractual term (ten years) and the vesting term (generally four years) of the Company’s stock options, taking into consideration multiple vesting tranches. The Company utilizes this method due to lack of historical exercise data and the plain-vanilla nature of the Company’s share-based awards.

Forfeitures

Forfeitures are required to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company based its estimate of forfeitures on data from a representative group of publicly-traded biopharmaceutical companies, as the Company does not currently have sufficient history, and records the stock-based compensation expense only on the awards that are expected to vest. To date forfeitures have been less than 5.0% of total grants.

2013 Employee stock purchase plan

In June 2013, the board of directors adopted, and in July 2013 our stockholders approved, the 2013 employee stock purchase plan, or the 2013 ESPP. The 2013 ESPP will be administered by our board of directors or by a committee appointed by our board of directors. The 2013 ESPP initially provides participating employees with the opportunity to purchase up to an aggregate of 327,272 shares of our common stock.