Equity Incentive Plans

We maintain two equity incentive plans: the 2009 Equity Incentive Plan (our 2009 Plan) and the 2015 Equity Incentive Plan (our 2015 Plan). In August 2015, our board of directors adopted, and in September 2015 our stockholders approved, the 2015 Plan, which became effective in connection with our IPO in October 2015 and serves as the successor to our 2009 Plan. Our 2015 Plan provides for the issuance of incentive stock options to our employees and non-statutory stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards, performance stock awards, performance cash awards, and other forms of stock awards to our employees, directors and consultants. No new awards are issued under our 2009 Plan after the effective date of our 2015 Plan. Outstanding awards granted under our 2009 Plan will remain subject to the terms of our 2009 Plan and applicable award agreements, until such outstanding awards that are stock options are exercised, terminated or expired by their terms.

We have initially reserved 27,000,000 shares of our Class A common stock for issuance under our 2015 Plan. The number of shares reserved for issuance under our 2015 Plan increases automatically on the first day of February of each of 2016 through 2025, in an amount equal to 5% of the total number of shares of our capital stock outstanding as of the immediately preceding January 31.

The exercise price of stock options will generally not be less than 100% of the fair market value of our common stock on the date of grant, as determined by our board of directors. Our equity awards generally vest over a two to four year period and expire no later than ten years from the date of grant.

2015 Employee Stock Purchase Plan

In August 2015, our board of directors adopted and our stockholders approved, the 2015 Employee Stock Purchase Plan (2015 ESPP), which became effective in connection with our IPO. A total of 3,500,000 shares of Class A common stock was initially reserved for issuance under the 2015 ESPP. The number of shares reserved for issuance under our 2015 ESPP increases automatically on the first day of February of each of 2016 through 2025, in an amount equal to the lesser of (i) 1% of the total number of shares of our capital stock outstanding as of the immediately preceding January 31, and (ii) 3,500,000 shares of Class A common stock.

The 2015 ESPP allows eligible employees to purchase shares of our Class A common stock at a discount through payroll deductions (or other payroll contributions) of up to 30% of their eligible compensation, subject to a cap of 3,000 shares on any purchase date or $25,000 in any calendar year (as determined under applicable tax rules). Except for the initial offering period, the 2015 ESPP provides for 24 month offering periods beginning March 16th and September 16th of each year, and each offering period will consist of four six-month purchase periods, subject to a reset provision. If the closing stock price on the offering date of a new offering falls below the closing stock price on the offering date of an ongoing offering, the ongoing offering would terminate immediately following the purchase of ESPP shares on the purchase date immediately preceding the new offering and participants in the terminated ongoing offering would automatically be enrolled in the new offering (ESPP reset). On each purchase date, eligible employees will purchase our Class A common stock at a price per share equal to 85% of the lesser of the fair market value of our Class A common stock (1) on the first trading day of the applicable offering period or (2) the purchase date. The initial offering period began on October 7, 2015 and ended on March 15, 2016 as our closing stock price on the new offering date of March 16, 2016 was lower than the closing stock price on October 7, 2015 which triggered an ESPP reset. The ESPP reset resulted in a modification charge of approximately $10.6 million which is being recognized over the new 24-month offering period ending March 15, 2018.

During the years ended January 31, 2016 and 2017, we recognized $4.4 million and $18.3 million of stock-based compensation expense related to our 2015 ESPP. As of January 31, 2017, there was $22.1 million of unrecognized stock-based compensation expense related to our 2015 ESPP which is expected to be recognized over a weighted-average period of approximately 1.2 years.

Early Exercise of Stock Options

Certain employees and directors have exercised options granted under the 2009 Plan prior to vesting. The unvested shares are subject to a repurchase right held by us at the original purchase price. The proceeds initially are recorded as liability related to early exercised stock options and reclassified to additional paid in capital as the repurchase right lapses. We issued 642,248 shares of common stock upon early exercise of stock options during the year ended January 31, 2015, for total exercise proceeds of $1.9 million. No unvested stock options were exercised during the years ended January 31, 2016 and 2017. For the years ended January 31, 2015 and 2016, we repurchased 50,000 and 15,000 shares of unvested common stock related to early exercised stock options at the original purchase price due to the termination of an employee. No shares were repurchased during the year ended January 31, 2017. As of January 31, 2016 and 2017, 2,809,264 and 494,117 shares held by employees and directors were subject to repurchase at an aggregate price of $4.8 million and $1.4 million.

We entered into promissory notes with certain of our executives and employees in connection with the exercise of their stock option awards. These notes bore fixed interest rates ranging from 0.95% to 1.84% per annum. As of January 31, 2014, outstanding promissory notes were $3.2 million and 6,295,056 shares of common stock were outstanding from stock options exercised via promissory notes. As the promissory notes were solely collateralized by the underlying common stock, they are considered nonrecourse from an accounting standpoint and therefore, stock options exercised via nonrecourse promissory notes are not considered outstanding shares. Accordingly, as of January 31, 2014, we did not record these transactions related to promissory notes. During the year ended January 31, 2015, an additional 300,000 stock options were early exercised via a nonrecourse promissory note in the amount of $773,000, which was also not recorded in our financial statements. All outstanding promissory notes and the related accrued interest, which totaled $4.0 million, were repaid in full as of January 31, 2015, and accordingly, the underlying common stock was recorded as outstanding shares. Proceeds from the repayment of promissory notes were included in additional paid-in capital for the portion of the underlying common stock that was vested, and in liability related to early exercised stock options for the portion of the underlying common stock that was unvested.

Stock Options

A summary of activity under our equity incentive plans and related information is as follows:



	Options Outstanding
	Number of Shares		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Life (Years)	Aggregate Intrinsic Value
						(in thousands)
Balance as of January 31, 2016	68,879,087		$	6.43	7.9	$	505,131
Options granted	1,999,000		12.69
Options exercised	(10,180,258	)	1.47
Options cancelled/forfeited	(3,857,640	)	12.18
Balance as of January 31, 2017	56,840,189		$	7.15	7.0	$	315,502
Vested and exercisable as of January 31, 2017	29,575,922		$	4.12	6.2	$	228,436

The aggregate intrinsic value of options vested and exercisable as of January 31, 2017 is calculated based on the difference between the exercise price and the closing price of $11.37 of our Class A common stock on January 31, 2017. The aggregate intrinsic value of options exercised for the years ended January 31, 2015, 2016 and 2017 was $43.2 million, $29.5 million and $114.2 million, respectively.

The weighted-average grant date fair value of options granted was $5.71, $8.38 and $5.57 per share for the years ended January 31, 2015, 2016 and 2017, respectively. The total grant date fair value of options vested for the years ended January 31, 2015, 2016 and 2017 was $9.9 million, $35.4 million and $61.8 million, respectively.

As of January 31, 2017, total unrecognized employee compensation cost was $132.6 million, which is expected to be recognized over a weighted-average period of approximately 2.9 years.

During the years ended January 31, 2015 and 2016 we granted options to purchase 499,750 and 238,000 shares of common stock, net of cancellations, that vest upon satisfaction of a performance condition. For those options that management determined that it is probable that the performance condition will be satisfied, stock-based compensation expense of $1.7 million, $2.5 million and $3.3 million was recognized during the years ended January 31, 2015, 2016 and 2017, respectively. At January 31, 2017, there were no outstanding stock options subject to performance vesting conditions.

In November 2016, we modified employee stock option awards to purchase 800,000 shares of our common stock. The modification included an immediate acceleration of performance-based options to purchase 360,000 shares of common stock and an acceleration of time-based options to purchase 440,000 shares of common stock contingent on continued employment through January 31, 2017. This modification resulted in stock-based compensation expense of $5.9 million that was recognized during the three months ended January 31, 2017.

Determination of Fair Value

The fair value of stock options granted to employees and to be purchased under ESPP is estimated on the grant date using the Black-Scholes option pricing model. This valuation model for stock-based compensation expense requires us to make assumptions and judgments about the variables used in the calculation including the fair value of the underlying common stock, expected term, the expected volatility of the common stock, a risk-free interest rate and expected dividend yield.

We estimate the fair value of employee stock options and ESPP purchase rights using a Black-Scholes option pricing model with the following assumptions:



	Year Ended January 31,
	2015	2016		2017
Employee Stock Options
Expected term (in years)	5.0 - 6.9	6.0 - 7.4		6.1
Expected volatility	55% - 68%	48% - 52%		44	%
Risk-free interest rate	1.3% - 2.2%	1.5% - 1.9%		1.25% - 1.49%
Dividend rate	—	—		—
Fair value of common stock	$4.81 - $12.65	$13.94 - $19.68		$10.37 - $14.52
Employee Stock Purchase Plan
Expected term (in years)	—	0.4 - 1.9		0.5 - 2.0
Expected volatility	—	49	%	41	%
Risk-free interest rate	—	0.1% - 0.7%		0.5% - 0.9%
Dividend rate	—	—		—

The assumptions used in the Black-Scholes option pricing model were determined as follows.

Fair Value of Common Stock—Prior to our IPO in October 2015, our board of directors considered numerous objective and subjective factors to determine the fair value of our common stock at each grant date. These factors included, but were not limited to (i) contemporaneous third-party valuations of common stock; (ii) the prices for our convertible preferred stock sold to outside investors; (iii) the rights and preferences of convertible preferred stock relative to common stock; (iv) the lack of marketability of our common stock; (v) developments in the business; and (vi) the likelihood of achieving a liquidity event, such as an IPO or sale of Pure Storage, given prevailing market conditions. Subsequent to our IPO, we use the market closing price of our Class A common stock as reported on the New York Stock Exchange to determine the fair value of our common stock at each grant date.

Expected Term—The expected term represents the period that our stock-based awards are expected to be outstanding. The expected term assumptions were determined based on the vesting terms, exercise terms and contractual lives of the options and ESPP purchase rights.

Expected Volatility—Since we have limited trading history of our common stock, the expected volatility was derived from the average historical stock volatilities of several public companies within the same industry that we consider to be comparable to our business over a period equivalent to the expected term of the stock option grants and ESPP purchase rights.

Risk-Free Interest Rate—The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for zero-coupon U.S. Treasury notes with maturities approximately equal to the expected term of the stock option grants and ESPP purchase rights.

Dividend Rate—We have never declared or paid any cash dividends and do not plan to pay cash dividends in the foreseeable future, and, therefore, use an expected dividend yield of zero.

Non-Employee Stock Option Awards

We estimate the fair value of non-employee stock options on the date of grant using a Black-Scholes option pricing model with the following assumptions:



	Year Ended January 31,
	2015	2016			2017
Expected term (in years)	10.0	10.0			—
Expected volatility	62% - 63%	49		%	—
Risk-free interest rate	1.6% - 2.6%	1.5		%	—
Dividend rate	—	—			—
Fair value of common stock	$9.40 - $12.40		$17.00		—

For the years ended January 31, 2015 and 2016 we granted non-employee stock options to purchase 83,500 and 22,500 shares of common stock, respectively. No stock options were granted to non-employees in the year ended January 31, 2017. We recognized stock-based compensation expense related to non-employee stock options of $2.5 million, $3.1 million and $0.7 million for the years ended January 31, 2015, 2016 and 2017, respectively.

Restricted Stock Units

A summary of the restricted stock unit activity under our 2015 Plan and related information is as follows:



	Number of Restricted Stock Units Outstanding	Weighted-Average Grant Date Fair value		Aggregate Intrinsic Value
				(in thousands)
Unvested Balance as of January 31, 2016	53,000	$	16.98	$	690
Granted	10,501,600	13.15
Vested	(1,237,502)	13.95
Forfeited	(534,074)	13.16
Unvested Balance of January 31,2017	8,783,024	$	13.06	$	99,863

The aggregate fair value, as of the respective vesting dates, of restricted stock units that vested during the year ended January 31, 2017 was $14.8 million. As of January 31, 2017, total unrecognized employee compensation cost related to outstanding restricted stock units was $103.1 million, which is expected to be recognized over a weighted-average period of approximately 2.8 years.

Repurchase of Common Stock in Connection with Tender Offer

In July 2014, our board of directors approved a tender offer which allowed our employees to sell fully vested shares of common stock or unexercised stock options to the Company. We repurchased 735,426 shares of common stock and 3,067,910 vested stock options from participating employees for a total consideration of $57.7 million, net of exercise proceeds of $2.1 million. The common stock repurchased was retired immediately thereafter. Of the $57.7 million total consideration, the fair value of the shares tendered net of exercise proceeds, was recorded in accumulated deficit, which totaled $30.1 million, while the amounts paid in excess of the fair value of our common stock at the time of repurchase were recorded as stock-based compensation expense, which totaled $27.6 million.

Stock-Based Compensation Expense

The following table summarizes the components of stock-based compensation expense recognized in the consolidated statements of operations (in thousands):



	Year Ended January 31,
	2015		2016		2017
Cost of revenue—product	$	303	$	276	$	601
Cost of revenue—support	1,273		2,388		5,639
Research and development	22,512		31,135		63,495
Sales and marketing	22,466		16,966		34,317
General and administrative	6,479		7,460		12,616
Total stock-based compensation expense	$	53,033	$	58,225	$	116,668

The stock-based compensation expense for the year ended January 31, 2015 included $27.6 million related to the repurchase of common stock in excess of fair value in connection with the tender offer.