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 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.

Since inception, we had two ESPP resets. The first ESPP reset occurred when our closing stock price on March 16, 2016 was below the closing stock price on October 7, 2015, which triggered a new 24-month offering period through March 15, 2018, resulting in a modification charge of approximately $10.6 million to be recognized over the new offering period. The second ESPP reset occurred when our closing stock price on March 16, 2017 was below the closing stock prices on March 16, 2016 and September 16, 2016, which triggered a new 24-month offering period through March 15, 2019, resulting in another modification charge of approximately $9.0 million. This amount along with the remaining unamortized expense from the first reset, is being recognized over the new offering period ending March 15, 2019.

During the years ended January 31, 2016, 2017 and 2018, we recognized $4.4 million, $18.3 million and $18.3 million, respectively, of stock-based compensation expense related to our 2015 ESPP. As of January 31, 2018, there was $26.4 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 1.1 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. No unvested stock options were exercised during the years ended January 31, 2016, 2017 and 2018. In the year ended January 31, 2016, we repurchased 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 years ended January 31, 2017 and 2018. As of January 31, 2017 and 2018, 494,117 and 85,262 shares held by employees and directors were subject to repurchase at an aggregate price of $1.4 million and $0.3 million.

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, 2017	56,840,189		$	7.15	7.0	$	315,502
Options granted	1,000,000		14.92
Options exercised	(8,814,019	)	2.79
Options cancelled/forfeited	(2,666,221	)	13.91
Balance as of January 31, 2018	46,359,949		$	7.75	6.3	$	574,224
Vested and exercisable as of January 31, 2018	28,990,955		$	5.30	5.7	$	430,325

The aggregate intrinsic value of options vested and exercisable as of January 31, 2018 is calculated based on the difference between the exercise price and the closing price of $20.14 of our Class A common stock on January 31, 2018. The aggregate intrinsic value of options exercised for the years ended January 31, 2016, 2017 and 2018 was $29.5 million, $114.2 million and $104.9 million, respectively.

The weighted-average grant date fair value of options granted was $8.38, $5.57 and $5.57 per share for the years ended January 31, 2016, 2017 and 2018, respectively. The total grant date fair value of options vested for the years ended January 31, 2016, 2017 and 2018 was $35.4 million, $61.8 million and $42.5 million, respectively.

As of January 31, 2018, total unamortized stock-based compensation expense related to our employee stock options was $74.4 million, which is expected to be recognized over a weighted-average period of approximately 2.6 years.

During the year ended January 31, 2016, we granted options to purchase 238,000 shares of common stock, net of cancellations, that vest upon satisfaction of performance and service conditions. For those options that management determined that the performance condition was satisfied, stock-based compensation expense of $2.5 million, $3.3 million and $0.6 million was recognized during the years ended January 31, 2016, 2017 and 2018, respectively. As of January 31, 2017 and 2018, 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 year 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,
	2016		2017		2018
Employee Stock Options
Expected term (in years)	6.0 - 7.4		6.1		6.1
Expected volatility	48% - 52%		44	%	47	%
Risk-free interest rate	1.5% - 1.9%		1.3% - 1.5%		1.9	%
Dividend rate	—		—		—
Fair value of common stock	$13.94 - $19.68		$10.37 - $14.52		$12.84
Employee Stock Purchase Plan
Expected term (in years)	0.4 - 1.9		0.5 - 2.0		0.5 - 2.0
Expected volatility	49	%	41	%	35% - 39%
Risk-free interest rate	0.1% - 0.7%		0.5% - 0.9%		0.9% - 1.4%
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, including (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.

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, 2017	8,783,024	$	13.06	$	99,863
Granted	15,779,364	12.16
Vested	(5,277,679)	12.30
Forfeited	(1,602,063)	11.88
Unvested balance of January 31, 2018	17,682,646	$	12.60	$	356,117

In March 2017, we granted 750,000 performance stock units (net of 77,000 canceled units) with both performance and service vesting conditions payable in common shares from 0% to 150% of the target number granted, contingent upon the degree to which the performance condition is met. At January 31, 2018, the performance condition was satisfied. Stock-based compensation expense for these performance stock units was $4.2 million for the year ended January 31, 2018 and total unamortized stock-based compensation expense was $3.3 million as of January 31, 2018, which is expected to be recognized over 2.2 years.

In August 2017, we granted 464,744 performance stock units with both performance and service vesting conditions payable in common shares from 0% to 150% of the target number granted, contingent upon the degree to which the performance condition is met. Because the performance condition for these stock units was not established as of January 31, 2018, there was no grant date from an accounting perspective and no stock-based compensation expense was recognized. Also, no grant date fair value was considered in the calculation of weighted-average grant date fair value in the table above. In March 2018, the performance condition for these performance stock units was established and the grant date fair value of these stock units was $21.13 per share. Stock-based compensation expense will be recognized under the accelerated attribution method over the vesting period through December 2020.

In March 2018, we converted 1,375,210 performance stock units and restricted stock units to 1,375,210 shares of restricted stock. The conversion did not change the fair value or vesting conditions and therefore no modification is required.

The aggregate fair value of restricted stock units that vested during the year ended January 31, 2018 was $75.5 million.

As of January 31, 2018, total unamortized stock-based compensation expense related to outstanding restricted stock units was $187.2 million, which is expected to be recognized over a weighted-average period of approximately 2.6 years.

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,
	2016		2017		2018
Cost of revenue—product	$	276	$	601	$	1,630
Cost of revenue—support	2,388		5,639		9,050
Research and development	31,135		63,495		71,229
Sales and marketing	16,966		34,317		47,687
General and administrative	7,460		12,616		21,077
Total stock-based compensation expense	$	58,225	$	116,668	$	150,673