7. Stockholder’s Equity and Stock Based Compensation

Convertible Preferred Stock

Upon the completion of the IPO, all outstanding convertible preferred stock was converted into 25,876,142 shares of common stock on a one-to-one basis.

Reverse Stock Split

On May 3, 2013, the Company effected a one-for-two reverse stock split of common stock and preferred stock. Upon the effectiveness of the reverse stock split, each two outstanding shares of common stock and each two outstanding shares of preferred stock, were exchanged into one share of common stock and one share of preferred stock, respectively. The reverse stock split also applied to any outstanding securities or rights convertible into, or exchangeable or exercisable for, common stock or preferred stock of the Company. Unless otherwise indicated, all share numbers, share prices and exercise prices (except shares authorized and par values) have been adjusted to reflect the stock split on a retroactive basis.

Common Stock Authorized

Upon the closing of the IPO, the Company increased the amount of common stock authorized for issuance from 100,000,000 to 1,000,000,000 common shares with a par value of $0.0001 per share.

Stock Option Plans

2006 Stock Plan

The Company’s Board of Directors (Board) and the Company’s stockholders adopted the 2006 Stock Plan (2006 Plan) in October 2006. The 2006 Plan was most recently amended in May 2013. The 2006 Plan was terminated in connection with the IPO, and accordingly, no shares will be available for issuance under this plan. The 2006 Plan will continue to govern outstanding awards granted thereunder. The 2006 Plan provided for the grant of incentive stock options and nonqualified stock options. As of June 30, 2013, options to purchase 7,872,832 shares of common stock and 201,260 restricted stock units remained outstanding under the 2006 Plan.

2013 Equity Incentive Plan

The Board adopted, and the Company’s stockholders approved, the 2013 Equity Incentive Plan (2013 Plan). The 2013 Plan was effective one business day prior to the effective date of the IPO. The 2013 Plan provides for the grant of incentive stock options, to the Company’s employees and any parent and subsidiary corporations’ employees, and for the grant of nonstatutory stock options, restricted stock, restricted stock units, stock appreciation rights, performance units and performance shares to the Company’s employees, directors and consultants and the Company’s subsidiary corporations’ employees and consultants. In addition, the shares reserved for issuance under the 2013 Plan also include (a) those shares reserved but unissued under the 2006 Stock Plan (2006 Plan), and (b) shares returned to the 2006 Plan as the result of expiration or termination of awards (provided that the maximum number of shares that may be added to the 2013 Plan pursuant to (a) and (b) is 9,119,341 shares). The number of shares available for issuance under the 2013 Plan will also include an annual increase on the first day of each fiscal year beginning in 2014, equal to the least of:

· 3,250,000 shares;

· 5% of the outstanding shares of common stock as of the last day of the Company’s immediately preceding fiscal year; or

· such other amount as the Company’s Board of directors may determine.

If an award expires or becomes unexercisable without having been exercised in full, is surrendered pursuant to an exchange program, or, with respect to restricted stock, restricted stock units, performance units or performance shares, is forfeited to or repurchased due to failure to vest, the unpurchased shares (or for awards other than stock options or stock appreciation rights, the forfeited or repurchased shares) will become available for future grant or sale under the 2013 Plan. With respect to stock appreciation rights, the net shares issued will cease to be available under the 2013 Plan and all remaining shares will remain available for future grant or sale under the 2013 Plan. Shares used to pay the exercise price of an award or satisfy the tax withholding obligations related to an award will become available for future grant or sale under the 2013 Plan. To the extent an award is paid out in cash rather than shares, such cash payment will not result in reducing the number of shares available for issuance under the 2013 Plan.

Summary of Stock Option Activity

A summary of the Company’s stock option activity under all stock option plans and related information for six months ended June 30, 2013 was as follows:

	OPTIONS OUTSTANDING
	Shares Available for Grant (in thousands)		Number of Stock Options Outstanding (in thousands)		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Life (Years)	Aggregate Intrinsic Value (in thousands)

Balance as of December 31, 2012	928		6,581		$	3.21	8.08	$	11,431
Additional shares authorized	4,502
Granted	(2,118	)	2,118		8.26
Exercised	—		(634	)	2.23
Repurchased	9		—		1.67
RSUs granted, net of cancellations/forfeitures	(76	)	—
Cancelled/forfeited	174		(174	)	4.04
Balance as of June 30, 2013	3,420		7,892		4.62		8.24	159,766

Exercisable as of June 30, 2013			7,602		4.61		8.76	153,989
Vested and expected to vest as of June 30, 2013			7,123		$	4.45	8.14	$	145,419

The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the Company’s closing price of $24.87 as of June 30, 2013 for options that were in-the-money as of that date.

Option awards generally vest over a four year period, with 25% vesting after one year from date of grant and monthly thereafter. Stock options granted under our 2006 Plan provided employee option holders with an early exercise provision, where in the event of termination any unvested shares purchased are subject to repurchase by the Company at the original purchase price. This right of repurchase lapses as the option vests. Options exercisable as of June 30, 2013 include options that are exercisable prior to vesting.

The weighted average grant date fair value of options granted and the total intrinsic value of options exercised were as follows (in thousands, except weighted average grant date fair value):

	Six Months Ended June 30,
	2013		2012
Weighted average grant date fair value	$	4.44	$	2.59
Total intrinsic value of options exercised	$	4,855	$	500

The total estimated grant date fair value of options vested during the six months ended June 30, 2013 was approximately $2.1 million.

Determining Fair Value of Stock Options

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option valuation model. The following assumptions were used to estimate the fair value of options granted to employees:

	Three Months Ended June 30,		Six Months Ended June 30,
	2013	2012	2013	2012
Expected term (in years)	6	6	6	6
Risk-free interest rate	0.86% - 1.375%	1.09%	0.86% - 1.375%	1.09%
Expected volatility	57% - 58%	63%	57% - 58%	63% - 65%
Expected dividend rate	0%	0%	0%	0%

The assumptions are based on the following for each of the periods presented:

Expected Term — The Company estimates the expected term consistent with the simplified method identified by the SEC. The Company elected to use the simplified method because of its limited history of stock option exercise activity and its stock options meet the criteria of the “plain-vanilla” options as defined by the SEC. The simplified method calculates the expected term as the average of the vesting and contractual terms of the award.

Volatility — Since the Company has no trading history by which to determine the volatility of its own common stock price, the expected volatility being used is derived from the historical stock volatilities of a representative industry peer group of comparable publicly listed companies over a period approximately equal to the expected term of the options.

Risk Free Interest Rate — The risk free interest rate is based on U.S. Treasury zero coupon issues with remaining terms similar to the expected term on the options.

Expected Dividend — The Company has never declared or paid any cash dividends and does not plan to pay cash dividends in the foreseeable future, and, therefore, used an expected dividend yield of zero in the valuation model.

Forfeiture — The Company estimates forfeitures at the time of grant and revises those estimates in subsequent periods if actual forfeitures differ from those estimates. The Company uses historical data to estimate pre-vesting forfeitures and records stock-based compensation expense only for those awards that are expected to vest. All service based stock-based payment awards are amortized on a straight-line basis over the requisite service periods of the awards, which are generally the vesting periods.

Restricted Stock Units

A summary of the Company’s Restricted Stock Units (RSU) activity and related information for the six months ended June 30, 2013 is as follows:

	Number of RSUs (in thousands)		Weighted Average Grant Date Fair Value		Aggregate Intrinsic Value (in thousands)
Balance as of December 31, 2012	328		$	4.58	$	2,437
RSUs Granted	76		15.10
RSUs Vested	(148	)	4.56
RSUs Repurchased	—
RSUs Cancelled/Forfeited	—
Balance as of June 30, 2013	257		$	7.70	$	6,383

During 2012 and the first six months of 2013, the Company granted RSUs to certain employees. Some of these RSUs are subject to a time-based vesting condition and some are subject to performance-based vesting condition, both of which must be satisfied before the RSUs are vested and settled for shares of common stock. The time-based vesting condition generally ranges from 2 to 4 years, and the performance-based vesting condition is satisfied upon the occurrence of a sale event or the completion of the Company’s IPO. Stock-based compensation expense associated with the performance-based RSUs is recognized if the performance-based vesting condition is considered probable of achievement. Recognition of compensation expense for these performance-based RSUs commenced during the second quarter of 2013 upon the IPO of the Company, which satisfied the performance condition. For the three and six months ended June 30, 2013, the Company recognized approximately $1.1 million in stock based compensation associated with these RSUs. RSUs granted subsequent to the IPO are subject to a time-based vesting condition of 4 years.

The aggregate intrinsic value of RSUs outstanding at June 30, 2013 was approximately $6.4 million, using the Company’s closing stock price of $24.87 per share as of June 30, 2013.

Employee Stock Purchase Plan

The Board adopted, and the Company’s stockholders approved, a 2013 Employee Stock

Purchase Plan (ESPP). The ESPP became effective on May 1, 2013. The ESPP provides for annual increases in the number of shares available for issuance under the ESPP on the first day of each fiscal year beginning in fiscal 2014, equal to the lesser of:

· 1% of the outstanding shares of our common stock on the first day of such fiscal year;

· 650,000 shares; or

· such other amount as may be determined by our board of directors

The ESPP allows eligible employees to purchase shares of our common stock at a discount through payroll deductions of up to 15% of their eligible compensation, at not less than 85% of the fair market value, as defined in the ESPP, subject to any plan limitations. A participant may purchase a maximum of 1,250 shares during an offering period. The offering period generally start on the first trading day on or after February 15th and August 15th of each year, except that the first offering period commenced on the first trading day following the effective date of the Company’s registration statement. At June 30, 2013, 738,032 shares were available for issuance under the ESPP.

Determining Fair Value of Employee Stock Plan Purchase Rights

The assumptions used to value employee stock purchase rights under the Black-Scholes model during the three and six months ended June 30, 2013 were as follows:

Expected term (in months)	9
Risk-free interest rate	0.11	%
Expected volatility	42	%
Expected dividend rate	0	%

Stock Compensation Expense

The stock-based compensation expense included in operating results was allocated as follows (in thousands):

	Three Months Ended June 30,				Six Months Ended June 30,
	2013		2012		2013		2012

Cost of subscription and support revenue	$	114	$	38	$	177	$	68
Cost of professional services and other revenue	154		60		247		91
Research and development	937		170		1,147		281
Sales and marketing	863		217		1,093		423
General and administrative	548		236		953		371
Total stock-based compensation expense	$	2,616	$	721	$	3,617	$	1,234

As of June 30, 2013, total unrecognized compensation cost related to unvested awards not yet recognized under all equity compensation plans, adjusted for estimate forfeitures, was as follows:

	June 30, 2013
	Unrecognized Expense		Average Expected Recognition Period
	(in thousands)		(in years)
Stock options	$	13,384	2.88
Restricted stock units	1,200		1.69
Employee Stock Purchase Plan	948		0.64
Total unrecognized stock-based compensation expense	$	15,532