9. Stockholders’ Equity and Stock Based Compensation

Common Stock Authorized and Outstanding

As of September 30, 2015, the Company was authorized to issue 1,000,000,000 common shares with a par value of $0.0001 per share and 20,000,000 convertible preferred shares with a par value of $0.0001 per share. As of September 30, 2015, the Company had approximately 43.2 million shares of common stock issued and outstanding.

Summary of Stock Option Activity

A summary of the Company’s stock option activity under all stock option plans and related information for nine months ended September 30, 2015 is as follows:

	Number of Stock Options Outstanding		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Life	Aggregate Intrinsic Value
	(in thousands)				(Years)	(in thousands)

Balance as of December 31, 2014	5,404		$	11.55	7.56	$	120,595
Granted	59		29.17
Exercised	(1,050	)	4.54
Cancelled/forfeited	(320	)	16.93

Balance as of September 30, 2015	4,093		13.18		6.96	71,562


Exercisable as of September 30, 2015	3,429		8.75		6.66	71,085

Vested and expected to vest as of September 30, 2015	4,083		13.20		6.96	$	71,331

The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the Company’s closing price of $28.42 as of September 30, 2015 for options that were in-the-money as of that date.

Option awards generally vest over a four year period, with 25% vesting one year from date of grant and monthly thereafter. Stock options granted under the Company’s 2006 Plan provided option holders with an early exercise provision, where in the event of termination any exercised and unvested shares 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 September 30, 2015 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):

	Nine Months Ended September 30,
	2015		2014
Weighted average grant date fair value of options granted	$	29.17	$	20.79
Total intrinsic value of options exercised	$	26,011	$	42,103

The total estimated grant date fair value of options vested during the nine months ended September 30, 2015 was approximately $10.9 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 September 30,		Nine Months Ended September 30,
	2015	2014	2015	2014
Expected term (in years)	6	N/A	6	6
Risk-free interest rate	1.87%	N/A	1.70% - 1.87%	1.84% - 1.97%
Expected volatility	45%	N/A	45%	49% - 56%
Expected dividend rate	0%	N/A	0%	0%

Restricted Stock Units

A summary of the Company’s Restricted Stock Units (RSUs) activity and related information for the nine months ended September 30, 2015 is as follows:

	Number of RSUs		Weighted Average Grant Date Fair Value		Aggregate Intrinsic Value
	(in thousands)				(in thousands)

Balance as of December 31, 2014	2,360		$	33.30	$	77,207
RSUs Granted	1,564		32.66
RSUs Vested	(475	)	33.53
RSUs Cancelled/Forfeited	(478	)	32.10

Balance as of September 30, 2015	2,971		$	33.12	$	84,422

RSUs are generally subject to a time-based vesting condition that ranges from 3 to 4 years.

The aggregate intrinsic value of RSUs outstanding at September 30, 2015 was determined using the Company’s closing stock price of $28.42 per share as of September 30, 2015.

The weighted average grant date fair value of RSUs granted and the total intrinsic value of RSUs that vested during the periods presented were as follows (in thousands, except weighted average grant date fair value):

	Nine Months Ended September 30,
	2015		2014
Weighted average grant date fair value of RSUs granted	$	32.66	$	34.89
Total intrinsic value of vested RSUs	$	13,511	$	5,705

Market Stock Units

In February 2015, the Compensation and Leadership Development Committee of the Company’s Board of Directors granted market-performance based restricted stock units (MSUs) to its executive officers. The MSU awards were granted under the Company’s 2013 Equity Incentive Plan.

Each MSU award granted in the first quarter of fiscal 2015 contains three separate tranches. The actual number of MSUs eligible to vest in each tranche is based on the performance of the Company’s stock price relative to the performance of the NASDAQ Composite Index over the vesting period of each tranche, which ranges from one to three years. MSU participants have the ability to receive up to 100% of the target number of shares in tranche 1 and 2 and up to 150% of the target number of shares in tranche 3.

A summary of the Company’s MSU activity and related information for the nine months ended September 30, 2015 is as follows:

	Number of Shares Underlying MSUs		Weighted Average Grant Date Fair Value		Weighted Average Remaining Vesting Period	Aggregate Intrinsic Value
	(in thousands)				(in years)	(in thousands)

Balance as of December 31, 2014	—		$	—	—	$	—
MSUs Granted	240		37.53
MSUs Vested	—		—
MSUs Cancelled/Forfeited	(15	)	37.53

Balance as of September 30, 2015	225		$	37.53	1.38	$	6,389

The aggregate intrinsic value of MSUs outstanding was determined using the Company’s closing stock price of $28.42 as of September 30, 2015.

The fair value of each MSU award is determined by multiplying the fair value per share by the underlying number of shares. The fair value per share was determined on the grant date using the Monte Carlo valuation methodology and the assumptions described in the table below. The fair value per share for tranche 1, tranche 2, and tranche 3 is $9.10, $8.68 and $19.75, respectively. The Company amortizes the fair value of each MSU award using the graded-vesting method, adjusted for estimated forfeitures. Stock-based compensation expense associated with participants who fulfill their requisite service period is not reversed even if the performance conditions are not met. However, stock-based compensation expense is reversed for participants who forfeit their MSU awards prior to fulfilling their requisite service period.

The fair value of the MSUs granted during the first nine months of fiscal 2015 was estimated using the following weighted-average assumptions:

		Nine Months Ended
		September 30, 2015

Expected term (in years)		3
Risk-free interest rate		0.99%
Expected volatility		39%
Expected dividend rate		0%

Employee Stock Purchase Plan

The assumptions used to value employee stock purchase rights under the Black-Scholes model during the three and nine months ended September 30, 2015 and 2014 were as follows:

	Three Months Ended September 30,		Nine Months Ended September 30,
	2015	2014	2015	2014
Expected term (in months)	6	6	6	6 - 9
Risk-free interest rate	0.24%	0.05% - 0.08%	0.05% - 0.24%	0.05% - 0.11%
Expected volatility	31%	41% - 43%	31% - 43%	41% - 43%
Expected dividend rate	0%	0%	0%	0%

During the first nine months of fiscal 2015, the Company issued approximately 0.2 million shares of common stock under the Company’s Employee Stock Purchase Plan (ESPP) with an average purchase price of $23.88 per share.

Stock Compensation Expense

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

	Three Months Ended September 30,				Nine Months Ended September 30,
	2015		2014		2015		2014

Cost of subscription and support revenue	$	706	$	399	$	1,951	$	1,202
Cost of professional services and other revenue	1,178		699		3,215		1,756
Research and development	1,966		1,364		5,921		3,616
Sales and marketing	3,725		2,145		9,931		6,019
General and administrative	3,092		1,908		8,656		4,840

Total stock-based compensation expense	$	10,667	$	6,515	$	29,674	$	17,433

For the nine months ended September 30, 2015, the Company incurred expenses of $6.5 million for options, $19.8 million for RSUs, $3.0 million for MSUs and $1.3 million for ESPP shares. Additionally, the Company capitalized stock-based compensation expense of $0.9 million associated with the Company’s internal-use software projects. Amounts for the nine months ended September 30, 2015 include stock compensation expense of $1.2 million related to performance-based RSUs that are tied to product milestones issued in connection with an acquisition that occurred in December 2014.

As of September 30, 2015, total unrecognized compensation cost related to unvested awards not yet recognized under all equity compensation plans, adjusted for estimated forfeitures, was as follows:

	September 30, 2015
	Unrecognized Expense		Average Expected Recognition Period
	(in thousands)		(in years)
Stock options	$	12,937	1.58
Restricted stock units and market stock units	68,755		2.84
Employee stock purchase plan	619		0.38

Total unrecognized stock-based compensation expense	$	82,311	2.62