STOCKHOLDER'S EQUITY

12 Months Ended

Dec. 31, 2019

STOCKHOLDERS' EQUITY

Convertible Preferred Stock

As of December 31, 2019, the Company is authorized to issue 100,000,000 shares of preferred stock, with a $0.0000001 par value. No shares of preferred stock are outstanding as of December 31, 2019.

Common Stock

The Company has authorized the issuance of Class A common stock and Class B common stock. Holders of the Company's Class A common stock and Class B common stock are entitled to dividends when, as and if, declared by the Company's board of directors, subject to the rights of the holders of all classes of stock outstanding having priority rights to dividends. As of December 31, 2019, the Company did not declare any dividends. Holders of shares of Class A common stock are entitled to one vote per share, while holders of shares of Class B common stock are entitled to ten votes per share. Shares of the Company's Class B common stock are convertible into an equivalent number of shares of its Class A common stock and generally convert into shares of its Class A common stock upon transfer. The holders of Class A common stock and Class B common stock have no preemptive or other subscription rights and there are no redemption or sinking fund provisions with respect to such shares.

Class A common stock and Class B common stock are referred to as "common stock" throughout these Notes to the Consolidated Financial Statements, unless otherwise noted. As of December 31, 2019, the Company was authorized to issue 1,000,000,000 shares of Class A common stock and 500,000,000 shares of Class B common stock, each with a par value of

$0.0000001 per share. As of December 31, 2019, there were 352,386,562 shares of Class A common stock and 80,410,158 shares of Class B common stock outstanding. Options and awards granted following the Company's November 2015 initial public offering are related to underlying Class A common stock. Additionally, holders of Class B common stock are able to convert such shares into Class A common stock.

Warrants

On February 24, 2017, the Company and Starbucks entered into a Warrant Cancellation and Payment Agreement pursuant to which the Company paid Starbucks cash consideration of approximately $54.8 million in return for the termination of the Warrant to Purchase Stock dated August 7, 2012, as amended, that provided Starbucks with the right to purchase an aggregate of approximately 9.5 million shares of the Company’s common stock.

In conjunction with the 2022 Notes offering, the Company sold warrants whereby the Counterparties have the option to purchase a total of approximately 19.2 million shares of the Company’s Class A common stock at a price of $31.18 per share. None of the warrants were exercised as of December 31, 2019.

In conjunction with the 2023 Notes offering, the Company sold the 2023 warrants whereby the counterparties have the option to purchase a total of approximately 11.1 million shares of the Company’s Class A common stock at a price of $109.26 per share. None of the warrants were exercised as of December 31, 2019.

Indemnification Arrangements

During the years ended December 31, 2019 and 2018, the Company received 20,793 and 469,894 shares of common stock, respectively, that were forfeited back to the Company as indemnification against liabilities related to certain acquired businesses preacquisition matters. The receipt of the forfeited shares was accounted for as equity repurchases.

Conversion of 2022 Notes and Exercise of the 2022 Convertible Note Hedges

In connection with the conversion of certain of the 2022 Notes in 2018, the Company issued 7.3 million shares of Class A common stock. The Company also exercised a pro-rata portion of the 2022 convertible note hedges and received 7.2 million shares of Class A common stock from the counterparties to offset the shares issued.

Stock Plans

The Company maintains two share-based employee compensation plans: the 2009 Stock Plan (2009 Plan) and the 2015 Equity Incentive Plan (2015 Plan). The 2015 Plan serves as the successor to the 2009 Plan. The 2015 Plan became effective as of November 17, 2015. Outstanding awards under the 2009 Plan continue to be subject to the terms and conditions of the 2009 Plan. Since November 17, 2015, no additional awards have been nor will be granted in the future under the 2009 Plan.

Under the 2015 Plan, shares of shares of the Company's Class A common stock are reserved for the issuance of incentive and nonstatutory stock options (ISOs and NSOs, respectively), restricted stock awards (RSAs), restricted stock units (RSUs), performance shares, and stock bonuses to qualified employees, directors, and consultants. The awards must be granted at a price per share not less than the fair market value at the date of grant. Initially, 30,000,000 shares were reserved under the 2015 Plan and any shares subject to options or other similar awards granted under the 2009 Plan that expire, are forfeited, are repurchased by the Company or otherwise terminate unexercised will become available under the 2015 Plan. The number of shares available for issuance under the 2015 Plan will be increased on the first day of each fiscal year, in an amount equal to the least of (i) 40,000,000 shares, (ii) 5% of the outstanding shares on the last day of the immediately preceding fiscal year, or (iii) such number of shares determined by the administrator. As of December 31, 2019, the total number of shares subject to stock options, RSAs and RSUs outstanding under the 2015 Plan was 19,340,627 shares, and 84,133,011 shares were available for future issuance.

Under the 2009 Plan, shares of common stock are reserved for the issuance of ISOs or NSOs to eligible participants. The options may be granted at a price per share not less than the fair market value at the date of grant. Options granted generally vest over a 4 year term from the date of grant, at a rate of 25% after one year, then monthly on a straight-line basis thereafter. Generally, options granted are exercisable for up to 10 years from the date of grant. The Plan allows for early exercise of employee stock options whereby the option holder is allowed to exercise prior to vesting. Any unvested shares

are subject to repurchase by the Company at their original exercise prices. As of December 31, 2019, the total number of options and RSUs outstanding under the 2009 Plan was 18,196,638 shares.

A summary of stock option activity for the year ended December 31, 2019 is as follows (in thousands, except share and per share data):


	Number of Stock Options Outstanding	Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value
Balance at December 31, 2018	33,152,881	$	9.52	5.45	$	1,543,793
Granted	1,184,657	72.15
Exercised	(10,176,170)	8.09
Forfeited	(541,564)	39.88
Balance at December 31, 2019	23,619,804	$	12.66	4.89	$	1,191,746

Options exercisable as of December 31, 2019	22,107,017	$	9.77	4.63	$	1,168,770

Aggregate intrinsic value represents the difference between the Company’s estimated fair value of its common stock and the exercise price of outstanding, “in-the-money” options. Aggregate intrinsic value for stock options exercised through December 31, 2019, 2018, and 2017 was $616.3 million, $720.1 million, and $464.1 million, respectively.

The total weighted average grant-date fair value of options granted was $30.58, $16.25 and $5.97 per share for the years ended December 31, 2019, 2018 and 2017, respectively.

Restricted Stock Activity

The Company issues RSAs and RSUs under the 2015 Plan, which typically vest over a term of four years.

Activity related to RSAs and RSUs during the year ended December 31, 2019 is set forth below:


	Number of shares	Weighted Average Grant Date Fair Value
Unvested as of December 31, 2018	17,934,728	$	31.34
Granted	7,028,055	70.61
Vested	(8,023,399)	30.19
Forfeited	(3,021,923)	40.25
Unvested as of December 31, 2019	13,917,461	$	49.90

Employee Stock Purchase Plan

On November 17, 2015, the Company’s 2015 Employee Stock Purchase Plan (ESPP) became effective. The ESPP allows eligible employees to purchase shares of the Company’s common stock at a discount through payroll deductions of up to 15% of their eligible compensation, (or 25% for offering periods that commence after November 1, 2019), subject to any plan limitations. The ESPP provides for 12-month offering periods. The offering periods are scheduled to start on the first trading day on or after May 15 and November 15 of each year. Each offering period includes two purchase periods, which begin on the first trading day on or after November 15 and May 15, and ending on the last trading day on or before May 15 and November 15, respectively. Employees are able to purchase shares at 85% of the lower of the fair market value of the Company’s common stock on the first trading day of the offering period or the last trading day of the purchase period. The number of shares available for sale under the ESPP will be increased annually on the first day of each fiscal year, equal to the least of (i) 8,400,000 shares, (ii) 1% of the outstanding shares of the Company’s common stock as of the last day of the immediately preceding fiscal year, or (iii) such other amount as determined by the administrator.

As of December 31, 2019, 5,022,962 shares had been purchased under the ESPP and 14,294,425 shares were available for future issuance under the ESPP. The Company recorded $18.9 million, $9.0 million, and $6.0 million of share-based compensation expense related to the ESPP during the year ended December 31, 2019, 2018, and 2017, respectively.

Share-Based Compensation

The fair value of stock options granted was estimated using the following weighted-average assumptions:


	Year Ended December 31,
	2019		2018		2017

Dividend yield	—	%	—	%	—	%
Risk-free interest rate	2.37	%	2.92	%	1.88	%
Expected volatility	40.48	%	30.87	%	32.22	%
Expected term (years)	6.02		6.19		6.02

The following table summarizes the effects of share-based compensation on the Company's consolidated statements of operations (in thousands):


	Year Ended December 31,
	2019		2018		2017
Cost of revenue	$	155	$	97	$	77
Product development	210,840		144,601		98,310
Sales and marketing	26,720		22,797		17,568
General and administrative	60,148		49,386		39,881
Total	$	297,863	$	216,881	$	155,836

The Company recorded $18.9 million, $9.0 million, and $6.0 million of share-based compensation expense related to the Company's 2015 Employee Stock Purchase Plan during the year ended December 31, 2019, 2018 and 2017, respectively.

The Company capitalized $8.2 million, $9.3 million, and $3.7 million of share-based compensation expense related to capitalized software during the year ended December 31, 2019, 2018 and 2017, respectively.

As of December 31, 2019, there was $687.3 million of total unrecognized compensation cost related to outstanding stock options and restricted stock awards that are expected to be recognized over a weighted average period of 2.73 years.