— STOCK-BASED COMPENSATION

Dell Technologies Inc. 2013 Stock Incentive Plan — On September 7, 2016, at the effective time of the EMC merger transaction, the Denali Holding Inc. 2013 Stock Incentive Plan (the “2013 Plan”) was amended and restated as the Dell Technologies Inc. 2013 Stock Incentive Plan (the "Restated Plan"). Employees, consultants, non-employee directors, and other service providers of the Company or its affiliates are eligible to participate in the Restated Plan. The Restated Plan authorizes the issuance of an aggregate of 75 million shares of the Company’s Class C Common Stock and 500,000 shares of the Company’s Class V Common Stock, of which approximately 61 million shares of Class C Common Stock were previously reserved for issuance under the 2013 Plan. The Restated Plan authorizes the Company to grant stock options, restricted stock units ("RSUs"), stock appreciation rights ("SARs"), restricted stock awards ("RSAs"), and dividend equivalents.

As of October 28, 2016 and January 29, 2016, there were approximately 21 million and 17 million shares, respectively, of common stock of Dell Technologies available for future grants under the Restated Plan and the 2013 Plan.

Stock Option Agreements — Stock options granted under the Restated Plan include service-based awards and performance-based awards. A majority of the service-based stock options vest pro-rata at each option anniversary date over a five year period. Performance-based stock options, with a market condition, become exercisable upon achievement of return on equity ("ROE") metrics up to the seven year anniversary of the going-private transaction date, depending upon the achievement of the market condition. Both service-based and performance-based stock options are granted with option exercise prices equal to the fair market value of the Company's common stock, as determined by the Company's board of directors. Generally, common stock issued under both service-based and performance-based awards are subject to liquidity events, such as an initial public offering, change in control, sales of common stock under an annual company liquidity program, and calls and puts resulting upon the occurrence of specified events. A majority of the stock options expire ten years after the date of grant. Compensation expense for service-based stock options is recognized on a straight-line basis over the requisite service period, while compensation expense for performance-based stock options, with a market condition, is recognized on a graded accelerated basis net of estimated forfeitures over the requisite service period.

Stock Option Activity — The following table summarizes stock option activity during the nine months ended October 28, 2016:



	Number of Options		Weighted-Average Exercise Price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value
	(in millions)		(per share)		(in years)	(in millions)
Options outstanding, January 29, 2016	54		$	14.30
Granted	2		28.04
Exercised	(1	)	14.22
Forfeited	(2	)	17.97
Canceled/expired	—		—
Options outstanding, October 28, 2016 (a)	53		$	14.79	7.0	$	682
Options vested and expected to vest (net of estimated forfeitures), October 28, 2016	50		$	14.79	7.0	$	635
Options exercisable, October 28, 2016	11		$	14.14	6.9	$	143

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(a)	Of the 53 million stock options outstanding on October 28, 2016, 23 million related to performance-based awards and 30 million related to service-based awards.

The total fair value of options vested was $1 million and $4 million for the three and nine months ended October 28, 2016, respectively, and $18 million and $20 million for the three and nine months ended October 30, 2015, respectively. The intrinsic value of the options exercised was $9 million and $14 million for the three and nine months ended October 28, 2016, respectively, and immaterial and $3 million for the three and nine months ended October 30, 2015, respectively. As of October 28, 2016 and January 29, 2016, there was $122 million and $183 million, respectively, of total unrecognized stock-based compensation expense, net of estimated forfeitures, related to unvested stock options expected to be recognized over a weighted-average period of 2.9 years and 3.6 years, respectively.

The tax benefit related to stock option expense was $9 million and $24 million for the three and nine months ended October 28, 2016, respectively, and $7 million and $19 million for the three and nine months ended October 30, 2015, respectively.

In connection with the EMC merger transaction and in accordance with the merger agreement, certain executives holding unvested restricted stock units of EMC ("EMC RSUs") were given the opportunity to elect to exchange each unvested EMC RSU held by such executives that would otherwise have vested in the ordinary course on or after January 1, 2017 for (a) a deferred cash award having a cash value equal to the closing price of a share of EMC common stock on the last trading day before the closing date of the EMC merger transaction, or $29.05, and (b) an option ("rollover option") to purchase a share of Class C Common Stock of Dell Technologies ("the rollover opportunity"). The rollover options have a three-year term and a per share exercise price equal to the fair market value of a share of Class C Common Stock on the date of grant, or $27.50, and, to the extent vested, may be exercised using a cashless exercise method for both the exercise price and the applicable minimum required tax withholding (subject to certain limitations). Each deferred cash award will vest, and each rollover option will vest and thereby become exercisable, on the same schedule as the EMC RSU for which they were exchanged (with any performance-vesting condition deemed satisfied at the target level of performance upon the closing of the EMC merger transaction). Pursuant to the rollover opportunity, options to purchase shares of Class C Common Stock were issued and have been included within the stock option activity table above as granted options.

Valuation of Service-Based Stock Option Awards — For service-based stock options granted under the 2013 Plan and the Restated Plan, the Company utilized the Black-Scholes option pricing model to estimate the fair value of stock options at the grant date. The Black-Scholes option pricing model incorporates various assumptions, including leveraged adjusted volatility of a public peer group, expected term, risk-free interest rates, and dividend yields. The weighted assumptions utilized for valuation of options under this model as well as the weighted-average grant date fair value of stock options granted during the respective periods are presented below.

The expected term is based on historical experience and on the terms and conditions of the stock awards granted to employees. For the periods presented, option valuations used leverage-adjusted volatility of a peer group and the expected term was based on analysis of the Company's historical option settlement experience and on the terms and conditions of the stock awards granted.

The assumptions utilized in this model as well as the weighted-average grant date fair value of stock options granted are presented below:



	Nine Months Ended
	October 28, 2016			October 30, 2015
Weighted-average grant date fair value of stock options granted per option	$	10.39		$	10.05
Expected term (in years)	3.3			5.1
Risk-free rate (U.S. Government Treasury Note)	1.0		%	1.5		%
Expected volatility	52		%	46		%
Expected dividend yield	—		%	—		%
Forfeiture Rate	6.1		%	6.1		%

Valuation of Performance-Based Stock Option Awards — For performance-based stock options granted under the 2013 Plan and the Restated Plan, the Company utilized the Monte Carlo valuation model to simulate probabilities of achievement of the market condition and the grant date fair value. The valuation model for performance-based option grants during the nine months ended October 28, 2016 and October 30, 2015 used a weighted-average leverage adjusted 5 years peer volatility and corresponding risk free interest rate. Upon fulfillment of a ROE condition, a specific portion of the performance options become exercisable. An embedded binomial lattice option pricing model was used to determine the value of these exercisable options using the assumption that each option will be exercised at the midpoint between the date of satisfaction of a ROE condition and the expiration date of such option.

The assumptions utilized in this model as well as the weighted-average grant date fair value of stock options granted are presented below:



	Nine Months Ended
	October 28, 2016			October 30, 2015
Weighted-average grant date fair value of stock options granted per option	$	8.83		$	10.85
Expected term (in years)	—			—
Risk-free rate (U.S. Government Treasury Note)	1.7		%	2.0		%
Expected volatility	44		%	50		%
Expected dividend yield	—		%	—		%
Forfeiture Rate	6.1		%	6.1		%

Restricted Stock Unit Awards — The Company's restricted stock primarily consists of RSU awards granted to employees. RSUs are valued based on the Company's Class C Common Stock price on the date of grant. The shares underlying the RSU awards are not issued until the RSU vests. Upon vesting, each RSU converts into one share of Class C Common Stock.

The Company's restricted stock also includes performance stock units ("PSU") awards, which have been granted to certain of the Company's executives and employees. The PSU awards include performance conditions and, in certain cases, a time-based vesting component. For PSU awards granted under the 2013 Plan and the Restated Plan, the Company utilized the Monte Carlo valuation model to simulate the probabilities of achievement of the market condition and the grant date fair value. The vesting and payout of the PSU awards depends upon the return on equity achieved on various measurement dates and liquidity events. Upon fulfillment of a ROE condition, a specific portion of the PSU award becomes exercisable.

The following table summarizes non-vested restricted stock and restricted stock units activity during the nine months ended October 28, 2016:



	Number of Shares	Weighted- Average Grant Date Fair Value
	(in millions)	(per share)
Non-vested restricted stock unit balance, January 29, 2016	—	$	—
Granted	11	19.58
Vested	—	—
Forfeited	—	—
Non-vested restricted stock unit balance, October 28, 2016 (a)	11	$	19.58

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(a)	Of the 11 million non-vested restricted stock units, 6 million related to performance-based awards and 5 million related to service-based awards.

As of October 28, 2016 and January 29, 2016 there was $174 million and $1 million, respectively, of unrecognized stock-based compensation expense, net of estimated forfeitures, related to these awards expected to be recognized over a weighted-average period of approximately 2.9 years and 1.9 years, respectively.

SecureWorks Long-Term Incentive Plan — In connection with the SecureWorks IPO, its board of directors adopted the SecureWorks 2016 Long-Term Incentive Plan ("2016 Plan"). The 2016 Plan became effective on April 18, 2016 and will expire on the tenth anniversary of the effective date unless the 2016 Plan is terminated earlier by the board of directors or in connection with a change in control of SecureWorks Corp. SecureWorks has reserved 8,500,000 shares of Class A common stock for issuance pursuant to awards under the 2016 Plan. The 2016 Plan provides for the grant of options, SARs, RSAs, RSUs, deferred stock units, unrestricted stock, dividend equivalent rights, other equity-based awards and cash bonus awards. Awards may be granted under the 2016 Plan to individuals who are employees, officers, or non-employee directors of SecureWorks or any of its affiliates, consultants and advisors who perform services for SecureWorks or any of its affiliates, and any other individual whose participation in the 2016 Plan is determined to be in the best interests of SecureWorks by the compensation committee of the board of directors.

The stock option and restricted stock units activity under the 2016 Plan was not material during the nine months ended October 28, 2016.

VMware

The following VMware stock incentive plans were assumed on September 7, 2016 in connection with the EMC merger transaction:

VMware Equity Plans — In June 2007, VMware adopted its 2007 Equity and Incentive Plan (the “2007 Plan”). As of October 28, 2016, the number of authorized shares under the 2007 Plan was 122 million. The number of shares underlying outstanding equity awards that VMware assumes in the course of business acquisitions are also added to the 2007 Plan reserve on an as-converted basis. VMware has assumed 4 million shares, which accordingly have been added to the authorized shares under the 2007 Plan reserve.

Awards under the 2007 Plan may be in the form of stock-based awards such as RSUs or stock options. Generally, restricted stock grants made under the 2007 Plan have a three-year to four-year period over which they vest and vest 25% the first year and semi-annually thereafter. VMware’s Compensation and Corporate Governance Committee determines the vesting schedule for all equity awards. VMware’s restricted stock also include PSU awards, which have been granted to certain VMware executives and employees. The PSU awards include performance conditions and, in certain cases, a time-based vesting component. Upon vesting, each PSU award will convert into VMware’s Class A common stock at various ratios ranging from 0.5 to 2.0 shares per PSU, depending upon the degree of achievement of the performance target designated by each individual award. If minimum performance thresholds are not achieved, then no shares will be issued.

The exercise price for a stock option awarded under the 2007 Plan shall not be less than 100% of the fair market value of VMware Class A common stock on the date of grant. Most options granted under the 2007 Plan vest 25% after the first year and monthly thereafter over the following three years and expire between six and seven years from the date of grant. VMware utilizes both authorized and unissued shares to satisfy all shares issued under the 2007 Plan. As of October 28, 2016, there were an aggregate of 15 million shares of common stock available for issuance pursuant to future grants under the 2007 Plan.

VMware Stock Options — The following table summarizes stock option activity for VMware employees in VMware stock options:



	Number of Options	Weighted-Average Exercise Price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value
	(in millions)	(per share)		(in years)	(in millions)
Options outstanding, September 7, 2016	2	$	65.01
Granted	—	—
Exercised	—	—
Forfeited	—	—
Canceled/Expired	—	—
Options outstanding, October 28, 2016 (a)	2	$	65.80	4.6	$	44
Options vested and expected to vest (net of estimated forfeitures), October 28, 2016	2	$	65.44	4.6	$	44
Options exercisable, October 28, 2016	1	$	64.95	4.5	$	29

_________________

(a) Stock option activity during the period was immaterial. The ending weighted-average exercise price was calculated based on underlying options outstanding as of October 28, 2016.

The above table includes stock options granted in conjunction with unvested stock options assumed in business combinations. As a result, the weighted-average exercise price per share may vary from the VMware stock price at time of grant. Aggregate intrinsic values represent the total pretax intrinsic values based on VMware’s closing stock price of $77.65 as of October 28, 2016 as reported on the NYSE, which would have been received by the option holders had all in-the-money options been exercised as of that date. The total fair value of VMware stock options that vested during the period from September 7, 2016 through October 28, 2016 was $4 million. The intrinsic value of the options exercised during the period from September 7, 2016 through October 28, 2016 was $3 million. During the period from September 7, 2016 through October 28, 2016, $1 million in cash was received from the stock option exercises.

The tax benefit related to stock option expense was $1 million from the period from September 7, 2016 through October 28, 2016. As of October 28, 2016, there was $21 million of total unrecognized stock-based compensation expense, net of estimated forfeitures, related to unvested stock options expected to be recognized over a weighted-average period of 0.8 years.

Fair Value of VMware Options — The fair value of each option to acquire VMware Class A common stock granted is estimated on the date of grant using the Black-Scholes option-pricing model. The weighted-average grant date fair value of VMware stock options can fluctuate from period to period primarily due to higher valued options assumed through business combinations with exercise prices lower than the fair market value of VMware’s stock on the date of grant.

For all equity awards granted, volatility is based on an analysis of historical stock prices and implied volatilities of VMware’s Class A common stock. The expected term is based on historical exercise patterns and post-vesting termination behavior, the term of the purchase period for grants made under VMware's employee stock purchase plan, or the weighted-average remaining term for options assumed in acquisitions. VMware’s expected dividend yield input was zero as it has not historically paid, nor expects in the future to pay, cash dividends on its common stock. The risk-free interest rate is based on a U.S. Treasury instrument whose term is consistent with the expected term of the stock options.

There were no options granted during the period from September 7, 2016 through October 28, 2016.

VMware Restricted Stock — The following table summarizes VMware's restricted stock activity since September 7, 2016:



	Number of Shares	Weighted- Average Grant Date Fair Value
	(in millions)	(per share)
Non-vested restricted stock unit balance, September 7, 2016	22	$	67.01
Granted	—	—
Vested	—	—
Forfeited	—	—
Non-vested restricted stock unit balance, October 28, 2016	22	$	66.92

_________________

(a) Stock option activity during the period was immaterial. The ending weighted-average exercise price was calculated based on underlying unvested RSU balance as of October 28, 2016.

As of October 28, 2016, restricted stock representing 22 million shares of VMware’s Class A common stock was outstanding, with an aggregate intrinsic value of $1,690 million based on VMware’s closing price as of October 28, 2016 as reported on the NYSE. The total fair value of VMware restricted stock awards that vested during the period from September 7, 2016 through October 28, 2016 was $20 million. As of October 28, 2016, there was $998 million of unrecognized stock-based compensation expense, net of estimated forfeitures, related to these awards expected to be recognized over a weighted-average period of approximately 1.5 years.

Stock-based Compensation Expense — Stock-based compensation expense for the Company was allocated as follows for the respective periods:



	Three Months Ended						Nine Months Ended
	October 28, 2016			October 30, 2015			October 28, 2016			October 30, 2015
				(in millions)
Stock-based compensation expense (a) (b):
Cost of net revenue	$	13		$	3		$	17		$	7
Operating expenses	137			16			166			46
Stock-based compensation expense before taxes	150			19			183			53
Income tax benefit	(47		)	(7		)	(59		)	(19		)
Stock-based compensation expense, net of income taxes	$	103		$	12		$	124		$	34

____________________


(a)	As a result of the EMC merger transaction, stock-based compensation expense for the three and nine months ended October 28, 2016 includes $108 million related to VMware plans for the period from September 7, 2016 through October 28, 2016.


(b)	Stock-based compensation expense for the three and nine months ended October 28, 2016 does not include $807 million of post-merger stock compensation expense and related taxes resulting from the EMC merger transaction. See Note 3 of the Notes to the Unaudited Condensed Consolidated Financial Statements for more information on the EMC merger transaction.