7. Stock-Based Compensation

As part of the Reorganization Agreement, the Company was required to replace GrubHub Holdings Inc.’s share-based payment awards. The fair value of the replacement awards attributable to pre-combination services at the time of the Merger was approximately $11.0 million, which was included as additional consideration transferred in the business combination in the total purchase price of $421.5 million. The fair value of the replacement options attributable to post combination services was approximately $12.5 million and will be recognized as compensation cost in the Company’s post-Merger consolidated financial statements over the remaining vesting period.

The Company granted 1,598,990 and 368,750 stock options during the three months ended March 31, 2014 and 2013, respectively. The fair market value of each stock option award was estimated based on the assumptions below as of the grant date using the Black-Scholes-Merton option pricing model. Expected volatilities are based on historical volatilities of comparable publicly traded companies. The Company uses historical data to estimate option exercises and employee terminations within the valuation model. Separate groups of employees that have similar historical exercise behavior are considered separately for valuation purposes. The expected term of the award is estimated using a simplified method. The fair value at grant date was determined considering the performance of the Company at the grant date as well as future growth and profitability expectations by applying market and income approaches. The risk-free rate for the period within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The assumptions used to determine the fair market value of the stock options granted during the three months ended March 31, 2014 and 2013 were as follows:


	2014			2013
Weighted average fair value of options granted	$	12.95		$	1.66
Average risk-free interest rate		2.02	%		1.10	%
Expected stock price volatilities_(a)		50.7	%		53.8	%
Dividend yield		None			None
Expected stock option life		6.31			6.06

There was no active external or internal market for the Company’s shares until April of 2014. Thus, it was not possible to estimate the expected volatility of the Company’s share price in estimating fair value of options granted. As a substitute for such volatility, the Company used the historical volatility of comparable companies.

Stock option awards as of December 31, 2013 and March 31, 2014, and changes during the three months ended March 31, 2014, were as follows:


	Options			Weighted Average Exercise Price		Average Intrinsic Value (thousands)		Weighted Average Exercise Term (years)
Outstanding at December 31, 2013		7,669,553		$	4.08	$	56,844		8.29
Granted		1,598,990			13.70
Forfeited		(166,876	)		5.86
Exercised		(418,463	)		3.38

Outstanding at March 31, 2014		8,683,204			5.85		131,628		8.40

Vested and expected to vest March 31, 2014		7,442,473			5.67		114,077		8.38
Exercisable at March 31, 2014		3,368,799		$	3.80	$	57,945		8.02

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the fair value of the common stock on March 31, 2014 and December 31, 2013, respectively, and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their in-the-money options on each date. This amount will change in future periods based on the fair market value of the Company’s stock and the number of options outstanding. The aggregate intrinsic value of awards exercised during the three months ended March 31, 2014 was $6.5 million.

The stock options vest over different lengths of time depending upon the grantee. Compensation expense is recognized over the vesting period. The Company recorded compensation expense of $2.4 million and $0.6 million for the three months ended March 31, 2014 and 2013, respectively. As of March 31, 2014, total unrecognized compensation cost, adjusted for estimated forfeitures, related to non-vested stock options was $29.8 million and is expected to be recognized over a weighted average period of 3.37 years.