9. Stock-Based Compensation

Under the GrubHub Inc. 2013 Omnibus Incentive Plan (the “2013 Plan”), the Company has granted certain employees and directors non-qualified stock options and restricted stock units. The 2013 Plan authorizes the issuance of up to 10,351,283 shares of common stock. The Board of Directors of the Company and committee or subcommittee of the Board of Directors has discretion to establish the terms and conditions for grants, including, but not limited to, the number shares and vesting and forfeiture provisions. The Company recognizes compensation expense based on estimated grant date fair values for all stock-based awards issued to employees and directors, including stock options and restricted stock units. For all stock options outstanding as of December 31, 2014, the exercise price of the stock options equals the fair value of the stock option on the grant date. The stock options and restricted stock units vest over different lengths of time, but generally over 4 years, and are subject to forfeiture upon termination of employment prior to vesting. The maximum term for stock options issued to employees under the 2013 Plan is 10 years, and they expire 10 years from the date of grant. Compensation expense for stock options and restricted stock units is recognized ratably over the vesting period.

The rights granted to the recipient of a restricted stock unit award generally accrue over the vesting period. Participants holding restricted stock units are not entitled to any ordinary cash dividends paid by the Company with respect to such shares unless otherwise provided by the terms of the award. The Company does not expect to pay any dividends in the foreseeable future.

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 is recognized as compensation cost in the Company’s post-Merger consolidated financial statements over the remaining vesting period.

Stock Options

The Company granted 2,019,413, 3,698,708 and 1,619,167 stock options during the years ended December 31, 2014, 2013 and 2012, respectively. The fair 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, prior to the IPO, 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 value of the stock options granted during the years ended December 31, 2014, 2013 and 2012 were as follows:

	2014			2013			2012
Weighted-average fair value options granted	$	13.87		$	3.97		$	1.46
Average risk-free interest rate		1.97	%		1.41	%		0.87	%
Expected stock price volatilities_(a)		50.3	%		50.7	%		54.8	%
Dividend yield	None			None			None
Expected stock option life (years)		6.26			5.20			6.11

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, 2014 and 2013, and changes during the year ended December 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		2,019,413			18.35
Forfeited		(953,472	)		6.68
Exercised_(a)		(2,554,699	)		3.73
Outstanding at December 31, 2014		6,180,795			8.49		172,661		7.87
Vested and expected to vest at December 31, 2014		4,738,666			7.56		138,012		7.73
Exercisable at December 31, 2014		2,506,615		$	4.02	$	80,962		7.22
(a)Included 138,048 shares of restricted common stock owned by officers of the Company that contained forfeiture provisions. ___________________________________________

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 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 value of the Company’s stock and the number of options outstanding. The aggregate intrinsic value of awards exercised during the years ended December 31, 2014, 2013 and 2012 was $74.0 million, $3.4 million and $0.1 million, respectively.

The Company recorded compensation expense for stock options of $9.4 million, $4.9 million and $2.4 million for the years ended December 31, 2014, 2013 and 2012, respectively. During the year ended December 31, 2014, the Company capitalized $0.1 million of stock-based compensation expense as website and software development costs. As of December, 2014, total unrecognized compensation cost, adjusted for estimated forfeitures, related to non-vested stock options was $19.2 million and is expected to be recognized over a weighted-average period of 2.95 years.

During the year ended December 31, 2014, the Company reported excess tax benefits as a decrease in cash flows from operations and an increase in cash flows from financing activities of $13.0 million. Excess tax benefits were suspended during the years ended December 31, 2013 and 2012 due to net operating losses. Excess tax benefits reflect the total of the individual stock option exercise transactions in which the reduction to the Company’s income tax liability is greater than the deferred tax assets that were previously recorded.

Restricted Stock Units

Non-vested restricted stock unit awards as of December 31, 2014 and 2013, and changes during the year ended December 31, 2014 were as follows:

	Shares		Weighted-Average Grant Date Fair Value
Outstanding at December 31, 2013		—	$	—
Granted		2,899		31.90
Forfeited		—		—
Vested		—		—
Outstanding at December 31, 2014		2,899	$	31.90

During the year ended December 31, 2014, compensation expense recognized related to restricted stock units was nominal. There were no non-vested restricted stock units or related expense during the years ended December 31, 2013 and 2012. As of December, 2014, $0.1 million of total unrecognized compensation cost, adjusted for estimated forfeitures, related to 2,899 non-vested restricted stock units with a weighted-average grant date fair value of $31.90 is expected to be recognized over a weighted-average period of 4.0 years. The fair value of these awards was determined based on the Company’s stock price at the grant date and assumes no expected dividend payments through the vesting period.

There were no excess tax benefits related to restricted stock units during the years ended December 31, 2014, 2013 and 2012.