7. Stock-Based Compensation

Stock Option Plans

On July 2, 2014, the Company’s stockholders approved the 2014 Stock Option and Incentive Plan (the “2014 Stock Option Plan”), which became effective upon the completion of the IPO. The 2014 Stock Option Plan provides for the grant of restricted stock awards, incentive stock options and non-statutory stock options. The 2014 Stock Option Plan replaced the Company’s 2011 Stock Option and Grant Plan (the “2011 Stock Option Plan”). The Company will no longer grant stock options or other awards under the 2011 Stock Option Plan. Any options or awards outstanding under the 2011 Stock Option Plan remained outstanding and effective. As of September 30, 2016, the total number of shares reserved under all equity plans for outstanding grants was 4,061,280, and the Company had 885,723 shares available for future issuance under such plans.

The 2014 Stock Option Plan provides for an annual increase, to be added on the first day of each fiscal year, by up to 4% of the Company’s issued and outstanding shares of common stock on the immediately preceding December 31. On January 1, 2016, 1,154,653 shares of common stock, representing 4% of the Company’s issued and outstanding shares of common stock as of December 31, 2015, were added to the 2014 Stock Option Plan.

Terms of restricted stock awards and stock option agreements, including vesting requirements, are determined by the Board of Directors or the Compensation Committee of the Board of Directors, subject to the provisions of the applicable stock option plan. Options and restricted stock awards granted by the Company that are not performance-based, generally vest based on the continued service of the grantee with the Company during a specified period following the grant. These awards, when granted to employees, generally vest ratably over four years, with a 25% cliff vesting at the one year anniversary. All awards expire in ten years.

During the nine months ended September 30, 2016 and 2015, the Company granted 74,039 and 497,100 options, respectively, to employees to purchase shares of common stock that contain performance-based vesting criteria, primarily related to the achievement of certain clinical and regulatory development milestones related to product candidates. Recognition of stock-based compensation expense associated with these performance-based stock options commences when the performance condition is considered probable of achievement, using management’s best estimates. During the three months ended June 30, 2015, the achievement of one milestone was considered probable and that milestone was achieved during the three months ended September 30, 2015. The estimated quantity of awards expected to vest was recognized by determining the cumulative expense as of June 30, 2015 and the remaining expense was recognized over the estimated service period. This milestone represents 35% of the performance-based option grants that were made during 2015. During the three and nine months ended September 30, 2015, the Company recognized stock-based compensation expense related to this milestone of $1.4 million and $4.8 million, respectively. three and nine months ended September 30, 2016

The achievement of the remaining milestones was deemed to be not probable as of September 30, 2016 and therefore no expense has been recognized related to these awards for the three and nine months ended September 30, 2016.

Stock-based compensation expense recognized during the three and nine months ended September 30, 2016 and 2015 was as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2016		2015		2016		2015
			(in thousands)
Research and development	$	2,530	$	1,472	$	6,179	$	4,293
General and administrative	$	2,218		2,935	$	6,748		6,861
	$	4,748	$	4,407	$	12,927	$	11,154

For stock option awards, the fair value is estimated at the grant date using the Black-Scholes option-pricing model, taking into account the terms and conditions upon which options are granted. The fair value of the options is amortized on a straight-line basis for awards to employees and on a graded basis for awards to non-employees over the requisite service period of the awards. The weighted average grant date fair value per share relating to outstanding stock options granted under the Company’s stock option plans during the nine months ended September 30, 2016 and 2015 was $23.32 and $33.44, respectively.

The fair value of each option granted to employees and nonemployee directors during the three and nine months ended September 30, 2016 and 2015, under the Company’s stock option plans has been calculated on the date of grant using the following weighted average assumptions:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
Expected dividend yield		0	%		0	%		0	%		0	%
Expected volatility		80.19	%		86.59	%		80.12	%		91.03	%
Risk free interest rate		1.25	%		1.80	%		1.38	%		1.57	%
Expected term	6.03 years			6.08 years			6.05 years			6.03 years

Expected dividend yield: The Company has not paid, and does not anticipate paying, any dividends in the foreseeable future.

Risk-free interest rate: The Company determined the risk-free interest rate by using a weighted average equivalent to the expected term based on the U.S. Treasury yield curve in effect as of the date of grant.

Expected volatility: The Company does not have sufficient history to support a calculation of volatility using only its historical data. The Company uses a weighted-average volatility considering the Company’s own volatility since the IPO in July 2014 and the volatilities of a peer group of comparable companies for time periods prior to the IPO.

Expected term (in years): Expected term represents the period that the Company’s stock option grants are expected to be outstanding. As the Company has only been publicly traded since July 2014, there is not sufficient historical term data to calculate the expected term of the options. Therefore, the Company elected to utilize the “simplified” method to estimate the expected term of options granted to employees. Under this approach, the weighted average expected life is presumed to be the average of the vesting term and the contractual term of the option.

Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from estimates. The Company estimates forfeitures based on historical termination behavior. For the nine months ended September 30, 2016 and 2015, forfeiture rates of 11.2% and 10.0%, respectively, were applied.

For options granted to nonemployees, the expected life of the option used is ten years, which is the contractual term of each option. All other assumptions used to calculate the grant date fair value are generally consistent with the assumptions used for options granted to employees.

The table below summarizes activity related to stock options:

	Shares			Weighted Average Exercise Price		Weighted Average Remaining Life (in years)		Aggregate Intrinsic Value (in thousands)
Outstanding as of December 31, 2015		3,002,809		$	26.67		8.67	$	96,479
Granted		1,213,068			33.68
Exercised		(69,822	)		4.52
Forfeited		(84,775	)		46.47
Outstanding as of September 30, 2016		4,061,280			28.74		8.39	$	76,947
Vested and expected to vest as of September 30, 2016		3,327,569			27.53		8.33	$	67,698
Exercisable as of September 30, 2016		1,363,896			21.87		7.73	$	35,845

At September 30, 2016, the Company had unrecognized stock-based compensation expense related to its unvested service-based stock option awards of $40.0 million, which is expected to be recognized over the remaining weighted average vesting period of 2.79 years. The total fair value of shares vested for the nine months ended September 30, 2016 and 2015 was $14.9 million and $7.3 million, respectively. In addition, the Company has 429,815 outstanding unvested stock options that vest upon the achievement of certain performance criteria. Total unrecognized stock-based compensation expense related to those awards was $8.5 million at September 30, 2016.

The intrinsic value of stock options exercised during the nine months ended September 30, 2016 and 2015 was $2.6 million and $28.2 million, respectively.

Restricted Stock Awards

During the year ended December 31, 2013, the Company granted restricted stock awards to certain officers, employees, directors, and consultants of the Company. During the three months ended September 30, 2016 and 2015, the Company recorded $4,000 and $0.1 million, respectively, of stock-based compensation expense related to its restricted stock. During the nine months ended September 30, 2016 and 2015, the Company recorded $35,000 and $0.2 million, respectively, of stock-based compensation expense related to its restricted stock. The table below summarizes activity relating to restricted stock:

	Shares
Outstanding as of December 31, 2015		42,781
Issued		—
Vested		(40,468	)
Forfeited		—
Repurchased		—
Outstanding as of September 30, 2016		2,313

At September 30, 2016, the Company had unrecognized stock-based compensation expense related to its unvested restricted stock awards of $1,000 which is expected to be recognized over the remaining weighted average vesting period of 0.13 years.

During the nine months ended September 30, 2016 and 2015, no shares of restricted stock were issued.

Unvested shares are subject to repurchase by the Company, at the issuance price, upon the termination of the employee at the sole discretion of the Company. No shares were repurchased during the nine months ended September 30, 2016 and 2015.

2014 Employee Stock Purchase Plan

On July 2, 2014, the Company’s stockholders approved the 2014 Employee Stock Purchase Plan, which had been previously approved by the Board of Directors. A total of 282,000 shares of common stock were initially authorized for issuance under this plan. The 2014 Employee Stock Purchase Plan became effective upon the completion of the IPO. As of September 30, 2016, 14,351 shares have been issued under this plan.