7. Stock‑Based Compensation

Equity Plans

2015 Equity Incentive Plan

General. The Company’s board of directors adopted its 2015 Equity Incentive Plan, or the 2015 Plan, in June 2015. The Company’s 2015 Plan replaced its 2007 Stock Plan. However, awards outstanding under the 2007 Plan will continue to be governed by the terms of the 2007 plan.

Share Reserve. The initial number of shares of the Company’s common stock available for issuance under the 2015 Plan was 3,451,495 shares. As of December 31, 2016, 13,094,869 shares were reserved for future issuance under the 2015 plan, which includes unissued and forfeited shares from the 2007 plan. The number of shares reserved for issuance under the 2015 Plan will be increased automatically on the first business day of each of our fiscal years, commencing in 2016, by a number equal to the smallest of:

3,500,000 shares;

4% of the shares of common stock outstanding on the last business day of the prior fiscal year; or

the number of shares determined by our board of directors.

Stock options vest as determined by the compensation committee. In general, they will vest over a four-year period following the date of grant. Stock options expire at the time determined by the compensation committee but in no event more than ten years after they are granted. These awards generally expire earlier if the participant's service terminates earlier.

Restricted Shares and Stock Units. Restricted shares and stock units may be awarded under the 2015 Plan in return for any lawful consideration, and participant who receive restricted shares or stock units generally are not required to pay cash for their awards. In general, these awards will be subject to vesting. Vesting may be based on length of service, the attainment of performance-based milestones or a combination of both, as determined by the compensation committee.

2007 Stock Plan

General. The Company’s board of directors adopted its 2007 Plan in January 2007, and it was approved by the Company’s stockholders. No further awards have been made under the 2007 Plan after July 1, 2015, the date of the Company’s initial public offering; however, awards outstanding under our 2007 Plan will continue to be governed by their existing terms.

Share Reserve. As of December 31, 2016, the Company reserved 7,713,510 shares of its common stock for issuance under the 2007 Plan, all of which may be issued as incentive stock options. As of December 31, 2016, options to purchase 6,098,564 shares of common stock, at exercise prices ranging from $0.0978 to $12.8501 per share, or a weighted-average exercise price of $2.71 per share, were outstanding under the 2007 Plan.

Options vest as determined by the administrator. In general, the Company granted options that vest over a four-year period following the date of grant. In most cases, options granted prior to 2011 (and prior to 2012 with respect to the Company’s executive officers) were immediately exercisable, subject to the Company’s right to repurchase unvested shares. Options expire at the time determined by the administrator, but in no event more than ten years after they were granted, and generally expire earlier if the optionee's service terminates earlier.

Restricted Shares. Restricted shares could be awarded or sold under the 2007 Plan in return for cash or cash equivalents or, as permitted by the administrator in its sole discretion, in exchange for services rendered to the Company, by delivery of a full-recourse promissory note or through any other means permitted by applicable law. Restricted shares vest as determined by the administrator.

2015 Employee Stock Purchase Plan

General. The Company’s 2015 Employee Stock Purchase Plan, or 2015 ESPP, was adopted by its board of directors in June 2015 and its stockholders approved it in June 2015. The 2015 ESPP is intended to qualify under Section 423 of the Internal Revenue Code.

Share Reserve. The Company has reserved 893,548 shares of its common stock for issuance under the 2015 ESPP. As of December 31, 2016, 1,056,344 shares were available for issuance under the 2015 plan. The number of shares reserved for issuance under the 2015 ESPP will automatically be increased on the first business day of each of the Company’s fiscal years, commencing in 2016, by a number equal to the least of:

880,000 shares;

1% of the shares of common stock outstanding on the last business day of the prior fiscal year; or

the number of shares determined by our board of directors.

The number of shares reserved under the 2015 ESPP will automatically be adjusted in the event of a stock split, stock dividend or a reverse stock split (including an adjustment to the per-purchase period share limit).

Offering Periods. Each offering period will last a number of months determined by the compensation committee, not to exceed 27 months. A new offering period will begin periodically, as determined by the compensation committee. Offering periods may overlap or may be consecutive. Unless otherwise determined by the compensation committee, two offering periods of six months' duration will begin in each year on May 1 and November 1.

The first offering period started on December 15, 2015 and ended on April 30, 2016, and 116,215 shares were purchased at the end of this offering period for a total proceeds of $1.0 million. The second offering period started on May 1, 2016 and ended on October 31, 2016, and 224,637 shares were purchased at the end of this offering period for a total proceeds of $1.6 million.

Purchase Price. The price of each share of common stock purchased under our 2015 ESPP will not be less than 85% of the lower of the fair market value per share of common stock on the first day of the applicable offering period (or, in the case of the first offering period, the price at which one share of common stock is offered to the public in this offering) or the fair market value per share of common stock on the purchase date.

Early Exercise of Employee Options

As of December 31, 2015, the Company had approximately 1.3 million exercised and unvested shares outstanding that are subject to a repurchase right held by the Company at the original issuance price in the event that the optionee’s employment is terminated, either voluntarily or involuntarily. Effective in the year ended December 31, 2015, pursuant to the agreements with the option holders, the Company changed its estimated expiration of its repurchase right for 1.3 million exercised and unvested shares outstanding that are subject to repurchase right held by it through the 210 days after the date of the prospectus filed in connection with the Company’s IPO. Accordingly, the unrecognized compensation expense is being accelerated over a shorter performance period through January 2016. As a result of this acceleration, the Company recorded an additional $1.3 million in stock-based compensation expense during the year ended December 31, 2015.

Stock Options

The following table summarizes option activity during the year ended December 31, 2016:


	Outstanding Options
					Weighted-
			Weighted-		Average
	Shares		Average		Remaining	Aggregate
	Available for	Number of	Exercise		Contractual	Intrinsic
(in thousands, except for contractual life and exercise price)	Grant	Shares	Price		Life	Value
					(In years)
Balance at December 31, 2015	3,743	9,316	$	3.96	8.31	$	63,713
Additional shares authorized	2,014	—
Options granted	(2,558)	2,558	$	10.23
Options exercised	—	(1,915)	$	1.88
Options forfeited	916	(916)	$	8.28
Balance at December 31, 2016	4,115	9,043	$	5.72	7.55	$	55,396
Exercisable at December 31, 2016		5,054	$	3.10	6.51	$	43,938
Vested and expected to vest at December 31, 2016		9,039	$	5.72	7.55	$	55,386

The total intrinsic value of stock options exercised during the years ended December 31, 2016, 2015 and 2014 was $16.9 million, $6.9 million and $1.2 million, respectively. The total fair value of stock options vested during the years ended December 31, 2016, 2015 and 2014 was $8.5 million $4.5 million and $4.1 million, respectively.

The weighted-average grant date fair value of options granted during the years ended December 31, 2016, 2015 and 2014 was $5.92, $7.29 and $3.28 per share, respectively.

Restricted Stock Awards

In February 2016, the Company granted 24,540 fully vested restricted shares to a non-employee service provider.

Restricted Stock Units

Starting April 2016, the Company began granting restricted stock units to its employees from the 2015 Plan. The following table summarizes restricted stock unit activity for the year ended December 31, 2016:


			Weighted-Average Grant Date
	Shares		Fair Value

Balance at December 31, 2015		—	$	—
Granted		212	$	9.76
Vested		(40)	$	9.59
Canceled/forfeited		(13)	$	9.81
Balance at December 31, 2016		159	$	9.80

Stock‑Based Compensation Expense

Employee and non‑employee stock‑based compensation expense was calculated based on awards ultimately expected to vest and have been reduced for estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods, if actual forfeitures differ from those estimates.

The following table presents the effect of employee and non‑employee stock‑based compensation expense on selected statements of operations line items for the years ended December 31, 2016, 2015 and 2014.


	Year ended December 31,
	2016						2015						2014
	Employee		Non-Employee		Total		Employee		Non-Employee		Total		Employee		Non-Employee		Total
	(in thousands)
Cost of revenues	$	651	$	(10)	$	641	$	351	$	241	$	592	$	262	$	29	$	291
Research and development		2,829		24		2,853		1,566		9		1,575		1,563		30		1,593
Selling, general and administrative		6,837		270		7,107		4,993		166		5,159		3,180		93		3,273
Total	$	10,317	$	284	$	10,601	$	6,910	$	416	$	7,326		5,005	$	152	$	5,157

As of December 31, 2016, approximately $19.4 million of unrecognized compensation expense, adjusted for estimated forfeitures, related to unvested awards will be recognized over a weighted‑average period of approximately 2.8 years.

Valuation of Stock Option Grants to Employees

The Company estimates the fair value of its stock options granted to employees on the grant date using the Black‑Scholes option‑pricing model. The fair value of employee stock options is amortized on a straight‑line basis over the requisite service period of the awards, generally the vesting period. The fair value of employee stock options was estimated using the following assumptions:


	Year ended December 31,
	2016					2015					2014
Expected term	5.1		—	5.2		5.6		—	10.0		4.9 — 7.1
Expected volatility	62.2	%	—	72.5	%	69.7	%	—	78.8	%	73.4	%	—	87.0	%
Expected dividend rate				0	%				0	%				0	%
Risk-free interest rate	0.97	%	—	1.92	%	1.56	%	—	2.32	%	1.65	%	—	2.04	%

Expected Term: The expected term of options represents the period of time that options are expected to be outstanding. For granted "at-the-money" stock options, the Company estimated the expected term by using the simplified method up until December 31, 2015, which involved calculating the average of the time-to-vesting and the total contractual life of the options. Starting January 1, 2016, the Company uses a different approach by calculating the average of—(1) its employees’ historical stock options exercise behavior, and (2) the weighted-average of the time-to-vesting and the total contractual life of the options. For stock options that are not granted "at-the-money," the Company uses the binomial lattice model to calculate the expected term.

Expected Volatility: The Company derived the expected volatility from the average historical volatilities of comparable publicly traded companies within its peer group over a period approximately equal to the expected term.

Expected Dividend Rate: The Company has not paid and does not anticipate paying any dividends in the near future.

Risk-Free Interest Rate: The risk-free interest rate assumption is based on U.S. Treasury yield in effect at the time of grant for zero coupon U. S. Treasury notes with maturities approximately equal to the expected term.

Valuation of Stock Option Grants to Non-Employees

Total options outstanding as of December 31, 2016, include 141,046 shares of option awards that were granted to non-employees, of which 10,456 shares are unvested. Stock-based compensation expense related to stock options granted to non-employees is recognized as the stock option is earned and the services are rendered. The Company believes that the estimated fair value of the stock options is more readily measurable than the fair value of the services rendered. The fair value of the stock options granted to non-employees is calculated at each reporting date using the Black-Scholes options-pricing model with the following assumptions:


	Year ended December 31,
	2016					2015					2014
Expected term	2.7		—	3.2		4.9		—	9.8		4.4 — 10.0
Expected volatility	50.9	%	—	72.6	%	70.2	%	—	75.4	%	71.9	%	—	80.2	%
Expected dividend rate				0	%				0	%				0	%
Risk-free interest rate	0.68	%	—	1.38	%	1.74	%	—	2.24	%	1.41	%	—	2.61	%