7. Stock‑Based Compensation

2007 and 2015 Stock Plans

In January 2007, the Board of Directors (the “Board”) adopted, and the Company’s stockholders approved, the Company’s 2007 Stock Plan (the “2007 Plan”), which was amended and restated on March 25, 2010 and amended on April 16, 2015. Pursuant to the 2007 Plan, stock options may be granted to employees, consultants, and outside directors of the Company. Options granted may be either incentive stock options or non-statutory stock options. Under the amended and restated 2007 Plan, the Company had reserved 15,999,289 shares of its common stock for issuance through March 31, 2016. The 2007 Plan was terminated in July 2015; however, the terms of the 2007 Plan will continue to govern any outstanding awards thereunder.

In June 2015, the Board adopted, and the Company’s stockholders approved, the Company’s 2015 Equity Incentive Plan (the “2015 Plan”), which, by its terms, took effect as of the Company’s initial public offering on July 2, 2015. The Company reserved 3,451,495 shares of its common stock for issuance under the 2015 Plan; in addition, the Board and stockholders authorized the reservation of up to 9,890,310 shares of common stock to cover shares reserved but unissued under the 2007 Plan and shares subject to outstanding awards under the 2007 Plan that expire or lapse unexercised or shares issued under the 2007 Plan that are subsequently reacquired by the Company.

Employee Stock Purchase Plan

In the second quarter of 2015, shareholders approved the 2015 Natera, Inc. Employee Stock Purchase Plan (the “ESPP”), which became effective upon the Company’s initial public offering on July 2, 2015. Under the ESPP, employees may purchase the Company’s common stock through payroll deductions at a price equal to 85% of the lower of the fair market values of the stock as of the beginning or the end of six-month offering periods. An employee’s payroll deductions under the ESPP are limited to 15% of the employee’s compensation and employees may not purchase more than 5,000 shares of stock during any offering period. A participant shall not be granted an option under the ESPP if such option would permit the participant’s rights to purchase stock to accrue at a rate that exceeds $25,000 fair market value of stock for each calendar year in which such option is outstanding at any time. The Company has made 893,548 shares available for issuance under the Plan, a number that is automatically increased by the least of (i) 1% of the total number of shares of common stock actually issued and outstanding on the last business day of the prior fiscal year, (ii) 880,000 shares of common stock (subject to certain adjustments pursuant to Subsection (c) below), or (iii) a number of shares of common stock determined by the Board.

The first offering period of fiscal year 2016 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 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 total proceeds of $1.6 million. The first offering period of fiscal year 2017 started on November 1, 2016, and no shares have been purchased in this offering period as of March 31, 2017.

Stock Options

The following table summarizes option activity for the three months ended March 31, 2017:


	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, 2016	4,115	9,043	$	5.72	7.55	$	55,396
Additional shares authorized	2,107	—
Options granted	(146)	146	$	9.37
Options exercised	—	(128)	$	3.23
Options forfeited/cancelled	287	(287)	$	10.26
Balance at March 31, 2017	6,363	8,774	$	5.67	7.23	$	33,558
Exercisable at March 31, 2017		4,919	$	3.17	6.13	$	29,209
Vested and expected to vest at March 31, 2017		8,398	$	5.53	7.17	$	33,134

Restricted Stock Awards

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

Restricted Stock Units

Starting April 2016, the Company began granting RSUs to its employees from the 2015 Plan. The following table summarizes restricted stock unit activity for the three months ended March 31, 2017:



		Weighted-
		Average
		Grant Date
(in thousands, except for grant date fair value)	Shares	Fair Value

Balance at December 31, 2016	159	$	9.80
Granted	5	$	9.37
Vested	(15)	$	9.59
Canceled/forfeited	(11)	$	9.69
Balance at March 31, 2017	138	$	9.82

Stock‑Based Compensation Expense

Employee and non‑employee stock‑based compensation expense was calculated based on awards ultimately expected to vest and has 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 tables present the effect of employee and non‑employee stock‑based compensation expense on selected statements of operations line items for the three months ended March 31, 2017 and 2016.


	Three months ended March 31,
	2017						2016
	Employee		Non-Employee		Total		Employee		Non-Employee		Total
	(in thousands)
Cost of revenues	$	143	$	(12)	$	131	$	158	$	(25)	$	133
Research and development		650		—		650		606		(1)		605
Selling, general and administrative		1,764		(2)		1,762		1,461		197		1,658
Total	$	2,557	$	(14)	$	2,543	$	2,225	$	171	$	2,396

As of March 31, 2017, approximately $16.5 million of unrecognized compensation expense, adjusted for estimated forfeitures, related to unvested option awards and RSUs will be recognized over a weighted‑average period of approximately 2.7 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:


	Three months ended March 31,
	2017			2016
Expected term		5.1		5.1		—	5.2
Expected volatility		62.7	%	70.6	%	—	71.0	%
Expected dividend rate		0	%				0	%
Risk-free interest rate		1.91	%	1.25	%	—	1.51	%

Valuation of Stock Option Grants to Non-Employees

As of March 31, 2017, total options outstanding include 141,046 shares of option awards that were granted to non-employees, of which 8,693 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:


	Three months ended March 31,
	2017			2016
Expected term		2.7			3.2
Expected volatility		51.7	%		72.6	%
Expected dividend rate		0	%		0	%
Risk-free interest rate		1.42	%		0.90	%

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.