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.

No further awards have been made under the 2007 Plan after July 1, 2015, the date of the Company’s initial public offering. However, any remaining awards that were outstanding under the 2007 Plan will continue to be governed by the terms of that plan. As of December 31 2017, there were 5,551,616 shares outstanding under the 2007 Plan, with exercise prices ranging from $0.0978 to $12.8501.

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, 2017, 14,567,816 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 fiscal year, 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 the Company’s 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.

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, 2017, 1,136,615 shares were available for issuance under the 2015 ESPP. 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 the Company’s 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).

Purchase Price. Employees may purchase each share of common stock under the 2015 ESPP 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 the six-month offering periods. An employee’s payroll deductions under the ESPP are limited to 15% of the compensation, and up to a maximum of 5,000 shares may be purchased 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 exceeding $25,000 fair market value of stock for each calendar year in which such option is outstanding at any time.

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 of 2017 started on November 1, 2016 and ended on April 30, 2017, and 211,729 shares were purchased at the end of this offering period for total proceeds of $1.5 million. The second offering period of 2017 started on May 1, 2017 and ended on October 31, 2017, and 234,452 shares were purchased at the end of this offering period for total proceeds of $1.8 million.

Early Exercise of Employee Options

As of December 31, 2015, the Company had approximately 1.3 million 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 these 1.3 million 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, 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	(2,078)	2,078	$	10.55
Options exercised	—	(565)	$	4.10
Options forfeited	593	(593)	$	10.37
Balance at December 31, 2017	4,737	9,963	$	6.54	7.03	$	31,902
Exercisable at December 31, 2017		6,103	$	4.41	5.95	$	30,201
Vested and expected to vest at December 31, 2017		9,592	$	6.41	6.96	$	31,738

The total intrinsic value of stock options exercised during the years ended December 31, 2017, 2016 and 2015 was $3.7 million, $16.9 million and $6.9 million, respectively. The total fair value of stock options vested during the years ended December 31, 2017, 2016 and 2015 was $12.1 million $8.5 million and $4.5 million, respectively.

The weighted-average grant date fair value of options granted during the years ended December 31, 2017, 2016 and 2015 was $5.71, $5.92 and $7.29 per share, respectively.

Performance-based Awards

In June 2017, the Board approved a stock option grant of 425,000 shares to the Company’s chief executive officer, of which 200,000 shares are performance-based options. The vesting of these performance-based options is contingent upon the completion of requisite service for the next three years and the achievement of certain milestones within such period. The milestones are (i) to successfully secure a specified strategic arrangement, at which point 50,000 shares will begin vesting over one year in equal quarterly installments, (ii) to successfully secure a specified licensing arrangement, at which point 75,000 shares will begin vesting over one year in equal quarterly installments, and (iii) to successfully secure specified licensing arrangements related to oncology, at which point 75,000 shares will begin vesting over one year in equal quarterly installments. Each milestone is independent of the other.

For the year ended December 31, 2017, the Company did not recognize any compensation expense associated with the performance-based options since none of the milestones were achieved or were probable of being achieved.

Restricted Stock Units

The following table summarizes restricted stock unit activity for the year ended December 31, 2017:


		Weighted-
		Average
	Number of	Grant Date
	Shares	Fair Value

Balance at December 31, 2016	159	$	9.80
Granted	345	$	10.48
Vested	(64)	$	9.79
Canceled/Forfeited	(51)	$	10.17
Balance at December 31, 2017	389	$	10.38

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, 2017, 2016 and 2015.


	Year ended December 31,
	2017						2016						2015
	Employee		Non-Employee		Total		Employee		Non-Employee		Total		Employee		Non-Employee		Total
	(in thousands)
Cost of revenues	$	544	$	—	$	544	$	651	$	(10)	$	641	$	351	$	241	$	592
Research and development		3,214		—		3,214		2,829		24		2,853		1,566		9		1,575
Selling, general and administrative		7,644		—		7,644		6,837		270		7,107		4,993		166		5,159
Total	$	11,402	$	—	$	11,402	$	10,317	$	284	$	10,601		6,910	$	416	$	7,326

As of December 31, 2017, approximately $20.0 million of unrecognized compensation expense related to unvested option awards and RSUs, net of estimated forfeitures. The unrecognized compensation expense will be recognized over a weighted‑average period of approximately 2.52 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,
	2017					2016					2015
Expected term (years)	5.14		—	5.24		5.10		—	5.20		5.58		—	10.00
Expected volatility	40.75	%	—	62.93	%	63.06	%	—	72.49	%	69.65	%	—	78.82	%
Expected dividend rate				0	%				0	%				0	%
Risk-free interest rate	1.67	%	—	2.16	%	0.97	%	—	1.92	%	1.56	%	—	2.32	%

Valuation of Stock Option Grants to Non-Employees

Total options outstanding as of December 31, 2017 include 135,746 shares of option awards that were granted to non-employees, of which 3,401 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,
	2017					2016					2015
Expected term (years)	2.67		—	2.71		2.65		—	3.16		4.94		—	9.78
Expected volatility	41.22	%	—	52.18	%	50.90	%	—	72.61	%	70.17	%	—	75.35	%
Expected dividend rate				0	%				0	%				0	%
Risk-free interest rate	1.42	%	—	1.95	%	0.68	%	—	1.38	%	1.74	%	—	2.24	%

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 for employees, 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 employee stock options that are not granted "at-the-money," the Company uses the binomial lattice model to calculate the expected term. Regarding non-employee stock options, the Company estimated the expected term by assessing their historical exercise behavior and length of service, and calculated the average of these two components.

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.