8. Stock‑Based Compensation

2015 Equity Incentive Plan

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 IPO on July 2, 2015. The 2015 Plan replaced the Company’s 2007 Stock Plan (the “2007 Plan”). No further awards have been granted under the 2007 Plan after July 1, 2015. However, any remaining awards that were outstanding under the 2007 Plan will continue to be governed by the terms of that plan. The Company initially reserved 3,451,495 shares of its common stock for issuance under the 2015 Plan; in addition, the Company 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.

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 time 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.

During the three and nine months ended September 30, 2018, the Company recognized stock-based compensation cost associated with the performance-based options of $0.1 million and $0.4 million after it evaluated that milestone (ii) described above was achieved.

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 IPO 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 2018 started on November 1, 2017 and ended on April 30, 2018, and 206,447 shares were purchased at the end of the first offering period for total proceeds of approximately $1.9 million. The second offering period of 2018 started on May 1, 2018 and will end on October 31, 2018. As of September 30, 2018, no shares had been purchased in the second offering period.

Stock Options

The following table summarizes option activity for the nine months ended September 30, 2018:


	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, 2017	4,737	9,963	$	6.54	7.03	$	31,902
Additional shares authorized	2,162	—
Options granted	(1,697)	1,697	$	11.24
Options exercised	—	(1,774)	$	6.80
Options forfeited/cancelled	759	(759)	$	7.23
Balance at September 30, 2018	5,961	9,127	$	7.31	6.97	$	151,881
Exercisable at September 30, 2018		5,348	$	5.01	5.75	$	101,241
Vested and expected to vest at September 30, 2018		8,908	$	7.23	6.93	$	148,943

Restricted Stock Units

The following table summarizes RSU activity for the nine months ended September 30, 2018:



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

Balance at December 31, 2017	389	$	10.38
Granted	923	$	11.72
Vested	(146)	$	13.02
Canceled/forfeited	(77)	$	9.78
Balance at September 30, 2018	1,089	$	11.56

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 and nine months ended September 30, 2018 and 2017.


	Three months ended September 30,
	2018						2017
	Employee		Non-Employee		Total		Employee		Non-Employee		Total
	(in thousands)
Cost of revenues	$	176	$	15	$	191	$	138	$	9	$	147
Research and development		1,047		—		1,047		943		—		943
Selling, general and administrative		2,292		86		2,378		1,894		2		1,896
Total	$	3,515	$	101	$	3,616	$	2,975	$	11	$	2,986


	Nine months ended September 30,
	2018						2017
	Employee		Non-Employee		Total		Employee		Non-Employee		Total

	(in thousands)
Cost of revenues	$	466	$	20	$	486	$	420	$	10	$	430
Research and development		2,963		—		2,963		2,323		—		2,323
Selling, general and administrative		6,606		83		6,689		5,650		3		5,653
Total	$	10,035	$	103	$	10,138	$	8,393	$	13	$	8,406

As of September 30, 2018, approximately $28.4 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 2.58 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 September 30,									Nine months ended September 30,
	2018					2017				2018					2017
Expected term (years)	5.35		—	5.50		5.22	—	5.23		5.24		—	5.62		5.14		—	5.23
Expected volatility	40.59	%	—	41.05	%	62.27	—	62.49	%	40.28	%	—	41.05	%	62.27	%	—	62.93	%
Expected dividend rate				0.00	%			0.00	%				0.00	%				0.00	%
Risk-free interest rate	2.75	%	—	2.97	%	1.67	—	1.90	%	2.37	%	—	2.97	%	1.67	%	—	1.90	%

Valuation of Stock Option Grants to Non-Employees

As of September 30, 2018, total options outstanding include 141,784 shares of option awards that were granted to non-employees, of which 47,541 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 September 30,						Nine months ended September 30,
	2018			2017			2018					2017
Expected term (years)		2.76			2.70		2.72		—	2.76		2.67		—	2.70
Expected volatility		41.36	%		51.28	%	41.36	%	—	42.03	%	51.28	%	—	52.18	%
Expected dividend rate		0.00	%		0.00	%				0.00	%				0.00	%
Risk-free interest rate		2.86	%		1.58	%	2.36	%	—	2.86	%	1.42	%	—	1.58	%

Expected Term: The expected term of options represents the period of time that options are expected to be outstanding. The Company determines its expected term 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 estimates the expected term by assessing their historical exercise behavior and length of service, and calculates 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.