9. 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 executive chairman, 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.

Milestones (i) and (ii) described above have been achieved during the first quarter of 2019 and 2018, respectively. Milestone (iii) described above was achieved during the third quarter of 2019. During the three and nine months ended September 30, 2019, total stock-based compensation expense recorded for the performance-based options was $0.4 million and $0.6 million, respectively; and during the three and nine months ended September 30, 2018, the Company recognized stock-based compensation expense of $0.1 million and $0.4 million, respectively.

In December 2018, the Board approved a performance-based option grant of 600,000 shares to the Company’s executive chairman. The vesting of these performance-based options is contingent upon the achievement of a certain milestone, and provided that the completion of requisite service is through the date of such vesting, at which point the performance-based options will become fully vested and exercisable. The revenue milestone was concluded to be probable of being achieved in the third quarter of 2019, and the Company recognized $2.5 million of stock-based compensation expense in the three and nine months ended September 30, 2019.

In January 2019, the Board approved a stock option grant of 200,000 shares and 100,000 restricted stock units to the Company’s chief executive officer, which are performance-based awards with market conditions. Such awards will vest based on the achievement of certain values of the Company’s common stock at two separate thresholds within certain periods and are contingent upon the completion of requisite service through the date of such vesting. The Company utilized a Monte Carlo Simulation to determine the grant date fair value of such awards and the period when such award will become probable. The first milestone was achieved in the third quarter of 2019, resulting in 18,750 of restricted stock units and 37,500 stock options to vest, and recorded a cumulative catch-up of the remaining unrecognized stock-based compensation expense of $0.2 million within the quarter. For the three and nine months ended September 30, 2019, the Company recorded approximately $0.3 million and $0.5 million of stock-based compensation related to such awards.

Additionally, the Board approved 100,000 restricted stock units each to the Company’s chief financial officer and chief operating officer in March 2019. These two awards also have performance and market conditions, which are based on the same stock value performance target as that of the chief executive officer’s before such awards vest and are contingent upon the completion of requisite service through the date of such vesting. The Company utilized a Monte Carlo Simulation to determine the grant date fair value of such awards and the period when such award will become probable. The first milestone was achieved in the third quarter of 2019, resulting in 25,000 of restricted stock units to vest for each individual, and recorded a cumulative catch-up of the remaining unrecognized stock-based compensation expense of $0.4 million within the quarter. For three and nine months ended September 30, 2019, the Company recorded approximately $0.7 million and $1.0 million of stock-based compensation related to such awards.

In May 2019, the Board approved a grant of 188,099 restricted stock units to several employees, which are performance-based awards. Such awards will vest based on the achievement of a certain product line revenues over a calendar year. The other performance target requires the achievement of a certain run rate for tests in another product line and are contingent upon the completion of requisite service through the date of such vesting. The revenue milestone was probable of being achieved in the third quarter of 2019, and the Company recorded approximately $0.9 million of stock-based compensation related to such awards in the three and nine months ended September 30, 2019.

In September 2019, the Board approved a grant of 50,000 restricted stock units to the Senior VP of Business Development. Such awards will vest based on the achievement of certain values of the Company’s common stock at a specific threshold within certain periods and are contingent upon the completion of requisite service through the date of such vesting. The Company utilized a Monte Carlo Simulation to determine the grant date fair value of such awards and the period when such award will become probable. For three and nine months ended September 30, 2019, the Company recorded approximately $13,000 of stock-based compensation related to such awards.

Employee Stock Purchase Plan

In the second quarter of 2015, the Company’s stockholders 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 2019 started on November 1, 2018 and ended on April 30, 2019, and 132,177 shares were purchased at the end of the first offering period for total proceeds of $2.1 million. The second offering period of 2019 started on May 1, 2019 and ended on October 31, 2019. As of September 30, 2019, 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, 2019:


	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, 2018	5,431	9,463	$	7.69	6.91	$	61,718
Additional shares authorized	2,483	—
Options granted	(1,837)	1,837	$	18.00
Options exercised	—	(2,138)	$	4.87
Options forfeited/cancelled	364	(364)	$	13.93
Balance at September 30, 2019	6,441	8,798	$	10.27	7.10	$	198,252
Exercisable at September 30, 2019		4,811	$	7.09	5.74	$	123,680
Vested and expected to vest at September 30, 2019		8,603	$	10.18	7.06	$	194,605

Restricted Stock Units

The following table summarizes RSU activity for the nine months ended September 30, 2019:



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

Balance at December 31, 2018	1,084	$	11.72
Granted	1,765	$	18.72
Vested	(419)	$	11.86
Canceled/forfeited	(161)	$	16.68
Balance at September 30, 2019	2,269	$	17.69

Stock‑Based Compensation Expense

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. Non-employee stock-based compensation expense was not adjusted for estimated forfeitures up until the occurrence of the actual forfeiture of the associated awards.

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, 2019 and 2018.


	Three months ended September 30,
	2019						2018
	Employee		Non-Employee		Total		Employee		Non-Employee		Total
	(in thousands)
Cost of revenues	$	258	$	11	$	269	$	176	$	15	$	191
Research and development		1,580		—		1,580		1,047		—		1,047
Selling, general and administrative		8,312		86		8,398		2,292		86		2,378
Total	$	10,150	$	97	$	10,247	$	3,515	$	101	$	3,616


	Nine months ended September 30,
	2019						2018
	Employee		Non-Employee		Total		Employee		Non-Employee		Total
	(in thousands)
Cost of revenues	$	641	$	21	$	662	$	466	$	20	$	486
Research and development		3,738		—		3,738		2,963		—		2,963
Selling, general and administrative		15,184		518		15,702		6,606		83		6,689
Total	$	19,563	$	539	$	20,102	$	10,035	$	103	$	10,138

As of September 30, 2019, approximately $44.4 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 3.3 years.

Valuation of Stock Option Grants to Employees and Non-employees

Upon the adoption of ASU 2018-07 on January 1, 2019, the fair value of stock options granted to both employees and non-employees is estimated on the grant date using the Black-Scholes option-pricing model except for the performance-based options with a market condition. Prior to January 1, 2019, the Company only estimated the fair value of the stock options granted to its employees on the grant date, while the fair value of its unvested non-employee stock options was remeasured at the end of each reporting period up until their vesting date. The fair value of the stock options is amortized on a straight‑line basis over the requisite service period of the awards, which is generally the vesting period.

The Company utilizes Black-Scholes option pricing model when estimating the fair value of stock options. For the three and nine months ended September 30, 2019, the following valuation assumptions were applied on both the employee and non-employee options. In the same period of the prior year, the valuation assumptions as follows were only used for stock options granted to employees.


	Three months ended September 30,										Nine months ended September 30,
	2019					2018					2019					2018
Expected term (years)	5.23		—	10.00		5.35		—	5.50		5.23		—	10.00		5.24		—	5.62
Expected volatility	43.07	%	—	45.84	%	40.59	%	—	41.05	%	42.53	%	—	45.84	%	40.28	%	—	41.05	%
Expected dividend rate				0.00	%				0.00	%				0.00	%				0.00	%
Risk-free interest rate	1.60	%	—	2.12	%	2.75	%	—	2.97	%	1.60	%	—	2.60	%	2.37	%	—	2.97	%

For the three and nine months ended September 30, 2018, the Company used a different set of Black-Scholes valuation assumptions when estimating the fair value of stock options granted to its non-employees. The fair value was remeasured at the end of each reporting period up until December 31, 2018. The following table summarizes the valuation assumptions used:


	Three months ended			Nine months ended
	September 30, 2018			September 30, 2018
Expected term (years)		2.76		2.72		—	2.76
Expected volatility		41.36	%	41.36	%	—	42.03	%
Expected dividend rate		0.00	%				0.00	%
Risk-free interest rate		2.86	%	2.36	%	—	2.86	%

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 for the employee and non-employee stock options by calculating the average of (1) 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 granted to non-employees prior to January 1, 2019, 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 in the DNA sequencing, diagnostics, or personalized medicine industries over a period approximately equal to the expected term. When selecting these companies, certain comparable characteristics such as enterprise value and financial leverage were considered. The selected companies also had sufficient historical stock price volatility commensurate with the expected term of the Company’s stock options.

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.

As of September 30, 2019, total options outstanding include 91,073 shares of option awards that were granted to non-employees, of which 30,648 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.