Stock-Based Compensation

3 Months Ended

Mar. 31, 2020

Stock-Based Compensation

Stock-Based Compensation

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

The Company grants certain senior-level executives performance stock options and units which vest based on either market and time-based service conditions or performance and time-based service conditions, which are referred to herein as performance-based awards. The Company has assessed the performance-based award with the appropriate valuation method and has recognized the applicable stock-based compensation expense. The following table summarizes the performance-based and market-based awards as of March 31, 2020:

Period Granted	Options Granted	RSUs Granted	Options Vested	RSUs Vested	Milestone	Valuation Method
(in thousands)
Q1 2019	200	300	38	69	(1)	Monte-Carlo Simulation
Q2 2019	—	188	—	—	(2)	Fair Market Value
Q3 2019	—	50	—	—	(1)	Monte-Carlo Simulation
Q1 2020	150	300	—	—	(1)	Monte-Carlo Simulation
Q1 2020	—	436	—	—	(3)	Fair Market Value
Q1 2020	129	—	—	—	(3)	Black-Scholes-Merton

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(1) The awards will vest based on the achievement of certain values of the Company’s common stock at multiple thresholds within certain periods and are contingent upon the completion of requisite service through the date of such vesting.

(2) The vesting of the awards will be triggered after the end of the achievement milestone, as measured by the Company.

(3) The awards will vest based on achievement of certain revenue target and are contingent upon the completion of requisite service through the date of such vesting.

The Company has recognized $1.4 million and $0.2 million in stock-based compensation for performance-based awards for the three months ended March 31, 2020 and March 31, 2019, respectively.

   The fair value of performance-based awards with market conditions granted estimated using a Monte Carlo simulation model used the following inputs for the period ended March 31, 2020:

	March 31,
	2020
Risk-free interest rate		0.61	%	—	1.64	%
Expected dividend yield					0.00	%
Expected volatility		55	%	—	65	%
Expected term (years)		5.25		—	7.25

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 2020 started on November 1, 2019 and will end on April 30, 2020. No shares were purchased in the three months ending March 31, 2020.

Stock Options

The following table summarizes option activity for the three months ended March 31, 2020:

	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, 2019	6,416	8,497	$	10.39	6.88	$	197,955
Additional shares authorized	3,120	—
Options granted	(409)	409	$	25.51
Options exercised	—	(356)	$	10.74
Options forfeited/cancelled	45	(45)	$	17.76
RSUs granted	(4,140)	—
RSUs forfeited/cancelled	88	—
Balance at March 31, 2020	5,120	8,505	$	11.07	6.78	$	159,957
Exercisable at March 31, 2020		5,078	$	7.85	5.54	$	111,759
Vested and expected to vest at March 31, 2020		8,316	$	10.96	6.74	$	157,297

Restricted Stock Units

The following table summarizes RSU activity for the three months ended March 31, 2020:

		Weighted-
		Average
		Grant Date
(in thousands, except for grant date fair value)	Shares	Fair Value
Balance at December 31, 2019	2,404	$	19.86
Granted	2,071	$	26.67
Vested	(291)	$	16.88
Cancelled/forfeited	(44)	$	21.35
Balance at March 31, 2020	4,140	$	22.48

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 months ended March 31, 2020 and 2019.

	Three months ended March 31,
	2020						2019
	Employee		Non-Employee		Total		Employee		Non-Employee		Total
	(in thousands)
Cost of revenues	$	314	$	—	$	314	$	168	$	—	$	168
Research and development		1,682		160		1,842		894		—		894
Selling, general and administrative		5,252		9		5,261		2,646		343		2,989
Total	$	7,248	$	169	$	7,417	$	3,708	$	343	$	4,051

As of March 31, 2020, approximately $96.7 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 3.1 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 months ended March 31, 2020, 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 March 31,
	2020					2019
Expected term (years)	5.27		—	10.0		5.33		—	5.53
Expected volatility	49.94	%	—	58.53	%	42.53	%	—	42.75	%
Expected dividend rate				0.00	%				0.00	%
Risk-free interest rate	0.44	%	—	1.70	%	2.26	%	—	2.60	%

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 March 31, 2020, total options outstanding include 72,849 shares of option awards that were granted to non-employees, of which 23,126 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.