Stock-Based Compensation

9 Months Ended

Sep. 30, 2023

Stock-Based Compensation

Stock-Based Compensation

9. Stock-Based Compensation

2015 Equity Incentive Plan

General.  The Company’s board of directors adopted its 2015 Equity Incentive Plan (the “2015 Plan”) in June 2015. The 2015 Plan replaced the Company’s prior stock plans.

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. 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 least of:

● 3,500,000 shares;

● 4% of the shares of common stock issued and outstanding on the last business day of the prior fiscal year; or

● a 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 (“RSUs”) may be awarded under the 2015 Plan in return for any lawful consideration, and participants 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.

Employee Stock Purchase Plan

During the period ended September 30, 2023, there have not been any changes to the Company’s 2015 Natera, Inc. Employee Stock Purchase Plan (the “ESPP”) as disclosed in Form 10-K for the fiscal year ended December 31, 2022.  

The Company has made 3,964,612 shares available for issuance under the Plan as of September 30, 2023, a number that is automatically increased on the first business day of each fiscal year of the Company during the term of the ESPP 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 the ESPP), or (iii) a number of shares of common stock determined by the Company’s board of directors.

The first offering period of 2023 started on November 1, 2022 and ended on April 30, 2023. As of September 30, 2023, 218,649 shares have been purchased in the first offering period. The second offering period of 2023 began on May 1, 2023 and ended on October 31, 2023.

Stock Options and Restricted Stock Units

The following table summarizes option and RSU activity for the nine months ended September 30, 2023:

	Outstanding Options and RSUs
					Weighted-
			Weighted-		Average
	Shares	Number of	Average		Remaining	Aggregate
	Available for	Shares	Exercise		Contractual	Intrinsic
(in thousands, except for contractual life and exercise price)	Grant	Outstanding	Price		Life	Value
					(in years)
Balance at December 31, 2022	3,263	5,300	$	21.11	4.84	$	131,385
Additional shares authorized	3,500	—
Options granted	(497)	497	$	44.29
Options exercised	—	(265)	$	13.26
RSUs granted	(5,728)	—
RSUs forfeited/cancelled	760	—
Balance at September 30, 2023	1,298	5,532	$	23.57	4.61	$	142,513
Exercisable at September 30, 2023		4,525	$	13.81	3.74	$	141,977
Vested and expected to vest at September 30, 2023		5,466	$	23.05	4.56	$	142,478

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 assessed the performance-based awards with the appropriate valuation method and has recognized the applicable stock-based compensation expense.

The Company has recognized $23.0 million and $12.4 million in stock-based compensation for performance-based awards for the three months ended September 30, 2023 and 2022, respectively. The Company has recognized $40.5 million and $40.0 million in stock-based compensation for performance-based awards for the nine months ended September 30, 2023 and 2022, respectively. There were no performance-based awards with market conditions and a fair value estimated using a Monte Carlo simulation model granted in the nine months ended September 30, 2023 and 2022.

Restricted Stock Units

The following table summarizes unvested RSU for the nine months ended September 30, 2023:

		Weighted-
		Average
		Grant Date
(in thousands, except for grant date fair value)	Shares	Fair Value
Balance at December 31, 2022	6,836	$	57.12
Granted	5,728	$	44.99
Vested	(2,364)	$	57.01
Cancelled/forfeited	(760)	$	50.01
Balance at September 30, 2023	9,440	$	50.28

Stock-Based Compensation Expense

Stock based compensation is related to stock options and RSUs granted to the Company’s employees and is measured at the grant date based on the fair value of the award. The fair value is recognized as expense over the requisite service period, which is generally the vesting period of the respective awards on a straight-line basis. If awards have both a service condition and performance or market condition, then an accelerated expense method is used. No compensation cost is recognized when the requisite service has not been met and the awards are therefore forfeited.

Employee stock-based compensation expense is 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 is 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, 2023 and 2022.

	Three months ended September 30,
	2023						2022
	Employee		Non-Employee		Total		Employee		Non-Employee		Total
	(in thousands)
Cost of revenues	$	3,284	$	15	$	3,299	$	2,124	$	—	$	2,124
Research and development		18,278		650		18,928		12,972		497		13,469
Selling, general and administrative		35,233		271		35,504		24,524		221		24,745
Total	$	56,795	$	936	$	57,731	$	39,620	$	718	$	40,338

	Nine months ended September 30,
	2023						2022
	Employee		Non-Employee		Total		Employee		Non-Employee		Total
	(in thousands)
Cost of revenues	$	8,669	$	24	$	8,693	$	5,903	$	—	$	5,903
Research and development		47,316		1,965		49,281		33,911		1,432		35,343
Selling, general and administrative		83,822		1,100		84,922		74,700		452		75,152
Total	$	139,807	$	3,089	$	142,896	$	114,514	$	1,884	$	116,398

As of September 30, 2023, approximately $368.4 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 2.5 years.

Valuation of Stock Option Grants to Employees and Non-employees

The Company utilizes the Black-Scholes option pricing model when estimating the fair value of stock options. For the three and nine months ended September 30, 2023, the following valuation assumptions were applied on both the employee and non-employee options.

	Three months ended September 30,						Nine months ended September 30,
	2023			2022			2023					2022
Expected term (years)		6.03			6.05		5.20		—	6.03		5.12		—	10.00
Expected volatility		68.23	%		61.63	%	68.23	%	—	70.07	%	55.91	%	—	62.30	%
Expected dividend rate		—	%		—	%				—	%				—	%
Risk-free interest rate		4.18	%		3.15	%	3.41	%	—	4.18	%	1.62	%	—	3.15	%

As of September 30, 2023, total stock options outstanding include stock options for 23,005 shares of common stock that were granted to non-employees, of which none are vested. 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.