15.Equity Compensation Plans

Equity Incentive Plans

2014 Equity Incentive Plan

In September 2014, the Company adopted the 2014 Equity Incentive Plan (the “2014 Plan”). Under the 2014 Plan, the Company may grant stock options, restricted stock, restricted stock units, stock appreciation rights, performance units, performance shares and performance awards to its employees, directors and consultants, and its parent and subsidiary corporations’ employees and consultants.

As of December 31, 2016, a total of 11.6 million shares of common stock were available for grant under the 2014 plan, subject to adjustment in the case of certain events. In addition, any shares that otherwise would be returned to the Omnibus Plan (as defined below) as the result of the expiration or termination of stock options may be added to the 2014 Plan. The number of shares available for issuance under the 2014 Plan is subject to an annual increase on the first day of each year, equal to the least of 8.8 million shares, 4% of the outstanding shares of common stock as of the last day of the immediately preceding fiscal year and an amount of shares as determined by the Company. In accordance with the annual increase, an additional 4.3 million shares were reserved for issuance at the beginning of 2016 under the 2014 Plan.

As of December 31, 2016, there were 0.7 million time-based stock options, 6.3 million restricted stock units (“RSUs”), and 1.7 million performance share units (“PSUs”) granted and outstanding under the 2014 Plan. The time-based options are subject to ratable time-based vesting over three to four years. The RSUs are subject to ratable time-based vesting over one to four years. The PSUs vest quarterly or annually over one to four years subject to individual participants’ achievement of quarterly or annual performance goals.

2013 Omnibus Incentive Plan; Non-plan Option Grant

The Company’s 2013 Omnibus Incentive Plan (the “Omnibus Plan”) was terminated in connection with the adoption of the 2014 Plan in September 2014, and accordingly no additional shares are available for issuance under the Omnibus Plan. The Omnibus Plan will continue to govern outstanding awards granted under the plan.

During 2014 and 2013, the Company granted stock options of which one-third are subject to ratable time-based vesting over a five-year period and two-thirds are subject to vesting upon certain performance conditions and the achievement of certain investment return thresholds by 313. Certain performance stock options were modified as described in the section captioned “—Equity Award Modifications.” The stock options have a ten-year contractual period.

Long-term Incentive Plan

In July 2013, the Company’s board of directors approved 4.1 million shares of common stock for six Long-term Incentive Plan Pools (“LTIP Pools”) that comprise the 2013 Long-term Incentive Plan (the “LTIP”). The purpose of the LTIP was to attract and retain key service providers and strengthen their commitment to the Company by providing incentive compensation measured by reference to the value of the shares of the Company’s common stock. Eligible participants include nonemployee direct sales personnel who sell the solar energy system contracts, employees that install and maintain the solar energy systems and employees that recruit new employees to the Company.

Based on the terms of the agreement, participants are allocated a portion of the LTIP Pools relative to the performance of other participants. LTIP awards to employees are considered to be granted when the allocation of the LTIP Pools to each participant is fixed, which occurs once performance and service conditions are met. Nonemployee awards are granted and will be measured on the date on which the performance is complete, which is the date the service or other performance conditions are achieved. The Company recognizes stock-based compensation expense based on the lowest aggregate fair value of the non-employee awards at the reporting date.

As of December 31, 2016, 1.1 million shares of common stock had been awarded to participants under the LTIP and 0.3 million shares had been returned to the 2014 Plan. As of December 31, 2016, 2.7 million shares remained outstanding.

Equity Award Modifications

Current CEO Equity Awards

In May 2016, the Company appointed an interim CEO. In December 2016, the interim CEO was appointed as the permanent CEO. In connection with his interim appointment, the CEO was awarded 1.0 million stock options pursuant to the 2014 Plan, which were then cancelled and replaced with 0.5 million RSUs. Either award vested on the first anniversary of his start date, or if earlier, on the date on which a successor CEO was appointed. The cancellation of stock options and grant of RSUs was accounted for as a modification; however, there was no incremental value arising from the modification. As a result of the CEO’s permanent appointment, the RSUs became fully vested and all remaining expense was accelerated and recognized during the year ended December 31, 2016.

Former CEO Resignation

In May 2016, the Company accepted the resignation of its former CEO. Pursuant to a separation agreement, the Company accelerated the vesting of 0.2 million of the former CEO’s stock options. Further, all of the CEO’s vested stock options were modified such that they will remain exercisable until the third anniversary of his termination date. As a result of these modifications, the Company recorded incremental stock-based compensation expense of $0.7 million during the year ended December 31, 2016.

Omnibus Plan Performance Options

In May 2016, the Company modified the unvested Omnibus Plan performance options (the “Tier II Options”). The modified Tier II Options vest annually over three years with the first vesting date occurring in May 2017. The original performance condition for the Tier II Options remains in effect and will trigger immediate vesting of the Tier II Options if it is met prior to the three-year time-based vesting period. Due to the modification, the Company now considers the Tier II Options to be time-based options. Additionally, the Company will record incremental stock-based compensation expense of approximately $1.5 million over the three-year time-based vesting period, subject to immediate acceleration if the performance condition is met prior to the three-year time-based vesting period.

Stock Options

Stock Option Activity

Stock options are granted under the 2014 Plan and Omnibus Plan as described above. Stock option activity for the year ended December 31, 2016 was as follows (in thousands, except term and per share amounts):

						Weighted-
				Weighted-		Average
	Shares			Average		Remaining		Aggregate
	Underlying			Exercise		Contractual		Intrinsic
	Options			Price		Term		Value
Outstanding—December 31, 2015		9,277		$	1.36			$	76,488
Granted		1,640			3.09
Exercised		(2,679	)		1.08
Cancelled		(4,054	)		1.95
Outstanding—December 31, 2016		4,184		$	1.64		7.3	$	4,876
Options vested and exercisable—December 31, 2016		1,846		$	1.37		6.8	$	2,562
Options vested and expected to vest—December 31, 2016		3,868		$	1.62		7.2	$	4,616

The following table summarizes stock option activity by range of exercise price as of December 31, 2016 (number of awards in thousands):

	Awards Outstanding					Awards Exercisable
			Weighted-Average
	Number of Awards		Remaining	Weighted-Average		Number of Awards		Weighted-Average
Range of Exercise Price	Outstanding		Contractual Life	Exercise Price		Exercisable		Exercise Price
$0.00 - $1.00		2,002	6.6	$	1.00		1,080	$	1.00
$1.01 - $2.00		1,418	7.1		1.30		710		1.30
$2.01 - $10.00	685		9.8		2.98		21		4.14
$10.01 - $16.00	79		8.3		12.63		35		12.64
Total		4,184	7.3	$	1.64		1,846	$	1.37

The weighted-average grant date fair value of time-based options granted during the years ended December 31, 2016, 2015 and 2014 was $2.15, $9.39 and $4.69 per share. No performance-based stock options were granted during the years ended December 31, 2016 and 2015. The weighted-average grant date fair value of performance-based options granted during the year ended December 31, 2014 was $2.80 per share. The total intrinsic value of options exercised for the years ended December 31, 2016 and 2015 was $5.6 million and $7.4 million. There were no options exercised for the year ended December 31, 2014. Intrinsic value is calculated as the difference between the exercise price of the underlying options and the fair value of the common stock for the options that had exercise prices that were lower than the fair value per share of the common stock.

The total fair value of options vested for the years ended December 31, 2016, 2015 and 2014 was $1.6 million, $14.8 million and $1.0 million.

Determination of Fair Value of Stock Options

The Company estimates the fair value of the time-based stock options granted on each grant date using the Black-Scholes-Merton option pricing model and applies the accelerated attribution method for expense recognition. The Company estimated the fair value and the vesting period of the performance-based options granted in 2014 under the Omnibus Plan on each grant date using the Monte Carlo simulation method. No performance-based options were granted in 2016 or 2015.

The fair values using the Black-Scholes-Merton method were estimated on each grant date using the following weighted-average assumptions:

	Year Ended December 31,
	2016			2015			2014
Expected term (in years)		5.8			6.2			6.2
Volatility		83.1	%		89.0	%		87.1	%
Risk-free interest rate		1.7	%		1.8	%		1.9	%
Dividend yield		0.0	%		0.0	%		0.0	%

Use of the Black-Scholes-Merton option-pricing model requires the input of highly subjective assumptions, including (1) the fair value of the underlying common stock, (2) the expected term of the option, (3) the expected volatility of the price of the Company’s common stock, (4) risk-free interest rates and (5) the expected dividend yield of the Company’s common stock. The assumptions used in the option-pricing model represent management’s best estimates. These estimates involve inherent uncertainties and the application of management’s judgment. If factors change and different assumptions are used, the Company’s stock-based compensation expense could be materially different in the future.

These assumptions and estimates are as follows:

•

Fair Value of Common Stock. As the Company’s common stock is publicly traded, the fair value of the Company’s common stock is the close price on the grant date. Prior to the initial public offering, the fair value of common stock was estimated. The fair values of the common stock underlying the Company’s stock-based awards were determined by the Company’s board of directors, which considered numerous objective and subjective factors to determine the fair value of common stock at each grant date. These factors included, but were not limited to, the lack of marketability of the Company’s common stock and developments in the business. A significant factor considered for awards granted approaching the initial public offering was the expected offering price.

•

Expected Term. The expected term represents the period that the Company’s option awards are expected to be outstanding. The Company utilized the simplified method in estimating the expected term of its options granted. The simplified method deems the term to be the average of the time to vesting and the contractual life of the options.

•

Expected Volatility. The volatility is derived from the average historical stock volatilities of the Company and a peer group of public companies within the Company’s industry that it considers to be comparable to its business over a period equivalent to the expected term of the stock-based grants. The Company did not rely on implied volatilities of traded options in the industry peers’ common stock because of the low volume of activity.

•

Risk-Free Interest Rate. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for zero-coupon U.S. Treasury notes with maturities approximately equal to the option’s expected term.

•

Dividend Yield. The Company has never declared or paid any cash dividends and does not presently plan to pay cash dividends in the foreseeable future. Consequently, the Company used an expected dividend yield of zero.

The Company estimates potential forfeitures of stock grants and adjusts stock-based compensation expense accordingly. The estimate of forfeitures will be adjusted over the requisite service period to the extent that actual forfeitures differ, or are expected to differ, from such estimates. Changes in estimated forfeitures were recognized in the period of change.

The fair values using the Monte Carlo Simulation method were estimated on each grant date using the following weighted-average assumptions:

	Year Ended
	December 31,
	2014
Volatility		80.0	%
Risk-free interest rate		2.7	%

The assumptions used in the Monte Carlo Simulation were determined in a manner consistent with the assumptions for the Black-Scholes-Merton model. No performance-based options were granted in the years ended December 31, 2016 and 2015. As such, no Monte Carlo Simulation inputs were required for 2016 and 2015.

Restricted Stock Units

RSUs are granted under the 2014 Plan and the LTIP as described above. RSU activity for the year ended December 31, 2016 was as follows (awards in thousands):

				Weighted-
				Average
	Number of			Grant Date
	Awards			Fair Value
Outstanding at December 31, 2015		930		$	12.84
Granted		9,180			2.68
Vested		(990	)		6.97
Forfeited		(1,156	)		4.00
Outstanding at December 31, 2016		7,964		$	3.14

The total fair value of RSUs vested was $4.8 million and $9.0 million for the years ended December 31, 2016 and 2015. No RSUs vested in the year ended December 31, 2014. The Company determined the fair value of RSUs granted on each grant date based on the fair value of the Company’s common stock on the grant date.

Stock-Based Compensation Expense

Stock-based compensation was included in operating expenses as follows (in thousands):

	Year Ended December 31,
	2016			2015		2014
Cost of revenue	$	2,428		$	3,068	$	1,105
Sales and marketing		2,980			10,737		860
General and administrative		5,716			11,310		21,722
Research and development		(510	)		489		—
Total stock-based compensation	$	10,614		$	25,604	$	23,687

During the year ended December 31, 2016, several of the Company’s senior management, including the Company’s former CEO, left the Company. The Company reversed all stock-based compensation expense for awards that were forfeited by the terminated employees, which reduced stock-based compensation expense for the year ended December 31, 2016 below historical levels. As a result of these and other terminations, the Company increased its forfeiture rate during the year ended December 31, 2016, which is reflected in stock-based compensation expense for the year ended December 31, 2016.

The income tax benefit related to share-based compensation expense was $5.5 million and $4.8 million for the years ended December 31, 2016 and 2015. There was no income tax benefit related to share-based compensation recognized in the year ended December 31, 2014 as there were no option exercises or RSU releases.

In September 2014, the Company recorded $14.8 million of stock-based compensation expense in general and administrative expense related to the sale of shares of common stock to two of its directors as discussed in Note 14—Redeemable Non-Controlling Interests and Equity and Preferred Stock.

Unrecognized stock-based compensation expense, net of estimated forfeitures, for time-based stock options, performance-based stock options, RSUs and PSUs as of December 31, 2016 was as follows (in thousands, except years):

	Unrecognized
	Stock-Based		Weighted-
	Compensation		Average Period
	Expense		of Recognition
Time-based stock options	$	2,693	2.8 years
RSUs and PSUs		12,536	1.8 years
Total unrecognized stock-based compensation expense as of December 31, 2016	$	15,229