Note 8. Stockholders’ Equity

Preferred Stock

As of December 31, 2015, the Company had 13,820,301 shares of convertible preferred stock issued and outstanding, which were converted into 13,820,301 shares of common stock on July 25, 2016, immediately prior to the closing of the IPO.

Convertible preferred stock as of December 31, 2015, consisted of the following:

	December 31, 2015
	Shares Authorized		Original Issue Price per Share		Shares Issued and Outstanding		Net Carrying Value		Aggregate Liquidation Preference
	(in thousands, except share and per share amounts)
Series Seed		1,400,000	$	2.2300		627,867	$	1,378	$	1,400
Series A		11,199,876		5.9727		5,022,876		28,757		30,000
Series B		8,570,366		11.1942		3,843,604		42,835		43,026
Series C		9,684,789		15.0256		4,325,954		62,780		65,000
Total convertible preferred stock		30,855,031				13,820,301	$	135,750	$	139,426

In October 2015, the Company entered into a preferred stock purchase agreement with existing and new investors and issued 4,325,954 shares of Series C convertible preferred stock at a price per share of $15.0256. Proceeds to the Company net of the placement agent fee and expenses were approximately $62.8 million.

The rights, privileges, and preferences of convertible preferred stock are summarized as follows:

Liquidation Preference

Upon liquidation, dissolution, or winding up of the Company (whether voluntary or involuntary), or Deemed Liquidation Event (as defined below), before any distribution or payment shall be made to the holders of common stock, each series of convertible preferred stock shall be entitled to be paid on a pari passu basis out of the funds and assets available for distribution, an amount equal to the Original Issue Price of $2.2300 for holders of Series Seed convertible preferred stock, $5.9727 for holders of Series A convertible preferred stock, $11.1942 for holders of Series B convertible preferred stock and $15.0256 for holders of Series C convertible preferred stock, plus any dividends declared but unpaid thereon. If upon any liquidation, dissolution, winding up or Deemed Liquidation Event of the Company, the assets of the Company available for distribution to shareholders is insufficient to pay the holders of shares of preferred stock in full, the holders of preferred stock will share ratably in any distribution. After payment of all preferential amounts required to be paid to the holders of preferred stock, the remaining funds and assets available for distribution to the shareholders of the Company will be distributed among the holders of preferred stock and common stock, pro rata based on the number of shares held by each such holder.

The following events are defined as Deemed Liquidation Events unless the holders of at least 66.67% of the then outstanding shares of convertible preferred stock elect otherwise by written notice to the Company:

(i)	a merger or consolidation; or

(ii)	the sale, lease, transfer, exclusive license or other disposition, of all or substantially all the assets of the Company.

Voting

Each holder of shares of convertible preferred stock is entitled to the number of votes equal to the number of shares of common stock into which such shares of convertible preferred stock could be converted and has voting rights and powers equal to the voting rights and powers of the common stock, and except as provided by law or by other provisions of the Certificate of Incorporation, shall vote together with the common stock as a single class on an as-converted basis on all matters as to which holders of common stock have the right to vote.

The holders of convertible preferred stock, voting together as a single class, are entitled to elect four members of the Company’s Board of Directors. The holders of common stock, exclusively and as a separate class, are entitled to elect one member of the Company’s Board of Directors. The one remaining member of the Company’s Board of Directors is elected by the holders of the common stock and any other series or class of voting stock, including the convertible preferred stock, exclusively and voting together as a single class.

Conversion

The holders of convertible preferred stock are subject to certain optional and mandatory conversion rights.

(i)

Optional Conversion Rights: Each share of convertible preferred stock is convertible, at the option of the holder, into such number of fully paid shares of common stock as is determined by dividing the original issuance price by the conversion price in effect at the time of conversion. As of December 31, 2015, the conversion ratio was 1:1 for all series of preferred stock.

(ii)

Mandatory Conversion Rights: Upon either (a) the date and time, or the occurrence of a future event as determined by vote or written consent of holders of at least a 66.67% of the then outstanding shares of convertible preferred stock, or (b) the closing of the sale of shares of the Company’s common stock to the public in a qualified initial public offering, all outstanding shares of convertible preferred stock will automatically be converted into shares of common stock, at the then effective conversion rate. A qualified initial public offering is defined as the closing of a firm commitment underwritten public offering with an offering price per share of not less than $24.0410, and at least $50.0 million in gross proceeds.

The conversion price for convertible preferred shares is subject to adjustment upon certain events including certain dilutive issuances of shares, share subdivisions such as stock splits and stock dividends. At December 31, 2015, Series Seed preferred shares had a conversion price of $2.2300 per share, Series A preferred shares had a conversion price of $5.9727 per share, Series B preferred shares had a conversion price of $11.1942 per share and Series C preferred shares had a conversion price of $15.0256 per share.

Dividends

The holders of the outstanding shares of convertible preferred stock are entitled to receive, when and if declared by the Board of Directors, a noncumulative cash dividend at the rate of 8% of the applicable original issue price per annum on each outstanding share of convertible preferred stock. Such dividends are payable in preference to any dividends for common stock declared by the Board of Directors. In the case of a dividend on common stock, the dividend per share of convertible preferred stock would also include the dividend payable on each share determined, if applicable, as if all convertible preferred stock had been converted to common stock. No dividends had been declared as of December 31, 2015.

Stock Compensation

Stock-based compensation expense by category was as follows for the years ended December 31, 2016, 2015 and 2014:

	For the Year Ended December 31,
	2016		2015		2014
	(in thousands)
Research and development	$	1,042	$	932	$	387
General and administrative		962		359		128
Total stock-based compensation expense	$	2,004	$	1,291	$	515
Employees	$	1,869	$	413	$	142
Non-employees		135		878		373
Total stock-based compensation expense	$	2,004	$	1,291	$	515

Equity Incentive Plans

Under the Company’s 2012 Equity Incentive Plan, or the 2012 Plan, a total of 3,107,517 shares were reserved for issuance. In July 2016, the Company ceased granting awards under the 2012 Plan and rolled the remaining 705,862 shares available for grant into the 2016 Equity Incentive Plan, or 2016 Plan, which was adopted on July 18, 2016. Under the terms of the 2012 Plan, options were granted at an exercise price not less than fair market value. For employees holding more than 10% of the voting rights of all classes of stock, the exercise prices for incentive and non-statutory stock options were not to be less than 110% of fair market value, as determined by the board of directors. The terms of options granted under the 2012 Plan do not exceed ten years.

A total of 1,500,000 shares were reserved for issuance under the 2016 Plan in addition to the 705,862 shares rolled into the 2016 Plan from the 2012 Plan. At December 31 2016, 1,891,092 shares were available for future grant under the 2016 Plan. The number of shares reserved for issuance under the 2016 Plan increases automatically on January 1 of each calendar year continuing through the tenth calendar year during the term of the 2016 Plan by a number of shares equal to 5% of the total outstanding shares of the Company’s common stock as of the immediately preceding December 31. However, the board of directors at its discretion may reduce the amount of increase in any particular year. Under the terms of the 2016 Plan, in general, options will vest over a four-year period. However, options may vest based on time or achievement of performance conditions. The maximum term of options granted under the 2016 Plan is ten years, except that the maximum permitted term of incentive stock options granted to 10% stockholders is five years.

The following table summarizes option activity for the years ended December 31, 2016 and 2015:

	Shares Available for Grant			Number of Options Outstanding			Weighted- Average Exercise Price Per Option		Weighted- Average Remaining Contract Term (Years)		Aggregate Intrinsic Value
											(in thousands)
Balance, December 31, 2014		977,297			784,790		$	0.83		9.01	$	1,074
Shares reserved for issuance		1,345,430			—			—
Options granted		(1,687,484	)		1,687,484		$	4.64
Options exercised		—			(51,994	)	$	1.34
Options forfeited		104,787			(104,787	)	$	1.01
Options cancelled		11,631			(11,631	)	$	1.59
Balance, December 31, 2015		751,661			2,303,862		$	3.60		9.18	$	13,593
Increase to authorized shares		1,500,000			—
Options granted		(620,702	)		620,702		$	11.78
Options exercised		—			(129,809	)	$	1.21
Options forfeited		259,599			(259,599	)	$	4.83
Options cancelled		534			(534	)	$	5.44
Balance, December 31, 2016		1,891,092			2,534,622		$	5.60		8.50	$	32,126
Exercisable, December 31, 2016					905,669		$	2.79		7.66	$	14,021
Vested and expected to vest, December 31, 2016					2,386,820		$	5.42		8.39	$	30,685

The aggregate intrinsic values of options outstanding, exercisable, vested and expected to vest were calculated as the difference between the exercise price of the options and the fair value of the Company’s common stock as of December 31, 2016. During the year ended December 31, 2016, 129,809 options with an intrinsic value of approximately $1.1 million were exercised, with approximately $0.2 million of cash received. During the year ended December 31, 2015, 51,994 options with an intrinsic value of approximately $0.1 million were exercised, with approximately $0.1 million of cash received.

The weighted-average grant date fair value of employee options granted during the year ended December 31, 2016, 2015 and 2014 was $7.33, $3.01 and $0.67 per share, respectively. As of December 31, 2016, the total unrecognized compensation expense related to unvested employee options, net of estimated forfeitures, was approximately $5.7 million, which the Company expects to recognize over an estimated weighted average period of 2.67 years. To the extent the actual forfeiture rate is different from what the Company has estimated, stock-based compensation related to these awards will be different from its expectations.

The fair value of stock options for employees was estimated using a Black-Scholes option pricing model with the following assumptions:

	For the Year Ended December 31,
	2016	2015

Expected term (in years)	5.5-6.1	5.8-6.1
Expected volatility	68-70%	66-85%
Risk-free interest rate	1.2-1.5%	1.3-1.9%
Expected dividend yield	0%	0%

The weighted-average grant date fair value of non-employee options granted during the year ended December 31, 2016 and 2015 was $5.67 and $1.61, respectively. No non-employee options were granted during the year ended December 31, 2014. Options and awards to non-employees are recorded at fair value and remeasured at the end of each period. As of December 31, 2016, the total unrecognized compensation expense related to unvested non-employee options, net of estimated forfeitures, was approximately $0.2 million, which the Company expects to recognize over an estimated weighted average period of 1.78 years. To the extent the actual forfeiture rate is different from what the Company has estimated, stock-based compensation related to these awards will be different from its expectations.

The fair value of stock options for non-employees was estimated using a Black-Scholes option pricing model with the following assumptions:

	For the Year Ended December 31,
	2016	2015

Expected term (in years)	7.0-10.0	7.7-10.0
Expected volatility	62-73%	69-72%
Risk-free interest rate	1.3-2.3%	1.6-2.3%
Expected dividend yield	0%	0%

2016 Employee Stock Purchase Plan

On July 19, 2016, the 2016 Employee Stock Purchase Plan, or the 2016 ESPP was adopted. The 2016 ESPP was adopted in order to enable eligible employees to purchase shares of the Company’s common stock at a discount. Purchases will be accomplished through participation in discrete offering periods. The Company initially reserved 210,000 shares of common stock for issuance under the 2016 ESPP. The number of shares reserved for issuance under the 2016 ESPP will increase automatically on January 1 of each calendar year beginning after the first offering date and continuing through the first ten calendar years by the number of shares equal to 1% of the total outstanding shares of the Company’s common stock as of the immediately preceding December 31.

The ESPP will not become effective until such time as the Compensation Committee determines in the future, and as of December 31, 2016, the initial offering periods had not commenced.