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Stock-based Compensation

12 Months Ended

Dec. 31, 2019

Share-based Payment Arrangement [Abstract]

2011 and 2015 Equity Incentive Plans

The Company issues awards, including stock options, performance-based stock options, restricted stock LSUs and RSUs, under the Evolent Health Holdings, Inc. 2011 Equity Incentive Plan (the “2011 Plan”) and the 2015 Evolent Health, Inc. Omnibus Incentive Compensation Plan (the “2015 Plan”). We assumed the 2011 Plan in connection with the merger of Evolent Health Holdings with and into Evolent Health, Inc. The 2011 Plan allows for the grant of an array of equity-based and cash incentive awards to our directors, employees and other service providers. The 2011 Plan was amended on September 23, 2013, to increase the number of shares authorized to 9.1 million shares of the Company’s common stock. As of December 31, 2019 and 2018, 4.8 million stock options and 3.8 million shares of restricted stock have been issued, net of forfeitures, under the 2011 Plan.

On May 1, 2015, the Board of Directors approved and authorized the 2015 Plan which provides for the issuance of up to 6.0 million shares of the Company’s Class A common stock to employees and non-employee directors of the Company and its consolidated subsidiaries. The 2015 Plan was amended on June 13, 2018, to increase the number of shares authorized to 10.5 million. Upon confirmation of the amended 2015 Plan, the 2011 was automatically terminated and no further awards may be granted under the 2011 Plan. The 2011 Plan will continue to govern awards previously granted under the 2011 Plan. As of December 31, 2019 and 2018, 2.8 million and 3.3 million stock options and 4.4 million and 2.1 million RSUs have been issued, net of forfeitures, under the 2015 Plan.

We follow an employee model for our stock-based compensation as awards are granted in the stock of the Company to employees and non-employee directors of the Company or its consolidated subsidiaries. Following the adoption of ASU 2018-07 during 2018, we also follow the employee model for stock-based compensation for awards granted to acquire goods and services from non-employees.

Stock-based Compensation Expense

Total compensation expense by award type and line item in our consolidated financial statements was as follows (in thousands):



	For the Years Ended December 31,
	2019			2018		2017
Award Type
Stock options	$	4,237		$	9,008	$	15,487
Performance-based stock options	448			447		447
RSUs	8,877			7,766		4,503
Performance-based RSUs	(388		)	388		—
LSUs	2,444			—		—
Total compensation expense by award type	$	15,618		$	17,609	$	20,437

Line Item
Cost of revenue	$	2,673		$	1,475	$	1,371
Selling, general and administrative expenses	12,945			16,134		19,066
Total compensation expense by financial statement line item	$	15,618		$	17,609	$	20,437

No stock-based compensation was capitalized as software development costs for the years ended December 31, 2019, 2018 and 2017.

Total unrecognized compensation expense (in thousands) and expected weighted-average period (in years) by award type for all of our stock-based incentive plans were as follows:



	As of December 31, 2019
	Unrecognized Compensation Expense		Weighted Average Period
Stock options	$	5,829	2.22
Performance-based stock options	75		0.17
RSUs	12,767		2.58
LSUs	6,356		2.17
Total	$	25,027

Stock Options

Other than the performance-based stock options described below, options awarded under the incentive compensation plans are generally subject to a four-year graded service vesting period where 25% of the award vests after each year of service and have a maximum term of 10 years. Information with respect to our options is presented in the following disclosures.

The option price assumptions used for our stock option awards were as follows:



	For the Years Ended December 31,
	2019			2018			2017
Weighted-average fair value per option granted	$	6.52		$	6.30		$	8.38
Assumptions:
Expected term (in years)	6.25			6.25			6.25
Expected volatility	51.6		%	38.9		%	42.8		%
Risk-free interest rate	1.9- 2.7%			2.6 - 2.9%			1.9 - 2.1%
Dividend yield	—		%	—		%	—		%

The fair value of options is determined using a Black-Scholes options valuation model with the assumptions disclosed in the table above. The dividend rate is based on the expected dividend rate during the expected life of the option. Expected volatility is based on the historical volatility over the most recent period commensurate with the estimated expected term of the Company’s awards due to the limited history of our own stock price. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of the grant. The expected life represents the period of time the stock options are expected to be outstanding and is based on the simplified method. Under the simplified method, the expected life of an option is presumed to be the midpoint between the vesting date and the end of the contractual

term. We used the simplified method due to the lack of sufficient historical exercise data to provide a reasonable basis upon which to otherwise estimate the expected life of the stock options.

Information with respect to our stock options (in thousands), including weighted-average remaining contractual term (in years) and aggregate intrinsic value (in thousands) was as follows:



	Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value
Outstanding as of December 31, 2018	5,089		$	9.82	6.86	$	51,556
Granted	437		12.48
Exercised	(138	)	7.91
Forfeited	(560	)	15.63
Outstanding as of December 31, 2019	4,828		$	9.44	6.01	$	(1,880	)

Vested and expected to vest after December 31, 2019	4,553		$	9.16	5.91	$	(488	)

Exercisable at December 31, 2019	3,453		$	7.58	5.23	$	5,082

The total fair value of options vested during the years ended December 31, 2019, 2018 and 2017, was $5.9 million, $11.3 million and $13.0 million, respectively. The total intrinsic value of options exercised during 2019, 2018 and 2017 was $0.6 million, $25.1 million and $14.2 million, respectively. We issue new shares to satisfy option exercises.

Performance-based stock option awards

In March 2016, the Company granted approximately 0.3 million performance-based options to certain employees to create incentives for continued long-term success and to more closely align executive pay with our stockholders’ interests. Each of the grants is subject to market-based vesting, as follows:


•	one-third of the shares subject to the option award will vest in the event that the average closing price of the Company’s Class A common stock on the NYSE is at least $13.35 per share for a consecutive ninety day period;


•	one-third of the shares subject to the option award will vest in the event that the average closing price of the Company’s Class A common stock on the NYSE is at least $16.43 per share for a consecutive ninety day period; and


•	one-third of the shares subject to the option award will vest in the event that the average closing price of the Company’s Class A common stock on the NYSE is at least $19.51 per share for a consecutive ninety day period.

In addition, the percentage of options per tranche that has satisfied the market-based performance hurdle is also subject to a service completion schedule. The aggregate percentage of options eligible to vest is based upon each of the service completions dates below:


•	50% of the shares subject to the option award vested on March 1, 2019, and


•	50% of the shares subject to the option award will vest on March 1, 2020.

We measured the fair value of the performance-based stock options using a Monte Carlo simulation approach with the following assumptions: risk-free interest rate of 1.83%, volatility of 65%, expected term of ten years and dividend yield of 0% as we do not currently pay dividends nor expect to do so during the expected option term. These inputs resulted in a weighted-average fair value per option granted of $6.68. During 2016 all of the average stock price milestones were achieved and therefore the awards are now only subject to the service completion obligations.

Information with respect to our performance-based stock options (shares and aggregate intrinsic value shown in thousands, weighted-average remaining contractual term shown in years) was as follows:



	Options	Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value
Outstanding as of December 31, 2018	268	$	10.27	7.17	$	2,592
Outstanding as of December 31, 2019	268	10.27		6.17	(326		)

Vested and expected to vest after December 31, 2019	268	$	10.27	6.17	$	(326	)

Restricted Stock Units

Other than the performance-based RSUs described below, and other than RSUs granted to our non-employee directors which have a one year vesting period, RSUs awarded under the incentive compensation plans are generally subject to a four-year graded service vesting period where 25% of the award vests after each year of service and are issued to the participants for no consideration. During 2018, we also granted certain RSUs with a one-year vesting period in conjunction with the New Century Health transaction. Information with respect to our RSUs is presented below (in thousands, except for weighted-average grant-date fair value):



	Total RSUs		Weighted Average Grant Date Fair Value
Outstanding as of December 31, 2018	1,391		$	16.01
Granted	976		10.66
Forfeited	(337	)	14.81
Vested	(537	)	17.54
Outstanding as of December 31, 2019	1,493		$	12.23

During the years ended December 31, 2019, 2018 and 2017, we granted RSUs with a weighted-average grant date fair value of $10.66, $16.12 and $19.35, respectively, which represents the weighted-average closing price of our common stock on the grant date.

The total fair value of RSUs vested during the years ended December 31, 2019, 2018 and 2017 was $7.3 million, $4.8 million and $2.9 million, respectively.

Leveraged Stock Unit Awards

During 2019, the Company granted 0.7 million shares to certain employees to create incentives for continued long-term success and to more closely align executive pay with our stockholders’ interests. Each of the grants is subject to share price-based vesting on the business day following the third anniversary of the grant date, as follows:


•	If the stock price has increased by 33.3%, 75% of the shares will vest


•	If the stock price has increased by 50%, 100% of the shares will vest


•	If the stock price has increased by 100%, 150% of the shares will vest


•	If the stock price has increased by 200%, 200% of the shares will vest (this is the maximum possible vest amount)

We measured the fair value of the performance-based stock options using a Monte Carlo simulation approach with the following assumptions: risk-free interest rate of 2.54%, volatility of 51.65%, expected term of ten years and dividend yield of 0% as we do not currently pay dividends nor expect to do so during the expected option term. These inputs resulted in a weighted-average fair value per option granted of $12.85.

Information with respect to our leveraged stock unit awards (shares and aggregate intrinsic value shown in thousands, weighted-average remaining contractual term shown in years) was as follows:



	Leveraged Stock Units	Weighted Average Grant Date Fair Value		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value
Outstanding as of December 31, 2019	685	$	12.85	9.17	$	(2,603	)

Vested and expected to vest after December 31, 2019	685	$	12.85	9.17	$	(2,603	)

Performance-based RSUs

During 2018, in conjunction with the New Century Health transaction, we issued performance-based RSU awards to certain employees of New Century Health that became Evolent Health employees following the transaction. The awards were to vest based on the passage of time (18-month vesting period) and the achievement of certain operating results by New Century Health in 2019. Upon completion of the vesting period, the award recipients would have received a variable number of Evolent Health Class A common shares based on the predetermined monetary value of the award. Accordingly, these performance-based RSUs are recorded as liability awards. As one of the vesting criteria was continued employment at Evolent Health, these performance-based RSUs were considered compensation expense for the Company as opposed to contingent consideration related to the acquisition of New Century Health. See Note 4 for additional discussion of the New Century Health transaction.

The maximum monetary value of the original performance-based award, provided New Century Health meets or exceeds the defined operating results targets, was capped at $8.6 million. The fair value of the performance-based RSUs was estimated based on the real options approach, a form of the income approach, which estimated the probability of New Century Health achieving certain operating results during 2019. The most significant unobservable inputs used in the valuation of the performance-based RSUs was the risk-neutral probability of New Century Health achieving the defined operating results target or meeting the operating results target cap. A significant increase in either of those metrics, in isolation, would result in a significantly higher fair value of the performance-based RSUs. In determining the fair value of the performance-based RSUs, we determined the risk-neutral probability of New Century Health achieving operating results target was approximately 39.0% and we determined the risk-neutral probability of New Century Health meeting the operating results target cap was approximately 24.0%.

In August 2019, in connection with the settlement of the earn-out payable to the former employees of New Century Health, the Company canceled outstanding restricted stock units held by the former employees of New Century Health and issued new restricted stock units with modified performance conditions. No other changes to the original grant terms were made. In accordance with ASC Topic 718, Share Based Payments, canceled equity award accompanied by the concurrent grant of a replacement award shall be accounted for as a modification of the terms of the canceled award. The modification was treated as a Type 1 modification, as the awards were expected to vest under the original terms. Incremental compensation cost of $4.7 million was measured as the excess of the fair value of the modified award over the fair value of the original award immediately before the terms were modified and will be recorded over the remaining requisite service period. As of December 31, 2019, the required performance conditions for the performance-based RSUs were not met and no shares will be issued in conjunction with these awards.