8. Stock-based Compensation

2014 Stock Plan (the “2014 Plan”) and 2016 Equity Incentive Plan (the “2016 Plan")

In May 2014, the Company’s Board of Directors adopted the 2014 Stock Plan (the “2014 Plan”), and in January 2016, the Company adopted the 2016 Equity Incentive Plan (the “2016 Plan” and, together with the 2014 Plan, the “Plans”). The 2016 Plan became effective on February 10, 2016, or the IPO Date. On and after the IPO Date, no additional stock awards may be granted under the 2014 Plan. The Board may amend or suspend the 2016 Plan at any time, although no such action may materially impair the rights under any then-outstanding award without the holder’s consent. The Company will obtain stockholder approval for any amendments to the 2016 Plan as required by law. No incentive stock options may be granted under the 2016 Plan after the tenth anniversary of the effective date of the 2016 Plan. Initially, the aggregate number of shares of the Company’s common stock that was available to be issued pursuant to stock awards under the 2016 Plan was 4,339,451 shares, which was the sum of (1) 2,400,000 new shares, plus (2) the number of shares reserved for issuance under the 2014 Plan on the IPO Date, plus (3) any shares subject to outstanding stock awards that would have otherwise been returned to the 2014 Plan. Additionally, the number of shares of the Company’s common stock reserved for issuance under the 2016 Plan will automatically increase on January 1 of each year, beginning on January 1, 2017 and continuing through and including January 1, 2026, by 4.0% of the total number of shares of the Company’s capital stock outstanding on December 31 of the preceding calendar year, or a lesser number of shares determined by the Board. The maximum number of shares that may be issued pursuant to the exercise of incentive stock options under the 2016 Plan is 8,678,902 shares.

The Company has not granted stock appreciation rights to directors, officers or employees under the Plans since their inception. The Company granted 57,500 service-based restricted stock awards to several employees in August 2016 and 49,332 performance-based restricted stock units to several employees in March 2017. Options generally expire ten years following the date of grant. Options typically vest over a period of four years, but vesting provisions can vary by award based on the discretion of the Board of Directors. Options to purchase common stock carry an exercise price equal to the estimated fair value of the Company’s common stock on the date of grant. Options to purchase shares of the Company’s common stock may be exercised by payment of the exercise price in cash, by the delivery of previously acquired shares of common stock having a fair value equal to the exercise price payable or the withholding of common shares equal to the fair value of the aggregate exercise price. Upon the termination of service of a holder of stock options awarded under the Plans, all unvested options are immediately forfeited and vested options may be exercised within three months of termination.

Shares of common stock underlying awards previously issued under the 2016 Plan which are reacquired by the Company, withheld by the Company in payment of the purchase price, exercise price, or withholding taxes, expired, cancelled due to forfeiture, or otherwise terminated other than by exercise, are added to the number of shares of common stock available for issuance under the 2016 Plan. Shares available for issuance under the 2016 Plan may be authorized but unissued shares of the Company’s common stock or common stock reacquired by the Company and held in treasury. The 2016 Plan expires ten years from the date it was approved by the Board of Directors.

The following table summarizes stock option activity (in thousands, except per share data):


		Weighted		Weighted Average
		Average		Remaining	Aggregate
	Number of	Exercise		Contractual	Intrinsic
	Shares	Price		Life (Years)	Value (a)
Outstanding at December 31, 2016	2,577	$	22.01	8.79	$	66,466
Granted	1,103	$	78.59
Exercised	(268)	$	14.93
Cancelled or forfeited	(245)	$	36.02
Outstanding at December 31, 2017	3,167	$	41.30	8.35	$	219,656
Exercisable at December 31, 2017	1,158	$	20.96	7.70	$	103,843
Exercisable and expected to vest at December 31, 2017	3,167	$	41.30	8.35	$	219,656

(a)

The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying options and the estimated fair value of the common stock for the options that were in-the-money at December 31, 2016 and 2017.

As of December 31, 2017, 2,204,082 shares of common stock, were available for future grants under the 2016 Plan. The total intrinsic value of options exercised during the year ended December 31, 2017, 2016 and 2015 was $19.0 million, $3.4 million and $3.6 million, respectively.

As of December 31, 2017, there was $46.5 million of unrecognized stock-based compensation expense related to employees’ awards that is expected to be recognized over a weighted-average period of 1.3 years.

The Company has recorded aggregate stock-based compensation expense related to the issuance of stock option awards under the Plans in the consolidated statements of operations and comprehensive loss as follow (in thousands):


	Year ended		Year ended		Year ended
	December 31,		December 31,		December 31,
	2017		2016		2015
Research and development	$	15,383	$	5,988	$	1,294
General and administrative		15,502		9,668		3,956
	$	30,885	$	15,656	$	5,250

Stock Options Granted to Employees

The weighted-average grant date fair value of options granted during the years ended December 31, 2017, 2016 and 2015 was $57.13, $24.50 and $16.44, respectively, on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:


	Year ended		Year ended		Year ended
	December 31,		December 31,		December 31,
	2017		2016		2015
Expected volatility	86.34	%	91.84	%	90.00	%
Risk-free interest rate	1.94	%	1.45	%	1.57	%
Expected term (in years)	6.08		6.08		6.08
Expected dividend yield	0.00	%	0.00	%	0.00	%

Restricted Stock Units (RSUs)

The Company granted RSUs with service-based vesting terms. The outstanding RSUs vest over a period of three years. For awards that vest subject to the satisfaction of service requirements, compensation expense is measured based on the fair value of the RSUs on the date of grant and is recognized as expense on a straight-line basis, net of estimated forfeitures, over the requisite service period. All RSUs issued vest over time as stipulated in the individual RSU award agreements.

The Company recognized RSU-related stock-based compensation expense of $0.7 million and $0.8 million during the years ended December 31, 2017 and 2016, respectively, of which the majority is recorded within research and development expense. At December 31, 2017, there was $0.4 million of unrecognized compensation cost related to unvested RSUs that will be recognized as expense over a weighted-average period of 0.7 years. A summary of the status of the Company's RSUs at December 31, 2017 and of changes in RSUs outstanding under the 2016 Plan for the year ended December 31, 2017 is as follows (in thousands, except per share data):


		Weighted
		Average
		Grant Date
	Number	Fair Value
	of Shares	Per Share
Outstanding at December 31, 2016	58	$	34.90
Granted	2		99.26
Vested	(20)	$	37.60
Forfeited and cancelled	(13)	$	34.90
Outstanding at December 31, 2017	27	$	38.79

Performance-Based Restricted Stock Units (PSUs)

On March 20, 2017, the Company granted 49,332 PSUs to certain employees. These PSUs vest upon the achievement of certain regulatory and manufacturing milestones. If the milestones do not occur on or before the three-year anniversary of the grant date, all unvested PSUs will be cancelled. As of December 31, 2017, all 49,332 PSUs were outstanding, none had vested and the weighted-average grant date fair value of all shares was $79.75 per share. The Company has not yet recognized any PSU-related stock-based compensation expense as regulatory and manufacturing milestones have not yet been met; however, in the event the performance conditions are met, $3.9 million of research and development compensation expense will be recognized by the Company. There were no PSUs issued and outstanding as of December 31, 2016.

Valuation of Common Stock

Prior to the IPO, the Company estimated the fair value of common stock underlying stock option awards at the grant date of the award. Valuation estimates were prepared by management in accordance with the framework of the American Institute of Certified Public Accountants Practice Guide, with the assistance of independent third party valuations, and approved by the Company’s Board of Directors. The Company’s valuations of its common stock were based on a number of objective and subjective factors, including external market conditions affecting the Company’s industry sector, the prices at which the Company sold shares of its common and preferred stock, and the likelihood of achieving a liquidity event such as an initial public offering.

Restricted Stock Granted to Non-Employees

In January 2014, the Company issued 2,334,391 shares of restricted common stock to Dr. Brian Kaspar pursuant to a consulting agreement for scientific advisory services. Of these shares, 583,597 common shares were vested at the time of grant and the remaining restricted shares were scheduled to vest in the amount of 25% per year on the second, third and fourth anniversary of the grant date pursuant to a restricted stock purchase agreement, which became effective upon the effectiveness of the consulting agreement.

In January 2016, the Company entered into an employment agreement with Dr. Kaspar. Upon the effectiveness of the employment agreement, Dr. Kaspar’s 1,750,794 unvested shares granted pursuant to the restricted stock purchase agreement vested in full. As a result of the vesting of the remainder of this award the Company recorded $10.4 million of additional stock compensation expense for the year ended December 31, 2016, in research and development expense, as compared to $19.3 million of stock compensation expense recognized related to the grant for the year ended December 31, 2015.

Warrants Granted to Non-Employees

As of December 31, 2017 and 2016, there were 305,775 common stock warrants vested and outstanding issued to non-employees, with a weighted-average exercise price of $2.57.