Note 8—Equity Based Compensation

Equity based compensation (Successor)

The Company has recognized non-cash stock-based compensation cost as shown below. Historical amounts may not be representative of future amounts as the value of future awards may vary from historical amounts.



	Successor
	October 11, 2016 through December 31, 2016
(in thousands)	October 11, 2016 through December 31, 2016
Restricted stock awards	$	405
Stock option awards	928
Total equity based compensation expense	$	1,333

Equity Incentive Plan

On October 7, 2016, the stockholders of the Company approved the Centennial Resource Development, Inc. 2016 Long Term Incentive Plan (the “LTIP”). An aggregate of 16,500,000 shares of Class A common stock will be available for issuance under the LTIP. The LTIP provides for grant of stock options, including incentive stock options ("ISOs") and nonqualified stock options ("NSOs"), stock appreciation rights ("SARs"), restricted stock, dividend equivalents, restricted stock units ("RSUs") and other stock or cash based awards.

Restricted Stock

The following table provides information about restricted stock awards granted in 2016:



	Successor
	Awards	Weighted Average Grant-Date Fair Value
Service-based stock awards:
Outstanding as of October 11, 2016	—	$	—
Vested	—	$	—
Granted	256,597	$	20.03
Canceled	—	$	—
Outstanding as of December 31, 2016	256,597	$	20.03

Compensation cost for the service-based vesting restricted shares is based upon the grant-date market value of the award. Such costs are recognized ratably over the applicable vesting period. Unrecognized compensation cost related to unvested restricted shares at December 31, 2016 was $4.7 million. The Company expects to recognize that cost over a weighted average period of 2.6 years.

Stock Options

Options that have been granted under the LTIP expire ten years from the grant date and have service-based vesting schedules of three years. The exercise price for an option under the LTIP is the closing price of the Company’s common stock as reported by NASDAQ on the date of grant.

Compensation cost related to stock options is based on the grant-date fair value of the award, recognized ratably over the applicable vesting period. The Company estimates the fair value using the Black-Scholes option-pricing model. Expected volatilities are based on the re-levered asset volatility implied by a set of comparable companies. Expected term is based on the simplified method, and is estimated as the average of the weighted average vesting term and the time to expiration as of the grant date. The Company uses U.S. Treasury bond rates in effect at the grant date for its risk-free interest rates.

The following summarizes the options granted and related information, and the assumptions used to determine the fair value of those options.



	Successor
	October 11, 2016 through December 31, 2016
Options granted	2,760,500
Weighted average grant-date fair value	$	5.93
Weighted average exercise price	$	14.67
Total fair value (in thousands)	$	16,375
Expected term	6
Expected stock volatility	40.0		%
Dividend yield	—		%
Risk-free interest rate	1.5		%

Information about outstanding stock options is summarized in the table below:



	Options		Weighted Average Exercise Price		Weighted Average Remaining Term (in years)	Aggregate Intrinsic Value (in thousands)
Outstanding as of October 11, 2016	—		$	—	—	—
Exercised	—		$	—	—	—
Granted	2,760,500		$	14.67	5.8	$	13,934
Forfeited	(25,000	)	$	14.52	5.8	$	130
Outstanding as of December 31, 2016	2,735,500		$	14.67	5.8	$	13,804
Exercisable as of December 31, 2016	—		$	—	—	$	—

The following summary reflects the status of non-vested stock options as of December 31, 2016 and changes since the Business Combination on October 11, 2016:



	Options		Weighted Average Grant-Date Fair Value		Weighted Average Exercise Price
Non-vested as of October 11, 2016	—		$	—	$	—
Vested	—		$	—	$	—
Granted	2,760,500		$	5.93	$	14.67
Forfeited	(25,000	)	$	5.86	$	14.52
Non-vested as of December 31, 2016	2,735,500		$	5.93	$	14.67

As of December 31, 2016, there was $15.3 million of unrecognized compensation cost related to non-vested stock options. The Company expects to recognize that cost on a pro rata basis over a weighted average period of 2.8 years.

Equity based compensation (Predecessor)

Incentive Units

Certain employees of Centennial Resource Management, LLC, a wholly owned subsidiary of CRD at the time of grant, received an award of CRD and NGP Follow-On incentive units, or profits interests. All of the incentive units are non-voting and subject to certain vesting and performance conditions. The terms of the incentive units are as follows: Tier I and Tier II incentive units vest ratably over five years, but are subject to forfeiture if payout is not achieved. In addition, all unvested Tier I and Tier II incentive units vest immediately upon Tier I and Tier II payout, respectively. Tier III, IV and V incentive units vest only upon the achievement of certain payout thresholds for each such tier and each tier of incentive units is subject to forfeiture if the applicable required payouts are not achieved. In addition, vested and unvested incentive units are forfeited if an incentive unit holder's employment is terminated for any reason or if the incentive unit holder voluntarily terminates their employment. Payouts for each Tier I through Tier V are based upon achievement of specified rates of return on CRD and NGP Follow-Ons invested capital.

The incentive units are issued to employees in return for services provided and cash payout is based, in part, on the value of Centennial equity; therefore, the incentive units are accounted for as liability awards under ASC 718, with compensation expense based on period-end fair value. The achievement of payout conditions is a performance condition that requires CRP to assess, at each reporting period, the probability that an event of payout will occur. Compensation cost is required to be recognized at such time that the payout terms are probable of being met. The consummation of the Business Combination resulted in a Fundamental Change with respect to the incentive units and CRP recorded $165.4 million of compensation expense. No incentive compensation expense was recorded at December 31, 2015 or 2014, because it was not probable that the performance criterion would be met.