Employee Incentive Plans

The Company’s equity incentive plans provide for granting stock options, RSUs and restricted stock awards to employees, consultants, officers and directors. In addition, the Company offers an ESPP to eligible employees.

Stock-based compensation expense by award type was as follows (in thousands):



	Three Months Ended July 31,				Six Months Ended July 31,
	2017		2016		2017		2016
Stock options	$	6,127	$	3,664	$	12,152	$	7,033
RSUs	1,435		—		1,501		—
ESPP	2,015		—		2,800		—
Restricted stock awards	768		—		1,520		—
Restricted common stock	1,633		—		2,911		—
Total	$	11,978	$	3,664	$	20,884	$	7,033

Stock-based compensation expense was recorded in the following cost and expense categories in the Company’s condensed consolidated statements of operations (in thousands):



	Three Months Ended July 31,				Six Months Ended July 31,
	2017		2016		2017		2016
Cost of revenue
Subscription	$	1,056	$	446	$	1,742	$	839
Professional services and other	738		313		1,207		586
Research and development	4,438		736		7,739		1,354
Sales and marketing	3,021		1,412		5,396		2,766
General and administrative	2,725		757		4,800		1,488
Total	$	11,978	$	3,664	$	20,884	$	7,033

Stock-based compensation expense recorded to research and development in the condensed consolidated statements of operations exclude amounts that were capitalized related to internal-use software for the three and six months ended July 31, 2017 and 2016. See Note 6 for further details.

Equity Incentive Plans

The Company has two equity incentive plans: the 2009 Stock Plan (2009 Plan) and the 2017 Equity Incentive Plan (2017 Plan). Upon the completion of the Company’s IPO in April 2017, the Company ceased granting equity under the 2009 Plan, and all shares that remained available for future issuance under the 2009 Plan at that time were transferred to the 2017 Plan. As of July 31, 2017, 33,360,239 options to purchase Class B common stock granted under the 2009 Plan remain outstanding.

Stock Options

A summary of the Company’s stock option activity and related information is as follows:



	Number of Options		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value (in thousands)
Outstanding as of January 31, 2017	32,866,862		$	6.01	8.2	$	145,570
Granted	2,596,568		11.03
Exercised	(1,285,555	)	3.04
Canceled	(817,636	)	7.55
Outstanding as of July 31, 2017	33,360,239		$	6.48	7.9	$	516,132
As of July 31, 2017
Vested and exercisable	14,864,075		$	4.16	6.8	$	264,429

No stock options were granted in the three months ended July 31, 2017. The weighted-average grant-date fair value of options granted was $3.91 for the three months ended July 31, 2016, and $5.36 and $3.86 for the six months ended July 31, 2017 and 2016, respectively. The aggregate fair value of stock options vested was $8.4 million, and $3.3 million for the three months ended July 31, 2017 and 2016, respectively, and $13.0 million and $5.9 million for the six months ended July 31, 2017 and 2016, respectively. The intrinsic value of the options exercised, which represents the difference between the fair market value of the Company’s common stock on the date of exercise and the exercise price of each option, was $5.3 million and $1.3 million for the three months ended July 31, 2017 and 2016, respectively, and $19.3 million and $1.7 million for the six months ended July 31, 2017 and 2016, respectively.

As of July 31, 2017, there was a total of $67.4 million of unrecognized stock-based compensation expense, which is expected to be recognized over a weighted-average period of 3.0 years.

The Company used the Black-Scholes option pricing model to estimate the fair value of stock options granted with the following assumptions:



	Three Months Ended July 31,		Six Months Ended July 31,
	2017	2016	2017	2016

	(unaudited)
Expected volatility	—	42.9%-43.8%	40.3%-40.5%	42.9%-44.3%
Expected term (in years)	—	5.8-6.4	6.0-6.4	5.8-6.4
Risk-free interest rate	—	1.13%-1.50%	2.06%-2.21%	1.13%-1.54%
Expected dividend yield	—	—	—	—

Options Subject to Early Exercise

Prior to the IPO, at the discretion of the board of directors, certain options were exercisable immediately at the date of grant but subject to a repurchase right, under which the Company may buy back any unvested shares at their original exercise price in the event of an employee’s termination prior to full vesting. The consideration received for an exercise of an unvested option is considered to be a deposit of the exercise price and the related dollar amount is recorded as a liability. The liabilities are reclassified into equity as the awards vest. As of July 31, 2017 and January 31, 2017, the Company had $1.7 million and $2.2 million, respectively, recorded in accrued expenses and other current liabilities related to early exercises of options to acquire 323,574 and 467,180 shares of Class B common stock, respectively.

Restricted Stock Units

The Company granted 2,161,102 and 2,219,927 RSUs with an aggregate fair value of $50.6 million and $51.6 million in the three and six months ended July 31, 2017, respectively, of which all are unvested and outstanding as of July 31, 2017. As of July 31, 2017, there was $49.8 million of unrecognized compensation cost related to unvested RSUs, which is expected to be recognized over a weighted-average period of 3.8 years.

Equity Awards Issued in Connection with Business Combinations

In connection with the Stormpath transaction, the Company issued 800,000 shares of restricted common stock to Stormpath with an aggregate fair value of $8.6 million to be recognized as post combination stock-based compensation. The restricted common stock will vest ratably on the first and second anniversaries of the transaction date upon achievement of the respective performance conditions, including the continued employment of certain employees with the Company and the wind down of the Stormpath, Inc. entity. The stock-based compensation expense related to the restricted common stock has a requisite service period of two years and will be recognized using an accelerated attribution method due to the existence of performance conditions.

As of July 31, 2017, there was $5.7 million of unrecognized compensation expense related to restricted common stock which is expected to be recognized over the remaining weighted average life of 1.1 years. These shares of restricted common stock were separately authorized by the Company’s board of directors, and did not reduce the number of shares available for future issuance under the 2009 Plan or the 2017 Plan.

The Company separately entered into retention arrangements with certain employees of Stormpath and issued 598,500 restricted stock awards under the 2009 Plan with an aggregate fair value of $6.6 million with performance conditions, including continued employment of certain employees with the Company and the wind down of the Stormpath, Inc. entity. The restricted stock awards will vest ratably over two or three years from the transaction date. Additionally, the Company granted 518,900 service-based stock options under the 2009 Plan to certain Stormpath employees with an aggregate fair value of $2.5 million to vest ratably over the requisite four-year service period.

The restricted stock awards and stock options offered directly to Stormpath employees for employment with the Company are deemed replacement awards and a portion of such awards are considered compensation for pre-combination service. Of the $9.1 million total aggregate fair value of the awards, $1.5 million is related to pre-combination service and is recognized as goodwill and a reduction to the post-combination compensation expense. The post-combination expenses for the restricted stock awards and stock options are $5.5 million and $2.1 million, respectively. The expense related to the restricted stock awards will be recognized over two or three years based on an accelerated attribution method. The expense for the stock options will be recognized ratably over the requisite service period.

As of July 31, 2017, there was $4.0 million of unrecognized compensation expense related to unvested restricted stock awards, which is expected to be recognized over the remaining weighted average life of 1.6 years.

As of July 31, 2017, there was $1.9 million of unrecognized compensation cost related to unvested stock options, which is expected to be recognized over the remaining weighted average life of 2.5 years. The related stock options expense and activity are included within the Stock Options discussions above.

All of these shares are outstanding as of July 31, 2017.

Employee Stock Purchase Plan

In February 2017, the Company’s board of directors adopted, and in March 2017, the Company’s stockholders approved the 2017 Employee Stock Purchase Plan, or the ESPP, which became effective prior to the completion of the IPO. The ESPP initially reserves and authorizes the issuance of up to a total of 3,000,000 shares of Class A common stock to participating employees. Except for the initial offering period, the ESPP provides for 12-month offering periods beginning June 21 and December 21 of each year, and each offering period will consist of two six-month purchase periods. The initial offering period began April 7, 2017 and will end on June 20, 2018.

On each purchase date, eligible employees will purchase the shares at a price per share equal to 85% of the lesser of (1) the fair market value of our stock on the offering date or (2) the fair market value of our stock on the purchase date.

As of July 31, 2017, there was $8.6 million of unrecognized stock-based compensation expense related to the ESPP that is expected to be recognized over the remaining term of the initial offering period.

The Company estimated the fair value of ESPP purchase rights using a Black-Scholes option pricing model with the following assumptions:



	Three Months Ended July 31,	Six Months Ended July 31,
	2017	2017

	(unaudited)
Expected volatility	31.8%-34.2%	31.8%-37.4%
Expected term (in years)	0.5-1.0	0.5-1.2
Risk-free interest rate	1.12%-1.22%	0.95%-1.22%
Expected dividend yield	—	—