Equity-Based Compensation

2005 Common Membership Unit Plan

In 2005, Switch, Ltd. established the 2005 Common Membership Unit Plan (the “Unit Option Plan”) for the purpose of attracting and retaining the best available personnel for positions of substantial responsibility, to provide additional incentive to employees and consultants of Switch, and to promote the success of its business. All options granted under the Unit Option Plan were intended to be treated as non-statutory unit options under the Code. The term of each option was the term stated in the option agreement, which was no more than 10 years from the date of grant. Options exercised under the Unit Option Plan provided the purchaser with full rights equivalent to those of existing members and holders as of the date of exercise.

There were no unit options outstanding during the year ended December 31, 2019 and there were no unit options granted or vested during the years ended December 31, 2019, 2018, and 2017. Total aggregate intrinsic value of unit options exercised was $1.2 million and $0.9 million during the years ended December 31, 2018 and 2017, respectively.

Common Unit Awards

In 2012, Switch, Ltd. began issuing common unit awards (“Incentive Units”) containing a hurdle amount (similar to an exercise price) where employees benefited from any appreciation in the value of their awards above the hurdle amount under Switch, Ltd.’s then-current operating agreement. In connection with the effectiveness of the Switch Operating Agreement and closing of Switch, Inc.’s IPO, all outstanding Incentive Units, other than the unvested Common Unit awards discussed below, accelerated in full and were converted into Common Units after net settling the hurdle amount.

In September 2017, Switch, Ltd. granted 7.5 million Incentive Units to its Chief Executive Officer (the “CEO Award”) and 1.5 million Incentive Units to its President with a hurdle amount of $11.69 per Incentive Unit (the “President Award”). The CEO Award contained a provision that caused the Incentive Units underlying the CEO Award to convert into Common Units on a one-to-one basis in connection with the closing of Switch, Inc.’s IPO. In connection with the effectiveness of the Switch Operating Agreement and closing of Switch, Inc.’s IPO, the CEO Award converted into 7.5 million Common Units and the President Award converted into 472,000 Common Units after net settling the hurdle amount. If a forfeiture of unvested Common Units under the CEO Award and the President Award occurs, the associated shares of Class B common stock are also forfeited.

The summary of Common Unit activity under the Switch Operating Agreement for the year ended December 31, 2019 is presented below:



	Number of Units (in thousands)		Weighted Average Grant Date Fair Value per Unit
Unvested Common Units—January 1, 2019	3,986		$	11.11
Vested	(798	)	$	11.11
Unvested Common Units—December 31, 2019	3,188		$	11.11

The following additional disclosures are provided for awards under Switch, Ltd.’s then-current operating agreement for the periods prior to Switch, Inc.’s IPO and awards under the Switch Operating Agreement for the periods after Switch, Inc.’s IPO:



	Years Ended December 31,
	2019		2018		2017
Weighted average grant date fair value of Common Units	$	—	$	—	$	7.39
Total fair value of Common Units vested (in thousands)	$	9,423	$	10,659	$	1,115
Weighted average grant date fair value of Incentive Units	$	—	$	—	$	10.06
Total aggregate intrinsic value of Incentive Units converted into Common Units (in thousands)	$	—	$	—	$	318,033

The weighted average assumptions used in estimating the grant date fair value of Incentive Unit awards, exclusive of the CEO Award, are listed in the table below:



	Year Ended December 31, 2017
Expected volatility	29.3	%
Risk-free interest rate	1.4	%
Expected term (in years)	2.0
Dividend rate	0.6	%

As the CEO Award contained a provision that caused the Incentive Units underlying the CEO Award to convert into Common Units on a one-to-one basis in connection with the closing of Switch, Inc.’s IPO, the grant date fair value of the underlying units was $11.69 per unit.

As of December 31, 2019, total equity-based compensation cost related to all unvested Common Units was $9.6 million, which is expected to be recognized over a weighted average period of 1.78 years.

2017 Incentive Award Plan

In September 2017, Switch, Inc.’s Board of Directors adopted the 2017 Incentive Award Plan (the “2017 Plan”). The 2017 Plan, effective as of its adoption date, provides that the initial aggregate number of shares reserved and available for issuance is 25.0 million shares of Class A common stock plus an increase each January 1, beginning on January 1, 2018 and ending on and including January 1, 2027, equal to the lesser of (A) 17.0 million shares of Class A common stock, (B) 5% of the aggregate number of shares of Switch, Inc.’s Class A common stock, Class B common stock, and Class C common stock outstanding on the final day of the immediately preceding calendar year and (C) such smaller number of shares of Class A common stock as is determined by the Board of Directors. Effective January 1, 2019 and 2018, Switch, Inc.’s Board of Directors approved increases of 3.2 million shares and 7.9 million shares, respectively, in the aggregate number of shares of Class A common stock reserved and available for issuance under the 2017 Plan. These increases, and each annual increase thereafter, are subject to adjustment in the event of a stock split, stock dividend or other defined changes in Switch, Inc.’s capitalization.

The 2017 Plan allows for the grant of (i) stock options, including incentive stock options, (ii) stock appreciation rights, (iii) non-statutory stock options under the Code, (iv) restricted stock awards (“RSAs”), (v) restricted stock units (“RSUs”), or (vi) other stock or cash based awards as may be determined by the plan’s administrator from time to time. The term of each option award shall be no more than 10 years from the date of grant. Options exercised under the 2017 Plan provide the purchaser with full rights equivalent to those of existing Class A common stock holders and holders as of the date of exercise. The Company’s policy for issuing shares upon stock option exercise is to issue new shares of Class A common stock. Additionally, the Switch Operating Agreement states that Switch, Ltd. will maintain at all times a one-to-one ratio between the number of Common Units owned by Switch, Inc. and the number of outstanding shares of Class A common stock, including those issued as a result of stock option exercises and vesting of RSU awards.

The 2017 Plan also provides for dividend equivalent units (“DEUs”) based on the value of the dividends per share paid on the Company’s Class A common stock, which are accumulated on RSUs during the vesting period. The DEUs vest and will be settled with shares of the Company’s Class A common stock concurrently with the vesting of the associated RSUs based on the closing share price on the vesting date.

The summary of stock option activity under the 2017 Plan for the year ended December 31, 2019 is presented below:



	Number of Stock Options (in thousands)		Weighted Average Exercise Price per Stock Option		Weighted Average Remaining Contractual Life (Years)	Aggregate Intrinsic Value(in thousands)
Outstanding—January 1, 2019	7,352		$	14.16
Granted	1,217		$	10.66
Forfeited	(66	)	$	17.00
Expired	(161	)	$	17.00
Outstanding—December 31, 2019	8,342		$	13.57	8.08	$	21,430
Fully vested and expected to vest—December 31, 2019	8,342		$	13.57	8.08	$	21,430
Exercisable—December 31, 2019	5,561		$	16.06	7.58	$	4,092

The following additional disclosures are provided for stock options under the 2017 Plan:



	Years Ended December 31,
	2019		2018		2017
Weighted average grant date fair value	$	3.15	$	1.84	$	5.00
Total fair value of stock options vested (in thousands)	$	959	$	176	$	28,073

The weighted average assumptions used in estimating the grant date fair value of stock options are listed in the table below:



	Years Ended December 31,
	2019		2018		2017
Expected volatility	29.3	%	28.2	%	31.8	%
Risk-free interest rate	2.5	%	2.8	%	1.9	%
Expected term (in years)	6.3		5.9		5.0
Dividend rate	1.1	%	1.7	%	0.6	%

As of December 31, 2019, total equity-based compensation cost related to all unvested stock options was $5.2 million, which is expected to be recognized over a weighted average period of 2.79 years.

The summary of RSU activity, inclusive of DEU settlements, under the 2017 Plan for the year ended December 31, 2019 is presented below:



	Number of Units (in thousands)		Weighted Average Grant Date Fair Value per Unit
Unvested RSUs—January 1, 2019	2,789		$	14.93
Granted	1,555		$	9.12
Vested	(677	)	$	14.87
Forfeited	(359	)	$	12.01
Unvested RSUs—December 31, 2019	3,308		$	12.53

The following additional disclosures are provided for RSU awards under the 2017 Plan:



	Years Ended December 31,
	2019		2018		2017
Weighted average grant date fair value	$	9.12	$	15.03	$	18.01
Total fair value of shares vested (in thousands)	$	5,114	$	2,925	$	365

As of December 31, 2019, total equity-based compensation cost related to all unvested RSU awards was $29.9 million, which is expected to be recognized over a weighted average period of 2.48 years.

The summary of RSA activity under the 2017 Plan for the year ended December 31, 2019 is presented below:



	Number of Awards (in thousands)		Weighted Average Grant Date Fair Value per Award
Unvested RSAs—January 1, 2019	61		$	13.08
Granted	80		$	12.55
Vested	(61	)	$	13.08
Unvested RSAs—December 31, 2019	80		$	12.55

The following additional disclosures are provided for RSAs under the 2017 Plan:



	Years Ended December 31,
	2019		2018
Weighted average grant date fair value	$	12.55	$	13.08
Total fair value of shares vested (in thousands)	$	768	$	—

As of December 31, 2019, total equity-based compensation cost related to all unvested RSAs was $0.4 million, which is expected to be recognized over a weighted average period of 0.44 years.

Total equity-based compensation recognized on the consolidated statements of comprehensive income (loss) was as follows:



	Years Ended December 31,
	2019		2018		2017
	(in thousands)
Cost of revenue	$	1,491	$	1,468	$	1,289
Selling, general and administrative expense	28,033		34,265		83,501
Total equity-based compensation	$	29,524	$	35,733	$	84,790

Total income tax benefit related to equity-based compensation recognized on the consolidated statements of comprehensive income (loss) was $1.9 million, $1.5 million, and $0.4 million for the years ended December 31, 2019, 2018, and 2017, respectively.