4. Stockholders’ Equity

Preferred Stock

We are authorized to issue up to 15,000,000 shares of “blank check” Preferred Stock. As of December 31, 2018, there were no shares of Preferred Stock outstanding. We have designated Series C Junior Participating Preferred Stock but have no issued or outstanding shares as of December 31, 2018.

Common Stock

At December 31, 2018 and 2017, we had 300,000,000 shares of common stock authorized, of which 137,928,828 and 124,976,373 were issued and outstanding, respectively. As of December 31, 2018, total common shares reserved for future issuance were 14,839,373.

During the years ended December 31, 2018, 2017 and 2016, we issued 1,451,000, 1,709,000 and 1,285,000 shares of common stock, respectively, for stock option exercises, vesting of restricted stock units, and ESPP purchases. We received net proceeds from these transactions of $27.9 million, $22.9 million and $13.7 million in 2018, 2017 and 2016, respectively.

Stock Plans

1989 Stock Option Plan

In June 1989, our Board of Directors adopted, and the stockholders subsequently approved, a stock option plan that, as amended, provides for the issuance of non-qualified and incentive stock options for the purchase of up to 20,000,000 shares of common stock to our employees, directors, and consultants. The plan expires in January 2024. The 1989 Plan does not allow us to grant stock bonuses or restricted stock awards and prohibits us from repricing any options outstanding under the plan unless our stockholders approve the repricing. Options vest over a four-year period, with 25 percent exercisable at the end of one year from the date of the grant and the balance vesting ratably, on a monthly basis, thereafter and have a term of seven years. At December 31, 2018, a total of 848,753 options were outstanding, of which options to purchase 831,656 shares were exercisable, and 42,925 shares were available for future grant under the 1989 Plan.

2011 Equity Incentive Plan

In March 2011, our Board of Directors adopted, and the stockholders subsequently approved, a stock option plan that provides for the issuance of stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards, and performance cash awards to our employees, directors, and consultants. In June 2015 and in May 2017, after receiving approval from our stockholders, we amended our 2011 Equity Incentive Plan to increase the total number of shares reserved for issuance. We increased the shares available under our 2011 Equity Incentive Plan from 5,500,000 to 11,000,000 in June 2015 and from 11,000,000 to 16,000,000 in May 2017. The plan expires in June 2021. The 2011 Plan does not allow us to reduce the exercise price of any outstanding stock options or stock appreciation rights or cancel any outstanding stock options or stock appreciation rights that have an exercise price or strike price greater than the current fair market value of the common stock in exchange for cash or other stock awards unless our stockholders approve such action. Currently we anticipate awarding only options and restricted stock unit awards to our employees, directors and consultants. Under the 2011 Plan, stock options cannot vest in a period of less than two years and restricted stock unit awards cannot vest in a period of less than three years. We have granted restricted stock unit awards to our employees under the 2011 Plan which vest annually over a four-year period. At December 31, 2018, a total of 9,705,441 options were outstanding, of which 4,801,904 were exercisable, 1,183,154 restricted stock unit awards were outstanding, and 3,340,351 shares were available for future grant under the 2011 Plan.

Under the 2011 Plan, we may issue a stock award with additional acceleration of vesting and exercisability upon or after a change in control. In the absence of such provisions, no such acceleration will occur. The stock options and restricted stock unit awards we issue to our chief executive officer and issued to B. Lynne Parshall in her former role as chief operating officer will accelerate upon a change of control, as defined in the 2011 Plan. In addition, we implemented a change of control and severance benefit plan that provides for change of control and severance benefits to our executive officers, including our chief executive officer and chief financial officer. If we terminate one of our executive officers or if an executive officer resigns for good reason during the period that begins three months before and ends twelve months following a change in control of the company, the impacted executive officers’ stock options and RSUs vesting will accelerate for options and RSUs outstanding as of the termination date.

Corporate Transactions and Change in Control under 2011 Plan

In the event of certain significant corporate transactions, our Board of Directors has the discretion to take one or more of the following actions with respect to outstanding stock awards under the 2011 Plan:

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arrange for assumption, continuation, or substitution of a stock award by a surviving or acquiring entity (or its parent company);

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arrange for the assignment of any reacquisition or repurchase rights applicable to any shares of our common stock issued pursuant to a stock award to the surviving or acquiring corporation (or its parent company);

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accelerate the vesting and exercisability of a stock award followed by the termination of the stock award;

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arrange for the lapse of any reacquisition or repurchase rights applicable to any shares of our common stock issued pursuant to a stock award;

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cancel or arrange for the cancellation of a stock award, to the extent not vested or not exercised prior to the effective date of the corporate transaction, in exchange for cash consideration, if any, as the Board, in its sole discretion, may consider appropriate; and

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arrange for the surrender of a stock award in exchange for a payment equal to the excess of (a) the value of the property the holder of the stock award would have received upon the exercise of the stock award, over (b) any exercise price payable by such holder in connection with such exercise.

2002 Non-Employee Directors’ Stock Option Plan

In September 2001, our Board of Directors adopted, and the stockholders subsequently approved, an amendment and restatement of the 1992 Non-Employee Directors’ Stock Option Plan, which provides for the issuance of non-qualified stock options and restricted stock units to our non-employee directors. The name of the resulting plan is the 2002 Non-Employee Directors’ Stock Option Plan, or the 2002 Plan. In June 2015, after receiving approval from our stockholders, we amended our 2002 Non-Employee Directors Stock Option Plan to increase the total number of shares reserved for issuance. We increased the shares available under our 2002 Non-Employee Directors Stock Option Plan from 1,200,000 to 2,000,000. Options under this plan expire ten years from the date of grant. Options granted become exercisable in four equal annual installments beginning one year after the date of grant. At December 31, 2018, a total of 757,750 options were outstanding, of which 437,750 were exercisable, 63,099 restricted stock unit awards were outstanding, and 420,762 shares were available for future grant under the 2002 Plan.

Employee Stock Purchase Plan

In June 2009, our Board of Directors adopted, and the stockholders subsequently approved, the amendment and restatement of the ESPP and we reserved an additional 150,000 shares of common stock for issuance thereunder. In each of the subsequent years, we reserved an additional 150,000 shares of common stock for the ESPP resulting in a total of 3,674,596 shares authorized under the plan as of December 31, 2018. The ESPP permits full-time employees to purchase common stock through payroll deductions (which cannot exceed 10 percent of each employee’s compensation) at the lower of 85 percent of fair market value at the beginning of the purchase period or the end of each six-month purchase period. Under the amended and restated ESPP, employees must hold the stock they purchase for a minimum of six months from the date of purchase. During 2018, employees purchased and we issued to employees 43,416 shares under the ESPP at a weighted average price of $39.03 per share. At December 31, 2018, there were 774,816 shares available for purchase under the ESPP.

Stock Option Activity

The following table summarizes the stock option activity under our stock plans for the year ended December 31, 2018 (in thousands, except per share and contractual life data):

	Number of Shares			Weighted Average Exercise Price Per Share		Average Remaining Contractual Term (Years)		Aggregate Intrinsic Value
Outstanding at December 31, 2017		9,397		$	44.52
Granted		3,518		$	48.40
Exercised		(1,064	)	$	17.78
Cancelled/forfeited/expired		(540	)	$	52.47
Outstanding at December 31, 2018		11,311		$	47.85		4.41	$	93,663
Exercisable at December 31, 2018		6,071		$	46.83		3.22	$	63,756

The weighted-average estimated fair values of options granted were $25.49, $25.42 and $26.72 for the years ended December 31, 2018, 2017 and 2016, respectively. The total intrinsic value of options exercised during the years ended December 31, 2018, 2017 and 2016 were $34.8 million, $49.5 million and $28.0 million, respectively, which we determined as of the date of exercise. The amount of cash received from the exercise of stock options was $18.9 million, $21.2 million and $12.6 million for the years ended December 31, 2018, 2017 and 2016, respectively. For the year ended December 31, 2018, the weighted-average fair value of options exercised was $50.50. As of December 31, 2018, total unrecognized compensation cost related to non-vested stock-based compensation plans was $118.3 million. We will adjust the total unrecognized compensation cost for future changes in estimated forfeitures. We expect to recognize this cost over a weighted average period of 1.2 years.

Restricted Stock Unit Activity

The following table summarizes the RSU activity for the year ended December 31, 2018 (in thousands, except per share data):

	Number of Shares			Weighted Average Grant Date Fair Value Per Share
Non-vested at December 31, 2017		863		$	49.55
Granted		789		$	51.06
Vested		(324	)	$	50.21
Cancelled/forfeited		(82	)	$	51.59
Non-vested at December 31, 2018		1,246		$	50.20

For the years ended December 31, 2018, 2017 and 2016, the weighted-average grant date fair value of RSUs granted was $51.06, $48.88 and $41.79 per RSU, respectively. As of December 31, 2018, total unrecognized compensation cost related to RSUs was $27.9 million. We will adjust the total unrecognized compensation cost for future changes in estimated forfeitures. We expect to recognize this cost over a weighted average period of 1.4 years.

Stock-based Compensation Expense and Valuation Information

The following table summarizes stock-based compensation expense for the years ended December 31, 2018, 2017 and 2016 (in thousands), which was allocated as follows and includes $44.3 million, $17.5 million and $10.1 million of stock-based compensation expense for Akcea employees in 2018, 2017 and 2016, respectively:

	Year Ended December 31,
	2018		2017		2016
Cost of products sold	$	160	$	—	$	—
Research, development and patent		76,557		64,521		55,099
Selling, general and administrative		54,595		21,454		17,009
Total	$	131,312	$	85,975	$	72,108

Determining Fair Value

Valuation. We measure stock-based compensation expense for equity-classified awards, principally related to stock options, RSUs, and stock purchase rights under the ESPP at the grant date, based on the estimated fair value of the award and we recognize the expense over the employee’s requisite service period. We value RSUs based on the market price of our common stock on the date of grant.

We use the Black-Scholes model to estimate the fair value of stock options granted and stock purchase rights under our ESPP. The expected term of stock options granted represents the period of time that we expect them to be outstanding. We estimate the expected term of options granted based on actual and projected exercise patterns. We recognize compensation expense for stock options granted, RSUs, and stock purchase rights under the ESPP using the accelerated multiple-option approach. Under the accelerated multiple-option approach (also known as the graded-vesting method), we recognize compensation expense over the requisite service period for each separately vesting tranche of the award as though the award were in substance multiple awards, which results in the expense being front-loaded over the vesting period.

For the years ended December 31, 2018, 2017 and 2016, we used the following weighted-average assumptions in our Black-Scholes calculations:

Employee Stock Options:

	December 31,
	2018			2017			2016
Risk-free interest rate		2.4	%		1.8	%		1.5	%
Dividend yield		0.0	%		0.0	%		0.0	%
Volatility		63.0	%		65.9	%		58.7	%
Expected life	4.6 years			4.5 years			4.5 years

Board of Director Stock Options:

	December 31,
	2018			2017			2016
Risk-free interest rate		2.8	%		2.2	%		1.3	%
Dividend yield		0.0	%		0.0	%		0.0	%
Volatility		61.5	%		61.2	%		53.1	%
Expected life	6.6 years			6.6 years			6.5 years

ESPP:

	December 31,
	2018			2017			2016
Risk-free interest rate		1.8	%		0.8	%		0.4	%
Dividend yield		0.0	%		0.0	%		0.0	%
Volatility		47.3	%		59.9	%		86.4	%
Expected life	6 months			6 months			6 months

Risk-Free Interest Rate. We base the risk-free interest rate assumption on observed interest rates appropriate for the term of our stock option plans or ESPP.

Dividend Yield. We base the dividend yield assumption on our history and expectation of dividend payouts. We have not paid dividends in the past and do not expect to in the future.

Volatility. We use an average of the historical stock price volatility of our stock for the Black-Scholes model. We computed the historical stock volatility based on the expected term of the awards.

Expected Life. The expected term of stock options we have granted represents the period of time that we expect them to be outstanding. We estimated the expected term of options we have granted based on actual and projected exercise patterns.

Forfeitures. We reduce stock-based compensation expense for estimated forfeitures. We estimate forfeitures at the time of grant and revise, if necessary, in subsequent periods if actual forfeitures differ from those estimates. We estimate forfeitures based on historical experience. Our historical forfeiture estimates have not been materially different from our actual forfeitures.

In addition to our stock plans, Akcea has its own stock plan under which it grants options and RSUs and under which it derives its stock-based compensation expense. The following are the weighted-average Black-Scholes assumptions Akcea used under its plan for the years ended December 31, 2018, 2017 and 2016:

Employee Stock Options:

	December 31,
	2018			2017			2016
Risk-free interest rate		2.8	%		1.9	%		1.6	%
Dividend yield		0.0	%		0.0	%		0.0	%
Volatility		77.1	%		79.5	%		71.4	%
Expected life	6.08 years			6.06 years			6.08 years

Board of Director Stock Options:

	December 31,
	2018			2017			2016
Risk-free interest rate		2.9	%		1.9	%		2.0	%
Dividend yield		0.0	%		0.0	%		0.0	%
Volatility		78.2	%		79.4	%		79.6	%
Expected life	6.42 years			6.25 years			6.08 years

The following summarizes the Black-Scholes input methodology for Akcea options that differs from the methodology we use for Ionis options:

Volatility. Since Akcea does not have sufficient history to estimate the volatility of its common stock, Akcea calculates its expected volatility based on a blend of its historical volatility and reported data from selected publicly traded peer companies for which historical information is available. Akcea plans to continue to use this blend to calculate its volatility until the historical volatility of its common stock is sufficient to measure expected volatility for future option grants.

Expected Life. Since Akcea does not have sufficient historical information, it uses the simplified method for estimating its expected term. Under the simplified method Akcea calculates its expected term as the average time-to-vesting and the contractual life of the options. As Akcea gains additional historical information, it will transition to calculating its expected term based on its exercise patterns.