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STOCK-BASED COMPENSATION | 12 Months Ended
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Dec. 31, 2023
Equity [Abstract] |
STOCK-BASED COMPENSATION | STOCK-BASED COMPENSATION Prior to the IPO, the Company granted options to purchase shares of the Company’s common stock and restricted stock units (“RSU”) in respect of shares of the Company’s common stock to employees, directors and consultants under the Company’s 2011 Equity Incentive Plan. In July 2021, Duolingo adopted the 2021 Incentive Award Plan (“2021 Plan”) and the 2021 Employee Stock Purchase Plan (“ESPP”), each of which became effective on July 26, 2021 in connection with the IPO. An aggregate of 7,946 shares and 1,119 shares of Class A common stock were made available for future issuance under the 2021 Plan and ESPP, respectively. On each January 1, the number of shares of the Company’s Class A common stock available for issuance under the 2021 Plan have been, and through January 1, 2031, will be, increased by the lesser of (i) 5% of the shares outstanding on the preceding December 31 (calculated on an as-converted basis) and (ii) such smaller number of shares of common stock as determined by the Board or the Committee (as defined in the 2021 Plan). On January 1, 2024, the 2021 Plan was increased by 2,126 shares of common stock. The Board waived the 2024 automatic annual increase of shares available for future issuance under the ESPP and the Company intends to waive such automatic annual increase for all applicable future periods. The Company’s stock options vest based on terms in the stock option agreements, which generally provide for vesting over four years based on continued service to the Company and its subsidiaries. Each option has a term of ten years. Stock options granted under the 2021 Plan must generally have an exercise price of not less than the estimated fair market value of the underlying Class A common stock at the date of the grant. No options have been granted under the 2021 Plan. A summary of stock option activity under the Plans was as follows:
(In thousands, except prices and years) | Number of options |  | Weighted- average exercise price |  | Weighted- average remaining contractual life (years) |  | Aggregate intrinsic value
Options outstanding at January 1, 2023 | 4,410 |  |  | $ | 14.04 |  |  | 6.25 |  | $ | 251,832 |
Granted (1) | — |  |  |  |  |  |  |
Exercised | (1,396) |  |  | 9.76 |  |  |  |  |
Forfeited and expired | (29) |  |  | 14.09 |  |  |  |  |
Options outstanding at December 31, 2023 | 2,985 |  |  | $ | 16.04 |  |  | 5.60 |  | $ | 629,865 |
Options exercisable at December 31, 2023 | 2,817 |  |  | $ | 15.54 |  |  | 5.54 |  | $ | 594,157 |
________________ (1) There were no stock options granted during the years ended December 31, 2023 and 2022. The total intrinsic value of options exercised was approximately $192,456, $140,884 and $194,513 for the periods ended December 31, 2023, 2022 and 2021, respectively. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:
| 2023 |  | 2022 |  | 2021
Risk-free interest rate | n/a |  | n/a |  | 1.04 – 1.14%
Expected life | n/a |  | n/a |  | 5.90 years
Expected volatility | n/a |  | n/a |  | 48.90 – 49.12%
Dividend yield | n/a |  | n/a |  | —%
Fair value of common stock | n/a |  | n/a |  | $38.08 – $52.80
The risk-free interest rate is based on the U.S. treasury yield curve in effect as of the grant date. When establishing the expected life assumptions, the Company annually reviews historical employee exercise behavior of option grants and other economic data impacting the period the stock options are expected to remain outstanding. Expected volatility is determined using a benchmark index of similar public companies. The Company based the assumed dividend yield on its expectation of not paying dividends in the foreseeable future. Because the Company’s common stock was not yet publicly traded at the time the options were granted, the Company estimated the fair value of common stock. The Board estimated the fair value of the common stock at the time awards were granted based on factors such as valuations of comparable companies, the status of the Company’s development and sales efforts, revenue growth, and additional objective and subjective factors relating to the Company’s business. A summary of RSU activity under the Plans was as follows:
(In thousands, except prices) | Restricted stock units |  | Weighted- average grant date fair value per share
Outstanding at January 1, 2023 | 2,036 |  |  | $ | 85.74 |
Granted | 873 |  |  | 138.99 |
Released | (673) |  |  | 89.58 |
Forfeited | (209) |  |  | 96.23 |
Outstanding at December 31, 2023 | 2,027 |  |  | $ | 106.32 |
Prior to July 30, 2021, no stock-based compensation expense had been recognized for RSUs because the liquidity-based vesting condition had not been probable of being satisfied. Upon the IPO, the liquidity-based vesting condition was met and $2,035 of stock-based compensation expense was recognized related to these awards. As of December 31, 2023, there was approximately $1,393 of unrecognized compensation cost related to stock options granted under the plans with a weighted-average period of approximately seven months. The amount of unrecognized compensation expense for RSUs as of December 31, 2023 was $200,433 with a weighted-average period of approximately three years. Total unrecognized compensation expense as of December 31, 2023 was $201,826. There were 9,404 shares available for grant at December 31, 2023. Performance-based RSUs In June 2021, the Company granted an aggregate of 1,800 performance-based RSUs (the “Founder Awards”) to the Company’s founders. The Founder Awards vest upon the satisfaction of both a service-based condition and a performance-based condition and generally are settled one year after vesting. The service-based condition is satisfied as to 25% of the Founder Awards on each anniversary of the IPO on July 27, 2021, subject to the continuous service of the founders through the applicable date. The performance-based condition will be satisfied with respect to each of 10 equal tranches only if the trailing 60-calendar day volume-weighted-average closing trading price of the Company’s Class A common stock reaches certain stock-price hurdles for each such tranche, as set forth below, over a period of 10 years from the date of grant. Any RSUs associated with stock-prices hurdle not achieved by the tenth anniversary of the date of grant will terminate and be canceled for no additional consideration to the founders. The stock-price hurdles and number of RSUs eligible to vest will be adjusted to reflect any stock splits, stock dividends, combinations, reorganizations, reclassifications, or similar events under the 2021 Plan. The Founder Awards will be settled in shares of the Company’s Class B common stock.
Tranche |  | Company Stock Price Hurdle |  | Number of RSUs Eligible to Vest
1 |  | $ | 127.50 |  |  | 90 |
2 |  | $ | 153.00 |  |  | 90 |
3 |  | $ | 178.50 |  |  | 90 |
4 |  | $ | 204.00 |  |  | 180 |
5 |  | $ | 255.00 |  |  | 180 |
6 |  | $ | 306.00 |  |  | 180 |
7 |  | $ | 357.00 |  |  | 180 |
8 |  | $ | 408.00 |  |  | 180 |
9 |  | $ | 612.00 |  |  | 270 |
10 |  | $ | 816.00 |  |  | 360 |
The Company estimated the grant date fair value of the Founder Awards using a model based on multiple stock-price paths developed through the use of a Monte Carlo simulation that incorporates into the valuation the possibility that the stock-price hurdles may not be satisfied. The weighted-average grant date fair value of the Founder Awards was estimated to be $61.56 per share using the below inputs.
Input | Assumption
Valuation Date | June 28, 2021
Risk-free interest rate | 1.48%
Expected life | 9.98
Expected volatility | 51.67%
Dividend yield | 0.00%
Fair value of common stock | $95.00
The Company estimates that it will recognize total stock-based compensation expense of approximately $110,817 over the derived service period of each of the ten separate tranches which is between 3.58 – 5.92 years. If the stock-price hurdles are met sooner than the requisite service period, the stock-based compensation expense will be adjusted to prospectively recognize the remaining expense over the remaining derived service period. Provided that the founders continue to provide services to the Company, stock-based compensation expense is recognized over the derived service period, regardless of whether the stock-price hurdles are achieved. The stock-price hurdles for the first two tranches were met during 2021. With respect to these two tranches in combination, the service-based condition was satisfied during the three months ended September 30, 2023. Of the 180 shares underlying RSUs released, an aggregate of 96 shares were disbursed to the founders in a net-share settlement, and 84 shares were withheld by the Company to cover the founders’ tax withholding obligations. The shares withheld by the Company were added to the shares of Class A common stock available for issuance under the 2021 Plan. The stock-price hurdles for the third and fourth tranches were met during the three months ended December 31, 2023. As of the date of this Annual Report on Form 10-K, no additional stock-price hurdles have been met. The Company recognized $26,622, $30,997 and $16,463 for the years ended December 31, 2023, 2022 and 2021 respectively, which is included within General and administrative in the Consolidated Statements of Operations and Comprehensive Income (Loss). As of December 31, 2023, there is $36,735 of unrecognized compensation expense related to these awards. In February 2021, the Company initiated a tender offer which allowed employees to sell up to 10% of their vested options or shares back to the Company at a selling price of $59.77, which was above fair market value of $38.08. The Company paid $13,479 and incurred $5,275 of additional compensation expense related to this tender representing the difference between the aggregate selling price and fair market value of the options and shares sold, and a $7,335 decrease to Additional paid-in capital. As a result of this tender, 220 options were put back into the option pool and 23 shares were retired with an $868 decrease to Additional paid-in capital. Upon the IPO, vesting of stock option grants to certain executive officers were accelerated, which resulted in an additional $5,574 of compensation expense during the year ended December 31, 2021. This is included within General and administrative in the Consolidated Statements of Operations and Comprehensive Income (Loss). Total stock-based compensation expense was $95,221, $73,820 and $40,804 for the years ended December 31, 2023, 2022 and 2021, respectively. Stock based compensation expense is included in the Consolidated Statements of Operations and Comprehensive Income (Loss) as shown in the following table:
|  | Year Ended December 31,
(In thousands) |  |  |  | 2023 |  | 2022 |  | 2021
Cost of revenues |  |  |  | $ | 55 |  |  | $ | 38 |  |  | $ | 8 |
Research and development |  |  |  | 45,119 |  |  | 26,373 |  |  | 9,298 |
Sales and marketing |  |  |  | 3,908 |  |  | 2,540 |  |  | 881 |
General and administrative |  |  |  | 46,139 |  |  | 44,869 |  |  | 30,617 |
Total |  |  |  | $ | 95,221 |  |  | $ | 73,820 |  |  | $ | 40,804 |
Nominal amounts of stock based compensation expense is capitalized into intangible assets for the years ended December 31, 2023, 2022 and 2021.

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