9.	STOCKHOLDERS’ EQUITY AND INCENTIVE COMPENSATION

On January 1, 2014, we consummated the 2014 Reorganization, pursuant to which (i) affiliates of WCAS contributed WCAS Holdings and CP IV Blocker, which collectively owned all of the Series A Preferred Units of Holdings, to Software in exchange for shares of common stock of Software and (ii) the owners of outstanding Series B Preferred Units of Holdings contributed their Series B Preferred Units of Holdings to Software in exchange for shares of common stock of Software. Immediately after these contributions, Merger Sub merged with and into Holdings with Holdings surviving the merger. Upon consummation of the merger, the remaining holders of outstanding common and incentive units of Holdings received shares of common stock of Software for their common and incentive units by operation of Delaware law and Holdings’ ownership interest in Software was cancelled. Outstanding common units, Series B Preferred Units and WCAS Holdings and CP IV Blocker were contributed to Software in exchange for, or converted into, 45,708,573 shares of common stock and 8,121,101 shares of restricted stock of Software.

The shares of restricted stock were issued subject to various vesting conditions. A portion of the restricted stock was subject to time-based vesting conditions, while a portion was subject to market-based vesting conditions. The market-based vesting conditions were based on our total enterprise value exceeding certain specified thresholds. Following these transactions, all outstanding Series C Preferred Units were eliminated in an intercompany transaction between Holdings and WCAS Holdings, and we assumed the 2017 Note. As a result of the 2014 Reorganization, we recorded a one-time reclassification of $29.3 million of accumulated deficit to additional paid in capital on January 1, 2014. Following the 2014 Reorganization, Software became a holding company with its principal assets being the Series B Preferred Units of Holdings and the outstanding capital stock of WCAS Holdings and CP IV Blocker.

Compensation expense for restricted stock awards with time-based vesting conditions was measured based on the fair value of the award on the grant date and recognized over the requisite service period on a straight-line basis. Compensation expense relating to the issuance of restricted stock with market-based vesting conditions was measured based upon the fair value of the award on the grant date and recognized on a straight-line basis over the vesting period based upon the probability that the vesting conditions would be met. For restricted stock with market-based vesting conditions, 50% of the restricted stock vested upon reaching a total enterprise value of $1.4 billion on December 1, 2014 and the remaining 50% of the restricted stock vested upon reaching a total enterprise value of $1.8 billion on March 2, 2015. The associated compensation expense adjusted for actual forfeitures was $0.2 million for the nine months ended September 30, 2015 for the vesting of the restricted stock with market-based vesting conditions on March 2, 2015. The total net compensation expense for the vesting of the restricted stock with time and market-based vesting conditions was $0.3 million for the nine months ended September 30, 2015.

There was $0.3 million and $0.7 million of total unrecognized compensation cost related to unvested time-based restricted stock outstanding as of September 30, 2015 and December 31, 2014, respectively. The unrecognized compensation cost is expected to be recognized over a weighted average period of 2.1 years as of September 30, 2015.

On May 5, 2015, our stockholders approved the Paycom Software, Inc. Annual Incentive Plan (the “Incentive Plan”). The Incentive Plan provides for the payment of incentive compensation that is not subject to certain federal income tax deduction limitations. Participation in the Incentive Plan is limited to certain of our employees designated by the Compensation Committee of the Board of Directors.

On July 8, 2015, we issued an aggregate of 741,931 shares of restricted stock to each of our executive officers and certain non-executive employees under the Paycom Software, Inc. 2014 Long-Term Incentive Plan (the “LTIP”), of which 477,200 shares are subject to market-based vesting conditions and 264,731 shares are subject to time-based vesting conditions. The fair value of each share of restricted stock with market-based vesting conditions is estimated on the grant date using a Monte Carlo simulation model. This model considers a range of assumptions related to volatility, risk-free interest rate, expected term and expected dividend yield. Expected volatilities used in the model are based on historical volatilities of comparable guideline companies until a sufficient trading history in the Company’s common stock exists. The annual volatility assumed in the model was 26%. An expected dividend yield of 0% is applied given that the Company has not paid any dividends. The risk-free interest rate of 2.2% is derived from the implied yield available on 10 year U.S. Treasury securities with a remaining term equivalent to that of the applicable shares as of the valuation date. The expected term represents the period that the applicable shares of restricted stock are expected to be outstanding. The Company determined the expected term assumption based on the vesting terms and contractual terms of the restricted stock. The Company is required to estimate forfeitures and only record compensation costs for those awards that are expected to vest.

Restricted stock with market-based vesting conditions will vest 50% when the Company reaches a total enterprise value of $2.65 billion and 50% when the Company reaches a total enterprise value of $3.5 billion. Restricted stock with time-based vesting conditions will vest over periods of three or five years. Compensation expense for restricted stock awards with time-based vesting conditions was measured based on the fair value of the underlying shares of restricted stock on the grant date (which was equal to the closing price of our common stock of $33.33 on the grant date) and will be recognized over the requisite service periods on a straight-line basis. Compensation expense for restricted stock awards with market-based vesting conditions was measured based on the fair value of the underlying shares of restricted stock on the grant date, which was $21.76 or $27.24 depending on the enterprise value target. Compensation expense for restricted stock with market-based vesting conditions will be recognized on a straight-line basis over the requisite service period of 2.3 to 4.2 years. Our compensation expense related to the LTIP was $1.4 million for both the three and nine months ended September 30, 2015. There was $17.1 million of unrecognized compensation cost, net of estimated forfeitures, related to unvested restricted stock outstanding as of September 30, 2015. The unrecognized compensation cost is expected to be recognized over a weighted average period of 2.2 years as of September 30, 2015.

We do not receive any cash proceeds from the vesting of our restricted stock. The capitalized cash stock-based compensation expense related to software developed for internal use of $31 thousand for the nine months ended September 30, 2015 and $4 thousand for the year ended December 31, 2014, was included in software and capitalized software costs in “Property and equipment, net” in our Condensed Consolidated Balance Sheets as of September 30, 2015 and December 31, 2014, respectively.