9.	STOCKHOLDERS’ EQUITY AND STOCK-BASED 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 and restricted 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, an aggregate of 45,708,573 shares of common stock and 8,121,101 shares of restricted stock of Software.

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.

In conjunction with the 2014 Reorganization, unvested incentive units of Holdings were converted to shares of restricted stock of Software at various conversion ratios that ranged from 1:24 to 1:47. The conversion to restricted stock was determined based on the underlying conditions of the pre-conversion incentive units. The conversion to the grant-date fair values of restricted stock granted was determined by applying the applicable conversion ratio to the respective original grant-date fair value of incentive units granted. The following table presents a summary of the pre-conversion grant-date fair values of incentive units granted during 2013 and the related assumptions:

	Year Ended December 31, 2013
Grant-date fair value
Incentive units (converted to restricted stock as of January 1, 2014)	$0.11 - $0.92
Risk-free interest rates (based on 5 year U.S. Treasury Securities)	0.71% - 1.41%
Estimated volatility		50.0%
Expected life (in years)		5.0
Dividend yield	0%

Other than the shares of restricted stock issued in exchange for incentive units in connection with the 2014 Reorganization (“2014 Restricted Stock”), there were no new grants made during the year ended December 31, 2014. We did not receive any cash proceeds from the issuance of our restricted stock upon conversion of incentive units.

The shares of 2014 Restricted Stock were issued under the Paycom Software, Inc. 2014 Long-Term Incentive Plan (the “LTIP”) and were subject to either time-based vesting conditions or market-based vesting conditions. The market-based vesting conditions were based on our total enterprise value exceeding certain specified thresholds. Compensation expense related to the issuance of 2014 Restricted Stock 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 2014 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 2014 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 associated compensation expense, net of actual forfeitures, was $0.3 million. Total net compensation expense for the year ended December 31, 2014 was $0.7 million. The remaining 50% of the market-based restricted stock vested upon reaching a total enterprise value of $1.8 billion on March 2, 2015. Compensation expense, net of actual forfeitures, was $0.2 million for the year ended December 31, 2015 for the vesting of the 2014 Restricted Stock with market-based vesting conditions on March 2, 2015. The total net compensation expense for the vesting of 2014 Restricted Stock was $0.4 million for the year ended December 31, 2015.

With respect to 2014 Restricted Stock, there was $0.3 million and $0.7 million of total unrecognized compensation cost related to unvested time-based restricted stock outstanding as of December 31, 2015 and 2014, respectively. The unrecognized compensation cost is expected to be recognized over a weighted average period of 1.9 years as of December 31, 2015.

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 (“2015 Restricted Stock”) under 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 2015 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 life 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 our common stock exists. We are required to estimate forfeitures and only record compensation costs for those awards that are expected to vest. The following table presents a summary of the grant-date fair values of 2015 Restricted Stock granted during the year ended December 31, 2015 and the related assumptions:

Years Ended December 31,	2015
Grant-date fair value
Restricted stock	$21.76 - $33.33
Risk-free interest rate (based on 10 year U.S. Treasury Securities)		2%
Estimated volatility		26.0%
Expected life (in years)		3.6
Dividend yield	0%

Shares of 2015 Restricted Stock with market-based vesting conditions will vest 50% when we reach a total enterprise value of $2.65 billion and 50% when we reach a total enterprise value of $3.5 billion. Shares of 2015 Restricted Stock with time-based vesting conditions will vest over periods of three or five years. Compensation expense for 2015 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 2015 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 2015 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 2015 Restricted Stock was $2.6 million for the year ended December 31, 2015. With respect to 2015 Restricted Stock, there was $16.1 million of unrecognized compensation cost, net of estimated forfeitures, related to unvested restricted stock outstanding as of December 31, 2015. The unrecognized compensation cost is expected to be recognized over a weighted average period of 2.1 years as of December 31, 2015. At December 31, 2015, there were 2,566,623 shares authorized for future issuance under the LTIP.

The capitalized stock-based compensation expense related to software developed for internal use of $0.2 million and $4 thousand for the years ended December 31, 2015 and 2014, respectively, was included in software and capitalized software costs in “Property and equipment, net” in our consolidated balance sheets as of December 31, 2015 and 2014.

The following table presents stock-based compensation expense resulting from employee incentive stock arrangements and is presented in the following line items in the accompanying consolidated statements of income for the years ended December 31, 2015, 2014 and 2013 (in thousands):

Years Ended December 31,	2015		2014		2013
Operating expense	$	235	$	32	$	222
Sales and marketing		559	166		114
Research and development		104	16		345
General and administrative		2,112	498		253
Total stock-based compensation expense	$	3,010	$	712	$	934

The following table presents a summary of the activity related to restricted stock for the year ended December 31, 2015:

Year ended December 31, 2015	Number of shares			Weighted average grant- date fair value (in dollars)
Restricted stock outstanding at January 1, 2015		4,540,020		$	0.24
2015 Restricted Stock granted		741,931			27.65
2014 Restricted Stock vested		(3,287,091	)		0.20
2014 Restricted Stock forfeited		(7,215	)		0.48
2015 Restricted Stock forfeited		(7,805	)		30.95
Restricted stock outstanding at December 31, 2015		1,979,840			10.45