Note 8 ̶ Stock-based compensation

Early exercise of stock options

Stock options granted pursuant to the Company’s 2014 Equity Incentive Plan permit certain management-level option holders and directors to elect to exercise unvested options prior to vesting (“early exercise”). In the event of termination of the option holder’s employment or directorship, all unvested shares issued upon the early exercise, so long as they remain unvested, are subject to repurchase by the Company at the lower of the original exercise price or the fair market value of a share of common stock on the date of termination.

Consistent with authoritative guidance, early exercises are not considered substantive exercises for accounting purposes. Cash received for the exercise of unvested options is recorded as a liability, which is released to additional paid-in capital at each reporting date as the shares vest. A total of 1,522,826 shares subject to early exercised options vested during the nine months ended September 30, 2017 and the associated deposit liability of $4.1 million was reclassified to additional paid-in capital. As of September 30, 2017, no early exercised options remain unvested.

Stock options

Service-based vesting options

The following table summarizes the activity for options that vest solely based upon the satisfaction of a service condition for the nine months ended September 30, 2017:

	Options outstanding			Weighted-average exercise price		Weighted-average remaining contractual life (in years)		Aggregate intrinsic values (in thousands)
Balance as of December 31, 2016		3,168,967		$	8.55
Granted		205,300			26.53
Exercised		(379,214	)		1.94
Forfeited		(141,331	)		17.58
Balance as of September 30, 2017		2,853,722		$	10.28		8.13	$	35,748

Exercisable, September 30, 2017		1,098,328		$	4.67		6.94	$	19,637

The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the fair market value of a share of common stock of $22.55 on September 30, 2017.

Stock-based compensation cost related to service-based vesting options was $0.7 million and $1.8 million in the three and nine months ended September 30, 2017, respectively, and $2.6 million and $3.7 million in the three and nine months ended September 30, 2016, respectively. As of September 30, 2017, there was $8.3 million in unrecognized stock-based compensation cost related to unvested service-based stock options, which is expected to be recognized over a weighted-average period of 3.2 years.

All stock-based compensation expense is recorded in selling, general and administrative expenses.

Performance-based and market-based vesting options

The following table summarizes the activity for options that vest based upon the satisfaction of performance or market conditions for the nine months ended September 30, 2017:

	Options outstanding			Weighted-average exercise price		Weighted-average remaining contractual life (in years)		Aggregate intrinsic values (in thousands)
Balance as of December 31, 2016		3,836,107		$	2.46
Granted		463,200			27.02
Exercised		(1,711,381	)		2.71
Forfeited		(43,350	)		27.29
Balance as of September 30, 2017		2,544,576		$	6.33		7.56	$	43,083

The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the fair market value of a share of common stock of $22.55 on September 30, 2017.

Prior to the initial public offering, the Company granted options that vested based upon the achievement of both a performance and market condition. The performance condition was based on the occurrence of a liquidity event, and was satisfied in connection with the initial public offering in September 2016. The market condition was based upon the achievement of a minimum rate of return from the liquidity event, and was satisfied in March 2017. Accordingly, all such outstanding options vested in March 2017.

In February 2017, the Company granted options that vest based upon the achievement of specified stock prices. The fair values and derived service periods were determined using a Monte Carlo simulation model. If the awards vest prior to the end of the derived service period, the remaining unamortized compensation cost will be recognized in the period of vesting.

Stock-based compensation cost related to performance-based and market-based vesting options was $1.1 million and $2.9 million in the three and nine months ended September 30, 2017, respectively, and $1.5 million in both the three and nine months ended September 30, 2016. As of September 30, 2017, there was $1.8 million in unrecognized stock-based compensation cost related to unvested performance-based and market-based stock options, which is expected to be recognized over a weighted-average period of 0.6 years.

Restricted stock

The following table summarizes the activities for restricted stock awards (“RSAs”) and restricted stock units (“RSUs”) for the nine months ended September 30, 2017:

	Shares of restricted stock outstanding			Weighted-average grant date fair value
Balance as of December 31, 2016		586,224		$	17.00
Granted		884,081			26.60
Vested		(96,711	)		17.00
Forfeited		(126,523	)		23.27
Balance as of September 30, 2017		1,247,071		$	23.17

As of September 30, 2017, there were 302,200 unvested shares subject to RSAs outstanding.

The Company recognized stock-based compensation cost related to RSAs and RSUs of $2.0 million and $5.0 million in the three and nine months ended September 30, 2017, respectively, and $0.1 million in both the three and nine months ended September 30, 2016. As of September 30, 2017, there was $24.9 million in unrecognized stock-based compensation cost related to unvested RSAs and RSUs, which is expected to be recognized over a weighted-average period of 3.2 years.