Stock-Based Compensation

Equity Incentive Plans

Assumed Awards

In connection with the Elance-oDesk Combination, the Company assumed substantially all stock options outstanding under the Elance 1999 Stock Option Plan (the “Elance 1999 Plan”) and the Elance 2009 Stock Option Plan (the “Elance 2009 Plan”). Such assumed options were converted into options to purchase the Company’s common stock. In addition, all stock options outstanding under the oDesk Corporation 2004 Stock Plan (the “oDesk Plan”) were converted into options to purchase shares of the Company’s common stock, with the number of shares that could be purchased under each option reduced by approximately 16.14%. The exercise price of all options was simultaneously increased such that the then-aggregate exercise price payable by holders did not change. These options generally vest over a four-year period from the original date of grant and expire ten years from the original grant date.

2014 Equity Incentive Plan

In March 2014, the Company’s board of directors and, in June 2014, the Company’s stockholders approved the 2014 Equity Incentive Plan (“2014 EIP”). The total number of shares of common stock reserved and available for grant and issuance pursuant to such plan was originally 12,462,985 plus (i) shares that were then subject to outstanding option grants under the oDesk Plan, the Elance 1999 Plan, and the Elance 2009 Plan (collectively, the “Prior Plans”) but subsequently ceased to be subject to an award for any reason other than exercise of a stock option, (ii) shares that had been reserved but not subject to any outstanding awards under the Prior Plans and (iii) shares issued under the Prior Plans that were repurchased, forfeited, or used to pay employee withholding or exercise price obligations. The number of shares available for grant under the 2014 EIP was increased by 3,001,091 shares, 4,500,000 shares and 100,000 shares in August 2014, October 2017 and August 2018, respectively. Under the terms of the 2014 EIP, incentive stock options may be granted at prices not less than 100% of the fair value of the Company’s common stock on the date of grant unless determined in writing by the Company’s board of directors. The options granted under the 2014 EIP generally vest over a four-year period from the original date of grant and expire ten years from the original grant date.

2018 Equity Incentive Plan

In August 2018, the Company’s board of directors and stockholders each adopted the 2018 Equity Incentive Plan (“2018 EIP”), which became effective on the date immediately prior to the date of the IPO. A total of 10,701,505 shares of common stock were initially reserved for issuance pursuant to future awards under the 2018 EIP. On January 1 of each year, shares available for issuance are increased based on the provisions of the 2018 EIP. Any shares subject to outstanding awards under the 2014 EIP that are canceled or repurchased subsequent to the 2018 EIP’s effective date are returned to the pool of shares reserved for issuance under the 2018 EIP. Awards granted under the 2018 EIP may be (i) incentive stock options, (ii) nonqualified stock options, (iii) RSUs, (iv) restricted stock awards or (v) stock appreciation rights, as determined by our board of directors at the time of grant. As of December 31, 2018, 10,558,306 shares were reserved for future issuance under the 2018 EIP.

In July 2018, the Company’s board of directors granted an option exercisable for up to 1,860,000 shares of common stock to the Company’s Chief Executive Officer under the 2018 EIP (the “CEO Award”). The vesting and exercisability of the CEO Award is contingent upon the recipient’s continuous service as the Chief Executive Officer and the achievement of certain measurement objectives during three separate measurement periods within the period of time beginning on January 1, 2019 and ending on December 31, 2023. Each reporting period, the Company assesses the probability that the performance criteria will be met and records expense for those shares that are probable of vesting.

Determination of Fair Value

For the years ended December 31, 2018, 2017 and 2016, the fair value of stock options granted to employees was estimated on the grant date using the Black-Scholes valuation model with the following assumptions:



	2018		2017		2016
Dividend yield	0	%	0	%	0	%
Expected term (in years)	5.2 - 6.1		5.3 - 6.3		6.08
Risk-free interest rates	2.5% - 2.9%		1.9% - 2.2%		1.2% - 2.1%
Expected volatility	38% - 45%		39% - 43%		42% - 45%

Dividend Yield —The dividend yield is assumed to be zero as the Company has never paid dividends and has no current plans to do so.

Expected Term —The expected term represents the period that the Company’s stock-based awards are expected to be outstanding. For awards containing only service conditions, the Company determines the expected term using the simplified method as the Company does not have sufficient historical information to develop reasonable expectations about future exercise patterns and post-vesting employment termination behavior. The simplified method deems the term to be the average of the time-to-vesting and the contractual life of the options. The Company uses relevant data, including past exercise patterns, if available, to determine the expected term for performance-based awards.

Risk-Free Interest Rate —The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for zero-coupon U.S. Treasury notes with maturities approximately equal to the option’s expected term.

Expected Volatility —Since the Company does not have sufficient a trading history of its common stock, the expected volatility is derived from the average historical stock volatilities of several unrelated public companies within the Company’s industry that the Company considers to be comparable to its business over a period equivalent to the expected term of the stock option grants.

Fair Value of Common Stock —Given the absence of a public trading market prior to the IPO, the Company’s board of directors considered numerous objective and subjective factors to determine the fair value of its common stock at each grant date. These factors included, but were not limited to: (i) independent contemporaneous third-party valuations of common stock; (ii) the prices for the Company’s redeemable convertible preferred stock sold to outside investors; (iii) the rights and preferences of redeemable convertible preferred stock relative to common stock; (iv) the lack of marketability of its common stock; (v) developments in the business; and (vi) the likelihood of achieving a liquidity event, such as an IPO or sale of the Company, given prevailing market conditions. Subsequent to the IPO, the fair value of common stock is based on the closing price of the Company’s common stock, as reported on The Nasdaq Global Select Market on the date of grant.

The following table summarizes activity under the Company’s stock option plans:



	Number of Shares Underlying Outstanding Options		Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value (in thousands)
Balances at January 1, 2016	20,710,510		$	2.79	8.28	$	8,634
Granted	2,624,450		3.20
Exercised	(272,591	)	0.99
Forfeited and canceled	(2,132,867	)	2.93
Balances at December 31, 2016	20,929,502		2.85		7.58	11,149
Granted	5,803,596		3.58
Exercised	(1,554,944	)	1.64
Forfeited and canceled	(1,570,408	)	2.98
Balances at December 31, 2017	23,607,746		3.10		7.39	22,260
Granted	4,468,523		5.88
Exercised	(3,522,631	)	2.32
Forfeited and canceled	(779,359	)	3.80
Balances at December 31, 2018	23,774,279		3.71		7.10	342,262
Vested and exercisable as of December 31, 2018	13,774,468		3.19		6.13	205,455
Vested and expected to vest as of December 31, 2018	23,774,279		3.71		7.10	342,262

Before the IPO, the aggregate intrinsic value represented the difference between the exercise price of the options and the estimated fair value of the Company’s common stock as determined by its board of directors. Following the IPO, the aggregate intrinsic value represented the difference between the exercise price of the options and the closing price of the Company’s common stock on The Nasdaq Global Select Market on the day prior to the date of exercise. The intrinsic value of options exercised was $18.0 million, $2.9 million and $0.6 million for the years ended December 31, 2018, 2017 and 2016, respectively.

The weighted-average grant-date fair value of options granted was $3.65, $1.54 and $1.41 for the years ended December 31, 2018, 2017 and 2016, respectively. As of December 31, 2018, total unrecognized stock-based compensation cost, net of estimated forfeitures, was $23.0 million, which is expected to be generally recognized on a straight-line basis over a weighted-average period of 3.5 years.

The fair value of RSUs awarded to employees is based on the closing price of the Company’s common stock, as reported on The Nasdaq Global Select Market on the date of grant.

The following table summarizes the RSU activity and related information under the 2018 EIP:



	Number of RSUs Outstanding		Weighted-Average Grant Date Fair Value
Unvested balance - January 1, 2018	—		$	—
Granted	327,202		15.00
Vested	(38,742	)	15.00
Forfeited/canceled	—		—
Unvested balance - December 31, 2018	288,460		$	15.00

During 2018, 35,494 fully vested RSUs were granted to a consultant of the Company, which totaled $0.5 million. The consultant’s estimated tax liability associated with this vesting was $0.2 million. To satisfy this tax liability, the consultant surrendered 12,648 shares of common stock to the Company. The associated tax liability was paid in full prior to December 31, 2018.

As of December 31, 2018, there was $3.8 million of unrecognized stock-based compensation expense related to outstanding RSUs to employees that is expected to be recognized over a weighted-average period of 3 years.

2018 Employee Stock Purchase Plan

In August 2018, the Company’s board of directors and stockholders each adopted the 2018 Employee Stock Purchase Plan (“2018 ESPP”), which became effective prior to the completion of our IPO. A total of 1,700,000 shares of common stock was initially reserved for issuance under the 2018 ESPP. On January 1 of each year, shares available for issuance are increased based on the provisions of the 2018 ESPP. The 2018 ESPP allows eligible employees to purchase shares of our common stock at a discount of up to 15% through payroll deductions of their eligible compensation, subject to any plan limitations. Except for the initial offering period, the 2018 ESPP provides for 24-month offering periods beginning November 15 and May 15 of each year, and each offering period consists of four 6-month purchase periods. For the year ended December 31, 2018, the assumptions used to determine the fair value of the shares to be awarded are as follows:



	2018
Dividend yield	0	%
Expected term (in years)	0.5 - 2.0
Risk-free interest rates	2.4% - 2.9%
Unvested balance - expected volatility	37	%

On each purchase date, eligible employees may purchase the Company’s common stock at a price per share equal to 85% of the lesser of (1) the fair market value of our stock on the offering date or (2) the fair market value of our stock on the purchase date. In the event the price is lower on the last day of any purchase price period, in addition to using that price as the basis for that purchase period, the offering period resets and the new lower price becomes the new offering price for a new 24 month offering period. As of December 31, 2018, 1,700,000 shares were reserved for future issuance under the 2018 ESPP. As of December 31, 2018, there was $1.3 million of unrecognized stock-based compensation expense that is expected to be recognized over the remaining term of the respective offering periods.

Stock-Based Compensation

The following table summarizes the components of stock-based compensation expense recognized in the consolidated statements of operations for the years ended December 31, 2018, 2017 and 2016 (in thousands):



	2018		2017		2016
Cost of revenue	$	282	$	290	$	193
Research and development	3,258		1,797		1,820
Sales and marketing	1,637		1,299		1,052
General and administrative	5,184		3,460		4,201
Total	$	10,361	$	6,846	$	7,266

Stock-Based Compensation to Employees

Stock-based compensation expense related to employees for the year ended December 31, 2018 was $8.6 million, $1.1 million and $0.6 million related to stock option grants, RSU grants, and the 2018 ESPP, respectively. Stock-based compensation expense related to employees for the years ended December 31, 2017 and 2016 was $6.3 million and $6.5 million, respectively, related to stock option grants.

Certain common stockholders (who were employees or former employees of the Company) sold the Company’s common stock in secondary market transactions to third parties in 2017 and 2016. They sold an aggregate of 488,484 shares of common stock for $2.3 million at an average price of $4.72 per share for the year ended December 31, 2017. They sold an aggregate of 324,826 shares of common stock for $1.6 million at an average price of $4.93 per share for the year ended December 31, 2016. The incremental value between the sale price and the fair value of the common stock at each date of sale resulted in aggregate stock-based compensation expense of $0.4 million and $0.5 million for the years ended December 31, 2017 and 2016, respectively. There was an immaterial secondary market transaction during the year ended December 31, 2018.

Stock-Based Compensation to Non-Employees

The Company granted options to purchase 8,500 and 8,000 shares of the Company’s common stock to consultants in conjunction with services performed for the years ended December 31, 2017 and 2016, respectively. Stock-based compensation expense related to non-employees was $0.1 million and $0.2 million for the years ended December 31, 2017 and 2016, respectively. Stock-based compensation expense related to non-employees was immaterial for the year ended December 31, 2018.