As a result of the Stone Combination, the Company assumed the Stone Energy Corporation Executive Severance Plan and Stone Energy Corporation Employee Severance Plan, each a legacy plan of Talos Petroleum LLC (f/k/a Stone Energy Corporation). The plans provided for the payment of severance and change in control benefits to certain individuals who, prior to the Stone Combination, were executive officers or employees of Talos Petroleum LLC, in each case upon an involuntary termination within twelve months of the Stone Closing Date. For the years ended December 31, 2020, 2019 and 2018 the Company incurred nil, $0.2 million and $7.8 million, respectively, of severance expense, reflected in “General and administrative expense” on the Consolidated Statements of Operations. The plans were terminated on July 11, 2019.

Under the Talos Energy Inc. Long Term Incentive Plan (the “LTIP”), the Company may issue, subject to approval by the Talos board of directors, grants of options (including incentive stock options), stock appreciation rights, restricted stock, restricted stock units, stock awards, dividend equivalents, other stock-based awards, cash awards, substitute awards or any combination of the foregoing to employees, directors and consultants. The LTIP authorizes the Company to grant awards of up to 5,415,576 shares of the Company’s common stock.

Restricted Stock Units – Employees — RSUs granted to employees under the LTIP primarily vest ratably over an approximate three year period subject to such employee’s continued service through each vesting date. Upon vesting, each RSU represents a contingent right to receive one share of Common Stock. The total unrecognized share-based compensation expense related to these RSUs at December 31, 2020 was approximately $14.3 million, which is expected to be recognized over a weighted average period of 1.8 years.

Restricted Stock Units – Non-employee Directors —RSUs granted to non-employee directors under the LTIP vested approximately one year following the date of grant, subject to such non-employee director’s continued service through the vesting date. Upon vesting, these RSUs represent a contingent right to receive one share of Common Stock for each RSU for 60%, and cash for the remaining 40%. The total unrecognized share-based compensation expense related to these RSUs at December 31, 2020 was approximately $0.1 million, which is expected to be recognized over a weighted average period of 0.2 years. Of the unrecognized share-based compensation expense, $0.1 million relates to liability awards and will be subsequently remeasured at each reporting period.

The following table summarizes RSU activity for the years ended December 31, 2020, 2019 and 2018:

	Restricted Stock Units			Weighted Average Grant Date Fair Value
Unvested RSUs at December 31, 2017		—		$	—
Granted		139,411		$	33.85
Vested		(53	)	$	32.86
Forfeited		(654	)	$	32.86
Unvested RSUs at December 31, 2018		138,704		$	33.85
Granted		732,771		$	24.39
Vested		(69,235	)	$	33.72
Forfeited		(68,463	)	$	25.43
Unvested RSUs at December 31, 2019		733,777		$	25.20
Granted		1,284,797		$	10.02
Vested		(273,787	)	$	25.09
Forfeited		(91,799	)	$	19.65
Unvested RSUs at December 31, 2020		1,652,988		$	13.73

Performance Share Units – Employees —PSUs granted to employees under the LTIP represent the contingent right to receive one share of Common Stock. However, the number of shares of Common Stock issuable upon vesting ranges from zero to 200% of the target number of PSUs granted based on the TSR of the Common Stock relative to the TSR achieved by a specific industry peer group over an approximate three-year performance period, the last day of which is also the vesting date. The total unrecognized share-based compensation expense related to these PSUs at December 31, 2020 was approximately $7.4 million, which is expected to be recognized over a weighted average period of 1.5 years.

The following table summarizes PSU activity for the years ended December 31, 2020, 2019 and 2018:

	Performance Share Units			Weighted Average Grant Date Fair Value
Unvested PSUs at December 31, 2017		—		$	—
Granted		232,891		$	44.47
Vested		—		$	—
Forfeited		(1,349	)	$	42.94
Unvested PSUs at December 31, 2018		231,542		$	44.47
Granted		218,060		$	33.96
Vested		—		$	—
Forfeited		(31,771	)	$	40.27
Unvested PSUs at December 31, 2019		417,831		$	39.31
Granted		441,642		$	13.05
Vested		—		$	—
Forfeited		(25,301	)	$	37.67
Unvested PSUs at December 31, 2020		834,172		$	25.46

The grant date fair value of the PSUs, calculated using a Monte Carlo simulation, was $5.8 million, $7.4 million and $10.4 million for the years ended December 31, 2020, 2019 and 2018. The following table summarizes the assumptions used to calculate the grant date fair value of the PSUs granted for the years ended December 31, 2020, 2019 and 2018:

	2020 Grant Date			2019 Grant Date						2018 Grant Date
	March 5			March 5			May 16			August 29			September 28
Number of simulations		100,000			100,000			100,000			100,000			100,000
Expected term (in years)		2.8			2.8			2.6			2.7			2.6
Expected volatility		48.8	%		46.9	%		44.8	%		50.6	%		47.4	%
Risk-free interest rate		0.6	%		2.5	%		2.1	%		2.7	%		2.9	%
Dividend yield		—	%		—	%		—	%		—	%		—	%

Prior to the Stone Combination, the Limited Liability Company Agreement of Talos Energy LLC established Series A, Series B and Series C Units. Series B Units were generally intended to be used as incentives for Talos Energy LLC employees. Series B Units do not participate in distributions prior to vesting or until Series A Units have received cumulative distributions equal to (i) the original cash contributed to the Company for such Series A Units and (ii) an 8% return, compounded annually (the “Aggregate Series A Payout”), and Series C Units have received no distributions. In connection with the Transactions, the Series A, Series B and Series C Units were exchanged for an equivalent number of units in each of an entity affiliated with the Apollo Funds and an entity affiliated with the Riverstone Funds, each of which hold Common Stock of the Company. The modification did not result in incremental value to the Series B Units.

For accounting and financial reporting purposes, the Series B Units are deemed to be equity awards, and the compensation expense related to these awards is recorded on a straight-line basis over the vesting period in the Company’s Consolidated Financial Statements and is reflected as a corresponding credit to “Accumulated deficit” on the Consolidated Balance Sheets.

The Company’s unrecognized compensation expense at December 31, 2020 is approximately $3.4 million, which will be recognized upon an Aggregate Series A Payout.

In connection with the transactions contemplated in the Exchange Agreement on May 10, 2018, an entity affiliated with the Apollo Funds and an entity affiliated with the Riverstone Funds, each of which hold Common Stock in the Company as a result of the Sponsor Debt Exchange, established new Series A Units (“New Series A Units”) and new Series B Units (“New Series B Units”). The New Series B Units are generally intended to be used as incentives for Talos Energy LLC employees.

The New Series B Units do not participate in distributions prior to vesting or until the New Series A Units have received cumulative distributions of $102.0 million. After issuance, 80% of the New Series B Units vest on a monthly basis over a four year period based on the initial vesting schedule of the original Series B Units, subject to continued employment. All unvested New Series B Units fully vest upon the cumulative distribution of $102.0 million.

For accounting and financial reporting purposes, the New Series B Units are deemed to be equity awards, and the compensation expense related to these awards is recorded on a straight-line basis over the vesting period in the Company’s Consolidated Financial Statements and is reflected as a corresponding credit to “Accumulated deficit” on the Consolidated Balance Sheets.

The New Series B Units issued were valued using the option pricing method for valuing securities. In this method, the rights and claims of each security are modeled as a portfolio of Black-Scholes-Merton call options written on the total equity of the entities affiliated with the Apollo Funds and Riverstone Funds. The total value of the equity is calculated in an iterative process that results in the New Series A Units being valued at par. The risk-free rate of interest is based on the U.S. Treasury yield curve on the grant date. The expected time to a liquidity event is based on a weighted average calculation of management’s estimate considering market conditions and expectations. The expected volatility of equity is based on the volatility of the assets of similar publicly traded companies using a Black-Scholes-Merton model. The discount for lack of marketability is based on the restrictions on the New Series B Units and the volatility of the New Series B Units using a Black-Scholes-Merton model.

The Company’s unrecognized compensation expense at December 31, 2020 is approximately $1.0 million, which will be recognized upon the New Series A Units receiving a cumulative distribution.

Share-based compensation expense associated with RSUs, PSUs and Series B Units are reflected as General administrative expense, in the statements of operations, net amounts capitalized to “Proved properties”, in the Consolidated Balance Sheets. Because of the non-cash nature of share-based compensation, the expensed portion of share-based compensation is added back to net income in arriving at “Net cash provided by operating activities” in the Consolidated Statements of Cash Flows.

For the years ended December 31, 2020, 2019 and 2018, share-based compensation expense did not have an associated income tax benefit. The Company recognized the following share-based compensation expense, net for the years ended December 31, 2020, 2019 and 2018 (in thousands):

	Year Ended December 31,
	2020			2019			2018
Talos Energy Inc. Long Term Incentive Plan	$	16,227		$	12,523		$	2,091
Talos Energy LLC Series B Units		192			256			666
New Talos Energy LLC Series B Units		43			145			3,752
Total share-based compensation expense		16,462			12,924			6,509
Less: amounts capitalized to oil and gas properties		(7,793	)		(5,960	)		(3,616	)
Total share-based compensation expense, net	$	8,669		$	6,964		$	2,893