Stock-based compensation

During 2003, the Board established the 2003 Stock Plan, as amended (the "2003 Plan"). The 2003 Plan includes incentive stock options that are subject to the rules and regulations of the Code and nonqualified stock options. The option price, number of shares and grant date of stock options granted under the 2003 Plan were determined at the discretion of the Board. Under the 2003 Plan, as long as the optionholder performs services for the Company, the options generally vest over 48 months, with cliff vesting after one year and monthly vesting thereafter and are exercisable for a period not to exceed ten years from the date of grant.

In July 2018, the Board adopted the 2018 Equity Incentive Plan (the "2018 Plan") and ceased granting awards under the 2003 Plan. The 2018 Plan became effective in connection with the IPO. The Company reserved 21,200,000 shares of its common stock for issuance under the 2018 Plan. Any remaining shares available for issuance under the 2003 Plan on the effective date of the 2018 Plan were added to the shares of common stock reserved for issuance under the 2018 Plan. The number of shares reserved for issuance under the 2018 Plan will also be increased by (i) the number of shares that are subject to outstanding awards under the 2003 Plan which cease to be subject to such awards and (ii) the number of shares issued under the 2003 Plan which are forfeited or repurchased at their original issue price; however, shares subject to awards under the 2003 Plan that are used to pay the exercise price of an option or withheld to satisfy the tax withholding obligations related to any award will not become available for future grant or sale under the 2018 Plan. Further, the number of shares reserved for issuance under the 2018 Plan will increase automatically on January 1 of each year beginning in 2019 and continuing through 2028 by a number of shares of common stock equal to the lesser of (x) 5% of the total outstanding shares of the Company’s common stock and common stock equivalents as of the immediately preceding December 31 (rounded to the nearest whole share) and (y) a number of shares determined by the Board. As of September 29, 2018, there were 21,939,408 shares reserved for future issuance, including 21,200,000 shares authorized under the 2018 Plan, plus shares under the 2003 Plan that were available for issuance, or forfeited, that were added to shares reserved for issuance under the 2018 Plan.

As of September 29, 2018, the Company had not granted any RSUs. Stock option activity was as follows:



	Number of Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Weighted Average Intrinsic Value
					(in years)	(in thousands)
Outstanding at September 30, 2017	45,817,252		$	9.20	6.9	$	199,663
Granted	9,316,926		15.12
Exercised	(2,657,436	)	3.52
Forfeited	(3,971,280	)	13.14
Expired	(1,280	)	15.11
Outstanding at September 29, 2018	48,504,182		$	10.33	6.6	$	276,959

At September 29, 2018
Options exercisable	31,194,219		$	8.13	5.4	$	246,847
Options vested and expected to vest	45,662,090		$	10.07	6.5	$	272,699

During fiscal 2018, 2017 and 2016, the Company granted options with a fair value of $50.2 million, $39.4 million and $83.5 million, respectively, with a weighted-average grant date fair value of $5.39, $4.84 and $5.32 per share, respectively.

The total intrinsic value of stock options exercised was $31.3 million, $42.0 million and $17.4 million for fiscal 2018, 2017 and 2016, respectively.

As of September 29, 2018 and September 30, 2017, the Company had $71.5 million and $74.9 million, respectively, of unrecognized stock-based compensation cost, which is expected to be recognized over a weighted-average period of 2.6 years and 2.8 years, respectively.

The Company’s policy for issuing stock upon stock option exercise is to issue new common stock.

Stock-based compensation cost is measured at the grant date based on the fair value of the award and is expensed, net of estimated forfeitures, over the remaining requisite service period. The Company uses the Black- Scholes option pricing model to estimate the fair value of stock options. This model requires the input of highly subjective assumptions including the expected term of the option, expected stock price volatility and expected dividends. If any of the assumptions used in the Black-Scholes model changes significantly, stock-based compensation expense may differ materially in the future from that recorded in the current period.

The fair value of options at the date of grant was estimated using the Black-Scholes option pricing model with the following weighted-average assumptions:



	2018		2017		2016
Expected term (years)	6.25		6.25		6.25
Risk-free interest rate	2.73	%	1.95	%	1.29	%
Expected volatility	30.19	%	32.40	%	36.64	%
Expected dividend yield	—	%	—	%	—	%

Expected term

The expected term represents the period over which the Company anticipates stock-based awards to be outstanding. The Company does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term. As a result, the Company elected the simplified method, which is the average of the options’ vesting and contractual terms.

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 the expected term of the option.

Expected share price volatility

The Company’s computation of expected volatility is based on the historical volatility of selected comparable publicly traded companies over a period equal to the expected term of the option.

Expected dividend yield

The Company used a zero-dividend yield, as the Company has never paid dividends and does not plan to pay dividends in the near future.

Fair value of common stock

Prior to the IPO, in accordance with the American Institute of Certified Public Accountants Accounting and Valuation Guide, Valuation of Privately-Held Company Equity Securities Issued as Compensation, the Board exercised reasonable judgment and considered numerous objective and subjective factors to determine the best estimate of fair value of the Company’s common stock, including but not limited to the prices at which the Company sold shares of its common stock to outside investors in arm’s-length transactions; independent third-party valuations of the Company’s common stock; the rights, preferences and privileges of redeemable convertible preferred stock relative to those of common stock; the Company’s operating results, financial position and capital resources; and additional relevant economic information.

Subsequent to the Company's IPO, the Company began using the market closing price for its common stock as reported on The Nasdaq Global Select Market.

Total stock-based compensation expense by function category was as follows:



	2018		2017		2016
(In thousands)
Cost of revenue	$	198	$	240	$	211
Research and development	13,960		13,605		8,260
Sales and marketing	15,885		15,086		11,742
General and administrative	8,602		7,619		5,750
Total stock-based compensation expense	$	38,645	$	36,550	$	25,963