Share-based Compensation

9 Months Ended

Sep. 30, 2020

Share-based Payment Arrangement [Abstract]

11. Share-based Compensation

The table below sets forth the allocation of share-based compensation expenses:


	For the nine months ended September 30,
	2019		2020
	RMB		RMB
Research and development expenses		1,061		11,577
General and administrative expenses		2,302		7,658
Cost of revenues		1,447		3,876
Sales and marketing expenses		688		3,790

Total		5,498		26,901

NetEase Plan

(a) Description of restricted share units plan

In November 2009, NetEase adopted a restricted share units plan for NetEase’s employees, directors and consultants (the “2009 RSU Plan”). NetEase has reserved 323,694,050 ordinary shares for issuance under the plan. The 2009 RSU Plan was adopted by a resolution of the board of directors on November 17, 2009 and became effective for a term of ten years unless sooner terminated.

In October 2019, NetEase adopted a 2019 restricted share unit plan (the “2019 Plan”) for its employees, directors and others. The 2019 Plan has a

ten-year

term and a maximum number of 322,458,300 ordinary shares available for issuance pursuant to all awards under the plan.

(b) Share-based compensation expenses

NetEase recognizes share-based compensation expenses in its consolidated statements of operations and comprehensive income based on awards ultimately expected to vest, after considering estimated forfeitures. Forfeitures are estimated based on the NetEase’s historical experience over the last five years and revised in subsequent periods if actual forfeitures differ from those estimates.

The corresponding share-based compensation expenses were allocated to the Group based on grants to the Group’s employees, amounting to RMB3,183 and RMB2,177 which is treated as deemed contribution from NetEase Group and recorded in additional

paid-in

capital, for the nine months ended September 30, 2019 and 2020, respectively.

Youdao Plan

(a) Description of share incentive plan

On February 3, 2015, the Company adopted an option and restricted share unit plan for the Company’s employees, directors and consultants (the “2015 Share Incentive Plan” or “2015 Plan”). The 2015 Plan was adopted in February 2015 and became effective for a term of ten years unless sooner terminated, initially 8,000,000 ordinary shares of the Company was reserved. In April 2018, the Company further reserved an additional 2,222,222 ordinary shares for the 2015 Plan, which resulted in the total number of ordinary shares reserved under the 2015 Plan to be 10,222,222.

(b) Valuation

The Group uses binomial option pricing model to determine fair value of the share-based awards. The fair value of each option granted for the nine months ended September 30, 2019 and 2020 is estimated on the date of grant using the following assumptions:


	For the nine months ended September 30,
	2019		2020
Expected volatility		46.50%-46.90%		48.90%-52.20%
Expected dividends yield		0%		0%
Risk-free interest rate		2.10%-2.60%		0.30%-1.69%
Expected term (in years)		6		6
Fair value of underlying ordinary share (US$)		6.35-7.29		16.00-42.31

The expected volatility at the grant date and each option valuation date was estimated based on the annualized standard deviation of the daily return embedded in historical share prices of comparable peer companies with a time horizon close to the expected expiry of the term of the options. The Company has not declared or paid any cash dividends on its capital stock, and the Company does not anticipate any dividend payments in the foreseeable future. Expected term is the contract life of the options. The Company estimated the risk-free interest rate based on the yield to maturity of U.S. treasury bonds denominated in USD at the option valuation date.

The following table presents a summary of the Company’s options activities for the nine months ended September 30, 2019 and 2020:


	Number of options			Weighted average exercise price per share		Weighted average remaining contractual life		Aggregate intrinsic value
	(in thousands)			US$		Years		US$
Outstanding as of January 1, 2019		6,991			2.13		3.40		29,468
Granted		2,072			3.50
Forfeited		(626	)		2.52

Outstanding as of September 30, 2019		8,437			2.44		3.30		40,906

Outstanding as of January 1, 2020		8,329			2.43		3.06		97,000
Granted		888			4.00
Exercised		(1,987	)		1.93
Forfeited		(247	)		2.89

Outstanding as of September 30, 2020		6,983			2.76		2.98		161,159

Vested and exercisable as of September 30, 2019		—			—
Vested and exercisable as of September 30, 2020		3,156			2.12		1.70		74,874

The weighted average grant date fair value of share options granted during the nine months ended September 30, 2019 and 2020 were US$4.12 and US$23.37

per share

, respectively. The total fair value of options vested during the nine months ended September 30, 2019 and 2020 were nil and RMB11,536 (US$1,699), respectively.

Under the option plan, options are only exercisable subject to the grantee’s continuous service and completion of the Company’s IPO, and options for which the service condition has been satisfied are forfeited should employment terminate before the Company’s public listing. As the effectiveness of an IPO was not within the control of the Company, it was not deemed probable to occur for accounting purposes until the effective date of the IPO which was on October 24, 2019. Therefore, for the nine months ended September 30, 2019, no compensation expenses were recorded for the share options granted to the Group’s employees. As of September 30, 2020, the unrecognized compensation expenses related to the options granted under the 2015 Plan was estimated to US$16,049 (RMB108,966) and is expected to be recognized through the remaining vesting period of each grant. As of September 30, 2020, the weighted average remaining vesting period was 2.47 years.