STOCK-BASED COMPENSATION

Groupon, Inc. Stock Plans

In January 2008, the Company adopted the ThePoint.com 2008 Stock Option Plan, as amended (the “2008 Plan”), under which options for up to 64,618,500 shares of common stock were authorized to be issued to employees, consultants, and directors of ThePoint.com, which is now the Company. In April 2010, the Company established the Groupon, Inc. 2010 Stock Plan, as amended in April 2011 (the “2010 Plan”), under which options and restricted stock units (“RSUs”) for up to 20,000,000 shares of non-voting common stock were authorized for future issuance to employees, consultants and directors of the Company. In August 2011, the Company established the Groupon, Inc. 2011 Stock Plan (the “2011 Plan”), under which options, RSUs, and performance stock units for up to 50,000,000 shares of non-voting common stock were authorized for future issuance to employees, consultants and directors of the Company.

The 2008 Plan, 2010 Plan, and 2011 Plan (the “Plans”) are administered by the Board, who determine the number of awards to be issued, the corresponding vesting schedule and the exercise price for options. As of December 31, 2011, 50,559,387 shares were available for future issuance under the Plans. Prior to January 2008, the Company issued stock options and RSUs that are governed by employment agreements, some of which are still unvested and outstanding.

The Company recognized stock-based compensation expense of $0.1 million, $7.1 million and $76.6 million during the years ended December 31, 2009, 2010 and 2011, respectively, related to stock options, restricted stock units and performance stock units issued under the Plans and employment agreements. The corresponding tax benefit provided by stock compensation was $0.1 million, less than $0.1 million, and $12.1 million for the years ended December 31, 2009, 2010 and 2011, respectively. The Company also capitalized $1.5 million of stock-based compensation in 2011. No such amounts were capitalized in prior periods.

As of December 31, 2011, a total of $112.4 million of unrecognized compensation costs related to unvested stock options and unvested restricted stock units issued are expected to be recognized over the remaining weighted-average period of two years.

Employee Stock Purchase Plan

In December 2011, the Company established an employee stock purchase plan (“ESPP”). The employee stock purchase plan allows substantially all full-time and part-time employees to acquire shares of our common stock through payroll deductions over three month offering periods. The per share purchase price is equal to 85% of the fair market value of a share of our common stock on the last day of the offering period, and purchases are limited to 10% of an employee's salary, up to a maximum of $25,000 per calendar year. The Company is authorized to grant up to 10 million shares of common stock under the employee stock purchase plan, and, as of December 31, 2011, no shares of common stock have been issued under the ESPP.

Stock Options

The exercise price of stock options granted is equal to the fair market value of the underlying stock on the date of grant. The contractual term for stock options expires ten years from the grant date. Stock options generally vest over a three or four-year period, with 25% of the awards vesting after one year and the remainder of the awards vesting on a monthly or quarterly basis thereafter. The fair value of stock options on the date of grant is amortized on a straight-line basis over the requisite service period.

The table below summarizes the stock option activity during the year ended December 31, 2011:



	Options		Weighted- Average Exercise Price	Weighted- Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value (in thousands)^(a)
Outstanding at December 31, 2010	27,465,704		$1.00	9.00	$	189,406
Granted^(b)	158,000		$6.00
Exercised	(4,990,665	)	$0.55
Forfeited	(4,752,170	)	$1.21
Expired	(10,156	)	$1.66
Outstanding at December 31, 2011	17,870,713		$1.12	8.06	$	348,743

Exercisable at December 31, 2011	10,182,549		$1.00	8.00	$	199,891

(a)

The aggregate intrinsic value of options outstanding and exercisable represents the total pretax intrinsic value (the difference between the fair value of the Company's stock on the last day of each fiscal year and the exercise price, multiplied by the number of options where the exercise price exceeds the fair value) that would have been received by the option holders had all option holders exercised their options as of December 31, 2010 and December 31, 2011, respectively.

(b)

Of the 158,000 options granted during the year ended December 31, 2011, 38,000 options were granted with an exercise price of $0.02. These options were granted as part of a settlement with a former employee and the exercise price represents the fair market value of the stock when the employee left the Company. As a result of this grant, the weighted average exercise price for the options granted during the year ended December 31, 2011 is below the actual fair market values during the period. The options immediately vested and were expensed at the grant date fair value.

The fair value of stock options granted is estimated on the date of grant using the Black-Scholes-Merton option-pricing model. Expected volatility is based on historical volatilities for publicly-traded options of comparable companies over the estimated expected life of the stock options. The expected term represents the period of time the stock options are expected to be outstanding and is based on the “simplified method”. The Company used the “simplified method” due to the lack of sufficient historical exercise data to provide a reasonable basis upon which to otherwise estimate the expected life of the stock options. The risk-free interest rate is based on yields on U.S. Treasury STRIPS with a maturity similar to the estimated expected life of the stock options. The weighted‑average assumptions for stock options granted during the years ended December 31, 2009, 2010 and 2011 are outlined in the following table:



	2009	2010	2011
Dividend yield	—	—	—
Risk-free interest rate	2.82%	2.58%	1.79%
Expected term (in years)	6.84	6.13	4.47
Expected volatility	46%	46%	44%

Based on the above assumptions, the weighted-average grant date fair value of stock options granted during the years ended December 31, 2009, 2010 and 2011 was $0.05, $0.73 and $6.00, respectively. The total fair value of options that vested during the years ended December 31, 2009, 2010 and 2011 was less than $0.1 million, $0.3 million and $6.4 million, respectively. Additionally, the total intrinsic value of options that were exercised during the years ended December 31, 2009, 2010 and 2011 was $0.5 million, $5.7 million and $56.9 million, respectively.

Restricted Stock Units

The restricted stock units granted under the Plans vest over a four-year period, with 25% of the awards vesting after one year and the remaining awards vesting on a monthly or quarterly basis thereafter. Restricted stock units are generally amortized on a straight-line basis over the requisite service period, except for the restricted stock units with performance conditions, which are amortized using the accelerated method. The fair value of restricted stock units that vested during each of the years ended December 31, 2009, 2010 and 2011 was less than $0.1 million, less than $0.1 million and $12.4 million, respectively.

The table below summarizes activity regarding unvested restricted stock units under the Plans during the year ended December 31, 2011:



	Restricted Stock Units		Weighted- Average Grant Date Fair Value (per share)
Unvested at December 31, 2010	3,576,600		$	7.16
Granted	11,626,145		$	13.47
Vested	(1,281,791	)	$	9.77
Forfeited	(1,976,110	)	$	11.94
Unvested at December 31, 2011	11,944,844		$	12.23

The weighted-average grant date fair value of restricted stock units granted in 2010 was $7.16. No such awards were granted in 2009.

Performance Stock Units

In May 2010, the Company issued performance stock units (“PSUs”) under the terms of the agreement to acquire Mobly, Inc., a mobile technology company. The Company agreed to issue up to 1,440,000 PSUs to the previous Mobly shareholders contingent on meeting certain performance-based operational objectives over the next three years. Upon being granted, the PSUs immediately vest as common stock. Through June 30, 2011, a total of 480,000 shares were granted and 960,000 shares were still eligible to be granted in the future based on the performance criteria and discretion of the Board. The Company started recording stock compensation expense at the service inception date, which began at the date of acquisition and preceded the grant date. Due to the subjective nature of the performance evaluation, the fair value of the PSUs was remeasured each period until the grant date, when stock compensation expense was adjusted to the grant date fair value.

In September 2011, the Company amended the agreement with the previous Mobly, Inc. owners to agree that certain performance based operational objectives were met, which accelerated the vesting of 720,000 PSUs and resulted in the issuance of the equivalent number of shares of stock. The total fair value of the PSUs as of the modification date was $13.7 million, of which $7.0 million was recorded as a result of the modification. Additionally, as part of the amended agreement, the remaining 240,000 PSUs were cancelled and replaced with 240,000 RSUs that vest over a period of two years. As a result of the modification, the Company will continue to expense the original award at its fair value on the modification date.

Acquisition-Related Stock Awards

During 2010, the Company made several acquisitions of international subsidiaries that resulted in the issuance of additional equity-based awards to employees of the acquired companies.

CityDeal Acquisition

In May 2010, the Company acquired CityDeal, which resulted in the issuance of shares of the Company's restricted stock to a trust for current CityDeal employees. The restricted stock vests quarterly generally over a period of three years and is amortized on a straight-line basis over the requisite service period.

The table below summarizes activity regarding unvested restricted stock issued as part of the CityDeal acquisition during the year ended December 31, 2011:



	Restricted Stock		Weighted- Average Grant Date Fair Value (per share)
Unvested at December 31, 2010	4,439,210		$	4.26
Granted	217,576		$	7.90
Vested	(1,953,696	)	$	4.40
Forfeitures	(412,286	)	$	4.26
Unvested at December 31, 2011	2,290,804		$	4.49

The fair value of restricted stock that vested during the years ended December 31, 2010 and 2011 was $8.2 million and $8.6 million, respectively.

The Company recognized stock compensation expense of $15.6 million and $6.8 million during the year ended December 31, 2010 and 2011, respectively, related to restricted stock granted as part of the CityDeal acquisition, none of which provided the Company with a tax benefit. As of December 31, 2011, a total of $4.8 million of unrecognized compensation costs related to unvested restricted stock are expected to be recognized over the remaining weighted-average period of two years.

Subsidiary Awards

The Company made several other acquisitions during the year ended December 31, 2010 in which the selling shareholders of the acquired companies were granted RSUs and stock options (“subsidiary awards”) in the Company's subsidiaries. These subsidiary awards were issued in conjunction with the acquisitions as a way to retain and incentivize key employees. They generally vest on a quarterly basis for a period of three or four years, and dilute the Company's ownership percentage of the corresponding subsidiaries as they vest over time. The fair market value of the subsidiary shares granted was determined on a contemporaneous basis. A significant portion of the subsidiary awards are classified as liabilities on the consolidated balance sheet due to the existence of put rights that allow the selling shareholders to put their stock back to the Company. The liabilities for the subsidiary shares are remeasured on a quarterly basis, with the offset to stock-based compensation expense within selling, general and administrative expenses on the consolidated statement of operations. Additionally, the Company has call rights on most of the subsidiary awards, which allow it to purchase the remaining outstanding shares based on contractual agreements. Certain subsidiary awards have been settled in 2011 through purchasing of additional interests in the Company's subsidiaries. See Note 3 “Acquisitions.”

The Company recognized stock compensation expense of $13.5 million and $10.2 million during the years ended December 31, 2010 and 2011, respectively, related to subsidiary awards, none of which provided the Company with a tax benefit. The Company also settled certain liability-based awards by paying $11.1 million in cash and issuing 628,171 shares of Groupon Class A common stock. As of December 31, 2011, a total of $10.8 million of unrecognized compensation costs related to unvested subsidiary awards are expected to be recognized over the remaining weighted-average period of two years. The amount of unrecognized compensation costs is management's best estimate based on the current fair market values of each of the subsidiaries and could change significantly based on future valuations.

Common Stock Valuations

The Company determined the fair value per share of the common stock underlying the stock-based awards through the contemporaneous application of a discounted future earnings model initially and then a discounted cash flow methodology going forward, which was approved by the Board. Stock-based awards were granted to employees in the form of stock options, restricted stock units and restricted stock. All such awards granted were exercisable at a price per share equal to the per share fair value of the Company's common stock on the date of grant. Determining the fair value of the Company's common stock required making complex and subjective judgments. The assumptions used in the valuation models were based on future expectations combined with management estimates.

The discounted future earnings method calculates the present value of future economic benefits using a discount rate based on the nature of the business, the level of overall risk and the expected stability of the estimated future economic benefits. The future economic benefits are estimated over a period of years sufficient to reach stability of the business, and management expects the Company to grow substantially for several years before revenue stabilizes. The discounted cash flow method valued the business by discounting future available cash flows to present value at an approximate rate of return. The cash flows were determined using forecasts of revenue, net income and debt-free future cash flow. The discount rate was derived using a Capital Asset Pricing Model for companies in the “expansion” stage of development. The Company also applied a lack of marketability discount to its enterprise value, which took into account that investments in private companies are less liquid than similar investments in public companies. There is inherent uncertainty in all of these estimates.

Summarized below are the significant factors the Board considered in determining the fair value of the common stock underlying the Company's stock-based awards granted to its employees through its initial public offering on November 4, 2011.

First Quarter 2011

In the first quarter of 2011, the following significant events occurred: (1) the Company raised $492.5 million in net proceeds from the issuance of Series G Preferred in January 2011; (2) the Company expanded its presence into new and expanding markets in India, Malaysia, South Africa and the Middle East through a series of acquisitions; and (3) the number of subscribers increased to approximately 83.1 million as of March 31, 2011 and the Company launched its services in 21 additional markets across North America.

Second Quarter 2011

In the second quarter of 2011, the following significant events occurred: (1) the number of subscribers increased to approximately 115.7 million as of June 30, 2011; (2) the Company acquired a technology company and established its presence in Indonesia through an acquisition; (3) the Company launched “Groupon Now!” and established partnerships with Expedia, Inc. and Live Nation Entertainment Inc.

Third Quarter 2011

In the third quarter of 2011, the following significant events occurred: (1) the number of subscribers increased to approximately 142.9 million as of September 30, 2011; (2) the Company acquired two technology companies to improve its in-house technological capabilities; and (3) the Company launched “Groupon Goods”.