Preferred Stock and Stockholders' Equity (Members' Deficit) | 12 Months Ended |
Dec. 28, 2013 |
Preferred Stock and Stockholders' Equity (Members' Deficit) | ' |
8. Preferred Stock and Stockholders’ Equity (Members’ Deficit) |
LLC Conversion |
On May 31, 2013, the Company converted from a Delaware limited liability company into a Delaware corporation and changed the Company’s name from Gigamon LLC to Gigamon Inc. Effective May 31, 2013, all of the Company’s outstanding common units and preferred units were converted into shares of common stock and preferred stock. Immediately following the LLC Conversion, certain entities affiliated with Highland Capital Partners that held the Company’s Series A preferred stock were merged with and into the Company, and the entities affiliated with Highland Capital Partners that merged with and into the Company received preferred stock in exchange for their equity interests. Further, in connection with the LLC Conversion, Gigamon Systems LLC, the holder of all of the Company’s outstanding common units prior to the LLC Conversion, exchanged all of the interests that it held in the Company for 16,851,635 shares of the common stock of Gigamon Inc. In addition, all outstanding options to purchase shares in Gigamon Systems LLC were substituted for fully vested options to purchase 448,349 shares of the Company’s common stock, at a weighted average exercise price of $0.02 per share, for which the Company recognized related stock-based compensation expense of $8.5 million in fiscal 2013. Additionally, the Company recorded a net adjustment to deferred income tax asset of $14.8 million and reclassified $24.0 million from accumulated deficit to additional paid-in capital. |
Redeemable Convertible Series A Preferred Units |
The LLC Agreement authorized the Company to issue 8,109,848 Series A preferred units (“Series A”) at no par value. Upon the LLC Conversion, all of the then-outstanding Series A were converted into shares of Series A preferred stock. Furthermore, in connection with the closing of the Company’s IPO, all of the Company’s then-outstanding shares of Series A preferred stock were converted into shares of common stock on June 17, 2013 (the “Series A Conversion”). As of December 28, 2013 and December 31, 2012, the Company had zero and 8,109,847 Series A units outstanding, respectively. |
The rights, privileges and restrictions of Series A units as set forth in the LLC Agreement as in effect prior to the LLC Conversion are summarized as follows: |
Voting |
Each unit of Series A had voting rights equal to an equivalent number of common units into which it was convertible and voted together as one class with the common units. |
Liquidation |
Upon a liquidation or a deemed liquidation event, the Company was obligated to distribute the net proceeds or assets available for distribution, whether in cash or in other property, to the holders of Series A and common units as follows: |
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| • | | First, to the holders of Series A on a pari passu basis, and | | | | | | | | | | | | | | | | | |
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| • | | Next, to the holders of common units, pro rata in proportion to the number of common units held by such holders. | | | | | | | | | | | | | | | | | |
A merger or consolidation of the Company into another entity in which the members of the Company would own less than 50% of the voting stock/units of the surviving company or the sale or transfer of substantially all of the assets would be deemed a liquidation of the Company. |
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Conversion |
Conversion was either at the option of the holder or was automatic upon the written consent of the requisite Series A Preferred Holders. “Requisite Series A Preferred Holders” was defined as holders of a majority of the Series A units then issued and outstanding, voting as a separate class. |
Each Series A unit was convertible into a common unit by dividing $2.81 by the conversion price in effect. The initial conversion price of $2.81 was subject to adjustments for subdivisions or combinations of common units, reclassification, exchange and substitution and dilutive issuances. As of December 31, 2012, the conversion price in effect was the same as the issuance price. In connection with the LLC Conversion, the Series A units were converted into shares of Series A preferred stock at a ratio of 1-to-1. |
Redemption |
The holders of Series A units were entitled to elect to require the Company to purchase all of the outstanding Series A, after January 20, 2015, at $2.81 per unit plus accrued preferred return at 8% per annum, payable in three equal annual installments. Prior to the redemption upon the completion of the IPO, the Company was accreting to the January 20, 2015 redemption value of $33.5 million. For fiscal 2013, 2012 and 2011, the Company recorded $1.0 million, $2.1 million and $2.0 million, respectively, for the accretion of the Series A units to their redemption value using the effective interest method. As redemption of Series A units was outside the control of the Company, all units have been presented outside of Members’ deficit in the Company’s consolidated balance sheets and consolidated statements of redeemable convertible preferred units and stockholders’ equity (members’ deficit). |
The Company initially recorded the Series A units at their issuance price net of issuance costs, which represented the carrying value. The difference between the initial carrying value of Series A units and their total redemption value was accreted from the issuance date through the first redemption date, January 20, 2015, using the effective interest rate method. The Company recorded accretion of issuance costs of $56,000, $121,000 and $119,000, respectively, for fiscal 2013, 2012 and 2011. |
Preferred Stock |
The Company has authorized 20,000,000 shares of undesignated preferred stock, $0.0001 par value per share. As of December 28, 2013 and December 31, 2012, the Company had no shares of preferred stock issued or outstanding. |
Common Units |
Prior to the LLC Conversion, the Company had 33,333,333 common units authorized. Each holder of common units was entitled to one vote for each common unit held. Upon the LLC Conversion, all of the then-outstanding common units were converted into shares of common stock. As of December 28, 2013 and December 31, 2012, the Company had zero and 17,300,005 common units outstanding, respectively. |
Common Stock |
The Company has authorized 1,000,000,000 shares of common stock, $0.0001 par value per share. Each holder of common stock is entitled to one vote for each share of common stock held. Cumulative voting for the election of directors is not provided in the Company’s amended and restated certificate of incorporation. The Company’s common stock is not entitled to preemptive rights, and is not subject to conversion, redemption or sinking fund provisions. Subject to preferences that may apply to any shares of preferred stock outstanding at the time, the holders of common stock are entitled to receive dividends out of funds legally available if the Board, in its discretion, determines to issue dividends and then only at the times and in the amounts that the Board may determine. |
As of December 28, 2013, the Company had 31,151,723 shares of common stock issued and outstanding. The Company had zero shares of common stock authorized, issued or outstanding as of December 31, 2012. |
Treasury Stock |
As of December 28, 2013 and December 31, 2012, the Company had 8,109,848 shares of treasury stock outstanding, with a carrying value of $12.5 million, or $1.35 per share, within stockholders’ equity (members’ deficit) on its consolidated financial statements. The treasury stock was repurchased in fiscal 2010 pursuant to a purchase and redemption agreement and does not have any restrictions imposed by state law. |
Equity Award Plans |
Unit Option Plan |
In March 2012, the Company adopted the 2012 Unit Option Plan (the “Option Plan”). The Option Plan authorized the Company to grant options and RSUs, up to a maximum of 3,300,505 shares, to employees, members and consultants of the Company. The Option Plan was terminated in connection with the Company’s IPO but will continue to govern the terms and conditions of outstanding awards granted thereunder. Prior to its termination, the Option Plan authorized the Company to grant options and RSUs up to a maximum of 4,967,172 units to employees, directors and consultants of the Company. |
The following table summarizes the activity under the Option Plan prior to its termination (in shares): |
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| | Number of | | | | | | | | | | | | | | | | | |
shares | | | | | | | | | | | | | | | | |
Shares available for future grant at December 31, 2012 | | | 732,267 | | | | | | | | | | | | | | | | | |
Additional authorization | | | 1,666,667 | | | | | | | | | | | | | | | | | |
Options granted | | | (1,426,849 | ) | | | | | | | | | | | | | | | | |
RSUs granted | | | (507,264 | ) | | | | | | | | | | | | | | | | |
Options cancelled | | | 64,653 | | | | | | | | | | | | | | | | | |
RSUs cancelled | | | 3,234 | | | | | | | | | | | | | | | | | |
Transferred to 2013 Equity Incentive Plan upon termination | | | (532,708 | ) | | | | | | | | | | | | | | | | |
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Shares available for future grant at December 28, 2013 | | | — | | | | | | | | | | | | | | | | | |
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Under the Option Plan, stock options granted to new hires are generally subject to a four-year vesting period whereby options become 25% vested on the first anniversary from the grant date and then ratably monthly thereafter through the end of the vesting period. Vested options may be exercised up to ten years from the vesting commencement date, as defined in the Option Plan. Vested but unexercised options, under the Option Plan, expire 30 days after termination of employment with the Company. Prior to the IPO, vesting of certain options under the Option Plan was also subject to the completion of the IPO (the “IPO Stock Options”). |
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2013 Equity Incentive Plan |
In May 2013, the Company adopted the 2013 Equity Incentive Plan (the “2013 Equity Plan”). All authorized but unissued shares of the Company’s Option Plan were added to the 2013 Equity Plan’s authorized pool in June 2013. The Company is authorized to issue up to a maximum of 2,929,481 shares of common stock for future issuance, plus up to an additional 4,967,172 shares upon termination of awards under the Option Plan. In addition, the 2013 Equity Plan is subject to increase annually on the first day of each of the Company’s fiscal years beginning with fiscal 2014, by an amount equal to the least of (i) 1,464,740 shares, (ii) 5% of the outstanding shares of common stock as of the last day of the immediately preceding fiscal year, or (iii) such other amount as determined by the Board. Vested but unexercised options, under the 2013 Equity Plan, expire three months after termination of service with the Company. |
The 2013 Equity Plan permits the grant of stock options, stock appreciation rights, restricted stock, RSUs, performance units and performance shares to employees, directors and consultants of the Company. |
Employee Stock Purchase Plan |
In conjunction with the completion of its IPO, the Company adopted the 2013 Employee Stock Purchase Plan (the “ESPP”). Under the ESPP, 439,422 shares of the Company’s common stock are authorized for future issuance. The number of authorized shares under the ESPP is subject to increase on an annual basis. The ESPP allows eligible employees to purchase shares of the Company’s common stock at a discount through payroll deductions of up to 15% of their eligible compensation, subject to plan limitations. The ESPP provides for a 24-month offering period comprised of four purchase periods of approximately six months. Employees are able to purchase shares at 85% of the lower of the market value of the Company’s common stock (i) at the date of commencement of the offering period or (ii) at the last day of the purchase period. The offering periods are scheduled to start on the first trading day on or after May 15 and November 15 of each year, except for the first offering period, which commenced on the first trading day upon the completion of the Company’s IPO, or June 12, 2013, and ends on August 17, 2015. In fiscal 2013, the Company recorded stock-based compensation expense of $4.7 million for its ESPP. No shares have been purchased by employees under the ESPP as of and for the fiscal year ended December 28, 2013. |
Stock Option Activity |
Stock options granted to new hires, under the 2013 Equity Plan and formerly under the Option Plan (together, the “Option Plans”), are generally subject to a four-year vesting period whereby options become 25% vested on the first anniversary from the grant date and then ratably monthly thereafter through the end of the vesting period. Vested options may be exercised up to ten years from the vesting commencement date. |
In fiscal 2013 and fiscal 2012, the Company granted its employees zero shares and 66,663 shares subject to performance-based options, respectively. These options vest based upon the achievement of sales goals for each individual grantee. Based upon the achievement of each individual’s sales goals, 21,749 shares and 9,123 shares subject to such options had vested as of December 28, 2013 and December 31, 2012, respectively. The Company recognized approximately $134,400 and $90,000 in stock-based compensation expense during fiscal 2013 and fiscal 2012, respectively. As of December 28, 2013 and December 31, 2012, 39,998 shares and 50,666 shares subject to such performance-based options, respectively, were outstanding, with unrecognized expense of $0.1 million and $0.2 million, net of estimated forfeitures, respectively. |
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In fiscal 2013, the Company granted 448,349 shares subject to fully-vested options to certain employees, with an average exercise price of $0.02 per share, as substitute options to purchase our common stock in connection with the LLC Conversion. In fiscal 2012, the Company granted 153,647 shares subject to fully-vested options to certain employees, with an average exercise price of $10.38 per unit. Stock-based compensation expense recognized in fiscal 2013 and fiscal 2012 in connection with these fully vest options was $8.5 million and $0.9 million, respectively. |
In fiscal 2012, the Company granted a total of 1,143,413 shares subject to the IPO Stock Options, for which the Company recorded $3.8 million of stock-based compensation expense in fiscal 2013 upon the completion of its IPO in June 2013. |
The following table summarizes the stock option activity related to shares of common stock under the Company’s Option Plans: |
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| | Number of | | | Weighted- | | | Weighted- | | | Aggregate | | | | | |
Stock | Average | Average | Intrinsic | | | | |
Options | Exercise | Remaining | Value | | | | |
Outstanding | Price | Contractual | | | | | |
| | Life (Years) | | | | | |
| | (in thousands) | | | | | |
Options granted | | | 2,524,492 | | | $ | 7.87 | | | | | | | | | | | | | |
Options cancelled | | | (106,095 | ) | | $ | 6.5 | | | | | | | | | | | | | |
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Balance — December 31, 2012 | | | 2,418,397 | | | $ | 7.92 | | | | 9.40 | | | $ | 12,527 | | | | | |
Options granted | | | 1,599,514 | | | $ | 11.36 | | | | | | | | | | | | | |
Options exercised | | | (344,592 | ) | | $ | 4.99 | | | | | | | | | | | | | |
Options cancelled | | | (295,016 | ) | | $ | 8.86 | | | | | | | | | | | | | |
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Balance — December 28, 2013 | | | 3,378,303 | | | $ | 9.77 | | | | 8.78 | | | $ | 62,725 | | | | | |
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Vested and expected to vest — December 31, 2012 | | | 1,173,666 | | | $ | 9.34 | | | | 9.51 | | | $ | 4,428 | | | | | |
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Exercisable — December 31, 2012 | | | 189,459 | | | $ | 10.19 | | | | 9.61 | | | $ | 559 | | | | | |
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Vested and expected to vest — December 28, 2013 | | | 3,216,818 | | | $ | 9.68 | | | | 8.64 | | | $ | 60,034 | | | | | |
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Exercisable — December 28, 2013 | | | 972,268 | | | $ | 6.34 | | | | 8.65 | | | $ | 21,344 | | | | | |
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Aggregate intrinsic value represents the difference between the Company’s fair market value per share of $28.29 and $13.11 as of December 28, 2013 and December 31, 2012, respectively, and the exercise price of the awards for the total number of underlying options. |
Weighted-average fair value per share for option awards vested in fiscal 2013 and fiscal 2012 was $5.67 and $6.06, respectively. The total intrinsic value of options exercised was $10.6 million and zero in fiscal 2013 and fiscal 2012, respectively. No award was granted or vested under the Option Plan prior to fiscal 2012. Excluded from the options vested and expected to vest as of December 31, 2012 were 1,070,316 stock options that did not commence vesting until the completion of the Company’s IPO in June 2013. |
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Additional information regarding the Company’s outstanding stock options and vested and exercisable stock options is summarized below: |
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| | As of December 28, 2013 | |
| | Options Outstanding | | | Options Vested and | |
Exercisable |
Exercise Prices | | Number of | | | Weighted- | | | Weighted- | | | Shares | | | Weighted- | |
Stock | Average | Average | Subject | Average |
Options | Remaining | Exercise | to Stock | Exercise |
Outstanding | Contractual | Price per | Options | Price per |
| Life (Years) | Share | | Share |
$0.00 - $6.09 | | | 1,667,580 | | | | 8.43 | | | $ | 4.98 | | | | 647,032 | | | $ | 2.69 | |
$10.38 - $19.00 | | | 1,629,724 | | | | 9.04 | | | $ | 13.53 | | | | 325,236 | | | $ | 11.93 | |
$29.36 - $37.18 | | | 80,999 | | | | 9.88 | | | $ | 30.37 | | | | — | | | $ | — | |
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| | | 3,378,303 | | | | 8.78 | | | $ | 9.77 | | | | 972,268 | | | $ | 6.34 | |
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Restricted Stock Unit Activity |
RSUs generally vest ratably on a quarterly basis over a period of three to four years. The vesting is subject to the employee’s continuing service with the Company over that period. Until vested, RSUs do not have the voting or dividend participation rights of common stock and the shares of common stock underlying the awards are not considered issued and outstanding. RSUs are converted into shares of the Company’s common stock upon vesting on a one-for-one basis. Prior to our IPO, vesting of RSUs was subject to the occurrence of a liquidity event, and in certain instances additional vesting criteria. The liquidity event was defined as the earliest of (i) the closing of a sale event of the Company, or (ii) six months following the IPO of the Company’s common stock. |
The following table summarizes the RSU activity under the Company’s Option Plans: |
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| | Number of | | | Weighted- | | | Weighted- | | | Aggregate | | | | | |
RSUs | Average | Average | Intrinsic | | | | |
Outstanding | Grant Date | Remaining | Value | | | | |
| Fair Value | Contractual | | | | | |
| | Life (Years) | | | | | |
| | | | | | | (in thousands) | | | | | |
RSUs granted | | | 149,841 | | | $ | 11.12 | | | | | | | | | | | | | |
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Balance — December 31, 2012 | | | 149,841 | | | $ | 11.12 | | | | 1.98 | | | $ | 1,965 | | | | | |
RSUs granted | | | 764,509 | | | $ | 22.13 | | | | | | | | | | | | | |
RSUs vested | | | (50,849 | ) | | $ | 11.06 | | | | | | | | | | | | | |
RSUs cancelled | | | (22,552 | ) | | $ | 16.16 | | | | | | | | | | | | | |
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Balance — December 28, 2013 | | | 840,949 | | | $ | 21.00 | | | | 1.40 | | | $ | 23,790 | | | | | |
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Vested and expected to vest — December 28, 2013 | | | 783,633 | | | $ | 20.89 | | | | 1.35 | | | $ | 22,169 | | | | | |
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Aggregate intrinsic value represents the difference between the Company’s fair market value per share of $28.29 and $13.11 as of December 28, 2013 and December 31, 2012, respectively, and the exercise price of the awards for the total number of underlying RSUs. Weighted average fair value per share for RSUs vested in fiscal 2013 was $11.06 million. Total intrinsic value of RSUs vested in fiscal 2013 was $1.5 million. In fiscal 2013, the Company recognized stock-based compensation expense of $6.0 million related to its RSUs. |
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The Company did not recognize stock-based compensation expense related to its RSUs for fiscal 2012 as the liquidity event had not occurred as of December 31, 2012. Accordingly, none of the Company’s outstanding RSUs was vested or exercisable as of December 31, 2012. |
Stock-Based Compensation Expense |
The fair value of stock options is estimated on the date of grant using the Black-Scholes option-pricing model. It is based on the “simplified method” for developing the estimate of the expected life of a “plain vanilla” stock option. Under this approach, the expected term is presumed to be the midpoint between the average vesting date and the end of the contractual term of the option. The risk-free interest rate for the period covering the expected life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The expected volatility was determined based on historical volatility of the common stock of publicly traded comparable companies and the expected life of the options since the Company has not had sufficient public trading history of its common stock. The dividend yield assumption is based on the Company’s historical dividend payouts. The Company uses the graded vesting method for expense attribution. |
Prior to the IPO, determining the market value of the Company’s common stock required complex and subjective judgment and estimates. There was inherent uncertainty in making these judgments and estimates. The absence of an active market for the Company’s common units or common stock prior to the IPO required the Board to estimate the fair value of its common stock for purposes of setting the exercise price of the options and estimating the fair value of common stock at each meeting at which options were granted based on factors such as the valuations of comparable companies, the status of the Company’s development and sales efforts, revenue growth and additional objective and subjective factors relating to the Company’s business. The Company performed its analysis in accordance with applicable elements of the practice aid issued by the American Institute of Certified Public Accountants entitled Valuation of Privately Held Company Equity Securities Issued as Compensation. |
The fair value of the option awards and ESPP purchase rights granted and the assumptions used in the Black-Scholes option pricing model are summarized as follows: |
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| | Fiscal Year Ended | | | | | | | | | | | | | | | | |
| | December 28, | | December 31, | | | | | | | | | | | | | | | | |
2013 | 2012 | | | | | | | | | | | | | | | | |
Stock option awards: | | | | | | | | | | | | | | | | | | | | |
Expected term (in years) | | 5.00 - 6.08 | | 5.00 - 6.08 | | | | | | | | | | | | | | | | |
Risk-free interest rate | | 0.89% - 1.84% | | 0.91% - 1.28% | | | | | | | | | | | | | | | | |
Expected volatility | | 62.1% - 65.3% | | 62.5% - 65.1% | | | | | | | | | | | | | | | | |
Expected dividend rate | | 0% | | 0% | | | | | | | | | | | | | | | | |
Grant date fair value per award | | $9.44 - $23.29 | | $5.67 - $9.18 | | | | | | | | | | | | | | | | |
ESPP purchase right: | | | | | | | | | | | | | | | | | | | | |
Expected term (in years) | | 0.68 - 2.18 | | — | | | | | | | | | | | | | | | | |
Risk-free interest rate | | 0.08% - 0.20% | | —% | | | | | | | | | | | | | | | | |
Expected volatility | | 53.6% - 63.1% | | —% | | | | | | | | | | | | | | | | |
Expected dividend rate | | 0% | | —% | | | | | | | | | | | | | | | | |
Grant date fair value per share | | $12.11 - $15.68 | | $— | | | | | | | | | | | | | | | | |
The cost of RSUs is determined using the fair value of the Company’s common stock on the date of the grant. In fiscal 2013, the Company granted 764,509 RSUs with a grant date fair value per share ranging from $15.57 to $38.33. In fiscal 2012, the Company granted 95,842 RSUs and 53,999 RSUs with a grant date fair value per share of $10.38 and $12.42, respectively, including performance-based RSUs covering 8,666 shares. |
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As of December 28, 2013, unrecognized compensation expense related to stock options, RSUs and ESPP purchase rights, net of estimated forfeitures, of $10.3 million, $10.9 million, and $5.1 million, respectively, with a weighted-average remaining amortization period of 1.4 years, 1.4 years and 0.9 year, respectively. As of December 31, 2012, excluding the 1,070,316 IPO Stock Options and 149,841 RSUs that were subject to the IPO, unrecognized compensation expense related to unvested stock options, net of estimated forfeitures, was $4.9 million with a weighted-average remaining amortization period of 1.8 years. There was no capitalized stock-based compensation expense for any of the periods presented. |
The following table summarizes the stock-based compensation expense recorded in the Company’s consolidated statement of operations (in thousands): |
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| | Fiscal Year Ended | | | | | | | | | |
| | December 28, | | | December 31, | | | December 31, | | | | | | | | | |
2013 | 2012 | 2011 | | | | | | | | |
Cost of revenue | | $ | 3,496 | | | $ | 153 | | | $ | — | | | | | | | | | |
Research and development | | | 11,467 | | | | 542 | | | | 8 | | | | | | | | | |
Sales and marketing | | | 11,034 | | | | 893 | | | | 2 | | | | | | | | | |
General and administrative | | | 6,546 | | | | 2,011 | | | | 2 | | | | | | | | | |
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Total stock-based compensation expense | | $ | 32,543 | | | $ | 3,599 | | | $ | 12 | | | | | | | | | |
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Common Stock Reserved for Future Issuance |
The Company had the following shares of common stock reserved for future issuance (in shares): |
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| | As of | | | | | | | | | | | | | |
| | December 28, | | | December 31, | | | | | | | | | | | | | |
2013 | 2012 | | | | | | | | | | | | |
Option Plan: | | | | | | | | | | | | | | | | | | | | |
Common stock subject to options outstanding | | | 3,205,638 | | | | 2,418,397 | | | | | | | | | | | | | |
RSUs outstanding | | | 585,205 | | | | 149,841 | | | | | | | | | | | | | |
Shares available for future grants | | | — | | | | 732,267 | | | | | | | | | | | | | |
2013 Equity Plan: | | | | | | | | | | | | | | | | | | | | |
Common stock subject to options outstanding | | | 172,665 | | | | — | | | | | | | | | | | | | |
RSUs outstanding | | | 255,744 | | | | — | | | | | | | | | | | | | |
Shares available for future grants | | | 3,281,959 | | | | — | | | | | | | | | | | | | |
ESPP | | | 439,422 | | | | — | | | | | | | | | | | | | |
Convertible preferred units | | | — | | | | 8,109,847 | | | | | | | | | | | | | |
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Common stock reserved for future issuances | | | 7,940,633 | | | | 11,410,352 | | | | | | | | | | | | | |
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