Stockholders' Equity and Stock-Based Compensation | 10. Stockholders' Equity and Stock-Based Compensation Equity Compensation Plans In August 2021, the board of directors (the Board) adopted the 2021 Equity Incentive Plan (the 2021 Plan) and the 2021 Employee Stock Purchase Plan (ESPP), effective upon the IPO. Pursuant to the 2021 Plan, the Board may grant incentive stock options to purchase shares of the Company’s common stock, non-statutory stock options to purchase shares of the Company’s common stock, stock appreciation rights, restricted stock, restricted stock units (RSUs), performance awards (PRSUs) and other awards. The ESPP enables eligible employees to purchase shares of the Company's Class A common stock. Both the 2021 Plan and ESPP include an automatic increase to their shares reserve on January 1 of each year as set forth in the respective plan documents. In August 2022, the Compensation Committee of the Board adopted the 2022 Inducement Plan (the Inducement Plan) in accordance with Listing Rule 5635(c)(4) of the Nasdaq Stock Market. Under the Inducement Plan, nonstatutory stock options, stock appreciation rights, restricted stock, RSUs, PRSUs and other awards may be granted as an inducement material to an eligible person's entering into employment with the Company. Shares of common stock outstanding and reserved for future issuance were as follows (in thousands): June 30, 2024 2011 Stock Plan: Options, RSUs and PRSUs outstanding 4,149 2021 Equity Incentive Plan: Options, RSUs and PRSUs outstanding (1) 19,441 Shares reserved for future award issuances 82,078 2022 Inducement Plan: Options and RSUs outstanding 3,128 Shares reserved for future award issuances 6,480 2021 Employee Stock Purchase Plan Shares reserved for future award issuances 13,166 Total awards outstanding and shares of common stock reserved for issuance 128,442 (1) Outstanding shares include the Executive PRSUs and 2024 Executive Chairman Award, as discussed below, based on 100% achievement of target performance. 2021 Employee Stock Purchase Plan Under the ESPP, the price at which common stock is purchased is equal to 85% of the fair market value of a share of the Company’s common stock on the first day of the offering period or the applicable purchase date, whichever is lower. The fair market value of common stock will generally be the closing sales price on the determination date. The ESPP provides an offering period of 24 months, with four purchase periods that are generally six months long and end on May 15 and November 15 of each year. The Company issued 308,059 and 367,319 shares under the ESPP in the three and six months ended June 30, 2024 and 2023, respectively, in each case net of shares withheld and retired to satisfy withholding tax requirements for certain employees in jurisdictions outside the United States. The weighted average purchase price per share was $11.85 with aggregate net proceeds of $3.6 million in the three and six months ended June 30, 2024, and the weighted average purchase price was $11.87 with aggregate net proceeds of $4.3 million in the three and six months ended June 30, 2023. The ESPP also includes a reset provision for the purchase price if the fair market value of a share of the Company's common stock on the first day of any purchase period is less than or equal to the fair market value of a share of the Company's common stock on the first day of an ongoing offering. If the reset provision is triggered, a new 24-month offering period begins. The reset provision under the ESPP was triggered in May 2022, November 2022 and May 2024. Each triggering of the reset provision was considered a modification in accordance with ASC 718, Stock Based Compensation , with the modification charge recognized on a straight-line basis over the new offering period. The modifications did not have a material effect on the Company's stock-based compensation expense during the three and six months ended June 30, 2024 and 2023. Stock-based compensation expense related to ESPP was $1.3 million and $2.5 million for the three months ended June 30, 2024 and 2023, respectively, and $2.5 million and $4.5 million for the six months ended June 30, 2024 and 2023, respectively. Determination of Fair Value of the ESPP The Company estimates the fair value of the ESPP using the Black-Scholes option-pricing model, which requires certain complex valuation assumption inputs such as expected term, expected stock price volatility, risk-free interest rate, and dividend yield. The fair value of each of the four purchase periods is estimated separately. The following table summarizes the range of valuation assumptions used in estimating the fair value of the ESPP during the period: Valuation Assumption Inputs Three and Six Months Ended June 30, 2024 Three and Six Months Ended June 30, 2023 Expected term (in years) 0.5 - 2.0 0.5 - 1.5 Stock price volatility 48.3% - 57.2% 58.1% - 77.3% Risk-free interest rate 4.78% - 5.41% 4.47% - 5.26% Dividend yield —% —% Stock Options Stock options are generally granted with an exercise price equal to the fair market value of a share of common stock on the date of grant, have a 10-year contractual term, and vest over a four-year period. Share Information: Number of Shares (in thousands) Weighted-Average Exercise Price Weighted-Average Remaining Contractual Term (in years) Aggregate Intrinsic Value (in thousands) (1) Balance as of December 31, 2023 2,395 $ 10.39 7.0 $ 31,368 Assumed and converted options from acquisition (Note 6) 512 $ 3.26 Stock options exercised (122) $ 0.29 Stock options cancelled / forfeited / expired — $ — Balance as of June 30, 2024 2,785 $ 9.52 5.9 $ 10,493 Options vested and expected to vest as of June 30, 2024 2,785 $ 9.52 5.9 $ 10,493 Options exercisable as of June 30, 2024 1,252 $ 8.75 5.7 $ 5,667 (1) Aggregate intrinsic value for stock options represents the difference between the exercise price and the per share fair value of the Company’s common stock as of the end of the period, multiplied by the number of stock options outstanding, exercisable, or vested. The weighted-average grant date fair value per share of the assumed and converted stock options related to the Device42 acquisition was $11.09 for the three and six months ended June 30, 2024, of which approximately $1.8 million was related to post-combination services and will be recognized as stock-based compensation over requisite service period of two years (Note 6). Determination of Fair Value of the Stock Options The Company estimates the fair value of the stock options assumed in its acquisition using the Black-Scholes option-pricing model, which requires certain complex valuation assumption inputs such as expected term, expected stock price volatility, risk-free interest rate, and dividend yield. There were no stock options granted during the six months ended June 30, 2024, other than the stock options assumed as part of the Device42 acquisition. The following table summarizes the range of valuation assumptions used in estimating the fair value of the stock options during the period: Valuation Assumption Inputs Three and Six Months Ended June 30, 2024 Expected term (in years) 6.0 Stock price volatility 65% Risk-free interest rate 4.29% Dividend yield —% Restricted Stock Units RSUs are granted at fair market value at the date of the grant and typically vest over a four-year period. RSU activity, which includes PRSUs, during the six months ended June 30, 2024 was as follows: Share Information: Number of Shares Weighted-Average Grant Date Fair Value Per Share (in thousands, except per share data) Unvested, as of December 31, 2023 26,755 $ 18.44 Granted (1) 10,262 $ 23.54 Vested (2) (5,052) $ 17.56 Forfeited/Cancelled (3) (8,032) $ 20.37 Unvested, as of June 30, 2024 23,933 $ 20.16 (1) During the six months ended June 30, 2024, shares granted includes 0.9 million shares granted to the Executive Chairman as long-term equity incentive award accounted for as a modification with a weighted average grant date fair value of $69.78 per share. Refer to the Executive Chairman Awards discussion below. (2) During the six months ended June 30, 2024, total shares that vested were 5.1 million, of which 1.9 million were withheld for tax purposes. (3) Shares forfeited includes the cancellation of the 2021 Executive Chairman Performance Award consisting of 6,000,000 PRSUs discussed in the Executive Chairman Awards section below. The total fair value of vested RSUs during the three months ended June 30, 2024 and 2023 was $43.5 million and $47.5 million, respectively. For the six months ended June 30, 2024 and 2023, the total fair value of vested RSUs was $88.6 million and $86.4 million, respectively. Performance-Based Awards Executive Chairman Awards In September 2021, the Board approved a grant of 6,000,000 PRSUs to the Company's then CEO, now current Executive Chairman, with a time-based service condition beginning January 1, 2022, and a market condition involving five separate stock price hurdles ranging from $70.00 to $200.00 per share for each of the five vesting tranches (2021 Executive Chairman Performance Award). The 2021 Executive Chairman Performance Award had a total grant date fair value of $131.0 million. During the six months ended June 30, 2024, the Company recognized $4.6 million related to this 2021 Executive Chairman Performance Award prior to the modification effective March 1, 2024 discussed below. During the three and six months ended June 30, 2023, the Company recognized $7.0 million and $13.9 million of stock-based compensation expense related to this 2021 Executive Chairman Performance Award, respectively. As a result of macroeconomic conditions outside the control of the Company’s leadership team, the five separate stock price hurdles were considered by the Board to be too high for the 2021 Executive Chairman Performance Award to have the retention value expected at the time the award was granted. In February 2024, the Board approved the cancellation of the 2021 Executive Chairman Performance Award and the grant of a 2024 Executive Chairman Award with a fair value of $19 million, both effective March 1, 2024. The Company accounted for the 2024 Executive Chairman Award as a modification. There were no incremental costs recognized as a result of the modification and the remaining unrecognized stock-based compensation expense from the 2021 Executive Chairman Performance Award of $61.9 million will be recognized over the vesting period of the new 2024 Executive Chairman Award. The 2024 Executive Chairman Award comprised of 70% time-based RSUs that vest quarterly over four years and 30% PRSUs with the same terms as the Executive PRSUs discussed below. For the three and six months ended June 30, 2024, the Company recognized $5.8 million and $7.7 million, respectively, of stock-based compensation expense related to the 2024 Executive Chairman Award. Executive PRSUs In February 2024, the Board approved PRSUs to be granted to certain members of the executive team (Executive PRSUs), subject to service and performance-based vesting conditions. The performance-based vesting conditions include revenue and free cash flow targets over the performance period from January 1 to December 31, 2024, and vest over 3 years from the grant date. 70% and 30% of each Executive PRSU award will be earned based on the Company’s achievement of revenue and free cash flow targets, respectively. The performance targets allow the Company's executives to earn up to a maximum of 177.5% of target performance in the aggregate for significant outperformance. The fair value of each PRSU is based on the fair value of the Company's common stock on the date of grant. Stock-based compensation associated with these Executive PRSUs is recognized using the accelerated attribution method over the requisite service period, based on the Company's periodic assessment of the probability that the performance will be achieved. For the three and six months ended June 30, 2024 , the Company r ecognized $1.9 million and $2.5 million of stock-based compensation expense related to the Executive PRSUs, respectively. Stock-Based Compensation Total stock-based compensation expense recorded for the three and six months ended June 30, 2024 and 2023 was as follows (in thousands): Three Months Ended June 30, Six Months Ended June 30, 2024 2023 2024 2023 Cost of revenue $ 1,682 $ 1,731 $ 3,203 $ 3,427 Research and development (1) 10,355 10,060 19,021 19,039 Sales and marketing 18,376 17,273 35,677 33,029 General and administrative (2) 24,726 25,184 49,680 49,447 Stock-based compensation, net of amounts capitalized 55,139 54,248 107,581 104,942 Capitalized stock-based compensation 382 424 756 938 Total stock-based compensation expense $ 55,521 $ 54,672 $ 108,337 $ 105,880 (1) Stock-based compensation expense recorded to research and development in the consolidated statements of operations excludes amounts that were capitalized for internal-use software. (2) General and administrative expense includes stock-based compensation associated with RSUs and PRSUs granted to our former CEO (now Executive Chairman) of $12.7 million and $13.9 million for the three months ended June 30, 2024 and 2023, respectively, and $26.2 million and $27.7 million for the six months ended June 30, 2024 and 2023, respectively. As of June 30, 2024, unrecognized stock-based compensation expense related to unvested stock-based awards was as follows (in thousands, except for period data): June 30, 2024 Unrecognized Stock-Based Compensation Weighted-Average Period to Recognize Expense RSUs and PRSUs $ 442,570 2.7 Stock options 9,834 2.1 ESPP 9,451 1.2 Total unrecognized stock-based compensation expense $ 461,855 |