Stock-Based Compensation | 9. Stock-Based Compensation Stock Incentive Plans 2022 Inducement Plan In April 2022, the Company adopted the Kezar Life Sciences, Inc. 2022 Inducement Plan (the “Inducement Plan”), which is a non-stockholder approved stock plan adopted pursuant to the “inducement exception” provided under Nasdaq Listing Rule 5635(c)(4), for the award of nonstatutory stock options (“NSOs”), restricted stock units (“RSUs”) and other equity awards as permitted by the Inducement Plan (collectively, “Inducement Awards”) to persons not previously an employee or director of the Company, or following a bona fide period of non-employment, as an inducement material to such persons entering into employment with the Company (“Eligible Recipients”). Under the Inducement Plan, the Company may grant up to 3,000,000 shares of Common Stock in the form of Inducement Awards to Eligible Recipients in compliance with the requirements of Nasdaq Listing Rule 5635(c)(4). Awards must be approved by either a majority of the Company’s independent directors or the Company’s independent compensation committee. Consultants and directors are not eligible to received grants under the Inducement Plan. As of June 30, 2023, options to purchase 1,313,000 shares of common stock were outstanding, and 1,687,000 shares were available for future issuance under the Inducement Plan. 2018 Equity Incentive Plan In June 2018, the Company’s board of directors adopted and its stockholders approved the 2018 Equity Incentive Plan (the “2018 Plan”), which became effective as of June 20, 2018, at which point no further grants could be made under the 2015 Equity Incentive Plan (the “2015 Plan”) described below. Under the 2018 Plan, the Company may grant incentive stock options (“ISOs”), NSOs, stock appreciation rights, restricted stock awards, RSUs and other stock-based awards. As of June 30, 2023, options to purchase 10,212,197 shares of common stock and 433,611 RSUs were outstanding, and 1,499,142 shares were available for future issuance under the 2018 Plan. Initially, subject to adjustment as provided in the 2018 Plan, the aggregate number of shares of the Company’s common stock authorized for issuance pursuant to stock awards under the 2018 Plan was 4,000,000 shares, which is the sum of (i) 1,600,692 shares plus (ii) the number of shares reserved and available for issuance under the 2015 Plan at the time the 2018 Plan became effective and (iii) the number of shares subject to stock options or other stock awards granted under the 2015 Plan that expire, terminate are forfeited or otherwise not issued, or are withheld to satisfy a tax withholding obligation in connection with an award or to satisfy a purchase or exercise price of an award (such as upon the expiration or termination of a stock award prior to vesting). The number of shares of the Company’s common stock reserved for issuance under the 2018 Plan automatically increases on January 1 of each year, beginning on January 1, 2019 and continuing through and including January 1, 2028 , by 5 % of the total number of shares of capital stock outstanding on December 31 of the preceding calendar year, or a lesser number of shares determined by the Company’s board of directors prior to such increase. The maximum number of shares that may be issued upon the exercise of ISOs under the 2018 Plan is 12,500,000 shares. 2015 Equity Incentive Plan The Company’s 2015 Plan provided for the granting of ISOs and NSOs to employees, directors and consultants at the discretion of its board of directors. The 2015 Plan was terminated as to future awards in June 2018, although it continues to govern the terms of options that remain outstanding under the 2015 Plan. No additional stock awards will be granted under the 2015 Plan, and all outstanding stock awards granted under the 2015 Plan that are repurchased, forfeited, expire or are cancelled will become available for grant under the 2018 Plan in accordance with its terms. Options granted under the 2015 Plan expire no later than 10 years from the date of grant. Options granted under the 2015 Plan vest over periods determined by the Company’s board of directors, generally over four years . The 2015 Plan allows for early exercise of certain options prior to vesting. Upon termination of employment, the unvested shares are subject to repurchase at the original exercise price. As of June 30, 2023, options to purchase 1,436,808 shares of common stock were outstanding under the 2015 Plan. 2018 Employee Stock Purchase Plan In June 2018, the Company’s board of directors adopted and its stockholders approved the 2018 Employee Stock Purchase Plan (the “ESPP”), which became effective as of June 20, 2018. The ESPP is intended to qualify as an “employee stock purchase plan” within the meaning of Section 423 of the U.S. Internal Revenue Code of 1986, as amended. The number of shares of common stock initially reserved for issuance under the ESPP was 200,000 shares. The ESPP provides for an annual increase on January 1 of each year, beginning on January 1, 2019 and continuing through and including January 1, 2028, equal to the lesser of (i) 1 % of the shares of common stock outstanding on the last day of the prior fiscal year or (ii) 375,000 shares, or a lesser number of shares determined by the Company’s board of directors prior to such increase. In December 2022, the Company’s board of directors acted such that there was no increase of the number of shares of common stock reserved for issuance under the ESPP as of January 1, 2023. As of June 30, 2023, 503,836 shares of common stock had been issued under the ESPP and 829,388 shares remained available for future issuance under the ESPP. The price per share of common stock to be paid by an ESPP participant on the applicable purchase date of an offering period shall be equal to 85 % of the lesser of the fair market value of a share of common stock on (i) the applicable offering date or (ii) the applicable purchase date. The Company’s board of directors authorized an initial six-month offering period beginning on November 16, 2018 and ending on May 15, 2019 . The Company’s board of directors has subsequently authorized additional six-month offering periods, with the most recent offering period beginning on May 16, 2023 . Stock Option Activity The following table summarizes activity under the Company’s stock option plans and related information (in thousands, except share and per share amounts): Number of Weighted Weighted Aggregate Outstanding as of December 31, 2022 9,684,810 $ 8.12 7.6 $ 15,407 Options granted 4,043,994 $ 5.91 Options exercised ( 106,921 ) $ 2.00 $ 302 Options cancelled/forfeited ( 659,878 ) $ 9.16 Outstanding as of June 30, 2023 12,962,005 $ 7.43 7.8 $ 489 Vested and exercisable as of June 30, 2023 6,151,141 $ 7.19 6.5 $ 489 The weighted average grant date fair value of options granted during the three and six months ended June 30, 2023 was $ 2.19 and $ 4.45 per share, respectively. The aggregate intrinsic values of exercised stock options during the three and six months ended June 30, 2023 were $ 24 thousand and $ 0.3 million, respectively. The aggregate intrinsic value is calculated as the difference between the exercise price and the estimated fair value of the Company’s common stock at the date of exercise. Restricted Stock Units Activity During the six months ended June 30, 2023, the Company granted RSUs to certain employees pursuant to the 2018 Plan. One-third of each RSU grant will vest annually following the vesting commencement dates, over a vesting period of 3 years . RSUs are awards that entitle the holder to receive freely tradable shares of the Company's common stock upon vesting and are not forfeitable once fully vested. The valuations for these RSUs were based on the closing prices of the Company's common stock on the grant dates and recognized as stock-based compensation expenses over the respective vesting terms. Number of RSUs Outstanding Weighted Average Grant-Date Fair Price Outstanding as of December 31, 2022 434,790 $ 9.80 RSUs granted 81,619 $ 6.84 RSUs vested ( 13,989 ) $ 14.55 RSUs forfeited ( 68,809 ) $ 9.27 Outstanding as of June 30, 2023 433,611 $ 9.17 Stock-Based Compensation Expense Total stock-based compensation expense recognized by function was as follows (in thousands): Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 Research and development $ 2,013 $ 1,595 $ 4,281 $ 2,918 General and administrative 2,007 1,703 4,002 3,484 Total stock-based compensation expense $ 4,020 $ 3,298 $ 8,283 $ 6,402 As of June 30, 2023, the unrecognized stock-based compensation cost related to outstanding unvested stock options and RSUs that are expected to vest was $ 39.5 million with an estimated weighted average amortization period of 2.8 years. The fair value of the stock options granted is calculated using the Black-Scholes option-pricing model with the following range of assumptions: Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 Expected term (years) 5.5 - 6.1 5.5 - 6.0 5.5 - 6.1 5.3 - 6.0 Expected volatility 88.0 - 88.3 % 84.3 - 88.4 % 87.8 - 88.3 % 84.3 - 88.4 % Risk-free interest rate 3.5 - 3.9 % 2.8 - 3.2 % 3.5 - 4.3 % 1.6 - 3.2 % Expected dividend yield — — — — The expected term of options granted represents the period of time that options granted are expected to be outstanding and was determined by calculating the midpoint between the date of vesting and the contractual life of each option. The expected term of the ESPP rights is equal to the six-month look-back period. Volatility is based on the average of the historical volatility of the Company's stock price and that of a peer group of public companies over the expected term. The peer group was selected on the basis of operational and economic similarity with the Company’s principal business operations. The risk-free interest rate for the expected term of the options is based on the U.S. Treasury yield curve with a maturity equal to the expected term in effect at the time of grant. The Company has no t paid, and does not anticipate paying, cash dividends on its shares of common stock; therefore, the expected dividend yield is zero . |