10.	Stock Incentive Plan

The Company’s 2009 Stock Incentive Plan (“2009 Plan”) is administered by the Board of Directors and Compensation Committee, which have the authority to designate participants and determine the number and type of awards to be granted and any other terms or conditions of the awards. Options generally vest over a four-year period and expire ten years from the date of grant. Restricted stock units with service-based vesting conditions generally vest over a three-year period while restricted stock units with market-based vesting conditions generally vest over two or three-year periods. Certain stock-based awards provide for accelerated vesting if there is a change in control. On May 23, 2013, the Company’s stockholders approved an amendment to the 2009 Plan that increased the shares available to grant under the plan by 1,400,000 shares. As of December 31, 2013, there were 1,649,831 shares available for grant under the 2009 Plan.

The Company generally issues previously unissued shares of common stock for the exercise of stock options and restricted stock units. The Company received $6.2 million, $2.7 million and $3.8 million in cash from stock option exercises during the years ended December 31, 2011, 2012 and 2013, respectively.

The Company uses the Black-Scholes option-pricing model to estimate the grant date fair value of stock options. The Company estimates the expected volatility of its common stock at the date of grant based on the historical volatility of comparable public companies over the option’s expected term as well as its own stock price volatility since the Company’s IPO. The Company estimates expected term based on historical exercise activity and giving consideration to the contractual term of the options, vesting schedules, employee turnover, and expectation of employee exercise behavior. The assumed dividend yield is based upon the Company’s expectation of not paying dividends in the foreseeable future. The risk-free rate for periods within the estimated life of the stock option is based on the U.S. Treasury yield curve in effect at the time of grant. Historical employee turnover data is used to estimate pre-vesting stock option forfeiture rates. The compensation expense is amortized on a straight-line basis over the requisite service period of the stock award, which is generally four years for options.

The Company used the following assumptions to apply the Black-Scholes option-pricing model:

 

		Years Ended December 31,
		2011		2012		2013
Expected dividend yield		0.00%		0.00%		0.00%
Risk-free interest rate		0.91% - 2.28%		0.64% - 0.87%		0.87 - 1.36%
Expected term (in years)		5.56 - 6.25		5.56 - 6.25		6.25
Volatility		60%		55% - 60%		55%

 

The following table summarizes stock option activity (shares and intrinsic value in thousands):

 

		Number of Options				Weighted Average Exercise Price				Weighted Average Remaining Contractual Term (Years)				Aggregate Intrinsic Value
Outstanding, January 1, 2013			2,941			$	25.90				7.2
Granted			186				22.22
Exercised			(374	)			10.15							$	7,213
Forfeited			(364	)			33.97
Outstanding, December 31, 2013			2,389			$	26.85				6.4			$	22,330
Exercisable at December 31, 2013			1,451			$	23.45				5.4			$	17,855
Vested or expected to vest at December 31, 2013			2,331			$	26.78				6.3			$	21,965

The aggregate intrinsic value was calculated based on the positive differences between the estimated fair value of the Company’s common stock on December 31, 2013 of $33.55 per share or at time of exercise, and the exercise price of the options.

The weighted average grant date fair value of stock options issued was $22.42, $18.57 and $11.60 per share for the years ended December 31, 2011, 2012 and 2013, respectively.

During the year ended December 31, 2013, the Company granted 763,073 restricted stock units, containing time-based vesting conditions which generally lapse over a three year period.

In August 2013, the Company granted 74,000 restricted stock units containing market-based vesting conditions which vest upon the achievement of a total shareholder return target measured over the performance period which ranges from two to three years (“TSR units”). The number of TSR units that will vest can range from 0% of the target shares to 200% of the target shares, or 148,000, and is also based upon continued employment of the participant over the vesting period which ranges from two to three years. The TSR units are valued using a Monte Carlo simulation model. The number of awards expected to be earned is factored into the grant date Monte Carlo valuation for the TSR unit. Compensation cost is recognized regardless of the actual number of awards that are earned based on the market condition. Expected volatility is based on the Company’s historical volatility. The risk-free interest rate is based upon U.S. Treasury securities with a term similar to vesting term of the restricted stock unit.

The assumptions used in the Monte Carlo simulation model include (but are not limited to) the following:

 

		Year Ended December  31, 2013
Risk-free interest rate			0.62	%
Volatility			54	%

Compensation cost is recognized on a straight-line basis over the requisite service period. At December 31, 2013, all of the TSR units granted in August 2013 remain outstanding.

 

The following table summarizes all restricted stock unit activity (shares in thousands):

 

		Number of shares Underlying Restricted Stock Units				Weighted Average Grant Date Fair Value
Unvested as of January 1, 2013			783			$	31.14
Restricted stock units granted			837				26.93
Restricted stock units vested			(259	)			31.06
Restricted stock units forfeited			(169	)			29.26
Unvested as of December 31, 2013			1,192			$	28.47

The Company recognized stock based compensation expense within the accompanying consolidated statements of income as summarized in the following table (in thousands):

 

		Years Ended December 31,
		2011				2012				2013
Cost of revenue		$	316			$	484			$	706
Research and development			1,477				2,826				3,761
Sales and marketing			2,700				4,962				7,242
General and administrative			4,432				6,520				8,005
		$	8,925			$	14,792			$	19,714

As of December 31, 2013, there was approximately $36,656,000 of total unrecognized share-based compensation cost, net of estimated forfeitures, related to unvested stock option grants and unvested restricted stock units which are expected to be recognized over a weighted average period of 2.0 years. The total unrecognized share-based compensation cost will be adjusted for future changes in estimated forfeitures.