6. Stock-Based Compensation and Employee Benefit Plans

Common Stock

At December 31, 2011, the Company had 500 million authorized shares of Class A common stock and 500 million authorized shares of Class B common stock. Holders of the Company's Class A and Class B common stock have identical voting rights, except that holders of Class A common stock are entitled to one vote per share and holders of Class B common stock are entitled to ten votes per share with respect to transactions that would result in a change of control of the Company or that relate to the Company's equity incentive plans. In addition, holders of Class B common stock have the exclusive right to elect two member of the Company's Board of Directors, each referred to as a Class B Director. The shares of Class B common stock are not publicly traded. Each share of Class B common stock is convertible at any time at the option of the holder into one share of Class A common stock and in most instances automatically converts upon sale or other transfer.

Employee Benefit Plans

At December 31, 2011, the Company had stock-based compensation awards outstanding under the following plans: the 2004 Stock Plan, the 2010 Equity Incentive Plan and the 2010 Employee Stock Purchase Plan. Upon the closing of the initial public offering in March 2010, all stock awards are issued under the 2010 Equity Incentive Plan and are no longer issued under the 2004 Stock Plan.

2010 Equity Incentive Plan

The 2010 Plan provides for the grant of incentive stock options, nonstatutory stock options, restricted stock awards, restricted stock unit awards, stock appreciation rights, performance-based stock awards, and other forms of equity compensation, or collectively, stock awards. The aggregate number of shares of Class A common stock that may be issued pursuant to stock awards under the 2010 Plan will increase by any shares subject to stock options or other awards granted under the 2004 Stock Plan that expire or otherwise terminate without having been exercised in full and shares issued pursuant to awards granted under the 2004 Stock Plan that are forfeited to or repurchased by the Company. In addition, the number of shares of common stock reserved for issuance will automatically increase on the first day of each fiscal year, equal to the lesser of: 2,583,311 shares of the Company's Class A common stock; four percent (4%) of the outstanding shares of the Company's Class A common stock and Class B common stock on the last day of the immediately preceding fiscal year; or such lesser amount as the Company's board of directors may determine. The exercise price for an incentive or a nonstatutory stock option cannot be less than 100% of the fair market value of the Company's Class A common stock on the date of grant. Options granted will generally vest over a four-year period and the term can be from seven to ten years.

 

2010 Employee Stock Purchase Plan

The ESPP authorizes the issuance of shares of the Company's Class A common stock pursuant to purchase rights granted to the Company's employees. The number of shares of the Company's common stock reserved for issuance will automatically increase on the first day of each fiscal year, equal to the least of: 968,741 shares of the Company's Class A common stock; one and a quarter percent (1.25%) of the outstanding shares of the Company's Class A common stock and Class B common stock on the first day of the fiscal year; or such lesser amount as may be determined by our board of directors or a committee appointed by our board of directors to administer the ESPP. The ESPP is implemented through a series of offerings of purchase rights to eligible employees. Under the ESPP, the Company may specify offerings with a duration of not more than 27 months, and may specify shorter purchase periods within each offering. Each offering will have one or more purchase dates on which shares of the Company's common stock will be purchased for employees participating in the offering. An offering may be terminated under certain circumstances. Generally, all regular employees, including executive officers, employed by the Company may participate in the ESPP and may contribute up to 10% of their earnings, subject to certain limitations, for the purchase of the Company's common stock under the ESPP. Beginning with the offering period commencing in May 2011, employees may contribute up to 15% of their earnings for the purchase of the Company's common stock under the ESPP. Unless otherwise determined by the Company's board of directors, Class A common stock will be purchased for accounts of employees participating in the ESPP at a price per share equal to the lower of (a) 85% of the fair market value of a share of the Company's Class A common stock on the first date of an offering or (b) 85% of the fair market value of a share of the Company's Class A common stock on the date of purchase.

Stock-Based Compensation

The Company recognized stock-based compensation in the statements of operations as follows:

 

		Years Ended December 31,
		2011				2010				2009
Cost of net revenue		$	54			$	80			$	—
Research and development			4,434				2,589				583
Selling, general and administrative			2,880				1,546				376
		$	7,368			$	4,215			$	959

The total unrecognized compensation cost related to unvested stock options as of December 31, 2011 was $8.6 million, and the weighted average period over which these equity awards are expected to vest is 2.57 years. The total unrecognized compensation cost related to unvested restricted stock units as of December 31, 2011 was $12.0 million, and the weighted average period over which these equity awards are expected to vest is 3.44 years.

The Company records equity instruments issued to non-employees as expense at their fair value over the related service period as determined in accordance with the authoritative guidance and periodically revalues the equity instruments as they vest. Stock-based compensation expense related to non-employee consultants totaled $174, $208 and $35 for 2011, 2010 and 2009, respectively.

Stock Options

The Company uses the Black-Scholes valuation model to calculate the fair value of stock options and employee stock purchase rights granted to employees. Stock-based compensation expense is recognized over the vesting period using the straight-line method and is classified in the consolidated statements of operations based on the department to which the related employee reports.

 

The fair values of stock options and employee stock purchase rights were estimated at their respective grant date using the following assumptions:

Stock Options

 

		Years Ended December 31,
		2011				2010				2009
Weighted-average grant date fair value per share		$	4.15			$	6.89			$	3.36
Risk-free interest rate			1.95	%			2.51	%			2.68	%
Dividend yield			—				—				—
Expected life (years)			5.02				6.06				6.18
Volatility			52.00	%			55.00	%			56.00	%

Employee Stock Purchase Rights

 

		Years Ended December 31,
		2011				2010				2009
Weighted-average grant date fair value per share		$	1.89 – $2.46			$	3.18 – $8.38				—
Risk-free interest rate			0.05 – 0.07	%			0.14 – 1.14	%			—
Dividend yield			—				—				—
Expected life (years)			0.5				0.5 – 2.10				—
Volatility			45.70 – 72.84	%			30.43 – 60.03	%			—

The risk-free interest rate assumption was based on the United States Treasury's rates for U.S. Treasury zero-coupon bonds with maturities similar to those of the expected term of the award being valued. The assumed dividend yield was based on the Company's expectation of not paying dividends in the foreseeable future. The weighted-average expected life of options was calculated using the simplified method as prescribed by guidance provided by the Securities and Exchange Commission. This decision was based on the lack of relevant historical data due to the Company's limited historical experience. In addition, due to the Company's limited historical data, the estimated volatility incorporates the historical volatility of comparable companies whose share prices are publicly available.

A summary of the Company's stock option activity is as follows:

 

		Number of Options				Weighted- Average Exercise Price				Weighted- Average Contractual Term (in Years)				Aggregate Intrinsic Value
Outstanding at December 31, 2010			4,732			$	5.03
Granted			1,503				8.88
Exercised			(980	)			1.56
Canceled			(589	)			7.16
Outstanding at December 31, 2011			4,666			$	6.73				7.0			$	4,444
Vested and expected to vest at December 31, 2011			4,499			$	6.66				7.0			$	4,437
Exercisable at December 31, 2011			2,108			$	4.47				6.4			$	4,141

 

The exercise price for all stock options granted prior to the Company's initial public offering is at or above the estimated fair value of the underlying common stock as determined contemporaneously on the date of grant by the Company's Board of Directors with assistance from valuation information provided the Company's management. Given the absence of an active market for the Company's common stock, the Company's Board of Directors was required to estimate the fair value of the Company's common stock at the time of each grant. The Company's Board of Directors, which includes members who are experienced in valuing the securities of early-stage technology companies, considered objective and subjective factors in determining the estimated fair value of the Company's common stock on each option grant date.

The intrinsic value of stock options exercised during 2011, 2010 and 2009 was $6,674, $5,226 and $3,723, respectively.

The fair value of options which vested during 2011, 2010 and 2009 was $3,727, $2,096 and $656, respectively.

Restricted Stock Units

The Company calculates the fair value of restricted stock units based on the fair market value of our Class A common stock on the grant date. Stock-based compensation expense is recognized over the vesting period using the straight-line method and is classified in the consolidated statements of income based on the department to which the related employee reports.

A summary of the Company's restricted stock unit activity is as follows:

 

		Number of Shares				Weighted- Average Grant-Date Fair Value per Share
Outstanding at December 31, 2010			—			$	—
Granted			2,174				7.99
Vested			(133	)			8.55
Canceled			(221	)			8.63
Outstanding at December 31, 2011			1,820			$	7.87

The fair value of restricted stock units which vested during 2011 was $1,139. No restricted stock units vested during 2010 and 2009, respectively.

Shares Reserved for Future Issuance

Common stock reserved for future issuance is as follows:

 

		December  31, 2011
Stock options outstanding			4,666
Restricted stock units outstanding			1,820
Authorized for future grants under 2010 Equity Incentive Plan			7,319
Authorized for future issuance under 2010 Employee Stock Purchase Plan			719
Total			14,524