8. Stock-based Compensation Plans and Awards

• Stock Compensation Plans

        In February 2000, the board of directors of the Company adopted the 2000 Stock Incentive Plan, as amended (the "2000 Plan"). In March 2004, the board of directors of the Company adopted the 2004 Stock Option Plan (the "2004 Plan"), which replaced the 2000 Plan and provided for the issuance of incentive and non-statutory stock options to employees and other service providers of the Company.

        In May 2011, the board of directors of the Company adopted the Pandora Media, Inc. 2011 Equity Incentive Plan (the "2011 Plan" and, together with the 2000 Plan and the 2004 Plan, the "Plans"). The 2011 Plan was the successor to the 2004 Plan and was available for grants starting on June 14, 2011. The 2011 Plan provides for the issuance of stock options, restricted stock units and other stock-based awards. Shares of common stock reserved for issuance under the 2011 Plan include (a) 12,000,000 shares of common stock reserved for issuance under the 2011 Plan as of June 14, 2011 plus (b) 1,506,424 shares of common stock previously reserved but unissued under the 2004 Plan as of June 14, 2011 that are now available for issuance under the 2011 Plan. To the extent awards outstanding as of June 14, 2011 under the 2004 Plan expire or terminate for any reason prior to exercise or would otherwise return to the share reserve under the 2004 Plan, the shares of common stock subject to such awards will instead be available for future issuance under the 2011 Plan. Each fiscal year, (beginning with the fiscal year that commenced February 1, 2012 and ending with the fiscal year commencing February 1, 2021), the number of shares in the reserve under the Plan may be increased by the lesser of (x) 10,000,000 shares, (y) 4.0% of the outstanding shares of common stock on the last day of the prior fiscal year or (z) another amount determined by the Company's board of directors. For the fiscal year beginning February 1, 2012, 4.0% of the outstanding shares of common stock as of January 31, 2012 were added to the number of shares in the reserve. The 2011 Plan is scheduled to terminate in 2021, unless the board of directors determines otherwise.

        Plans are administered by the compensation committee of the board of directors (the "Plan Administrator") of the Company.

        Under the 2011 Plan, the Plan Administrator determines various terms and conditions of awards including option expiration dates (no more than ten years from the date of grant), vesting terms (generally over a four-year period), and payment terms. For stock option grants the exercise price is determined by the Plan Administrator, but generally may not be less than 100% of the fair market value of the common stock subject to the option on the date of grant.

        Certain of the Company's options granted prior to the IPO provided the right to exercise those options before they are vested. The Company has a right to repurchase any unvested shares at a repurchase price equal to the exercise price during the 90-day period following the termination of an individual's service with the Company for any reason.

• Valuation of Awards

        The per-share fair value of each stock option was determined on the date of grant using the Black-Scholes option pricing model using the following assumptions:

        The expected term of stock options granted represents the weighted average period that the stock options are expected to remain outstanding. The Company determined the expected term assumption based on the Company's historical exercise behavior combined with estimates of the post-vesting holding period. Expected volatility is based on historical volatility of peer companies in the Company's industry that have similar vesting and contractual terms. The risk free interest rate is based on the implied yield currently available on U.S. Treasury issues with terms approximately equal to the expected life of the option. The Company currently has no history or expectation of paying cash dividends on its common stock.

• Common Stock

        Each share of common stock has the right to one vote per share. The holders of common stock are also entitled to receive dividends as and when declared by the board of directors of the Company, whenever funds are legally available. These rights are subordinate to the dividend rights of holders of all classes of stock outstanding at the time.

        Early Exercise Liability.    In connection with the early exercise of stock options, the Company has the right, but not the obligation, to repurchase unvested shares of common stock upon termination of the individual's service to the Company at the original purchase price per share. During the fiscal years ended January 31, 2012 and 2013 there were no early exercises. During the fiscal year ended January 31, 2011, employees early exercised a total of 691,667 shares of common stock subject to these terms.

        As of January 31, 2012 and 2013, 483,334, and 308,334 unvested restricted shares, respectively, of common stock were subject to repurchase. Repurchase rights with respect to the restricted shares outstanding as of January 31, 2013 will expire ratably between February 1, 2011 and January 31, 2015.

        Stock Options.    Stock option activity during the year ended January 31, 2013 was as follows:

        As of January 31, 2013, there was $31.0 million of unrecognized compensation cost related to outstanding employee stock options. This amount is expected to be recognized over a weighted-average period of 2.4 years. To the extent the actual forfeiture rate is different from what we have estimated, stock-based compensation related to these awards will be different from our expectations.

        Options to Non-Employees.    The per-share fair value of stock options granted to non-employees is determined on the date of grant using the Black-Scholes option pricing model with the same assumptions as those used for employee awards with the exception of expected term. The expected term for non-employee awards is the contractual term of 10 years.

        As of January 31, 2011, 2012 and 2013, respectively, a total of 431,359, 59,375 and 52,000 common stock options, issued to non-employees were vested and outstanding.

        During the years ended January 31, 2011, 2012 and 2013, the Company recorded $15,500, $0.3 million and $0.2 million, respectively, in stock-based compensation expenses related to stock option grants made to non-employees. As of January 31, 2013, total compensation cost related to stock options granted to non-employees but not yet recognized, was $0.4 million which the Company expects to recognize over a weighted-average period of 1.8 years. The fair value of these options will be remeasured on each vesting date and as of each reporting date until the options vest. The remeasured fair value will be recognized as compensation expense over the remaining vesting term of the options.

• Option Granted to Related Party

        During January of 2011, the Company entered into a consulting arrangement with a spouse of one of the Company's executive officers, pursuant to which the consultant will provide consulting services to the Company for a period of four years. Pursuant to this arrangement, the Company granted the consultant options to purchase 40,000 shares of its common stock at $3.14 per share, to vest over four years at a rate of ¹/48th per month. Using the Black-Scholes option pricing model, the initial grant date fair value of these options was determined to be $60,000. During the fiscal year ended January 31, 2013 the executive officer terminated her employment with the Company; her spouse continues to provide consulting services. For the fiscal year ended January 31, 2013, $0.1 million compensation cost has been recognized related to these options due to the remeasured fair value at the reporting date.

• Stock Option Awards with Both a Service Period and a Market Condition

        On March 22, 2012, Mr. Joseph Kennedy, the Company's Chief Executive Officer, was granted a non-statutory stock option to purchase 800,000 shares of common stock. This option grant to Mr. Kennedy was intended to be in lieu of an annual equity grant for fiscal 2014. This option includes both a service period and a market vesting condition. The stock option will vest if the 60-day trailing volume weighted average price of the Company's common stock exceeds $21.00 per share, or if there is a sale of the Company for at least $21.00 per share, in each case prior to July 6, 2017. If the market condition is met, the performance option will vest ratably over four years, beginning on July 6, 2013, subject to severance and change of control acceleration. To the extent that the market condition is not met, the option will not vest and will be cancelled. The Company used a binomial model to value the option with a market condition. The Company used Monte Carlo simulation techniques that incorporate assumptions as provided by management for the term of option from grant date (in years), risk-free interest rate, stock price volatility and beginning stock price. The Company does not adjust compensation cost recognition for subsequent changes in the expected outcome of the market-vesting conditions.

        The following assumptions were used to value the grant using the Monte-Carlo simulation option pricing model: 10-year term, risk-free interest rate of 2.33%, expected volatility of 70% and a beginning stock price of $10.63. The grant-date fair value for the option was $6.08 per share. As of January 31, 2013, the remaining unrecognized compensation expense of approximately $3.6 million related to this grant is expected to be recognized over a period of 4.43 years.

Modification of Award

        During the year ended January 31 2012, the Company revised its employment policies for certain eligible officers, resulting in a modification of approximately 3.6 million stock options held by these employees. As a result, upon an involuntary termination, any unvested options or other stock awards scheduled to vest within a defined time frame would be accelerated. The modification of these stock options resulted in approximately $0 and $2.3 million incremental stock-based compensation expense for the years ended January 31, 2012 and January 31, 2013 respectively.

Restricted Stock Units

        During the fiscal year ended January 31, 2013, Pandora granted 4,864,000 restricted stock units ("RSUs"), respectively, under the 2011 Plan at a weighted average fair value of $10.37 per share. The fair value of the restricted stock units is expensed ratably over the vesting period. RSUs vest annually on a cliff basis over the service period, generally four years. The Company recorded stock-based compensation expense related to restricted stock units of approximately $10.4 million during the fiscal year ended January 31, 2013. As of January 31, 2013, total compensation cost not yet recognized of approximately $51.7 million related to non-vested restricted stock units, is expected to be recognized over a weighted average period of 3.30 years.

        The following table summarizes the activities for our RSUs for the year ended January 31, 2013:

• Stock-based Compensation Expenses

        The weighted-average fair value of stock option grants made during the fiscal years ended January 31, 2011, 2012 and 2013 was $1.17, $4.83 and $5.91 per share, respectively. As of January 31, 2013, total compensation cost related to stock options granted, but not yet recognized, was $31.35 million which the Company expects to recognize over a weighted-average period of approximately 2.4 years.

        The total grant date fair value of stock options vested during fiscal years ended January 31, 2011, 2012 and 2013 was not material, $5.0 million and $13.0 million, respectively.

        The aggregate intrinsic value of options and warrants exercised during the years ended January 31, 2011, 2012 and 2013 was $5.8 million, $51.9 million, $84.9 million, respectively. The total fair value of options vested during the years ended January 31, 2011, 2012 and 2013 was $909,000, $5.2 million and $13.1 million, respectively.

        Stock-based compensation expenses related to all employee and non-employee stock-based awards for fiscal 2011, 2012 and 2013 was as follows: