9. Stock-based Compensation Plans and Awards

Stock Compensation Plans

        In 2000, our board of directors adopted the 2000 Stock Incentive Plan, as amended (the "2000 Plan"). In 2004, our board of directors 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 Pandora. In 2011, our board of directors adopted the Pandora Media, Inc. 2011 Equity Incentive Plan (the "2011 Plan" and, together with the 2000 Plan and the 2004 Plan, the "Plans"), which replaced the 2004 plan. The Plans are administered by the compensation committee of our board of directors (the "Plan Administrator").

        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 12,000,000 shares of common stock reserved for issuance under the 2011 Plan and 1,506,424 shares of common stock previously reserved but unissued under the 2004 Plan as of June 14, 2011. 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 year, the number of shares in the reserve under the Plan may be increased by the lesser of 10,000,000 shares, 4.0% of the outstanding shares of common stock on the last day of the prior fiscal year or another amount determined by our board of directors. The 2011 Plan is scheduled to terminate in 2021, unless our board of directors determines otherwise.

        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 the fair market value of the common stock on the date of grant.

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. We determined the expected term assumption based on our historical exercise behavior combined with estimates of the post-vesting holding period. Expected volatility is based on historical volatility of peer companies in our 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. We currently have no history or expectation of paying cash dividends on our 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 our board of directors, whenever funds are legally available. These rights are subordinate to the dividend rights of holders of all classes of stock outstanding at the time.

Stock Options

        Stock option activity during the eleven months ended December 31, 2013 was as follows:

        As of December 31, 2013, there was $40.1 million of unrecognized compensation cost related to outstanding employee stock options. This amount is expected to be recognized over a weighted-average period of 3.03 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.

        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, 2013 and December 31, 2013, a total of 52,000 and 30,270 common stock options, issued to non-employees were vested and outstanding. During the twelve months ended January 31, 2012 and 2013 and the eleven months ended December 31, 2013, we recorded $0.3 million, $0.2 million and $0.6 million in stock-based compensation expenses related to stock option grants made to non-employees, respectively. As of December 31, 2013, total compensation cost related to stock options granted to non-employees but not yet recognized, was $0.3 million, which we expect to recognize over a weighted-average period of 0.95 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.

Early Exercise Liability

        Certain of our options granted prior to the IPO provided the right to exercise those options before they are vested. We have 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 Pandora for any reason.

        In connection with the early exercise of stock options, we have the right, but not the obligation, to repurchase unvested shares of common stock upon termination of the individual's service with Pandora at the original purchase price per share. As of January 31, 2013 and December 31, 2013, 308,334 and 80,209 unvested restricted shares of common stock were subject to repurchase. During the eleven months ended December 31, 2013 there were 104,167 shares repurchased at the previous early exercise price of $3.14 per share.

        During the twelve months ended January 31, 2012 and 2013 and the eleven months ended December 31, 2013 there were no early exercises. Repurchase rights with respect to the restricted shares outstanding as of December 31, 2013 will expire ratably by January 31, 2015.

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

        In March 2012, Mr. Joseph Kennedy, the Company's Chief Executive Officer, was granted non-statutory stock options to purchase 800,000 shares of common stock with an exercise price of $10.63 per share. This award included both a service period and a market vesting condition that stipulated that the award would vest if the 60-day trailing volume weighted average price of our common stock exceeded $21.00 per share, or if there was a sale of the Company for at least $21.00 per share, in each case prior to July 2017. Upon the market condition being met, the award would vest ratably over four years, beginning in July 2013, subject to severance and change of control acceleration.

        We used a Monte Carlo simulation to value the award due to the market vesting condition. The following assumptions were used to value the award using the Monte Carlo simulation: 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 award was $6.08 per share.

        In March 2013, we announced that we would begin a process to identify a successor to Mr. Kennedy as CEO, which prompted us to re-evaluate certain estimates and assumptions related to the stock-based compensation expense associated with his awards.

As a result of this re-evaluation, we reduced stock-based compensation expense by $1.7 million during the three months ended April 30, 2013, primarily related to the award with both a service period and a market condition. In September 2013, the market condition for Mr. Kennedy's awards was met and the shares became exercisable as if they had been vesting ratably over four years from July 2013. In the eleven months ended December 31, 2013, we recorded $0.6 million in additional stock-based compensation expense in connection with these awards.

Modification of Awards

        During the twelve months ended January 31, 2012, we revised our 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, $2.3 million and $0.8 million, in incremental stock-based compensation expense for the twelve months ended January 31, 2012 and 2013 and the eleven months ended December 31, 2013, respectively.

Restricted Stock Units

        During the eleven months ended December 31, 2013, we granted 7,129,868 restricted stock units ("RSUs") under the 2011 Plan at a weighted average fair value of $16.16 per share. The fair value of the restricted stock units is expensed ratably over the vesting period. RSUs generally vest annually on a cliff basis over the service period, which is generally four years. During the eleven months ended December 31, 2013, we recorded stock-based compensation expense related to restricted stock units of approximately $28.9 million. As of December 31, 2013, total compensation cost not yet recognized of approximately $129.6 million related to non-vested restricted stock units, is expected to be recognized over a weighted average period of 2.97 years.

        The following table summarizes the activities for our RSUs for the eleven months ended December 31, 2013:

Stock-based Compensation Expenses

        The weighted-average fair value of stock option grants made during the twelve months ended January 31, 2012 and 2013 and the eleven months ended December 31, 2013 was $4.83, $5.91 and $9.34 per share. As of December 31, 2013, total compensation cost related to stock options granted, but not yet recognized, was $40.1 million, which we expect to recognize over a weighted-average period of approximately 3.03 years.

        The total grant date fair value of stock options vested during the twelve months ended January 31, 2012 and 2013 and the eleven months ended December 31, 2013 was $5.0 million, $13.0 million and $9.1 million, respectively.

        The aggregate intrinsic value of options and warrants exercised during the twelve months ended January 31, 2012 and 2013 and the eleven months ended December 31, 2013 was $51.9 million, $84.9 million and $93.8 million,, respectively. The total fair value of options vested during the twelve months ended January 31, 2012 and 2013 and the eleven months ended December 31, 2013 was $5.2 million, $13.1 million and $9.4 million, respectively.

        Stock-based compensation expenses related to all employee and non-employee stock-based awards was as follows:

        During the eleven months ended December 31, 2013, we capitalized $0.7 million of stock-based compensation as internal use software and website development costs.