Annual report pursuant to Section 13 and 15(d)

Stock-based Compensation Plans and Awards

v2.4.1.9
Stock-based Compensation Plans and Awards
 12 Months Ended
Dec. 31, 2014
Disclosure of Compensation Related Costs, Share-based Payments [Abstract]  
Stock-based Compensation Plans and Awards
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.

Shares available for grant as of December 31, 2014 and the activity during the twelve months ended December 31, 2014 are as follows:
 
Shares Available for Grant
 
Equity Awards
 
ESPP
 
Total
Balance as of December 31, 2013
9,048,200

 
—

 
9,048,200

Additional shares authorized
7,815,837

 
4,000,000

 
11,815,837

Options granted
(349,500
)
 
—

 
(349,500
)
Restricted stock granted
(4,909,360
)
 
—

 
(4,909,360
)
ESPP shares issued
—

 
(142,265
)
 
(142,265
)
Options forfeited
1,639,935

 
—

 
1,639,935

Restricted stock forfeited
1,081,348

 
—

 
1,081,348

Balance as of December 31, 2014
14,326,460

 
3,857,735

 
18,184,195



Employee Stock Purchase Plan
 
In December 2013, our board of directors approved the Employee Stock Purchase Plan (“ESPP”), which was approved by our stockholders at the annual meeting in June 2014. The ESPP allows eligible employees to purchase shares of our common stock through payroll deductions of up to 15% of their eligible compensation, subject to a maximum of $25,000 per calendar year. Shares reserved for issuance under the ESPP include 4,000,000 shares of common stock. The ESPP provides for six- month offering periods, commencing in February and August of each year. At the end of each offering period employees are able to purchase shares at 85% of the lower of the fair market value of our common stock on the first trading day of the offering period or on the last day of the offering period.
 
We estimate the fair value of shares to be issued under the ESPP on the first day of the offering period using the Black-Scholes valuation model. The determination of the fair value is affected by our stock price on the first date of the offering period, as well as other assumptions including the risk-free interest rate, the estimated volatility of our stock price over the term of the offering period, the expected term of the offering period and the expected dividend rate. Stock-based compensation expense related to the ESPP is recognized on a straight-line basis over the offering period, net of estimated forfeitures.
 
The per-share fair value of shares to be granted under the ESPP is determined on the first day of the offering period using the Black-Scholes option pricing model using the following assumptions:
 
        
 
Twelve months ended 
 December 31,
 
2014
Expected life (in years)
0.5

Risk-free interest rate
0.06
%
Expected volatility
42
%
Expected dividend yield
0
%

 
During the twelve months ended December 31, 2014, we recognized $2.1 million of stock-based compensation expense related to the ESPP. In the twelve months ended December 31, 2014, 149,378 shares of common stock were issued under the ESPP at a purchase price of $23.95, which represents 85% of our stock price on the date of purchase of $28.17. There were no stock-based compensation expense related to the ESPP or shares of common stock issued under the ESPP in the twelve months ended January 31, 2013 or the eleven months ended December 31, 2013.

Stock Options 

Stock option activity during the twelve months ended December 31, 2014 was as follows:
 
Options Outstanding
 
Outstanding
Stock Options
 
Weighted-Average Exercise Price
 
Weighted-Average Remaining Contractual Term (in years)
 
Aggregate Intrinsic Value (1)
 
(in thousands, except share and per share data)
Balance as of December 31, 2013
22,708,200

 
$
4.85

 
5.76
 
$
493,866

Granted
349,500

 
35.61

 
 
 
 
Exercised
(10,437,509
)
 
1.62

 
 
 
 
Forfeited
(1,639,935
)
 
11.49

 
 
 
 
Balance as of December 31, 2014
10,980,256

 
7.91

 
1.08
 
120,033

Exercisable as of December 31, 2014
7,958,775

 
4.39

 
0.40
 
108,296

Expected to vest as of December 31, 2014 (2)
2,719,853

 
$
17.05

 
2.82
 
$
10,822

 
 
 
 
 
 
 
 
(1)Amounts represent the difference between the exercise price and the fair value of common stock at each period end for all in the money options outstanding based on the fair value per share of common stock of $26.60 and $17.83 as of December 31, 2013 and 2014.
 
 
(2)Options expected to vest reflect an estimated forfeiture rate.
 
 

The per-share fair value of stock options granted during the twelve months ended January 31, 2013, the eleven months ended December 31, 2013 and the twelve months ended December 31, 2014 was determined on the grant date using the Black-Scholes option pricing model with the following assumptions:
 
Twelve months ended 
 January 31,
 
Eleven months ended 
 December 31,
 
Twelve months ended 
 December 31,
 
2013
 
2013
 
2014
Expected life (in years)
6.02 - 6.67

 
5.99 - 6.32

 
6.08

Risk-free interest rate
0.99% - 1.52%

 
1.00% - 2.04%

 
1.71% - 1.93%

Expected volatility
56% - 57%

 
58% - 59%

 
58% - 59%

Expected dividend yield
0
%
 
0
%
 
0
%


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.

During the twelve months ended January 31, 2013, the eleven months ended December 31, 2013 and the twelve months ended December 31, 2014, we recorded stock-based compensation expense related to stock options of approximately $14.9 million, $10.6 million and $14.7 million, respectively.

As of December 31, 2014, there was $26.7 million of unrecognized compensation cost related to outstanding employee stock options. This amount is expected to be recognized over a weighted-average period of 2.86 years. To the extent the actual forfeiture rate differs from our estimates, stock-based compensation related to these awards could differ from our expectations.

The weighted-average fair value of stock option grants made during the twelve months ended January 31, 2013, the eleven months ended December 31, 2013 and the twelve months ended December 31, 2014 was $5.91, $9.34 and $19.74 per share, respectively.

The total grant date fair value of stock options vested during the twelve months ended January 31, 2013, the eleven months ended December 31, 2013 and the twelve months ended December 31, 2014 was $13.0 million, $9.1 million and $16.0 million, respectively.

The aggregate intrinsic value of stock options exercised during the twelve months ended January 31, 2013, the eleven months ended December 31, 2013 and the twelve months ended December 31, 2014 was $84.9 million, $93.8 million and $169.2 million, respectively. The total fair value of options vested during the twelve months ended January 31, 2013, the eleven months ended December 31, 2013 and the twelve months ended December 31, 2014 was $13.1 million, $9.4 million and $16.5 million, respectively.

Stock option awards with both a service period and a market condition

In March 2012, Mr. Joseph Kennedy, the Company’s former 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: ten-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.

Restricted Stock Units

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, which is generally four years. During the twelve months ended January 31, 2013, the eleven months ended December 31, 2013 and the twelve months ended December 31, 2014, we recorded stock-based compensation expense related to restricted stock units of approximately $10.4 million, $28.9 million and $69.9 million, respectively. As of December 31, 2014, total compensation cost not yet recognized of approximately $197.3 million related to non-vested restricted stock units, is expected to be recognized over a weighted average period of 2.60 years.

The following table summarizes the activities for our RSUs for the twelve months ended December 31, 2014:

 
Number of RSUs
 
Weighted-Average Grant Date Fair Value
Unvested as of December 31, 2013
10,365,512

 
$
14.31

Granted
4,909,360

 
32.29

Vested
(3,169,456
)
 
13.85

Forfeited
(1,081,348
)
 
19.06

Unvested as of December 31, 2014
11,024,068

 
21.99

Expected to vest as of December 31, 2014 (1)
9,914,453

 
$
21.88

(1) RSUs expected to vest reflect an estimated forfeiture rate.
 
 
 


Stock-based Compensation Expense

Stock-based compensation expense related to all employee and non-employee stock-based awards was as follows:
 
 
Twelve months ended 
 January 31,
 
Eleven months ended 
 December 31,
 
Twelve months ended 
 December 31,
 
2013
 
2013
 
2014
 
(in thousands)
Stock-based compensation expense
 

 
 

 
 

Cost of revenue—Other
$
1,214

 
$
1,946

 
$
4,414

Product development
4,530

 
8,802

 
17,546

Sales and marketing
12,294

 
20,222

 
42,165

General and administrative
7,462

 
9,071

 
22,930

Total stock-based compensation expense
$
25,500

 
$
40,041

 
$
87,055



During the eleven months ended December 31, 2013 and the twelve months ended December 31, 2014, we capitalized $0.7 million and $1.3 million of stock-based compensation as internal use software and website development costs. There was no capitalized stock-based compensation in the twelve months ended January 31, 2013.