Sirius XM Holdings Inc. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Stock-based Compensation Plans and Awards

Stock-based Compensation Plans and Awards

12 Months Ended

Dec. 31, 2015

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

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.

In December 2013, our board of directors approved the 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 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.

Shares available for grant as of December 31, 2015 and the activity during the twelve months ended December 31, 2015 are as follows:



	Shares Available for Grant
	Equity Awards		ESPP		Total
Balance as of December 31, 2014	14,326,460		3,857,735		18,184,195
Additional shares authorized	8,323,469		—		8,323,469
Ticketfly shares authorized	3,215,223		—		3,215,223
Options granted	(2,940,736	)	—		(2,940,736	)
Restricted stock granted	(11,678,792	)	—		(11,678,792	)
Market stock units granted	(776,000	)	—		(776,000	)
ESPP shares issued	—		(538,398	)	(538,398	)
Options forfeited	7,709		—		7,709
Restricted stock forfeited	1,245,994		—		1,245,994
Balance as of December 31, 2015	11,723,327		3,319,337		15,042,664

Employee Stock Purchase Plan ("ESPP")

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		2015
Expected life (in years)	0.5		0.5
Risk-free interest rate	0.06	%	0.12	%
Expected volatility	42	%	52	%
Expected dividend yield	0	%	0	%

During the twelve months ended December 31, 2014 and 2015, we withheld $6.4 million and $7.6 million in contributions from employees and recognized $2.1 million and $3.3 million of stock-based compensation expense related to the ESPP. In the twelve months ended December 31, 2014 and 2015, 149,378 and 538,398 shares of common stock were issued under the ESPP at a weighted average purchase price of $23.95 and $17.80. There was no stock-based compensation expense related to the ESPP or shares of common stock issued under the ESPP in the eleven months ended December 31, 2013.

Stock Options

Stock option activity during the twelve months ended December 31, 2015 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, 2014	10,980,256		$	7.91	1.08	$	120,033
Granted	2,940,736		3.44
Exercised	(1,077,797	)	4.78
Forfeited	(27,304	)	6.09
Balance as of December 31, 2015	12,815,891		7.15		1.09	101,151
Vested and exercisable as of December 31, 2015	9,292,855		5.74		0.57	81,541
Expected to vest as of December 31, 2015 (2)	3,259,020		$	10.81	2.47	$	18,156

(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 $17.83 and $13.41 as of December 31, 2014 and 2015.
(2)Options expected to vest reflect an estimated forfeiture rate.

The per-share fair value of stock options granted during the eleven months ended December 31, 2013, the twelve months ended December 31, 2014 and the twelve months ended December 31, 2015 was determined on the grant date using the Black-Scholes option pricing model with the following assumptions:



	Eleven Months Ended December 31,		Twelve Months Ended December 31,
	2013		2014		2015
Expected life (in years)	5.99 - 6.32		6.08		6.08
Risk-free interest rate	1.00% - 2.04%		1.71% - 1.93%		1.75% - 1.92%
Expected volatility	58% - 59%		58% - 59%		49% - 50%
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 eleven months ended December 31, 2013, the twelve months ended December 31, 2014 and the twelve months ended December 31, 2015, we recorded stock-based compensation expense related to stock options of approximately $10.6 million, $14.7 million and $10.7 million, respectively.

As of December 31, 2015, there was $32.2 million of unrecognized compensation cost related to outstanding employee stock options. This amount is expected to be recognized over a weighted-average period of 2.47 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 eleven months ended December 31, 2013, the twelve months ended December 31, 2014 and the twelve months ended December 31, 2015 was $9.34, $19.74 and $9.08 per share, respectively.

The total grant date fair value of stock options vested during the eleven months ended December 31, 2013, the twelve months ended December 31, 2014 and the twelve months ended December 31, 2015 was $9.1 million, $16.0 million and $17.6 million, respectively.

The aggregate intrinsic value of stock options exercised during the eleven months ended December 31, 2013, the twelve months ended December 31, 2014 and the twelve months ended December 31, 2015 was $93.8 million, $169.2 million and $9.5 million, respectively. The total fair value of options vested during the eleven months ended December 31, 2013, the twelve months ended December 31, 2014 and the twelve months ended December 31, 2015 was $9.4 million, $16.5 million and $17.6 million, respectively.

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 eleven months ended December 31, 2013, the twelve months ended December 31, 2014 and the twelve months ended December 31, 2015, we recorded stock-based compensation expense related to restricted stock units of approximately $28.9 million, $69.9 million and $96.1 million, respectively. As of December 31, 2015, total compensation cost not yet recognized of approximately $256.1 million related to non-vested restricted stock units, is expected to be recognized over a weighted average period of 2.75 years.

The following table summarizes the activities for our RSUs for the twelve months ended December 31, 2015:



	Number of RSUs		Weighted-Average Grant Date Fair Value
Unvested as of December 31, 2014	11,024,068		$	21.99
Granted	11,678,792		15.40
Vested	(4,184,415	)	21.06
Forfeited	(1,246,360	)	19.89
Unvested as of December 31, 2015	17,272,085		17.91
Expected to vest as of December 31, 2015 (1)	15,595,029		$	17.90
(1) RSUs expected to vest reflect an estimated forfeiture rate.

MSUs

We implemented a market stock unit program in March 2015 for certain key executives. MSUs are earned as a function of Pandora’s TSR performance measured against that of the Russell 2000 Index across three performance periods:


•	One-third of the target MSUs are eligible to be earned for a performance period that is the first calendar year of the MSU grant (the “One-Year Performance Period”);


•	One-third of the target MSUs are eligible to be earned for a performance period that is the first two calendar years of the MSU grant (the “Two-Year Performance Period”); and


•	Any remaining portion of the target MSUs are eligible to be earned for a performance period that is the entire three calendar years of the MSU grant (the “Three-Year Performance Period”).

For each performance period, a “performance multiplier” is calculated by comparing Pandora’s TSR for the period to the Russell 2000 Index TSR for the same period, using the average adjusted closing stock price of Pandora stock, and the Russell 2000 Index, for ninety calendar days prior to the beginning of the performance period and the last ninety calendar days of the performance period. In each period, the target number of shares will vest if the Pandora TSR is equal to the Russell 2000 Index TSR. For each percentage point that the Pandora TSR falls below the Russell 2000 Index TSR for the period, the performance multiplier is decreased by three percentage points. The performance multiplier is capped at 100% for the One-Year and Two-Year Performance Periods. However, the full award is eligible for a payout up to 200% of target, less any shares earned in prior periods, in the Three-Year Performance Period. Specifically, for each percentage point that the Pandora TSR exceeds the Russell 2000 Index TSR for the Three-Year Performance Period, the performance multiplier is increased by 2%. As such, the ability to exceed the target number of shares is determined exclusively with respect to Pandora's three-year TSR during the term of the award.

We have determined the grant-date fair value of the MSUs using a Monte Carlo simulation performed by a third-party valuation firm. We recognize stock-based compensation for the MSUs over the requisite service period, which is approximately three years, using the accelerated attribution method. During the twelve months ended December 31, 2015, we granted 776,000 MSUs at a total grant-date fair value of $4.3 million. During the twelve months ended December 31, 2015, we recorded stock-based compensation expense from MSUs of approximately $1.5 million. As of December 31, 2015, total compensation cost not yet recognized of approximately $2.8 million related to non-vested MSUs, is expected to be recognized over a weighted average period of 2.13 years. There was no stock-based compensation expense related to MSUs or shares of common stock issued under the MSU plan in the eleven months ended December 31, 2013 and the twelve months ended December 31, 2014.

The following table summarizes the activities for our MSUs for the twelve months ended December 31, 2015:



	Number of MSUs	Weighted-Average Grant Date Fair Value
Unvested as of December 31, 2014	—	$	—
Granted	776,000	5.60
Vested	—	—
Forfeited	—	—
Unvested as of December 31, 2015	776,000	5.60
Expected to vest as of December 31, 2015 (1)	710,882	$	5.60
(1) MSUs expected to vest reflect an estimated forfeiture rate.

Stock-based Compensation Expense

Stock-based compensation expense includes expense related to Ticketfly employees for the two months ended December 31, 2015. Stock-based compensation expense related to all employee and non-employee stock-based awards was as follows:



	Eleven Months Ended December 31,		Twelve Months Ended December 31,
	2013		2014		2015
	(in thousands)
Stock-based compensation expense
Cost of revenue—Other	$	1,946	$	4,414	$	5,531
Cost of revenue—Ticketing service	—		—		40
Product development	8,802		17,546		23,671
Sales and marketing	20,222		42,165		52,747
General and administrative	9,071		22,930		29,656
Total stock-based compensation expense	$	40,041	$	87,055	$	111,645

During the eleven months ended December 31, 2013 and twelve months ended December 31, 2014 and 2015, we capitalized $0.7 million, $1.3 million and $2.7 million of stock-based compensation as internal use software and website development costs, respectively.