Annual report pursuant to Section 13 and 15(d)

Stock-based Compensation Plans and Awards

v3.6.0.2
Stock-based Compensation Plans and Awards
 12 Months Ended
Dec. 31, 2016
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.

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, 2016 and the activity during the year ended December 31, 2016 are as follows:
 
Shares Available for Grant
 
Equity Awards
 
ESPP
 
Total
Balance as of December 31, 2015
11,723,327

 
3,319,337

 
15,042,664

Additional shares authorized
8,998,816

 
—

 
8,998,816

Restricted stock units granted
(15,522,398
)
 
—

 
(15,522,398
)
Performance stock units granted
(1,835,250
)
 
—

 
(1,835,250
)
ESPP shares issued
—

 
(1,254,910
)
 
(1,254,910
)
Options forfeited
1,592,289

 
—

 
1,592,289

Restricted stock units forfeited
2,587,203

 
—

 
2,587,203

Market stock units forfeited
185,714

 
—

 
185,714

Share adjustment
614,967

 
—

 
614,967

Balance as of December 31, 2016
8,344,668

 
2,064,427

 
10,409,095



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:
    
 
Year Ended December 31,
 
2014
 
2015
 
2016
Expected life (in years)
0.5

 
0.5

 
0.5

Risk-free interest rate
0.06
%
 
0.12
%
 
0.36
%
Expected volatility
42
%
 
52
%
 
44
%
Expected dividend yield
0
%
 
0
%
 
0
%

 
During the years ended December 31, 2014, 2015 and 2016, we withheld $6.4 million, $7.6 million and $9.7 million in contributions from employees and recognized $2.1 million, $3.3 million and $3.4 million of stock-based compensation expense related to the ESPP, respectively. In the years ended December 31, 2014, 2015 and 2016, 149,378, 538,398 and 1,254,910 shares of common stock were issued under the ESPP at a weighted average purchase price of $23.95, $17.80 and $6.76, respectively.

Stock Options 

Stock option activity during the year ended December 31, 2016 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, 2015
12,815,891

 
$
7.15

 
1.09
 
$
101,151

Granted
—

 
—

 
 
 
 
Exercised
(1,588,781
)
 
2.18

 
 
 
 
Forfeited
(1,790,730
)
 
19.02

 
 
 
 
Balance as of December 31, 2016
9,436,380

 
5.74

 
0.47
 
77,752

Vested and exercisable as of December 31, 2016
8,108,519

 
5.40

 
0.31
 
68,656

Expected to vest as of December 31, 2016 (2)
1,241,887

 
$
7.94

 
1.50
 
$
8,403

 
 
 
 
 
 
 
 
(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 $13.41 and $13.04 as of December 31, 2015 and 2016.
 
 
(2)Options expected to vest reflect an estimated forfeiture rate.
 
 

The per-share fair value of stock options granted during the years ended December 31, 2014 and 2015 was determined on the grant date using the Black-Scholes option pricing model with the following assumptions. No stock option grants were made during the year ended December 31, 2016.

 
Year Ended December 31,
 
2014
 
2015
 
2016
Expected life (in years)
6.08

 
6.08

 
N/A
Risk-free interest rate
1.71% - 1.93%

 
1.75% - 1.92%

 
N/A
Expected volatility
58% - 59%

 
49% - 50%

 
N/A
Expected dividend yield
0
%
 
0
%
 
N/A


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 years ended December 31, 2014, 2015 and 2016, we recorded stock-based compensation expense related to stock options of approximately $14.7 million, $10.7 million and $13.8 million, respectively.

As of December 31, 2016, there was $11.2 million of unrecognized compensation cost related to outstanding employee stock options. This amount is expected to be recognized over a weighted-average period of 1.55 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 years ended December 31, 2014 and 2015 was $19.74 and $9.08.

The aggregate intrinsic value of stock options exercised during the years ended December 31, 2014, 2015 and 2016 was $169.2 million, $9.5 million and $17.3 million, respectively. The total fair value of options vested during the years ended December 31, 2014, 2015 and 2016 was $16.5 million, $17.6 million and $10.2 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 years ended December 31, 2014, 2015 and 2016, we recorded stock-based compensation expense related to restricted stock units of approximately $69.9 million, $96.1 million and $124.3 million, respectively. As of December 31, 2016, total compensation cost not yet recognized of approximately $251.0 million related to non-vested restricted stock units, is expected to be recognized over a weighted average period of 2.73 years.

The following table summarizes the activities for our RSUs for the year ended December 31, 2016:

 
Number of RSUs
 
Weighted-Average Grant Date Fair Value
Unvested as of December 31, 2015
17,272,085

 
$
17.91

Granted
15,522,398

 
10.21

Vested
(7,666,647
)
 
16.94

Forfeited
(2,723,419
)
 
14.84

Unvested as of December 31, 2016
22,404,417

 
13.26

Expected to vest as of December 31, 2016 (1)
20,325,998

 
$
13.33

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


MSUs

In March 2015, the compensation committee of the board of directors granted performance awards consisting of market stock units to certain key executives under our 2011 Plan.

MSUs granted in March 2015 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 total potential 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 year ended December 31, 2015, we granted 776,000 MSUs at a total grant-date fair value of $4.3 million. There were no MSUs granted in the year ended December 31, 2016. During the years ended December 31, 2015 and 2016, we recorded stock-based compensation expense from MSUs of approximately $1.5 million and $0.7 million. As of December 31, 2016, total compensation cost not yet recognized of approximately $0.8 million
related to non-vested MSUs is expected to be recognized over a weighted average period of 1.13 years. There was no stock-based compensation expense related to MSUs or shares of common stock issued under the MSU plan in the year ended December 31, 2014.

In February 2016 and January 2017, the compensation committee of the board of directors certified the results of the One-Year Performance Period and Two-Year Performance Period of the 2015 MSU grant, which concluded December 31, 2015 and 2016. During the One-Year Performance Period, our relative TSR declined 26 percentage points relative to the Russell 2000 Index TSR for the period, which resulted in the vesting of the One-Year Performance Period at 22% of the one-third vesting opportunity for the period. During the Two-Year Performance Period, our relative TSR declined 48 percentage points relative to the Russell 2000 Index TSR for the period, which resulted in vesting of the Two-Year Performance Period at 0% of the one-third vesting opportunity for the period.

The following table summarizes the activities for our MSUs for the year ended December 31, 2016:

 
Number of MSUs
 
Weighted-Average Grant Date Fair Value
Unvested as of December 31, 2015
776,000

 
$
5.60

Granted
—

 
—

Vested
(56,903
)
 
2.57

Forfeited
(185,714
)
 
5.91

Unvested as of December 31, 2016
533,383

 
5.49

Expected to vest as of December 31, 2016 (1)
398,831

 
$
5.52

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


PSUs

In April 2016 and October 2016, the compensation committee of the board of directors granted 2016 Performance Awards consisting of stock-settled performance-based RSUs to certain key executives under our 2011 Plan.

PSUs granted in April 2016 and October 2016 have a vesting period that includes a four-year service period, during which one fourth of the awards will vest after one year and the remainder will vest quarterly thereafter. The PSUs are earned when our trailing average ninety-day stock price is equal to or greater than $20.00. If the trailing average ninety-day stock price does not equal or exceed $20.00 on the applicable vesting date, then the portion of the award that was scheduled to vest on such vesting date shall not vest but shall vest on the next vesting date on which the trailing average ninety-day stock price equals or exceeds $20.00. Any portion of the award that remains unvested as of the final vesting date shall be canceled and forfeited.

We have determined the grant-date fair value of the PSUs granted in April 2016 and October 2016 using a Monte Carlo simulation performed by a third-party valuation firm. We recognize stock-based compensation for the PSUs over the requisite service period, which is approximately four years, using the accelerated attribution method. During the year ended December 31, 2016, we granted 1,835,250 PSUs at a total grant-date fair value of $9.8 million. During the year ended December 31, 2016, we recorded stock-based compensation expense from PSUs of approximately $3.8 million. As of December 31, 2016, total compensation cost not yet recognized of approximately $5.8 million related to non-vested PSUs is expected to be recognized over a weighted average period of 3.16 years. There was no stock-based compensation expense related to PSUs or shares of common stock issued as a result of vesting of PSUs in the years ended December 31, 2014 and 2015.

The following table summarizes the activities for our PSUs for the year ended December 31, 2016:

 
Number of PSUs
 
Weighted-Average Grant Date Fair Value
Unvested as of December 31, 2015
—

 
$
—

Granted
1,835,250

 
5.33

Vested
—

 
—

Forfeited
—

 
—

Unvested as of December 31, 2016
1,835,250

 
5.33

Expected to vest as of December 31, 2016 (1)
1,658,031

 
$
5.32

(1) PSUs 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:
 
 
Year ended December 31,
 
2014
 
2015
 
2016
 
(in thousands)
Stock-based compensation expense
 

 
 

 
 

Cost of revenue—Other
$
4,414

 
$
5,531

 
$
6,108

Cost of revenue—Ticketing service
—

 
40

 
188

Product development
17,546

 
23,671

 
30,975

Sales and marketing
42,165

 
52,747

 
58,118

General and administrative
22,930

 
29,656

 
43,069

Total stock-based compensation expense
$
87,055

 
$
111,645

 
$
138,458



During the year ended December 31, 2016, we capitalized $7.5 million of stock-based compensation as internal use software and website development costs.

During the year ended December 31, 2016, we recorded $8.7 million related to accelerated awards in connection with executive severance. The majority of this amount is included in the general and administrative line item of our consolidated statement of operations.