Tesla 2012 Annual Report Download - page 81

Table of Contents
The fair value of each stock-based award was estimated on the grant date for the periods below using the Black-Scholes option-pricing
model with the following weighted-average assumptions.
If in the future we determine that another method for calculating the fair value of our stock-based awards is more reasonable, or if another
method for calculating the above input assumptions is prescribed by authoritative guidance, the fair value calculated for our stock-based awards
could change significantly.
The Black-Scholes option-pricing model requires inputs such as the risk-free interest rate, expected term and expected volatility. Further,
the forfeiture rate also affects the amount of aggregate compensation. These inputs are subjective and generally require significant judgment.
The risk-free interest rate that we use is based on the United States Treasury yield in effect at the time of grant for zero coupon United
States Treasury notes with maturities approximating each grant’s expected life. Given our limited history with employee grants, we use the
“simplified” method in estimating the expected term for our employee grants. The “simplified”
method, as permitted by the SEC, is calculated as
the average of the time-to-vesting and the contractual life of the options.
Our expected volatility is derived from the historical volatilities of several unrelated public companies within industries related to our
business, including the automotive OEM, automotive retail, automotive parts and battery technology industries, because we have limited trading
history on our common stock. When making the selections of our peer companies within industries related to our business to be used in the
volatility calculation, we also considered the stage of development, size and financial leverage of potential comparable companies. Our historical
volatility is weighted based on certain qualitative factors and combined to produce a single volatility factor.
We estimate our forfeiture rate based on an analysis of our actual forfeitures and will continue to evaluate the appropriateness of the
forfeiture rate based on actual forfeiture experience, analysis of employee turnover behavior and other factors. Quarterly changes in the
estimated forfeiture rate can have a significant effect on reported stock-based compensation expense, as the cumulative effect of adjusting the
rate for all expense amortization is recognized in the period the forfeiture estimate is changed. If a revised forfeiture rate is higher than the
previously estimated forfeiture rate, an adjustment is made that will result in a decrease to the stock-based compensation expense recognized in
the consolidated financial statements. If a revised forfeiture rate is lower than the previously estimated forfeiture rate, an adjustment is made that
will result in an increase to the stock-based compensation expense recognized in the consolidated financial statements.
As we accumulate additional employee stock-based awards data over time and as we incorporate market data related to our common stock,
we may calculate significantly different volatilities, expected lives and
80
Year Ended December 31,
2011
2010
2009
Risk
-
free interest rate:
Stock options
2.0
%
2.0
%
2.2
%
ESPP
0.2
%
—
—
Expected term (in years):
Stock options
6.0
5.3
4.6
ESPP
0.5
—
—
Expected volatility:
Stock options
70
%
71
%
64
%
ESPP
59
%
—
—
Dividend yield:
Stock options
0.0
%
0.0
%
0.0
%
ESPP
0.0
%
—
—