Tesla 2014 Annual Report Download - page 75

Table of Contents
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 our implied volatility and 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 and implied volatility are 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 forfeiture rates, which could materially impact the valuation of our stock-
based awards and the stock-based compensation expense that we will recognize in future periods. Stock-
based compensation expense is recorded
in our cost of revenues, research and development expenses, and selling, general and administrative expenses.
In August 2012, our Board of Directors granted 5,274,901 stock options to our CEO (2012 CEO Grant). The 2012 CEO Grant consists of
ten vesting tranches with a vesting schedule based entirely on the attainment of both performance conditions and market conditions, assuming
continued employment and service to us through each vesting date.
Each of the vesting tranches requires a combination of one of the ten pre-determined performance milestones outlined below and an
incremental increase in our market capitalization of $4.0 billion, as compared to the initial market capitalization of $3.2 billion measured at the
time of the 2012 CEO Grant.
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Successful completion of the Model X Engineering Prototype (Alpha);
•
Successful completion of the Model X Vehicle Prototype (Beta);
•
Completion of the first Model X Production Vehicle;
•
Successful completion of the Gen III Engineering Prototype (Alpha);
•
Successful completion of the Gen III Vehicle Prototype (Beta);
•
Completion of the first Gen III Production Vehicle;
•
Gross margin of 30% or more for four consecutive quarters;
•
Aggregate vehicle production of 100,000 vehicles;
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Aggregate vehicle production of 200,000 vehicles; and
•
Aggregate vehicle production of 300,000 vehicles.