TripAdvisor 2012 Annual Report Download - page 88

Stock-Based Compensation
TripAdvisor Equity Grants Assumed at Spin-Off
All stock-based compensation included in our consolidated and combined financial statements prior to the
Spin-Off relates to Expedia common stock options and restricted stock units (“RSUs”) held by TripAdvisor
employees prior to the Spin-Off. The following methods were used to measure the fair value of these awards and
we will continue to amortize the fair value thereof as follows for all pre-Spin-Off equity grants:
Stock Options. The value of stock options issued or modified, including unvested options assumed in
acquisitions, on the grant date (or modification or acquisition dates, if applicable) were measured at fair value,
using the Black-Scholes option valuation model. The Black-Scholes model incorporates various assumptions
including expected volatility, expected term, dividend yield and risk-free interest rates. The expected volatility
was based on historical volatility of Expedia’s common stock and other relevant factors. The expected term
assumptions were based on historical experience and on the terms and conditions of the stock awards granted to
employees. We will continue to amortize the fair value, net of estimated forfeitures, over the remaining vesting
term on a straight-line basis, with the amount of compensation expense recognized at any date at least equaling
the portion of the grant-date fair value of the award that is vested at that date. The majority of these stock options
vest over four years.
Restricted Stock Units. RSUs are stock awards granted to employees entitling the holder to shares of
common stock as the award vests, typically over a five-year period. RSUs were measured at fair value based on
the number of shares granted and the quoted price of Expedia’s common stock at the date of grant. We will
continue to amortize the fair value of these awards, net of estimated forfeitures, as stock-based compensation
expense over the vesting term on a straight-line basis, with the amount of compensation expense recognized at
any date at least equaling the portion of the grant-date fair value of the award that is vested at that date.
TripAdvisor Equity Grants Awards Issued Subsequent to the Spin-Off
We adopted the TripAdvisor, Inc. 2011 Stock and Annual Incentive Plan, or the 2011 Incentive Plan, as of
December 21, 2011, under which we may grant restricted stock, restricted stock awards, RSUs, stock options and
other stock-based awards to our directors, officers, employees and consultants. Refer to “Note 4—Stock Based
Awards and Other Equity Instruments” below for further information on the 2011 Incentive Plan and our stock
based award activity.
Stock Options. The exercise price for all stock options granted by us to date has been equal to the market
price of the underlying shares of common stock at the date of grant. In this regard, when making stock option
awards, our practice is to determine the applicable grant date and to specify that the exercise price shall be the
closing price of our common stock on the date of grant. Stock options granted during the year ended
December 31, 2012 had a term of ten years from the date of grant and generally vest over a four-year period.
The estimated fair value of the options granted under the 2011 Incentive Plan to date, have been calculated
using a Black-Scholes Merton option-pricing model (“Black-Scholes model”). The Black-Scholes model
incorporates assumptions to value stock-based awards, which includes the risk-free rate of return, volatility,
expected term and expected dividend yield.
Our risk-free interest rate is based on the rates currently available on zero-coupon U.S. Treasury issues, in
effect at the time of the grant, whose remaining maturity period most closely approximates the stock option’s
expected term assumption. We estimated the volatility of our common stock by using an average of historical
stock price volatility of publicly traded companies that we consider peers based on daily price observations over
a period equivalent or approximate to the expected term of the stock option grants. The decision to use a
weighted average volatility factor of a peer group was based upon the relatively short period of availability of
data on our common stock. We estimated our expected term using the simplified method for all stock options as
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