TripAdvisor 2014 Annual Report Download - page 61

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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, 2014 had a term of ten years from the date of grant and generally vest over a four-year requisite
service period.
During the year ended December 31, 2014, we issued 578,973 of primarily service based stock non-qualified stock options
under the 2011 Incentive Plan with a weighted average grant-date fair value per option of $46.65 and assumed acquisition related
options of 100,595 with a weighted average grant-date fair value per option of $80.31. We will amortize the fair value, 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. We use historical data to estimate pre-vesting option forfeitures and record share-based compensation expense only for those
awards that are expected to vest.
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, expected 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 have
estimated the volatility of our common stock, to date, by using an average of our historical stock price volatility and of publicly traded
companies that we consider peers based on daily price observations. We have estimated our expected term, to date, using the
simplified method, as we have not had sufficient historical exercise data on our common stock to date. Our expected dividend yield is
zero, as we have not paid any dividends on our common stock to date and do not expect to pay any cash dividends for the foreseeable
future.
As the Company now has three years of post-Spin-Off equity award activity, beginning in February 2015, we will change our
method of estimating our expected term, from the simplified method, and use historical exercise behavior and expected post-vest
termination data. Simultaneously, we will also begin estimating our expected volatility by equally weighting the historical volatility
and implied volatility on our own stock. Historical volatility will be determined using actual daily price observations of our stock
price over a period equivalent to or approximate to the expected term of our stock option grants to date. Implied volatility represents
the volatility of our actively traded options on our stock, with remaining maturities in excess of twelve months and market prices
approximate to the exercise prices of the stock option grant. These changes are not expected to materially affect our future
consolidated financial statements.
Restricted Stock Units (RSUs)
RSUs are stock awards that are granted to employees entitling the holder to shares of our common stock as the award vests.
During the year ended December 31, 2014, we issued 752,460 of primarily service based RSUs under the 2011 Incentive Plan with a
weighted average grant date fair value per option of $93.36. RSUs are measured at fair value based on the number of shares granted
and the quoted price of our common stock at the date of grant. We amortize the fair value, net of estimated forfeitures, as stock-based
compensation expense over the vesting term (generally a four-year requisite service period) 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. Estimated forfeitures are calculated consistent with the methodology used for our stock options using historical data to estimate
pre-vesting RSU forfeitures.
Estimates of fair value are not intended to predict actual future events or the value ultimately realized by employees who receive
these awards, and subsequent events are not indicative of the reasonableness of our original estimates of fair value. We have
considered various factors when estimating expected forfeitures, including, the employee class and historical forfeiture experience.
The estimate of stock awards that will ultimately be forfeited requires significant judgment and, to the extent that actual results or
updated estimates differ from our current estimates, such amounts will be recorded as a cumulative adjustment in the period such
estimates are revised and will also impact the amount of stock compensation expense to be recognized in future periods.
Refer to “Note 4— Stock Based Awards and Other Equity Instruments” in the notes to our consolidated financial statements for
further information on current year equity award activity.
Websites and Internal Use Software Development Costs
We capitalize certain costs incurred during the application development stage related to the development of websites and
internal use software when it is probable the project will be completed and the software will be used as intended. Such costs are