Chegg 2013 Annual Report Download - page 109

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and a performance condition. The service component for the majority of these awards is satisfied over
three years. We expect that the performance condition will be satisfied March 15, 2014.
• The fair value of shares to be purchase under our ESPP is estimated at the beginning of each six-month
offering period using the Black-Scholes-Merton option pricing model, which includes assumptions for
the expected term, risk-free interest rate, expected volatility and expected dividends. We expense
stock-based compensation, using the straight-line method over the life of the purchase period under the
offering.
The Black-Scholes-Merton option-pricing model utilizes the estimated fair value of our common stock and
requires the input of subjective assumptions, including the expected term and the price volatility of the
underlying stock. These assumptions represent management’s best estimates. These estimates involve inherent
uncertainties and the application of management’s judgment. If factors change and different assumptions are
used, our stock-based compensation expense could be materially different in the future. The assumptions
required are estimated as follows:
Expected term – The expected term for options granted to employees, officers and directors is
calculated as the midpoint between the vesting date and the end of the contractual term of the options. The
expected term for options granted to consultants is determined using the remaining contractual life.
Risk-free interest rate – The risk-free interest rate used in the valuation method is the implied yield
currently available on the United States treasury zero-coupon issues, with a remaining term equal to the
expected life term of our options.
Expected volatility – The expected volatility is based on the average volatility of similar public entities
within our peer group.
Expected dividends – The dividend assumption is based on our historical experience. To date we have
not paid any dividends on our common stock.
The following table summarizes the key assumptions used to determine the fair value of our stock options
granted to employees, officers and directors:
Year Ended December 31,
2013 2012 2011
Expected term (years) ............. 5.08 – 6.63 5.09 – 6.08 4.93 – 6.58
Expected volatility ............... 55.72% – 73.18% 55.10% – 58.77% 47.44% – 76.51%
Dividend yield ................... 0.00% 0.00% 0.00%
Risk-free interest rate ............. 0.81% – 1.92% 0.65% – 1.16% 0.96% – 4.55%
Weighted-average grant-date fair
value per share ................. $6.20 $3.86 $4.67
We recognize only the portion of the option award granted to employees that is ultimately expected to vest
as compensation expense. In addition to assumptions used in the Black-Scholes-Merton option pricing model, we
must also estimate a forfeiture rate to calculate the stock-based compensation expense related to our awards.
Estimated forfeitures are determined based on historical data and management’s expectation of exercise
behaviors. We will continue to evaluate the appropriateness of the forfeiture rate based on actual forfeiture
experience, analysis of employee turnover and other factors. Quarterly changes in the estimated forfeiture rate
can have a significant impact on our stock-based compensation expense as the cumulative effect of adjusting the
rate 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 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 financial statements.
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