Etsy 2015 Annual Report Download - page 67

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We account for stock-based compensation arrangements in restricted shares, subject to a put option that allows the holder of the shares to put the shares back
to us for cash, as liability-classified stock awards. These awards are re-measured at each reporting period, with changes in fair value being charged to the
statement of operations. Compensation expense is recognized using a graded vesting methodology for each separately vesting tranche of the award as though
the award were, in substance, multiple awards. Unless the put option is exercised, the restricted shares will be reclassified from a liability to an equity
classified award upon the termination of the put option.
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Our Black-Scholes option-pricing model requires the input of highly subjective assumptions, including the fair value of the underlying common stock, the
expected volatility of the price of our common stock, risk-free interest rates, the expected term of the option and the expected dividend yield of our common
stock. 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.
•. Prior to our initial public offering in April 2015, our board of directors considered numerous objective and subjective
factors to determine the fair value of our common stock at each meeting at which awards were approved. The factors included: contemporaneous third-
party valuations of our common stock; the prices, rights, preferences and privileges of our preferred stock relative to those of our common stock; the
prices of preferred stock sold by us to third-party investors in arms-length transactions; the prices of common stock sold to third-party investors by us
and in secondary transactions or repurchased by us in arms-length transactions; the lack of marketability of our common stock; our operating and
financial results; current business conditions and projections; and the likelihood of achieving a liquidity event, such as an initial public offering or sale
of our company, given then prevailing market conditions. Since our initial public offering, we have used the market closing price for our common stock
as reported on the Nasdaq to determine the fair value of our common stock.
•. As we do not have a sufficient trading history for our common stock, the expected stock price volatility for our common stock is
estimated by taking the average historical price volatility for industry peers based on daily price observations over a period equivalent to the expected
term of the stock option grants. Industry peers, which we have selected, consist of several public companies in the industry similar in size, stage of life
cycle and financial leverage. We intend to continue to consistently apply this process using the same or similar public companies until a sufficient
amount of historical information regarding the volatility of our own common stock share price becomes available, or unless circumstances change such
that the identified companies are no longer similar to us, in which case more suitable companies whose share prices are publicly available would be used
in the calculation.
•. The risk-free interest rate is based on the yields of U.S. Treasury securities with maturities similar to the expected term of the
options for each option group.
•. The expected term represents the period that our stock-based awards are expected to be outstanding. As we do not have sufficient
historical experience for determining the expected term of the stock option awards granted, we base our expected term for awards issued to employees or
members of our board of directors on the simplified method, which represents the average period from vesting to the expiration of the stock option. For
grants to non-employees, the expected term is equal to the contractual term, which is generally ten years.
 . We have never declared or paid any cash dividends to common stockholders and do not presently plan to pay cash dividends
in the foreseeable future. Consequently, we use an expected dividend yield of zero.
In determining the fair value of stock options granted, the following weighted average assumptions were used in the Black-Scholes option-pricing model for
awards granted in the periods indicated:
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Assumptions:
Expected volatility
45.7% - 50.3%
43.0% - 49.0%
40.4% - 45.0%
Risk-free interest rate
0.9% - 1.9%
1.7% - 2.1%
1.3% - 1.9%
Expected term (in years)
5.48 - 6.08
5.46 - 6.08
5.5 - 6.1
Dividend rate
—%
—%
—%
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