Tesla 2015 Annual Report Download - page 85

Fair Value Adoption
We utilize the fair value method in recognizing stock-based compensation expense. Under the fair value method, we estimated the fair
value of each option award and the ESPP on the grant date generally using the Black-Scholes option pricing model and the weighted average
assumptions noted in the following table.
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 on publicly traded options of our common stock 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.
The weighted-average grant-date fair value for option awards granted during the years ended December 31, 2014, 2013 and 2012 was
$94.01, $40.72 and $16.37 per share, respectively. The weighted-average grant-date fair value for ESPP granted during the years ended
December 31, 2014, 2013 and 2012 was $74.07, $19.22 and $8.99 per share, respectively. The fair value of RSUs is measured on the grant date
based on the closing fair market value of our common stock.
Performance-Based Stock Options
In December 2009, our Board of Directors approved an option grant to our CEO representing 4% of our fully-diluted share base prior to
such grant as of the grant date, or 3,355,986 stock options, with 1/4th of the shares vesting immediately, and 1/36th of the remaining shares
scheduled to vest each month over three years, assuming continued employment through each vesting date in recognition of his and our
company’s achievements and to create incentives for future success. In addition, to create incentives for the attainment of clear performance
objectives around a key element of our business plan— the successful launch and commercialization of Model S—the Board of Directors
approved an additional option grant to our CEO totaling an additional 4% of our fully-diluted shares prior to such grant as of the grant date, or
3,355,986 stock options, with a vesting schedule based entirely on the attainment of performance objectives as follows, assuming our CEO’s
continued employment and service to us through each vesting date:
Through December 31, 2013, all performance milestones were achieved. Stock-based compensation expense related to this grant to our
CEO was $0.4 million and $4.2 million for the years ended December 31, 2013 and 2012, respectively.
84
Year Ended December 31,
2014
2013
2012
Risk
-
free interest rate:
Stock options
1.9
%
1.3
%
1.0
%
ESPP
0.1
%
0.1
%
0.2
%
Expected term (in years):
Stock options
6.0
6.1
5.9
ESPP
0.5
0.5
0.5
Expected volatility:
Stock options
55
%
57
%
63
%
ESPP
46
%
43
%
51
%
Dividend yield:
Stock options
0.0
%
0.0
%
0.0
%
ESPP
0.0
%
0.0
%
0.0
%
●
1/4th of the shares subject to the option are scheduled to vest upon the successful completion of Model S Engineering Prototype;
1
●
1/4th of the shares subject to the option are scheduled to vest upon the successful completion of Model S Validation Prototype;
1
●
1/4th of the shares subject to the option are scheduled to vest upon the completion of the first Model S Production Vehicle; and
1
●
1/4th of the shares subject to the option are scheduled to vest upon the completion of the 10,000th Model S Production Vehicle.
1