iRobot 2007 Annual Report Download - page 104

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The Company has historically granted stock options at exercise prices that equaled the fair value of its common
stock as estimated by its board of directors, with input from management, as of the date of grant. Because there was
no public market for the Company’s common stock prior to its initial public offering on November 9, 2005, its board
of directors determined the fair value of its common stock by considering a number of objective and subjective
factors, including the Company’s operating and financial performance and corporate milestones, the prices at which
it sold shares of convertible preferred stock, the superior rights and preferences of securities senior to its common
stock at the time of each grant, and the risk and non-liquid nature of its common stock. The Company has not
historically obtained contemporaneous valuations by an unrelated valuation specialist because, at the time of the
issuances of stock options, the Company believed its estimates of the fair value of its common stock to be reasonable
based on the foregoing factors.
In connection with the initial public offering, the Company retrospectively reassessed the fair value of its
common stock for options granted during the period from July 1, 2004 to November 8, 2005. As a result of this
reassessment, the Company determined that the estimated fair market value used in granting options for the period
from July 1, 2004 to December 31, 2004 was reasonable and appropriate. Accordingly, no deferred compensation
was recorded for these grants. For the period from January 1, 2005 through November 8, 2005, the Company
determined that the estimated fair value of its common stock increased from $4.60 to $21.60 due to a number of
factors such as, among other things, the likelihood of an initial public offering, its improving operating results and
the achievement of other corporate milestones in 2005. Based upon this determination, the Company recorded
deferred compensation of approximately $3.4 million in the twelve months ended December 31, 2005 under APB
No. 25 relating to stock options with exercise prices below the retrospectively reassessed fair market value on the
date of grant. The Company recognized associated stock-based compensation expense of $0.2 million, $0.7 million
and $0.4 million for the fiscal years ended December 29, 2007, December 30, 2006 and December 31, 2005,
respectively. As of December 29, 2007, the deferred stock-based compensation balance associated with these grants
was $0.7 million. The Company will continue to recognize the associated stock-based compensation expense, in
accordance with the provisions of APB No. 25, related to these shares of $0.3 million, $0.3 million and $0.1 million
for 2008, 2009 and 2010, respectively.
Under the provisions of SFAS No. 123(R), the Company recognized $4.5 million of stock-based compensation
expense during the fiscal year ended December 29, 2007 for stock options granted subsequent to the Company’s
initial filing of its Form S-1 with the SEC. The unamortized fair value as of December 29, 2007 associated with
these grants was $15.8 million with a weighted average remaining recognition period of 2.68 years.
The fair value of each option grant for the fiscal years ended December 29, 2007 and December 30, 2006 was
computed on the grant date using the Black-Scholes option-pricing model with the following assumptions:
Fiscal Year Ended
December 29, 2007
Fiscal Year Ended
December 30, 2006
Risk-free interest rate ............................. 3.23% — 4.90% 4.32% — 5.11%
Expected dividend yield ........................... — —
Expected life.................................... 3.50 — 4.75 years 3.5 — 6.5 years
Expected volatility................................ 50%—55% 65%
The risk-free interest rate is derived from the average U.S. Treasury constant maturity rate, which approx-
imates the rate in effect at the time of grant, commensurate with the expected life of the instrument. The dividend
yield is zero based upon the fact the Company has never paid and has no present intention to pay cash dividends. The
expected term calculation is based upon the simplified method provided under SEC Staff Accounting Bulletin
(“SAB”) No. 107. Under SAB No. 107, the expected term is developed by averaging the contractual term of the
stock option grants (7 or 10 years) with the associated vesting term (typically 4 to 5 years). Given the Company’s
initial public offering in November 2005 and the resulting short history as a public company, the Company could not
rely solely on company specific historical data for purposes of establishing expected volatility. Consequently, the
70
iROBOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)