In August 2021, the board of directors approved the 2021 Incentive Award Plan (the “2021 Plan”). The plan became effective on September 28, 2021, the day prior to the Direct Listing of the Company’s Class A common stock, and the Company no longer grants equity awards under any prior equity plan. Upon the 2021 Plan becoming effective, there were 11,076,515 shares of Class A common stock authorized under the 2021 Plan, and the remaining shares available for issuance under the 2010 Equity Incentive Plan, 2011 Stock Plan, 2012 Milestone Stock Plan, and 2019 Founder Stock Plan (collectively, the “Prior Plans” and, collectively with the 2021 Plan, the “Plans”) were also made available for issuance under the 2021 Plan. The shares authorized under the 2021 Plan will increase annually, beginning on January 1, 2022 and continuing through 2031, by the lesser of (i) 5% of the outstanding common stock (on an as converted basis) as of the last day of the immediately preceding fiscal year, or (ii) a smaller amount as agreed by the board of directors. Awards granted under the 2021 Plan generally vest over four years. In addition, the shares authorized under the 2021 Plan will increase, among other things, to the extent that an award (including an award under the Prior Plans) terminates, expires, or lapses for any reason or an award is settled in cash without the delivery of shares.

Class A common stock, and such reserve will be increased annually on the first day of each fiscal year beginning in 2022 and ending in 2031, by an amount equal to the lesser of (i) 1% of the shares of the Company’s common stock outstanding (on an as converted basis) on the last day of the immediately preceding fiscal year and (ii) such number of shares of common stock as determined by the board of directors; provided, however, no more than 16,614,772 shares of common stock may be issued under the ESPP. In January 2022, the board of directors approved an annual increase of 1,147,092 shares to the ESPP, bringing the total to 3,362,395 shares authorized as of September 30, 2022. There were 3,244,066 shares available for future issuance pursuant to ESPP purchases as of September 30, 2022.

With the exception of the first offering period, offering periods begin on May 15 and November 15 of each year and consist of four six-month purchase periods. Eligible employees may contribute up to 20% of their base wages and the purchase price of shares of Class A common stock under an offering will be 85% of the lesser of the fair market value of Class A common stock on (i) the first day of the offering period, and (ii) the applicable purchase date. If such fair market value decreases from the first day of the offering period to the applicable purchase date, the offering period will terminate after the purchase of shares and all participants will be automatically enrolled in the next offering period (a “rollover event”). The initial offering period began on October 30, 2021 and ended on May 14, 2022 after the first purchase was completed as a result of a rollover event.

During the three and nine months ended September 30, 2022, zero and 118,329 shares were purchased under the ESPP, respectively. During the three and nine months ended September 30, 2022, the Company recognized $0.6 million and $2.1 million of stock-based compensation expense in connection with the ESPP, respectively, and withheld $0.5 million and $2.1 million of contributions from employees, respectively. As of September 30, 2022, total unrecognized compensation costs associated with the ESPP was $3.6 million and is expected to be amortized over a weighted average period of 0.8 years.

Stock-based compensation expense consisted of the following:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Cost of goods sold	$	236	$	780	$	693	$	780
Selling, general, and administrative expenses	24,065		63,552		77,516		75,222
Total stock-based compensation expense	$	24,301	$	64,332	$	78,209	$	76,002

Stock-based compensation expense for the three and nine months ended September 30, 2022 includes $18.7 million and $58.1 million related to the 2021 Founders Grant, as described below, respectively, and $3.8 million and $14.6 million in connection with RSUs, respectively, most of which include a performance-based vesting condition that was satisfied by the Company’s Direct Listing. Stock-based compensation expense for the three and nine months ended September 30, 2021 includes $28.8 million related to the 2021 Founders Grant, and $25.3 million in connection with RSUs with a performance-based vesting condition that was satisfied by the Company’s Direct Listing. The nine months ended September 30, 2021 also includes $9.2 million of stock compensation expense related to the 2021 tender offer.

following assumptions were used for options granted during the three and nine months ended September 30, 2021:


	Three Months Ended September 30, 2021		Nine Months Ended September 30, 2021
Risk-free interest rates	0.1	%	0.1% - 0.6%
Expected dividend yield	—		—
Expected term	0.25 years		0.25 - 6.25 years
Volatility	60	%	60	%

The risk-free interest rates were estimated based on the yield curve in effect at the time of grant for zero-coupon U.S. Treasury notes with terms consistent with the expected term of the option awards. The expected dividend yield was zero as the Company has never declared or paid cash dividends and has no plans to do so in the foreseeable future. The expected term was calculated using the simplified method using the vesting term and the contractual term of the options. Stock options expire ten years from the date of the grant. The volatility rate was determined based on an analysis of comparable public company historical volatilities adjusted based on the Company’s stage of development.

Because the Company’s common stock was not yet publicly traded when the options were granted, the Company estimated the fair value of common stock. The board of directors considered numerous objective and subjective factors to determine the fair value of the Company’s common stock at each meeting in which awards are approved. The factors considered included, but were not limited to: (i) the results of contemporaneous independent third-party valuations of the Company’s common stock; (ii) the prices, rights, preferences, and privileges of the Company’s redeemable convertible preferred stock relative to those of its common stock; (iii) the lack of marketability of the Company’s common stock; (iv) actual operating and financial results; (v) current business conditions and projections; (vi) the likelihood of achieving a liquidity event, such as a qualified public offering or sale of the Company, given prevailing market conditions; and (vii) contemporaneous transactions involving the Company’s common shares. The board of directors utilized third-party valuations which were performed in accordance with the guidance outlined in the American Institute of Certified Public Accountants’ Accounting and Valuation Guide, Valuation of Privately Held Company Equity Securities Issued as Compensation.

A summary of stock option activity for the nine months ended September 30, 2022 is as follows:


	Number of Stock Options	Weighted Average Exercise Price		Weighted average contractual term	Aggregate intrinsic value
Balance at December 31, 2021	3,623,377	$	8.03	5.7	$	136,824
Options granted	—	—
Options exercised	(463,946)	11.44			6,527
Options forfeited	(1,500)	4.46
Balance at September 30, 2022	3,157,931	$	7.53	4.8	$	21,481

Exercisable as of September 30, 2022	3,157,931	$	7.53	4.8	$	21,481
Vested as of September 30, 2022	2,350,151	4.32		3.8
Unvested as of September 30, 2022	807,780	$	15.40	7.9

A summary of RSU activity for the nine months ended September 30, 2022 is as follows:


	Number of Restricted Stock Units	Weighted Average Grant Date Fair Value
Unvested as of December 31, 2021	3,527,167	$	33.38
Granted	545,877	17.32
Forfeited	(204,560)	34.91
Released	(474,747)	23.48
Vested and not yet released	(358,347)	35.03
Unvested as of September 30, 2022	3,035,390	$	31.74

The total value of unrecognized stock compensation expense related to outstanding RSUs and PSUs granted under the Plans was $56.8 million and $58.4 million as of September 30, 2022, respectively, which is expected to be recognized over a weighted-average period of 1.4 years and 0.9 years, respectively. No PSUs were granted, forfeited, released or vested during the nine months ended September 30, 2022.

The majority of RSUs issued by the Company prior to the Direct Listing vest upon the satisfaction of both a service and a performance condition. The service-based vesting condition is satisfied so long as the participant remains in service and employed by the Company as of each of the vesting dates. The performance condition was satisfied upon the Company’s Direct Listing on September 29, 2021, and 936,646 RSUs for which the service condition had previously been satisfied vested and were released to holders. RSUs granted subsequent to the Direct Listing vest upon the satisfaction of a service based vesting condition only. The Company will deliver one share of either Class A or Class B common stock, depending on the terms of the grant, for each vested RSU.

In June 2021, the Company granted 4,397,688 PSUs and 1,884,724 RSUs to the co-CEOs, in the aggregate, under the 2019 Founder Stock Plan (the “Founders Grant”). The PSUs vest upon two performance conditions, (i) a qualified public offering, which was satisfied upon the Company’s Direct Listing on September 20, 2021, and (ii) the price of the Company’s Class A common stock reaching stock price hurdles over a period of ten years, as defined by the terms of the award. The PSUs are subject to the co-CEOs’ continued employment with the Company through the applicable vesting date. If the PSUs vest, the Company will deliver one share of Class B common stock on the settlement date. Unvested PSUs expire in ten years from the date of grant. The terms of the PSUs granted are described further below.

The PSUs are divided into eight substantially equal tranches, each one vesting on the date the 90-day trailing volume-weighted average trading price of the Company’s Class A common stock exceeds the stock price hurdle, as set forth in the table below, provided that no PSUs may vest prior to the six month anniversary of the Direct Listing.


Tranche	Number of PSUs	Stock Price Hurdle
1	549,712	$	47.75
2	549,710	$	55.71
3	549,712	$	63.67
4	549,710	$	71.63
5	549,712	$	79.59
6	549,710	$	87.55
7	549,712	$	95.50
8	549,710	$	103.46

The Company used a Monte Carlo simulation to calculate the grant-date fair value of the PSUs of $128.8 million. Since the PSUs contain a performance and market condition, the stock-based compensation expense will be recognized when it becomes probable that the performance condition will be met using the accelerated attribution method. Stock-based compensation will be recognized over the period of time the market condition for each tranche is expected to be met (i.e., the derived service period). The performance condition was satisfied at September 29, 2021 by the Direct Listing, and the Company began recording expense at that time.

The Founders Grant RSUs will vest in equal monthly installments over a period of five years, subject to the co-CEOs continued employment with the Company through the applicable vesting date and conditioned upon the completion of a qualified public offering. The grant-date fair value of the RSUs is $66.9 million. Since the RSUs contain a performance condition, stock-based compensation expense is recognized using the accelerated attribution method when it becomes probable that the performance condition will be met. The performance condition was satisfied on September 29, 2021 by the Direct Listing, and the Company began recording expense at that time.

Shares underlying vested PSUs and RSUs will be issued to the CEOs on a specified quarterly date following the second anniversary of the vesting date, except for an amount necessary to cover any taxes due in connection with the vesting, which will be withheld or sold to cover, or issued to offset, such taxes. Any RSUs or PSUs subject to the award that have not vested by the tenth anniversary of the grant date will be forfeited.

Most RSUs outstanding as of September 30, 2022 vest upon the satisfaction of both a service and a performance condition. Prior to the Direct Listing, the Company had concluded that it was not probable that the performance condition would be satisfied as the closing of a qualified public offering or change in control is not deemed probable until consummated. Accordingly, prior to the Direct Listing, the Company had not recorded stock-based compensation expense for RSUs with the exception of (i) $1.8 million recognized in June 2021 associated with RSUs that were repurchased in connection with the 2021 tender offer, and (ii) $2.3 million recognized in August 2021 associated with fully vested RSUs issued to certain directors. Upon the Direct Listing on September 29, 2021, the Company recorded stock-based compensation expense for the service condition satisfied through such date and began recording stock-based compensation expense using the accelerated attribution method as the service conditions are met. RSUs issued after the Direct Listing only contain a service condition and are recognized on a straight line basis over the vesting period.