9. Employee Stock Purchase Plan and Stock-Based Compensation

2018 Employee Stock Purchase Plan

In September 2018, the Company adopted the 2018 Employee Stock Purchase Plan (“ESPP”), which became effective on September 26, 2018, the day that the Form S-1 related to the IPO was declared effective, in order to enable eligible employees to purchase shares of the Company’s common stock.  The Company initially reserved 230,000 shares of common stock for sale under the ESPP. The aggregate number of shares reserved for sale under the ESPP will increase automatically on January 1st of each of the first ten calendar years after the effective date by the number of shares equal to the lesser of 1% of the total outstanding shares of the Company’s common stock as of the immediately preceding December 31 (rounded to the nearest whole share) or a number of shares as may be determined by the Company’s board of directors. The aggregate number of shares issued over the term of the Company’s ESPP, subject to stock-splits, recapitalizations or similar events, may not exceed 2,300,000 shares of the Company’s common stock.

2004 Equity Incentive Plan and 2018 Equity Incentive Plan

In September 2018, the Company adopted the 2018 Equity Incentive Plan (“2018 Plan”), which became effective on September 25, 2018. As a result, the Company will not grant any additional awards under the 2004 Equity Incentive Plan (“2004 Plan”). The terms of the 2004 Plan and applicable award agreements will continue to govern any outstanding awards thereunder. In addition to the shares of common stock reserved for future issuance under the 2004 Plan that were added to the 2018 Plan upon its effective date, the Company has initially reserved 2,300,000 shares of common stock for issuance under the 2018 Plan. In addition, the number of shares of common stock reserved for issuance under the 2018 Plan will automatically increase on the first day of January for a period of up to ten years, commencing on January 1, 2019, in an amount equal to 5% of the total number of shares of the Company’s capital stock outstanding on the last day of the preceding year, or a lesser number of shares determined by the Company’s board of directors.

The following table summarizes option activity under the Company’s 2004 Plan and 2018 Plan:

The aggregate intrinsic value was calculated as the difference between the exercise prices of the underlying stock option awards and the estimated fair value of the Company’s common stock on the date of exercise. For the three months and nine months ended September 30, 2018, the aggregate intrinsic value of stock options exercised was $18,275 and $153,414, respectively, determined at the date of the option exercise. For the three months and nine months ended September 30, 2017, the aggregate intrinsic value of stock options exercised was $8,431 and $51,107, respectively, determined at the date of the option exercise.

Employee Stock Options Valuation

For determining stock-based compensation expense, the fair-value-based measurement of each employee stock option was estimated as of the date of grant using the Black-Scholes option-pricing model with assumptions as follows:

Using the Black-Scholes option-valuation model, the weighted-average estimated grant-date fair value of employee stock options granted during the three months and nine months ended September 30, 2018, was $8.93 and $8.93 per share, respectively, and during the three months and nine months ended September 30, 2017, was $7.20 and $7.14 per share, respectively. The total fair value of options vested during the three and nine months ended September 30, 2018 was $0.3 million and $0.7 million, respectively, and for the three and nine months ended September 30, 2017 was $0.6 million and $1.4 million, respectively.

Non-Employee Stock-Based Compensation Expense

The Company remeasures the estimated fair value of the unvested portion of the award each period, until the award is fully vested. The Company believes that the fair value of the stock options is more reliably measurable than the fair value of services received. The fair value of options granted to non-employees was estimated using the Black-Scholes method. The stock-based compensation expense related to non-employees for the three and nine months ended September 30, 2018 was $1,019 and $20,795, respectively, and for the three and nine months ended September 30, 2017 was $19,055 and $58,212, respectively.

Stock-Based Compensation Expense

Total stock-based compensation expense recognized was as follows:

As of September 30, 2018, there was approximately $22.2 million of total unrecognized compensation cost related to the unvested stock options granted under the Company’s Plans. The remaining unrecognized compensation cost is expected to be recognized over a weighted-average period of 3.6 years.

Early Exercise of Options

Certain stock options granted under the Company’s stock option Plan provide option holders the right to elect to exercise unvested options in exchange for restricted common stock. A summary of the restricted stock shares issued under the Company’s Plan is as follows:

The shares were subject to repurchase by the Company at the original exercise price in the event the optionee’s employment was terminated either voluntarily or involuntarily. The repurchase right to these shares generally lapsed 25% after one year, and the remainder lapsed ratably over three years thereafter. The Company treated cash received from the exercise of unvested options as a refundable deposit, shown as a liability in its balance sheets. As of September 30, 2018 and December 31, 2017, the Company included cash received for the early exercise of options of approximately zero and $14,000, respectively, which is included in other noncurrent liabilities. Amounts are transferred from liabilities into common stock and additional paid-in-capital as the shares vest.

2017 Call Option Plan

In February 2017, the Company adopted a 2017 Call Option Plan to grant selected employees, officers, directors and consultants (collectively, the “Participants”) options to purchase shares of the common stock of SutroVax, an unconsolidated investee of the Company (see Note 7). The Company has reserved 450,000 shares of SutroVax common stock as of September 30, 2018 for issuance under the program. The call options vest 25% on each of January 1, 2017, 2018, 2019, and 2020, and expire one year from the vesting date.

Using the Black-Scholes option-valuation model, the call options are measured at fair value on grant date and at each reporting period prior to their vesting, with cost recognized over the requisite service period as compensation cost. Any changes in the fair value subsequent to the vesting date are recognized in other income (expense), net in the statement of operations.   Call options covering 420,000 shares have been granted with an exercise price of $0.76 per share, with 105,000 shares vested and zero exercised during the nine months period ended September 30, 2018 and 105,000 shares vested and exercised during the year ended December 31, 2017.  Call options covering 315,000 shares were outstanding and 210,000 shares were unvested as of September 30, 2018.

The amounts recognized as compensation expense related to the 2017 Call Option Plan were $19,000 and $50,000 for the three and nine months ended September 30, 2018, respectively, and $15,000 and $65,000 for the three and nine months ended September 30, 2017, respectively.

The amounts recognized as other income (expense) related to the 2017 Call Option Plan were $6,000 and $10,000 for the three and nine months ended September 30, 2018, respectively, and $6,000 and ($10,000) for the three and nine months ended September 30, 2017, respectively.