Note 14 – Equity Incentive Plans

In June 2019, we adopted the 2019 Equity Incentive Plan (the “2019 Plan”). The 2019 Plan provides for the grant of stock options, restricted stock, RSUs, stock appreciation rights, performance units and performance shares to our employees, directors and consultants. Stock options granted under the 2019 Plan may be either incentive stock options or nonstatutory stock options. Incentive stock options may only be granted to our employees. Nonstatutory stock options may be granted to our employees, directors and consultants. Generally, our stock options and RSUs vest over four years and our stock options are exercisable over a maximum period of 10 years from their grant dates. Vesting typically terminates when the employment or consulting relationship ends.

As of December 31, 2020, 49.0 million shares were reserved and available for issuance under the 2019 Plan, as adjusted to give effect to the Stock Split.

The following table summarizes our stock option and RSU activity:

The weighted-average grant date fair value of RSUs in the years ended December 31, 2020, 2019 and 2018 was $300.51, $56.55 and $63.29, respectively, as adjusted to give effect to the Stock Split. The aggregate release date fair value of RSUs in the years ended December 31, 2020, 2019 and 2018 was $3.25 billion, $502 million and $546 million, respectively.

The aggregate intrinsic value of options exercised in the years ended December 31, 2020, 2019, and 2018 was $1.55 billion, $237 million and $293 million, respectively.

ESPP

Our employees are eligible to purchase our common stock through payroll deductions of up to 15% of their eligible compensation, subject to any plan limitations. The purchase price would be 85% of the lower of the fair market value on the first and last trading days of each six-month offering period. During the years ended December 31, 2020, 2019 and 2018, we issued 1.8 million, 2.5 million and 2.0 million shares under the ESPP, as adjusted to give effect to the Stock Split. There were 34.3 million shares available for issuance under the ESPP as of December 31, 2020.

Fair Value Assumptions

We use the fair value method in recognizing stock-based compensation expense. Under the fair value method, we estimate the fair value of each stock option award with service or service and performance conditions and the ESPP on the grant date generally using the Black-Scholes option pricing model. The weighted-average assumptions used in the Black-Scholes model for stock options are as follows:

The fair value of RSUs with service or service and performance conditions is measured on the grant date based on the closing fair market value of our common stock. The risk-free interest rate is based on the U.S. Treasury yield for zero-coupon U.S. Treasury notes with maturities approximating each grant’s expected life. We use our historical data in estimating the expected term of our employee grants. The expected volatility is based on the average of the implied volatility of publicly traded options for our common stock and the historical volatility of our common stock.

2018 CEO Performance Award

In March 2018, our stockholders approved the Board of Directors’ grant of 101.3 million stock option awards to our CEO (the “2018 CEO Performance Award”), as adjusted to give effect to the Stock Split. The 2018 CEO Performance Award consists of 12 vesting tranches with a vesting schedule based entirely on the attainment of both operational milestones (performance conditions) and market conditions, assuming continued employment either as the CEO or as both Executive Chairman and Chief Product Officer and service through each vesting date. Each of the 12 vesting tranches of the 2018 CEO Performance Award will vest upon certification by the Board of Directors that both (i) the market capitalization milestone for such tranche, which begins at $100.0 billion for the first tranche and increases by increments of $50.0 billion thereafter (based on both a six calendar month trailing average and a 30 calendar day trailing average, counting only trading days), has been achieved, and (ii) any one of the following eight operational milestones focused on total revenue or any one of the eight operational milestones focused on Adjusted EBITDA have been achieved for the previous four consecutive fiscal quarters on an annualized basis. Adjusted EBITDA is defined as net income (loss) attributable to common stockholders before interest expense, provision (benefit) for income taxes, depreciation and amortization and stock-based compensation. Upon vesting and exercise, including the payment of the exercise price of $70.01 per share as adjusted to give effect to the Stock Split, our CEO must hold shares that he acquires for five years post-exercise, other than a cashless exercise where shares are simultaneously sold to pay for the exercise price and any required tax withholding.

The achievement status of the operational milestones as of December 31, 2020 was as follows:

Stock-based compensation under the 2018 CEO Performance Award represents a non-cash expense and is recorded as a selling, general, and administrative operating expense in our consolidated statement of operations. In each quarter since the grant of the 2018 CEO Performance Award, we have recognized expense, generally on a pro-rated basis, for only the number of tranches (up to the maximum of 12 tranches) that corresponds to the number of operational milestones that have been achieved or have been determined probable of being achieved in the future, in accordance with the following principles.

On the grant date, a Monte Carlo simulation was used to determine for each tranche (i) a fixed amount of expense for such tranche and (ii) the future time when the market capitalization milestone for such tranche was expected to be achieved, or its “expected market capitalization milestone achievement time.” Separately, based on a subjective assessment of our future financial performance, each quarter we determine whether it is probable that we will achieve each operational milestone that has not previously been achieved or deemed probable of achievement and if so, the future time when we expect to achieve that operational milestone, or its “expected operational milestone achievement time.” When we first determine that an operational milestone has become probable of being achieved, we allocate the entire expense for the related tranche over the number of quarters between the grant date and the then-applicable “expected vesting time.” The “expected vesting time” at any given time is the later of (i) the expected operational milestone achievement time (if the related operational milestone has not yet been achieved) and (ii) the expected market capitalization milestone achievement time (if the related market capitalization milestone has not yet been achieved). We immediately recognize a catch-up expense for all accumulated expense for the quarters from the grant date through the quarter in which the operational milestone was first deemed probable of being achieved. Each quarter thereafter, we recognize the prorated portion of the then-remaining expense for the tranche based on the number of quarters between such quarter and the then-applicable expected vesting time, except that upon vesting of a tranche, all remaining expense for that tranche is immediately recognized.

As a result, we have experienced, and may experience in the future, significant catch-up expenses in quarters when one or more operational milestones are first determined to be probable of being achieved. Additionally, the expected market capitalization achievement times are generally later than the related expected operational milestone achievement times. Therefore, if market capitalization milestones are achieved earlier than originally forecasted, for example due to periods of rapid stock price appreciation, this has resulted, and may result in the future, in higher catch-up expenses and the remaining expenses being recognized over shorter periods of time at a higher per-quarter rate.

During the three months ended June 30, 2020, the first tranche of the 2018 CEO Performance Award vested upon certification by the Board of Directors that the market capitalization milestone of $100.0 billion and the operational milestone of $20.0 billion annualized revenue had been achieved. Therefore, the remaining unamortized expense of $22 million for that tranche, which was previously expected to be recognized ratably in future quarters as determined on the grant date, was accelerated into the second quarter of 2020. Additionally, the operational milestone of annualized Adjusted EBITDA of $4.5 billion became probable of being achieved during the second quarter of 2020 and consequently, we recognized a catch-up expense of $79 million in that quarter. 

During the three months ended September 30, 2020, the second and third tranches of the 2018 CEO Performance Award vested upon certification by the Board of Directors that the market capitalization milestones of $150.0 billion and $200.0 billion and the operational milestones of annualized Adjusted EBITDA of $1.5 billion and annualized Adjusted EBITDA of $3.0 billion had been achieved. Therefore, the remaining unamortized expense of $95 million and $118 million associated with the second and third tranches, respectively, which were previously expected to be recognized ratably in future quarters as determined on the grant date were accelerated into the third quarter of 2020. Additionally, the operational milestone of annualized Adjusted EBITDA of $6.0 billion became probable of being achieved during the third quarter of 2020 and consequently, we recognized a catch-up expense of $77 million in that quarter. 

During the three months ended December 31, 2020, the fourth tranche of the 2018 CEO Performance Award vested upon certification by the Board of Directors that the market capitalization milestone of $250.0 billion and the operational milestone of annualized Adjusted EBITDA of $4.5 billion had been achieved. Therefore, the remaining unamortized expense of $122 million for that tranche, which was previously expected to be recognized ratably in future quarters through the third quarter of 2023 as determined on the grant date, was accelerated into the fourth quarter of 2020. Additionally, during the fourth quarter of 2020, the operational milestone of annualized Adjusted EBITDA of $8.0 billion became probable of being achieved and consequently, we recognized a catch-up expense of $75 million in that quarter. 

   As of December 31, 2020, we had $264 million of total unrecognized stock-based compensation expense for the operational milestones that were considered either probable of achievement or achieved but not yet certified, which will be recognized over a weighted-average period of 0.6 years. As of December 31, 2020, we had unrecognized stock-based compensation expense of $712 million for the operational milestones that were considered not probable of achievement. For the years ended December 31, 2020, 2019 and 2018 we recorded stock-based compensation expense of $838 million, $296 million and $175 million related to the 2018 CEO Performance Award.

2014 Performance-Based Stock Option Awards

In 2014, to create incentives for continued long-term success beyond the Model S program and to closely align executive pay with our stockholders’ interests in the achievement of significant milestones by us, the Compensation Committee of our Board of Directors granted stock option awards to certain employees (excluding our CEO) to purchase an aggregate of 5.4 million shares of our common stock, as adjusted to give effect to the Stock Split. Each award consisted of the following four vesting tranches with the vesting schedule based entirely on the attainment of the future performance milestones, assuming continued employment and service through each vesting date:

As of December 31, 2020, the following performance milestones had been achieved:

We begin recognizing stock-based compensation expense as each performance milestone becomes probable of achievement. As of December 31, 2020, we had unrecognized stock-based compensation expense of $4 million for the performance milestone that was considered not probable of achievement. For the years ended December 31, 2020, 2019 and 2018, we did not record any additional stock-based compensation related to the 2014 Performance-Based Stock Option Awards.

2012 CEO Performance Award

In August 2012, our Board of Directors granted 26.4 million stock option awards to our CEO (the “2012 CEO Performance Award”), as adjusted to give effect to the Stock Split. The 2012 CEO Performance Award consists of 10 vesting tranches with a vesting schedule based entirely on the attainment of both performance conditions and market conditions, assuming continued employment and service through each vesting date. Each vesting tranche requires a combination of a pre-determined performance milestone and an incremental increase in our market capitalization of $4.00 billion, as compared to our initial market capitalization of $3.20 billion at the time of grant. As of December 31, 2020, the market capitalization conditions for all of the vesting tranches and the following performance milestones had been achieved:

We begin recognizing stock-based compensation expense as each milestone becomes probable of achievement. As of December 31, 2020, we had unrecognized stock-based compensation expense of $6 million for the performance milestone that was considered not probable of achievement. For the years ended December 31, 2020 and 2019, we did not record any additional stock-based compensation expense related to the 2012 CEO Performance Award. For the year ended December 31, 2018, the stock-based compensation we recorded related to this award was immaterial.

Summary Stock-Based Compensation Information

The following table summarizes our stock-based compensation expense by line item in the consolidated statements of operations (in millions):

Our income tax benefits recognized from stock-based compensation arrangements in each of the periods presented were immaterial due to cumulative losses and valuation allowances. During the years ended December 31, 2020, 2019, and 2018, stock-based compensation expense capitalized to our consolidated balance sheets was $89 million, $52 million and $18 million, respectively. As of December 31, 2020, we had $3.51 billion of total unrecognized stock-based compensation expense related to non-performance awards, which will be recognized over a weighted-average period of 2.7 years.