Envestnet, Inc. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Stock-Based Compensation

Stock-Based Compensation

12 Months Ended

Dec. 31, 2018

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

On December 31, 2004, the Company adopted a stock incentive plan (the “2004 Plan”). The 2004 Plan provided for the grant of options to employees, consultants, and non-employee directors to purchase common stock, which vest over time and have a ten-year contractual term. To satisfy options granted under the 2004 Plan, the Company made common stock available from authorized but unissued shares or shares held in treasury, if any, by the Company. Stock options granted under the 2004 Plan were non-stock options, as defined in the 2004 Plan agreement. Stock options were granted with an exercise price no less than the fair-market-value price of the common stock at the date of the grant.

The 2004 Plan has a change in control provision whereby if a change in control occurs and the participant’s awards are not equitably adjusted, such awards shall become fully vested and exercisable and all forfeiture restrictions on such awards shall lapse. Based on the terms of the 2004 Plan, the Company’s initial public offering in 2010 did not trigger the change in control provision and did not result in any modifications to the outstanding equity awards under the 2004 Plan.

On June 22, 2010, the Board of Directors approved the 2010 Long-Term Incentive Plan (“2010 Plan”), effective upon the closing of the Company’s initial public offering. The 2010 Plan provides for the grant of options, stock appreciation rights, Full Value Awards (as defined in the 2010 Plan) and cash incentive awards to employees, consultants and non-employee directors to purchase common stock, which vest over time and have a ten-year contractual term. The maximum number of shares of common stock that may be delivered under the 2010 Plan is equal to the sum of 2,700,000 plus the number of shares of common stock that are subject to outstanding awards under the 2004 Plan which are forfeited, expire or are canceled after the effective date of the Company’s initial public offering. Stock options and stock appreciation rights are granted with an exercise price no less than the fair-market-value price of the common stock at the date of the grant. On May 13, 2015 and July 13, 2017, the shareholders approved the 2010 Long-Term Incentive Plan as Amended. The amendments increased the number of common shares of the Company reserved for delivery under the 2010 Plan by 2,700,000 shares and 3,525,000 shares, respectively.

As a result of the merger between Envestnet and Tamarac, the Company adopted the Envestnet, Inc. Management Incentive Plan for Envestnet | Tamarac Management Employees (the “2012 Plan”). The 2012 Plan provides for the grant of restricted common stock, stock options and the purchase of common stock for certain Envestnet | Tamarac employees. The maximum number of shares of stock which may be issued with respect to awards under the 2012 Plan is 1,023,851.

The 2012 Plan provides for the grant of up to 559,551 shares of common stock (“Target Incentive Awards”). The Target Incentive Awards vest based upon Tamarac meeting certain performance conditions and then a subsequent two-year service condition. The Company measured the cost of these awards based on the estimated fair value of the award as of the market closing price on the day before the acquisition closed. The Company is recognizing the estimated expense on a graded-vesting method over a requisite service period of three to five years, which is the estimated vesting period. The Company estimates the expected vesting amount and recognizes compensation expense only for those awards expected to vest. This estimate is reassessed by management each reporting period and may change based upon new facts and circumstances. Changes in the assumptions impact the total amount of expense and are recognized over the vesting period. As of December 31, 2017, all 559,551 shares of restricted stock had vested.

As a result of the merger between Envestnet and Yodlee, the Company adopted the Envestnet, Inc. 2015 Acquisition Equity Award Plan (the “2015 Plan”). The 2015 Plan provides for the assumption of all unvested equity awards previously granted pursuant to the Yodlee employees and the conversion of such awards into equity awards of the Company pursuant to the 2015 Plan. No new awards are being made under the 2015 Plan. The maximum number of shares of stock which may be issued with respect to awards under the 2015 Plan is 1,058,807.

As of December 31, 2018, the maximum number of options and restricted stock available for future issuance under the Company’s plans is 3,078,360.

Employee stock-based compensation expense was as follows:



	Year Ended December 31,
	2018			2017			2016
Stock-based compensation expense	$	40,245		$	31,331		$	33,276
Tax effect on stock-based compensation expense	(10,093		)	(11,906		)	(13,001		)
Net effect on income	$	30,152		$	19,425		$	20,275

The tax effect on stock-based compensation expense above was calculated using a blended statutory rate of 25.1%, 38.0%, and 39.1% for the years ended December 31, 2018, 2017 and 2016, respectively. However, due to the valuation allowance recorded on domestic deferreds, there was no tax effect related to stock-based compensation expense for the years ended December 31, 2018, 2017 and 2016, respectively.

Stock Options

The following weighted average assumptions were used to value options granted during the periods indicated:



	December 31,
	2018		2017			2016
Grant date fair value of options	$	—	$	14.51		$	9.56
Volatility	—		43.8		%	42.2		%
Risk-free interest rate	—		2.1		%	1.4		%
Dividend yield	—		—			—
Expected term (in years)	—		6.3			6.3

The following table summarizes option activity under the Company’s plans:



					Weighted-Average
			Weighted-		Remaining
			Average		Contractual Life	Aggregate
	Options		Exercise Price		(Years)	Intrinsic Value
Outstanding as of December 31, 2015	3,533,791		$	15.03	4.7	$	61,199
Granted	163,864		22.38
Exercised	(598,382	)	8.23
Forfeited	(66,079	)	35.08
Outstanding as of December 31, 2016	3,033,194		16.33		4.3	63,264
Granted	75,238		31.70
Exercised	(837,857	)	9.49
Forfeited	(16,010	)	37.42
Outstanding as of December 31, 2017	2,254,565		19.23		4.3	69,939
Granted	—		—
Exercised	(359,345	)	14.76
Forfeited	(7,251	)	27.51
Outstanding as of December 31, 2018	1,887,969		20.05		3.4	56,046
Options exercisable	1,830,082		19.78		3.3	54,837

The aggregate intrinsic values in the table below represent the total pre-tax intrinsic value (the aggregate difference between the fair value of the Company’s common stock on December 31, 2018, 2017 and 2016 of $49.19, $49.85 and $35.25, respectively, and the exercise price of in-the-money options) that would have been received by the option holders had all option holders exercised their options as of that date.

Other information is as follows:



	Year Ended December 31,
	2018		2017		2016
Total intrinsic value of options exercised	$	15,667	$	29,562	$	14,165
Cash received from exercises of stock options	5,305		7,951		4,924

Exercise prices of stock options outstanding as of December 31, 2018 range from $7.15 to $55.29. At December 31, 2018, there was $632 of unrecognized compensation expense related to unvested stock options, which the Company expects to recognize over a weighted-average period of 1.0 years.

Restricted Stock Units and Restricted Stock Awards

Periodically, the Company grants restricted stock unit awards to employees. Beginning with grants issued in February 2016, restricted stock units awards vest one-third on the first anniversary of the grant date and quarterly thereafter. For grants issued prior to February 2016, restricted stock units awards would vest ratably in three annual tranches from the date of grant.

The following is a summary of the activity for unvested restricted stock units and awards granted under the Company’s plans:



			Weighted-
			Average Grant
	Number of		Date Fair Value
	Shares		per Share
Outstanding as of December 31, 2015	2,153,211		$	35.63
Granted	1,009,661		28.82
Vested	(1,082,206	)	29.12
Forfeited	(185,907	)	30.96
Outstanding as of December 31, 2016	1,894,759		30.40
Granted	959,591		32.38
Vested	(969,513	)	31.51
Forfeited	(118,198	)	30.11
Outstanding as of December 31, 2017	1,766,639		32.48
Granted	996,099		55.42
Vested	(1,073,681	)	32.62
Forfeited	(103,269	)	40.37
Outstanding as of December 31, 2018	1,585,788		46.33

At December 31, 2018, there was $55,427 of unrecognized compensation expense related to unvested restricted stock unit awards, which the Company expects to recognize over a weighted-average period of 1.9 years.

In connection with the Yodlee merger, on November 19, 2015, the Company issued 1,052,000 shares of Envestnet restricted stock unit awards (“replacement awards”) issued in connection with unvested Yodlee employee equity awards. The Yodlee unvested stock options and unvested restricted stock units were canceled and exchanged for the replacement awards. In accordance with ASC 805, these awards are considered to be replacement awards. Exchanges of share options or other share-based payment awards in conjunction with a business combination are modifications of share-based payment awards in accordance with ASC Topic 718. As a result, a portion of the fair-value-based measure of the replacement awards, are included in measuring the consideration transferred in the Yodlee business combination. To determine the portion of the replacement award that is part of consideration transferred to acquire Yodlee, we have measured both the replacement awards granted by Envestnet and the historical Yodlee awards as of November 19, 2015 in accordance with ASC 718. The portion of the fair-value-based measure of the replacement award that is part of the consideration transferred in exchange for the acquisition of Yodlee, equals the portion of the Yodlee award that is attributable to pre-combination service. Envestnet has attributed a portion of the replacement awards to post combination service as these awards require post combination service. The fair value of the rollover consideration was estimated to be $32,836 of which $4,318 was attributable to pre-acquisition services. The remaining fair value of $28,518 is amortizing over the 43 month vesting period subsequent to the acquisition date. As of December 31, 2018, the remaining amount of unrecognized expense totaled $767.

The Company entered into employment agreements with certain executive officers, three of whom received a total of 205,000 performance-based restricted stock unit awards in May 2016 which vest upon the achievement of certain “Target Performance Measures” as defined in the employment agreements, and four of whom also received a total of 125,000 restricted stock units awards in August 2016 which vest quarterly thereafter. The Target Performance Measures for the Performance Periods, as defined in the employment agreements, were achieved as of December 31, 2016 and these shares will fully vest in May 2019.

During March 2018 and July 2018, the Company granted approximately 26,000 and 30,000 performance-based restricted stock unit awards to certain employees, respectively. These performance-based restricted unit awards vest upon the achievement of certain pre-established business and financial metrics as well as service condition. The business and financial metrics governing the vesting of these performance-based restricted stock unit awards provide thresholds which dictate the number of shares to vest upon each evaluation date, which range from 50% to 150%. If these metrics are achieved, as defined in the individual grant terms, these shares would cliff vest three years from the grant date.