Stock-Based Compensation

12 Months Ended

Dec. 31, 2021

Share-based Payment Arrangement [Abstract]

In 2012, the Board of Directors adopted the 2012 Stock Option and Restricted Stock Incentive Plan (the “2012 Plan”), which provides for the granting of incentive and nonqualified stock options, shares of restricted stock and other equity interests or awards in the Company. The Company only issued time-based vesting awards under the 2012 Plan.

In 2017, the Board approved the 2017 Equity Incentive Plan (the “2017 Plan”). No new awards have been issued under the 2012 Plan following the approval of the 2017 Plan. The 2017 Plan provides for the granting of incentive and nonqualified stock options, shares of restricted stock and other equity interests or awards in the Company. The Company issued time-based and

performance-based vesting awards under the 2017 Plan. As of December 31, 2021, the total combined number of shares available for grant under the 2012 Plan and 2017 Plan was 10.4 million.

In 2020, the Board approved the 2020 Incentive Award Plan (the “2020 Plan”, together with the 2012 Plan and the 2017 Plan, the “Plans”). The 2020 Plan provides for the granting of incentive and nonqualified stock options, restricted stock units (“RSUs”) and other equity interests or awards in the Company. As of December 31, 2021, the total number of shares available for grant under the 2020 Plan was 44.5 million shares. The Company issued time-based and performance-based vesting awards under the 2020 Plan. As of December 31, 2021, a share reserve established that the aggregate number of shares may not exceed 900.0 million shares under the Plans.

The Company has historically issued three types of stock-based compensation: time-based awards, long term incentive plan (“LTIP”) awards and performance-based stock compensation plan (“PSP”) awards. LTIP awards are performance-based equity awards that are used to establish longer-term performance objectives and incentivize management to meet those objectives. PSP awards are short-term performance-based equity awards which establish performance objectives related to one or two particular fiscal years. All stock-based compensation awards expire seven to ten years after the grant date.

Time-based awards generally vest over a four-year period in annual and/or quarterly installments and expire no later than ten years from the date of grant. Time-based options are valued using the Black-Scholes option-pricing model with the assumptions noted in the table below. The fair value of time-based RSUs is estimated on the grant date using the underlying share price.

LTIP awards that were granted as RSUs in 2021 vest based on long-term revenue targets and used the underlying share price on the grant date to estimate their fair value. LTIP awards that were granted as RSUs in 2020 vested based on reaching specific share price targets and used a Monte Carlo Simulation with the assumptions noted in the table below to estimate their fair value. Prior to 2020, LTIP awards were granted as stock options and were valued using the Black-Scholes option-pricing model with the assumptions noted in the table below.

PSP awards granted in 2021 and 2020 vest based on meeting both revenue and EBITDA targets. As these awards are performance-based RSUs, the fair value is estimated on the grant date using the underlying share price. Prior to 2020, PSP awards were granted as stock options and were valued using the Black-Scholes option-pricing model with the assumptions noted in the table below.

The fair value of each option is estimated on the grant date using the Black-Scholes option-pricing model and the assumptions noted in the table below. The fair value is recognized over the requisite service period of the awards, which is generally the vesting period. For awards with only service-based vesting conditions, the Company recognizes compensation cost using the straight-line method. Expected volatility is based on average volatility for a representative sample of comparable public companies. Stock options are generally granted with an exercise price equal to the fair value of the common stock at the grant date with a 10-year contractual term.

The expected term represents the period of time that the options are expected to be outstanding. The expected term is estimated using the average of the vesting term and the original contractual term of the option. The risk-free interest rate is estimated using the rate of return on U.S. treasury notes with a life that approximates the expected life of the option. The fair value of the stock options issued was measured using the following assumptions:


	Year ended December 31,
	2021		2020		2019
Risk free interest rate	1.1	%	0.4	%	2.0	%
Expected term (in years)	5.8		6.1		6.0
Expected volatility	43.0	%	42.5	%	41.5	%
Expected dividend yield	0.0	%	0.0	%	0.0	%

For grants with market-based conditions, the fair value of each award was determined using a Monte Carlo Simulation. No awards with market-based conditions were granted in 2021. The model uses multiple input variables that determined the probability of satisfying the market condition requirements as follows:


	Year ended December 31, 2020
Risk free interest rate	1.7	%
Expected volatility	38.9	%
Expected dividend yield	0.0	%

The following table shows stock option activity for the year ended December 31, 2021, 2020, and 2019:


	Time-based		PSP		LTIP		Total	Weighted Average Exercise Price of Options		Weighted Average FMV of RSUs		Weighted Average Remaining Term of Options (Years)	Aggregate Intrinsic Value of Options
	Options	RSUs	Options	RSUs	Options	RSUs
Outstanding at December 31, 2019	27,853	—	3,972	—	16,201	—	48,026	$	2.86	$	—	7.64	$	203,431
Granted	4,781	3,816	—	907	—	28,354	37,858	4.11		34.63		—	—
Exercised options / vested RSUs	(11,621)	(149)	(932)	—	(2,347)	(15,554)	(30,603)	1.28		21.03		—	—
Forfeited	(494)	(119)	(17)	—	—	—	(630)	5.24		33.72		—	—
Outstanding at December 31, 2020	20,519	3,548	3,023	907	13,854	12,800	54,651	3.57		47.01		7.05	1,607,562
Granted	1,100	2,466	—	600	—	6,744	10,910	50.60		52.97		—	—
Exercised options / vested RSUs	(6,571)	(1,523)	(667)	—	(2,183)	—	(10,944)	3.33		37.64		—	—
Forfeited	(353)	(296)	(2)	(19)	—	(201)	(871)	4.30		44.20		—	—
Outstanding at December 31, 2021	14,695	4,195	2,354	1,488	11,671	19,343	53,746	$	5.46	$	49.94	6.34	$	662,108

The following table provides additional information for stock option awards outstanding as of December 31, 2021:


	Awards Outstanding	Weighted Average Remaining Term of Options (Years)	Aggregate Intrinsic Value		Weighted Average Exercise Price of Options
Stock options exercisable	25,276	6.13	$	605,212	$	3.86
Stock option expected to vest	3,444	7.87	$	56,896	$	17.05

As of December 31, 2021, total unrecognized stock-based compensation expense of $742.0 million related to granted and unvested share-based compensation arrangements is expected to be recognized over a weighted-average period of 1.8 years. The following table shows stock compensation expense for the years ended December 31, 2021, 2020 and 2019:


	Year ended						Year ended						Year ended
	December 31, 2021						December 31, 2020						December 31, 2019
	Options		RSUs		Total		Options		RSUs		Total		Options		RSUs		Total
Time Based (1)	$	14,654	$	61,085	$	75,739	$	8,176	$	21,286	$	29,462	$	7,065	$	—	$	7,065
PSP (2)	—		82,089		82,089		1,633		21,275		22,908		5,222		—		5,222
LTIP (2)	—		525,465		525,465		9,552		255,116		264,668		5,326		—		5,326
B Shares (3)	—		—		—		8,000		—		8,000		—		—		—
Total	$	14,654	$	668,639	$	683,293	$	27,361	$	297,677	$	325,038	$	17,613	$	—	$	17,613

(1) Time-based awards vest and are expensed over a defined service period.

(2) PSP and LTIP awards vest based on defined performance criteria and are expensed based on the probability of achieving such criteria.

(3) Related to the Business Combination; Class B shares have no economic rights.

The weighted-average grant-date fair values of options granted during the years ended December 31, 2021, 2020 and 2019 were $19.53, $2.00 and $2.00 per share, respectively.During the years ended December 31, 2021, 2020 and 2019 the Company received proceeds from the exercise of stock options of $31.5 million, $27.6 million and $1.1 million respectively, and the aggregate intrinsic value of those stock options exercised was $473.4 million, $1,256.0 million and $3.4 million respectively. The total grant date fair value of stock options that vested during the years ended December 31, 2021, 2020 and 2019 were $14.0 million, $35.1 million and $9.8 million, respectively.

DraftKings Inc. 10-K