8. Stock-based compensation

2014 Stock Plan

Pieris granted zero and 1,157,734 options to employees, consultants, and directors under its 2014 employee, director, and consultant equity incentive plan, (the “2014 Plan”) during the three and nine months ended September 30, 2016, respectively. The 2014 Plan was terminated on June 28, 2016 when the Company adopted its 2016 employee, director and consultant equity incentive plan, (the “2016 Plan”). Therefore, no options were granted for the three and nine months ended September 30, 2017 under the 2014 Plan.

2016 Stock Plan

In June 2016, the Company adopted the 2016 Plan which provides for the granting of stock options, restricted and unrestricted stock awards, and other stock-based awards to employees of the Company, non-employee directors of the Company, and certain other consultants performing services for the Company as designated by the Compensation Committee of the Board of Directors or the Board of Directors. The vesting periods of equity incentives issued under the 2016 Plan are determined by the Compensation Committee of the Company’s Board of Directors, with stock options generally vesting over a four-year period.

The Company granted 148,306 and 1,407,061 options to employees and directors under the 2016 Plan during the three months ended September 30, 2017 and the nine months ended September 30, 2017, respectively. The Company granted 114,378 options to employees and directors under the 2016 Plan during the three and nine months ended September 30, 2016. As of September 30, 2017, there were 1,951,052 shares available for future grant under the 2016 Plan. The shares available for future grant under the 2016 Plan include 218,467 shares forfeited under the 2016 Plan and 14,958 shares forfeited under the 2014 Plan. These forfeited shares are available for future issuance under the 2016 Plan.

During the three months ended September 30, 2017, the Company granted an option to purchase 450,000 shares of common stock outside of the Plan to a newly-hired executive officer as an inducement and was material to the executive officer entering into employment with the Company. The compensation expense associated with this inducement option was $54,270 and is included in general and administrative expense for both, the three and nine months periods ended September 30, 2017.

Stock-based compensation expense was $0.6 million and $2.0 million for the three and nine months ended September 30, 2017, respectively. For the three and nine months ended September 30, 2016 stock based compensation expense was $0.4 million and $1.4 million, respectively.

Total stock-based compensation expense was recorded to operating expenses based upon the functional responsibilities of the individuals holding the respective options as follows:

There were 95,625 and 110,625 options exercised under the 2014 Plan during the three and nine months ended September 30, 2017 respectively, for which the Company received $188,250 and $218,250 in cash. There were 46,930 and 121,392 options exercised under the 2016 Plan during the three and nine months ended September 30, 2017 respectively, for which the Company received zero and $147,950 in cash. No options were exercised during the 2016 periods.

The Company uses the Black-Scholes option pricing model to determine the estimated fair value for stock-based awards. Option-pricing models require the input of various subjective assumptions, including the option’s expected life, expected dividend yield, price volatility, risk free interest rate, and forfeitures of the underlying stock. Accordingly, the weighted-average fair value of the options granted was $3.34 and $2.02 for the three months ended September 30, 2017 and the nine months ended September 30, 2017. The weighted-average fair value of the options granted was $1.05 and $1.01 for the three months ended September 30, 2016 and the nine months ended September 30, 2016.

The calculation was based on the following assumptions:

Option-pricing models require the input of various subjective assumptions, including the option’s expected life and the price volatility of the underlying stock. Pieris’ estimated expected stock price volatility is based on the average volatilities of other guideline companies in the same industry. Pieris’ expected term of options granted during the three and nine months ended September 30, 2017 and 2016, respectively was derived using the SEC’s simplified method. The risk-free rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant.

The Company’s stock options have a maximum term of ten years from the date of grant. Stock options granted under the 2016 Plan may be either incentive stock options, or nonqualified stock options. The exercise price of stock options granted under the 2016 Plan must be at least equal to the fair market value of the common stock on the date of grant.